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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1998
REGISTRATION NO. 333-46681
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
CORRECTIONAL PROPERTIES TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)
GARDENS PLAZA, SUITE 430
3300 PGA BOULEVARD
PALM BEACH GARDENS, FLORIDA 33410
(561) 691-6644
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
MR. CHARLES R. JONES
GARDENS PLAZA, SUITE 430
3300 PGA BOULEVARD
PALM BEACH GARDENS, FLORIDA 33410
(561) 691-6644
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
WACKENHUT CORRECTIONS CORPORATION
(Exact Name of Co-Registrant as Specified in its Charter)
4200 WACKENHUT DRIVE
PALM BEACH GARDENS, FLORIDA 33410-4243
(561) 622-5656
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
JAMES P. ROWAN, ESQ.
4200 WACKENHUT DRIVE
PALM BEACH GARDENS, FLORIDA 33410-4243
(561) 622-5656
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
Copies of all communications to:
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BRUCE I. MARCH, ESQ. STEVEN L. LICHTENFELD, ESQ.
AKERMAN, SENTERFITT & EIDSON, P.A. BATTLE FOWLER LLP
ONE SOUTHEAST THIRD AVENUE, 28TH FLOOR 75 EAST 55TH STREET
MIAMI, FLORIDA 33131-1704 NEW YORK, NEW YORK 10022
(305) 374-5600 (212) 856-7000
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Approximate date of commencement of the proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------------------------------------------------
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Common Shares of Beneficial Interest, par
value $.001 per share 7,130,000 shares $21.00 $149,730,000 $44,170.35(3)
=================================================================================================================================
</TABLE>
(1) Includes 930,000 shares which may be purchased by the underwriters solely to
cover over-allotments if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
(3) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 8, 1998
PROSPECTUS
6,200,000 SHARES
CP TRUST LOGO
CORRECTIONAL PROPERTIES TRUST
COMMON SHARES OF BENEFICIAL INTEREST
---------------------
Correctional Properties Trust (together with its subsidiaries, the
"Company") was formed in February 1998 as a Maryland real estate investment
trust to capitalize on the growing trend toward privatization in the corrections
industry by acquiring correctional and detention facilities from both private
prison operators and governmental entities. The Company will use approximately
$113.0 million of the net proceeds of the offering (the "Offering") of the
Company's common shares of beneficial interest, $.001 par value per share (the
"Common Shares"), offered hereby to acquire eight correctional and detention
facilities (collectively, the "Initial Facilities") currently operated by
Wackenhut Corrections Corporation (together with its subsidiaries, "Wackenhut
Corrections"). The Company will also be granted the option to acquire three
additional correctional and detention facilities (the "Option Facilities")
currently under development by Wackenhut Corrections and the right to acquire
additional correctional or detention facilities which Wackenhut Corrections
acquires or has the right to acquire in the future. The Company will lease the
Initial Facilities to Wackenhut Corrections and Wackenhut Corrections will
continue to operate such facilities.
All of the Common Shares offered hereby are being sold by the Company. The
Company intends to pay regular quarterly distributions, beginning with a pro
rata distribution for the quarter ending June 30, 1998. See "Distributions." The
Company's Amended and Restated Declaration of Trust will provide that no
shareholder or group of affiliated shareholders may actually or constructively
own more than 9.8% of the outstanding Common Shares, subject to certain
exceptions. See "Description of Shares of Beneficial Interest -- Restrictions on
Ownership."
Prior to the Offering, there has not been a public market for the Common
Shares. It is currently estimated that the initial public offering price per
Common Share will be between $19.00 and $21.00. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Common Shares have been approved for listing on the
New York Stock Exchange (the "NYSE") under the symbol "CPV," subject to official
notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR MATERIAL RISK FACTORS RELEVANT
TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING:
- Dependence of the Company on rent payments from Wackenhut Corrections for
all of its initial income and the fact that the Company may be unable to
make its estimated distributions if Wackenhut Corrections fails to make
such rent payments;
- Conflicts of interest between the Company and Wackenhut Corrections,
including the fact that the purchase and lease of the Initial Facilities
and the Option Facilities was not negotiated on an arm's-length basis and
may not reflect their market value and the fact that certain trustees of
the Company are and will continue to be officers and directors of Wackenhut
Corrections following consummation of the Offering, all of which could lead
to decisions that do not reflect the best interests of the Company and its
shareholders;
- The Company's lack of control over the operations of any of the facilities
owned by it due to tax restrictions that prevent real estate investment
trusts ("REITs") from operating such facilities;
- Ownership of the Company's facilities is subject to risks inherent in the
privatized corrections industry generally, including limited contract
duration, reliance upon government appropriations for payment under awarded
contracts, government regulation, possible fluctuations in occupancy
levels, limited acceptance of private prison operation, community
opposition to facility location and potential legal proceedings, all of
which could adversely affect the ability of Wackenhut Corrections and other
tenants to make required rent payments;
- The lack of operating history of the Company and certain of the Initial
Facilities (only three of which have an operating history of more than one
year) and management's lack of experience in operating a REIT;
- Reliance by the Company on indebtedness and additional equity for future
growth, including the risks normally associated with debt financing, the
lack of restriction on the incurrence of indebtedness and the risk that
sufficient sources of financing will not be available to fund acquisitions;
- The right of governmental entities to assume certain subleases and occupy
certain of the Company's facilities at rental rates that may be less than
the rental rates payable under the leases as well as the right of
governmental entities to purchase certain of the Company's facilities at a
purchase price that may be less than their fair market values; and
- The taxation of the Company as a regular corporation if it fails to
qualify as a REIT.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------------------
Per Share $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
==============================================================================================================================
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(1) The Company and Wackenhut Corrections have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $2,430,000, which are payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
930,000 additional Common Shares on the same terms and conditions as set
forth above, solely for the purpose of covering over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, and Proceeds to Company will
be $ , $ and $ , respectively.
-------------------------
The Common Shares are being offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them, and subject to
certain conditions. It is expected that certificates for the Common Shares
offered hereby will be available for delivery on or about , 1998 at
the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
---------------------
SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
SBC WARBURG DILLON READ INC.
GENESIS MERCHANT GROUP
SECURITIES
SUNTRUST EQUITABLE SECURITIES
, 1998
<PAGE> 3
[COVER 2]
[PHOTO OF CORRECTIONS OFFICER AT THE BROWARD FACILITY]
[PHOTO OF CORRECTIONS OFFICER AT A SECURITY CHECKPOINT IN THE GOLDEN STATE
COMMUNITY CORRECTIONAL FACILITY.]
[CORRECTIONAL PROPERTIES TRUST LOGO]
[PHOTO OF CORRECTIONS OFFICER INSPECTING THE PERIMETER OF
THE DESERT VIEW COMMUNITY CORRECTIONAL FACILITY.]
[PHOTO OF A CLASSROOM IN ONE OF THE CALIFORNIA FACILITIES.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
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[GATEFOLD]
CORRECTIONAL PROPERTIES TRUST
[MAP OF THE UNITED STATES SHOWING THE LOCATION OF THE FACILITIES TO BE ACQUIRED
BY THE COMPANY PURSUANT TO THE FORMATION TRANSACTIONS.]
INITIAL FACILITIES
1 -- Queens Private Correctional Facility
(New York, NY)
2 -- Broward County Work Release Center
(Broward County, FL)
3 -- Aurora INS Processing Center (Aurora, CO)
4 -- Karnes County Correctional Center
(Karnes, TX)
5 -- McFarland Community Correctional Facility
(McFarland, CA)
6 -- Central Valley Community Correctional
Facility (McFarland, CA)
7 -- Golden State Community Correctional
Facility (McFarland, CA)
8 -- Desert View Community Correctional
Facility (Adelanto, CA)
OPTION FACILITIES
9 -- Michigan Youth Correctional Facility
(Baldwin, MI)
10 -- Lawton Correctional Facility (Lawton, OK)
11 -- Jena Juvenile Justice Center (Jena, LA)
[PHOTO OF CENTRAL VALLEY FACILITY SIGNAGE]
[PHOTO OF EXTERIOR OF BROWARD FACILITY]
[PHOTO OF EXTERIOR OF DESERT VIEW FACILITY]
[PHOTO OF EXTERIOR OF MCFARLAND FACILITY]
[PHOTO OF EXTERIOR OF GOLDEN STATE FACILITY]
[AERIAL PHOTO OF CENTRAL VALLEY FACILITY]
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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PROSPECTUS SUMMARY................................ 1
The Company..................................... 1
Summary Risk Factors............................ 2
Business and Growth Strategies of the Company... 5
The Facilities.................................. 5
The Initial Facilities.......................... 5
The Option Facilities........................... 7
Wackenhut Corrections Corporation............... 7
The Formation Transactions...................... 8
Advantages and Disadvantages to Unaffiliated
Shareholders.................................. 10
Benefits to Wackenhut Corrections and Certain
Affiliates.................................... 10
Structure of the Company........................ 12
The Offering.................................... 13
Distributions................................... 13
Tax Considerations and Tax Status of the
Company....................................... 14
Summary Selected Financial Information.......... 15
RISK FACTORS...................................... 17
The Dependence of the Company on Wackenhut
Corrections as the Lessee of the Facilities for
its Initial Revenues and Ability to Make
Distributions.................................. 17
Conflicts of Interest........................... 18
General....................................... 18
No Arm's-Length Bargaining.................... 18
Potential for Future Conflicts................ 19
Benefits to Wackenhut Corrections............. 19
Lack of Control Over Day-to-Day Operations of
the Facilities................................ 20
Privatized Corrections Industry Risks........... 20
Limited Contract Duration..................... 20
Limited Availability of Alternate Lessees..... 20
Reliance Upon Government Appropriations for
Payment Under Awarded Contracts.............. 21
Governmental Regulation: Oversight, Audits and
Investigations............................... 21
Possible Fluctuations in Occupancy Levels..... 21
Limited Acceptance of Private Prison
Operation................................... 21
Community Opposition to Facility Location and
Adverse Publicity............................ 21
Potential Legal Proceedings................... 22
Lack of Operating History of the Company........ 22
Limited Operating History of the Facilities..... 22
Debt Risks...................................... 22
Dependence on Debt............................ 22
Adverse Consequences of Debt and Risks of
Leverage..................................... 23
Risks Associated with Permitted Subleases....... 23
Tax Risks....................................... 24
Failure of Company to Qualify as a REIT....... 24
Adverse Effects of REIT Minimum Distribution
Requirements................................. 25
Failure of the Operating Partnership to
Qualify as a
Partnership.................................. 25
Lack of Appraisals of the Facilities............ 25
No Assurance as to Valuation of the Company and
the
Common Shares.................................. 26
Risks Related to Distribution Policy............ 26
Dependence on Key Personnel..................... 26
Potential Limitations on Alternative Acquisition
Opportunities.................................. 26
Limitations on the Operational Flexibility of
the
Company........................................ 26
Potential Anti-Takeover Effect of Certain
Provisions of Maryland Law and the Company's
Declaration of Trust and Bylaws................ 27
Ownership Limit Necessary to Maintain REIT
Qualification................................ 27
Super-Majority Vote of Trustees............... 27
Preferred Shares.............................. 28
Staggered Board............................... 28
Maryland Business Combination Law............. 28
Maryland Control Share Acquisition Statute.... 29
No Prior Market for Common Shares............... 29
Changes in Investment and Financing Policies
Without
Vote of Shareholders........................... 29
Adverse Effect of Increase in Interest Rates on
Price
of Common Shares............................... 29
Factors Affecting Market Price.................. 30
ERISA Risks..................................... 30
Real Estate Investment Risks.................... 30
General....................................... 30
Valuation and Liquidity Risks................. 30
Acquisition and Expansion Risks............... 31
Risks Associated with Partnership and Joint
Venture
Property Ownership Structures................ 31
Environmental Matters......................... 31
Uninsured Losses.............................. 31
THE COMPANY....................................... 33
General......................................... 33
Business and Growth Strategies.................. 34
Acquisition Opportunities..................... 34
Expansion Opportunities....................... 35
Rent Escalations.............................. 35
The Bank Credit Facility........................ 36
The Operating Partnership....................... 36
USE OF PROCEEDS................................... 37
DISTRIBUTIONS..................................... 38
CAPITALIZATION.................................... 41
SUMMARY SELECTED FINANCIAL
INFORMATION...................................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............. 44
General......................................... 44
Results of Operations........................... 44
Pro Forma Results of Operations................. 44
Liquidity and Capital Resources................. 44
Funds from Operations........................... 45
Inflation....................................... 46
THE PRIVATIZED CORRECTIONS INDUSTRY............... 47
WACKENHUT CORRECTIONS CORPORATION................. 49
General......................................... 49
Certain Selected Financial Information of
Wackenhut
Corrections.................................... 50
Management's Discussion and Analysis of
Financial
Condition and Results of Operations of
Wackenhut Corrections.......................... 52
Results of Operations........................... 52
Financial Condition............................. 54
Year 2000....................................... 56
Interest Rate Sensitivity....................... 56
Inflation....................................... 56
Incorporation of Certain Documents by
Reference..................................... 56
THE FACILITIES.................................... 57
The Initial Facilities.......................... 57
Other Data on Significant Properties............ 60
The Option Facilities........................... 60
Ownership of the Facilities..................... 61
The Excluded Facilities......................... 62
Legal Proceedings............................... 62
Competition..................................... 62
Government Regulation........................... 62
Corrections Industry Regulations.............. 62
Environmental Matters......................... 63
Americans with Disabilities Act............... 63
THE FORMATION TRANSACTIONS........................ 64
Advantages and Disadvantages to Unaffiliated
Shareholders................................... 65
Benefits to Wackenhut Corrections and Certain
Affiliates..................................... 65
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RELATIONSHIP BETWEEN WACKENHUT CORRECTIONS AND THE
COMPANY AFTER THE FORMATION TRANSACTIONS......... 67
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN
ACTIVITIES....................................... 69
Investment Policies............................. 69
Disposition Policies; Wackenhut Corrections'
Right of
First Refusal.................................. 69
Financing Policies.............................. 70
Working Capital Reserve Policies................ 70
Conflicts of Interest Policies.................. 70
Declaration of Trust and Bylaw Provisions..... 70
Other Policies.................................. 71
OPERATING PARTNERSHIP AGREEMENT................... 72
Management...................................... 72
Transferability of Interests.................... 72
Capital Contribution............................ 72
Operations...................................... 72
Distributions and Allocations................... 73
Term............................................ 73
Tax Matters..................................... 73
LEASES............................................ 74
Use of the Facilities........................... 74
Amounts Payable Under the Leases; Net
Provisions.................................... 74
Maintenance, Modification and Capital
Additions..................................... 75
Insurance....................................... 75
Environmental Matters........................... 76
Assignment and Subletting....................... 76
Damage to, or Condemnation of, a Leased
Property...................................... 76
Indemnification Generally....................... 77
Events of Default............................... 77
SUBLEASES......................................... 79
The Broward Facility Sublease................... 79
The California Facilities Subleases............. 79
The Michigan Facility Sublease.................. 80
The Jena Facility............................... 80
MANAGEMENT........................................ 82
Trustees and Executive Officers................. 82
Committees of the Board of Trustees............. 84
Company Independent Committee................. 84
Audit Committee............................... 85
Compensation Committee........................ 85
Executive Committee........................... 85
Compensation of Trustees........................ 85
Indemnification................................. 85
Executive Compensation.......................... 86
Incentive Compensation.......................... 86
Employee Incentive Plan......................... 86
Awards Available for Issuance under the
Employee
Incentive Plan............................... 86
Shares Subject to the Employee Incentive
Plan........................................ 87
Certain Federal Income Tax Consequences....... 87
Non-Employee Trustee Option Plan................ 88
Shares Subject to the Non-Employee Trustee
Option
Plan......................................... 88
Transferability............................... 89
Eligibility................................... 89
Options....................................... 89
Certain Federal Income Tax
Consequences Related to Options.............. 89
Deferred Compensation Plan...................... 89
CERTAIN RELATIONSHIPS AND TRANSACTIONS............ 90
Initial Facilities.............................. 90
Option Facilities............................... 90
Leases.......................................... 90
Right to Purchase............................... 90
PRINCIPAL SHAREHOLDERS OF THE COMPANY............. 91
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST...... 92
General......................................... 92
Common Shares................................... 92
Preferred Shares................................ 93
Power to Authorize and Issue Additional Common
Shares and Preferred Shares.................... 93
Restrictions on Ownership....................... 93
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S DECLARATION OF TRUST AND BYLAWS........ 96
Classification and Removal of Trustees.......... 96
Meetings of Shareholders........................ 96
Limitations on Shareholder Liability............ 97
Business Opportunities.......................... 97
Super-Majority Vote of Trustees................. 97
Business Combinations........................... 97
Control Share Acquisitions...................... 98
Interested Trustee Transactions................. 99
Amendments to the Declaration of Trust and
Bylaws........................................ 99
Dissolution of the Company...................... 99
Restrictions on Investment...................... 99
Limitations on Changes in Control............... 99
Limitation of Liability and Indemnification of
Trustees...................................... 100
Transfer Agent and Registrar.................... 100
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS........ 101
Taxation of the Company as a REIT............... 101
General....................................... 101
Requirements for Qualification................ 102
Income Tests.................................. 103
Prepaid Rent.................................. 107
Other Issues.................................. 107
Asset Tests................................... 107
Annual Distribution Requirements.............. 108
Failure to Qualify as a REIT.................... 108
Taxation of Taxable Domestic Shareholders....... 109
Backup Withholding............................ 110
Taxation of Tax-Exempt Shareholders............. 110
Taxation of Non-Domestic Shareholders........... 111
Ordinary Dividends............................ 111
Return of Capital............................. 112
Capital Gain Dividends........................ 112
Sales of Shares............................... 112
Treaty Benefits............................... 113
Tax Aspects of the Operating Partnership........ 113
Classification as a Partnership............... 113
Income Taxation of the Operating Partnership and
its
Partners....................................... 115
Operating Partnership Allocations............. 116
Basis in Operating Partnership Interest....... 116
ERISA CONSIDERATIONS.............................. 117
Employee Benefit Plans, Tax-Qualified Retirement
Plans and IRAs................................. 117
Status of the Company Under ERISA............... 118
UNDERWRITING...................................... 120
EXPERTS........................................... 121
LEGAL MATTERS..................................... 121
AVAILABLE INFORMATION............................. 122
GLOSSARY.......................................... 123
INDEX TO FINANCIAL STATEMENTS..................... F-1
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CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" RELATING TO, WITHOUT LIMITATION, FUTURE ECONOMIC PERFORMANCE, PLANS
AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND PROJECTIONS OF REVENUE
AND OTHER FINANCIAL ITEMS, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE"
OR "CONTINUE" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY. THE CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
IN SUCH FORWARD-LOOKING STATEMENTS.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information
contained in this Prospectus assumes (i) an initial public offering price (the
"Offering Price") per common share of beneficial interest, par value $.001 per
share (the "Common Shares"), of $20.00 (the mid-point of the range of estimated
initial public offering prices set forth on the cover page of this Prospectus),
(ii) the consummation of the Formation Transactions (as hereinafter defined),
and (iii) the Underwriters' over-allotment option is not exercised. Unless the
context requires otherwise, (a) the term "Company," as used herein, includes
Correctional Properties Trust and its wholly-owned subsidiaries, CPT Limited
Partner Inc., a Delaware corporation ("CPT LP"), and CPT Operating Partnership
L.P., a Delaware limited partnership (the "Operating Partnership"), (b) the term
"Operating Partnership," as used herein, includes the Operating Partnership and
each of its subsidiaries, and (c) the term "Wackenhut Corrections," as used
herein, includes Wackenhut Corrections Corporation and each of its subsidiaries.
See "Glossary" for the definitions of certain terms used in this Prospectus.
Investors should carefully consider the information set forth under the heading
"Risk Factors."
THE COMPANY
The Company was formed in February 1998 as a Maryland real estate
investment trust to capitalize on the growing trend toward privatization in the
corrections industry. The principal business strategy of the Company is to
acquire correctional and detention facilities from both private prison operators
and governmental entities and to lease such facilities to experienced
correctional and detention facility operators under long-term, non-cancelable,
triple-net leases (leases where the tenant is required to pay all operating
expenses, taxes, insurance, structural and non-structural repairs and other
costs). The Company intends to operate as a real estate investment trust (a
"REIT") and will be one of only two publicly-traded REITs which focus on the
acquisition and ownership of correctional and detention facilities.
The Company will, in connection with the consummation of the offering of
the Common Shares offered hereby (the "Offering"), enter into a series of
agreements with Wackenhut Corrections, a leading domestic and international
developer and operator of privatized correctional and detention facilities,
which will provide it access to acquisition opportunities in the industry. The
Company will use approximately $113.0 million of the net proceeds of the
Offering to acquire eight correctional and detention facilities currently
operated by Wackenhut Corrections (collectively, the "Initial Facilities") that
have an aggregate design capacity of 3,154 beds. The Company will also have the
option to acquire three additional correctional and detention facilities
currently under development by Wackenhut Corrections (collectively, the "Option
Facilities") that have an aggregate design capacity of 2,256 beds. In addition,
the Company will be granted the right to acquire each of the correctional or
detention facilities which Wackenhut Corrections acquires or has the right to
acquire in the future (the "Future Facilities," and together with the Initial
Facilities and the Option Facilities, the "Facilities"), subject to certain
limited exceptions where the sale or transfer of ownership of a facility is
restricted under the applicable facility operating agreement or
governmentally-assisted financing arrangements. See "The Facilities -- The
Initial Facilities," "The Facilities -- The Option Facilities" and "The
Formation Transactions" for a description of the terms of such arrangements. The
Initial Facilities and Option Facilities include all of the correctional and
detention facilities which Wackenhut Corrections presently owns or has the right
to acquire, with the exception of two facilities for which Wackenhut Corrections
has previously granted an option to purchase to the contracting governmental
entity. See "The Facilities -- The Excluded Facilities" and "The Formation
Transactions."
The Company will lease the Initial Facilities to Wackenhut Corrections
(which will continue to operate such Initial Facilities) pursuant to long-term,
non-cancelable, triple-net leases (the "Leases"). Each of the Leases will
provide for an initial term of 10 years and may generally be extended by
Wackenhut Corrections for three additional five-year terms at fair market rental
rates. The Leases provide for a base rent equal to 9.5% of the total purchase
price of each Initial Facility (the "Initial Facility Purchase Price") and
annual rent escalations equal to the annual increase in the Consumer Price
Index -- All Urban Consumers, as published
1
<PAGE> 9
by the Bureau of Statistics of the United States Department of Labor (the
"CPI"), subject to a minimum annual increase of 3% during the first three years
and a maximum annual increase of 4% throughout the term of the Lease (the "Base
Rent Escalation"). Wackenhut Corrections will not, under its arrangements with
the Company, be restricted from leasing properties (domestic or foreign) from
parties other than the Company.
Management believes that the privatized corrections industry has the
potential for substantial growth in the United States due to increases in the
inmate population, decreases in the availability of public funding for new
correctional and detention facilities and a growing acceptance of the trend
toward privatization in the corrections industry. Management believes that
recent statistics illustrate this trend. According to the United States Bureau
of Justice Statistics ("Bureau of Justice Statistics"), the inmate population in
federal, state and local facilities in the United States has grown from 501,886
in 1980 to 1,646,020 in 1996, representing an increase of approximately 228%. In
addition, according to the Bureau of Justice Statistics, as of December 31,
1996, state prison systems reported operating at approximately 16% to 24%
overcapacity and the federal corrections system reported operating at
approximately 25% overcapacity. The privatized corrections industry has
capitalized on these favorable supply/demand fundamentals, resulting in a
substantial increase in the number of privatized beds. According to the reports
on privatization from the Private Corrections Project Center for Studies in
Criminology and Law, University of Florida (the "Privatization Reports"), the
number of beds under management at adult correctional facilities which were
under private management (including those under construction) in the United
States increased in 1996 from 57,609 to 77,584, representing an increase of
approximately 35%. The Company believes that it is well-positioned to capitalize
on these favorable industry fundamentals due to (i) the corrections industry
knowledge, experience and contacts of the members of its Board of Trustees (the
"Board of Trustees") and management team, (ii) its relationship and contractual
arrangements with Wackenhut Corrections, and (iii) its access to capital as a
publicly-traded company. However, the Company's management does not have prior
experience in managing and operating REITs.
The Company is managed by an experienced Board of Trustees and management
team, including Dr. George C. Zoley, Chairman of the Company and Vice Chairman
and Chief Executive Officer of Wackenhut Corrections, and Charles R. Jones,
President and Chief Executive Officer and a trustee of the Company. Dr. Zoley
and Mr. Jones have 16 and 12 years of experience, respectively, in the
privatized corrections industry. Although Dr. Zoley, Mr. Jones and Patrick T.
Hogan, Vice President and Chief Financial Officer of the Company, will manage
the Company's day-to-day operations and negotiate future acquisitions, any such
transactions with Wackenhut Corrections will be subject to approval by the
Independent Committee of the Company's Board of Trustees (the "Company
Independent Committee"). Dr. Zoley and Mr. Jones, as the only trustees of the
Company prior to the consummation of the Offering, coordinated the formation of
the Company with the cooperation of Wackenhut Corrections. See "Management --
Trustees and Executive Officers" for a biographical summary of Dr. Zoley and
Messrs. Jones and Hogan.
SUMMARY RISK FACTORS
AN INVESTMENT IN THE COMMON SHARES INVOLVES VARIOUS RISKS AND INVESTORS
SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS." SUCH RISKS
INCLUDE, AMONG OTHERS, THE FOLLOWING:
- Dependence upon rent payments from Wackenhut Corrections for all of the
Company's initial income, including risks related to (i) the ability of
Wackenhut Corrections to make rent payments that are sufficient to permit
the Company to make the initial estimated distributions to its
shareholders, (ii) the failure of Wackenhut Corrections to effectively
operate and manage the Facilities or meet its obligations under operating
agreements with governmental entities which could result in the
cancelation or non-renewal of such agreements and (iii) the failure or
delay in making rent payments in the event of the insolvency or
bankruptcy of Wackenhut Corrections;
- Conflicts of interest between the Company and Wackenhut Corrections,
including (i) the lack of arm's-length negotiations relating to the
purchase of the Initial Facilities and, if acquired, the Option
Facilities and the Future Facilities, including the risk that the
purchase prices paid therefor may exceed the fair market value of such
facilities, (ii) the lack of arm's-length negotiations relating to the
2
<PAGE> 10
Leases, (iii) the possible failure by the Company to enforce the terms
and conditions of the Leases against Wackenhut Corrections, even when
such enforcement would be in the best interests of the Company and its
shareholders and (iv) the benefits to be received by Wackenhut
Corrections and its affiliates and certain of their respective directors
and officers in connection with the Formation Transactions, including,
among other things, (a) the receipt by Wackenhut Corrections of
approximately $42.3 million in connection with the purchase of the
Initial Facilities and the receipt by Wackenhut Corrections of
approximately $5.2 million if the Company elects to exercise its option
to purchase the Option Facilities, (b) the repayment of approximately
$54.4 million in indebtedness incurred under an operating lease facility
guaranteed in part by Wackenhut Corrections (the "Wackenhut Lease
Facility") in connection with the purchase of the Initial Facilities and
(c) the receipt by Dr. Zoley, George Wackenhut, Richard Wackenhut and
other directors, officers and employees of Wackenhut Corrections and its
affiliates (other than Messrs. Jones and Hogan) contemporaneous with the
consummation of the Offering of options to purchase an aggregate of
480,000 Common Shares at a price per share equal to the Offering Price,
all of which could lead to decisions that do not reflect the best
interests of the Company and its shareholders;
- The Company's lack of control over the operations of any of the
facilities owned by it due to tax restrictions that prevent REITs from
operating such facilities;
- Ownership of the Company's facilities is subject to risks inherent in the
privatized corrections industry generally, including (i) limited contract
duration, (ii) reliance upon government appropriations for payments under
awarded contracts, (iii) government regulation, (iv) possible
fluctuations in occupancy levels, (v) limited acceptance of private
prison operation, (vi) community opposition to facility location and
(vii) potential legal proceedings, all of which could adversely affect
the ability of Wackenhut Corrections and other tenants to make required
lease payments;
- Limited duration of correctional and detention facility management
contracts (with the terms typically ranging between one and five years),
which could result in Wackenhut Corrections' obligation to continue to
make payments under a Lease for a Facility (each of which has a term of
ten years) even though it loses the facility operating agreement for such
Facility and the corresponding revenue therefrom, thereby increasing the
likelihood of default by Wackenhut Corrections under the Lease;
- Lack of operating history of the Company, including the fact that (i) the
Company was organized in February 1998 and there can be no assurance that
it will generate sufficient revenue to make anticipated distributions to
shareholders, (ii) the Company is subject to risks generally associated
with the formation of a new business and (iii) the Company's management
has no experience operating a REIT;
- Ownership of the Company's facilities is subject to risks that the
Initial Facilities will fail to perform in accordance with expectations
given the limited operating history of the Initial Facilities (only three
of which have an operating history of more than one year) which, in turn,
could increase the risk that Wackenhut Corrections will be unable to make
required lease payments to the Company;
- Reliance by the Company on debt or additional equity for growth as a
result of the expenditure of substantially all of the net proceeds of the
Offering on the purchase of the Initial Facilities and tax restrictions
on the Company's ability to retain cash generated by operating
activities, including the lack of assurance that adequate funds will be
available for the purchase of the Option Facilities and other facilities;
- Potential adverse consequences of high levels of debt, including the
absence of any limitation on the level of debt which may be incurred by
the Company, increase in debt service which could adversely affect the
Company's Cash Available for Distribution (as hereinafter defined) and
its ability to make expected distributions to shareholders and the
increased risk of default on the Company's obligations;
- The right of governmental entities to assume certain subleases and occupy
certain Facilities at rental rates which may be less than the rental
rates payable by Wackenhut Corrections under the Leases and
3
<PAGE> 11
risks associated with the right of governmental entities to purchase
certain Facilities at a purchase price which may be less than their fair
market values;
- The taxation of the Company as a regular corporation if it fails to
qualify as a REIT and taxation of the Operating Partnership as a
corporation if it fails to qualify as a partnership, each of which would
have a material adverse effect on Cash Available for Distribution;
- Lack of appraisals of the Facilities, including the possibility that the
purchase prices paid by the Company for the Initial Facilities and, if
acquired, the Option Facilities and the Future Facilities may exceed the
fair market value of such Facilities;
- Proposed distribution of at least 90.1% of the estimated Cash Available
for Distribution, including the risk that actual Cash Available for
Distribution may be insufficient to allow the Company to maintain its
anticipated initial annual distribution rate of $1.40 per Common Share;
- Dependence on certain key personnel, including Dr. George Zoley, Chairman
of the Company, and Charles Jones, President and Chief Executive Officer
and a trustee of the Company, and the lack of any employment agreements
with any such persons;
- Possible reluctance of other private prison operators to consider
possible sale/leaseback transactions with the Company given the Company's
ongoing relationship with Wackenhut Corrections and the overlap in
certain trustees of the Company and officers and directors of Wackenhut
Corrections;
- Limitations on the operational flexibility of the Company, including a
right of first refusal in favor of Wackenhut Corrections in connection
with any proposed sale by the Company of the Facilities;
- Limitations on the ability of shareholders to effect a change in control
of the Company, including, without limitation (i) restrictions on the
ownership of the Common Shares or the Company's preferred shares of
beneficial interest, par value per share of $.001 (the "Preferred
Shares"), by any shareholder or group of affiliated shareholders in
excess of 9.8% of any class and series of the Common Shares and Preferred
Shares, subject to certain limited exceptions, (ii) a requirement that
two-thirds of the members of the Board of Trustees approve the
acquisition by any party of 20% of the voting power of the Company's
voting securities (including, without limitation, the Common Shares),
(iii) the power of the Board of Trustees to authorize and issue
additional Common Shares or Preferred Shares or to classify or reclassify
authorized but unissued Common Shares or Preferred Shares, and (iv) the
staggered classification of the Board of Trustees, which could have the
effect of delaying, deferring or preventing a transaction or change in
control of the Company that might involve a premium price for Common
Shares or Preferred Shares or would otherwise be in the best interests of
the Company's shareholders;
- Absence of a prior public market for the Common Shares and lack of
assurances that an active trading market will develop or that the Common
Shares will trade at or above the Offering Price following the
consummation of the Offering;
- Ability of the Board of Trustees to change the Company's investment,
financing, distribution and other policies at any time without shareholder
approval;
- Possible adverse effect of an increase in interest rates on the market
price of the Common Shares;
- Ownership of the Company's facilities is subject to risks affecting real
estate investments generally, including (i) economic and other conditions
which may adversely affect real estate investments, (ii) uncertainty as
to valuation and the relative illiquidity of real estate investments,
particularly correctional and detention facilities which have limited
alternate uses, (iii) risks related to acquisition and expansion of real
estate investments, (iv) potential liability for unknown or future
environmental matters and (v) the possibility that a facility could
sustain an uninsured loss; and
- The Common Shares may not be appropriate investments for certain employee
benefit or retirement plans.
4
<PAGE> 12
BUSINESS AND GROWTH STRATEGIES OF THE COMPANY
The Company's primary business objectives are to maximize current returns
to shareholders through increases in Cash Available for Distribution and to
increase long-term total returns to shareholders through appreciation in the
value of the Common Shares. The Company intends to achieve these objectives by
(i) pursuing investment opportunities with private prison operators and
governmental entities for the acquisition of correctional and detention
facilities, (ii) working with tenants to identify opportunities to expand
existing and newly acquired facilities and (iii) structuring facility leases to
include rent escalation provisions which provide for annual increases in rent.
THE FACILITIES
The Company will enter into a purchase and sale agreement (the "Purchase
Agreement"), pursuant to which it will acquire the eight Initial Facilities, and
a series of option agreements (the "Option Agreements") pursuant to which it
will have the option to acquire each of the three Option Facilities at any time
on or prior to the earlier of (i) four years from receipt of a certificate of
occupancy for the subject facility, or (ii) six months after such facility
achieves an occupancy level of 75% of the number of beds authorized under the
certificate of occupancy for the facility (the "Option Facility Option Period").
The Company will also enter into an agreement (the "Right to Purchase
Agreement") pursuant to which it will have the right to acquire any Future
Facility on or prior to the earlier of (i)(a) in the case of a newly developed
Future Facility, four years from receipt of a certificate of occupancy for such
Future Facility or (b) in the case of an already operating Future Facility, four
years from the date such Future Facility is acquired by Wackenhut Corrections or
the party from which Wackenhut Corrections has the right to acquire such Future
Facility, or (ii) six months after the Future Facility attains an occupancy
level of 75% of the number of beds authorized under the certificate of occupancy
for such Future Facility (the "Future Facility Option Period"), subject to
certain limited exceptions where the sale or transfer of ownership of a facility
is restricted under the applicable facility operating agreement or pursuant to
restrictions from governmentally-assisted financing arrangements. This right to
purchase Future Facilities from Wackenhut Corrections under the Right to
Purchase Agreement will continue for 15 years after the consummation of the
Offering, so long as there are any leases in force between the Company and
Wackenhut Corrections. The Initial Facilities and Option Facilities include all
of the correctional and detention facilities which Wackenhut Corrections owns or
has the right to acquire, with the exception of two facilities for which
Wackenhut Corrections has granted the contracting governmental entity an option
to purchase. See "The Facilities -- The Excluded Facilities." The following is a
summary of certain information with respect to the Initial Facilities and the
Option Facilities.
THE INITIAL FACILITIES
The Initial Facilities will be acquired for an aggregate cash purchase
price of approximately $113.0 million. The Company will lease the Initial
Facilities to Wackenhut Corrections (and Wackenhut Corrections will continue to
operate such Initial Facilities) pursuant to the Leases, which have initial
terms of 10 years and provide for aggregate initial annual rents of
approximately $10.7 million. Throughout the terms of the Leases, the base rents
will escalate annually by the Base Rent Escalation. The Initial Facilities are
located in five states and have an aggregate design capacity of 3,154 beds.
5
<PAGE> 13
The following table sets forth certain information with respect to the
Initial Facilities:
<TABLE>
<CAPTION>
EXPIRATION
DESIGN OF INITIAL
CAPACITY AND FACILITY FACILITY FACILITY INITIAL
TYPE OF CONTRACTING SECURITY OCCUPANCY OPENING OPERATING PURCHASE ANNUAL
FACILITY AND LOCATION FACILITY ENTITY LEVEL(1) RATE(2) DATE AGREEMENT PRICE BASE RENT
- --------------------- ------------ ----------- -------- ------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aurora INS Processing
Center..................... INS INS(3) Minimum/ 300/100% May April $7,828,775 $743,734
Aurora, CO Processing Medium 1987 1998(7)
Center
McFarland Community
Correctional Facility...... Pre-Release CDOC(4) Minimum/ 224/86% February January 7,020,219 666,921
McFarland, CA Center Medium 1988 1999
Queens Private Correctional
Facility................... INS INS(5) Minimum/ 200/99% March March 14,732,071 1,399,547
New York, NY Detention Medium 1997 1999(8)
Facility
Central Valley Community
Correctional Facility...... Adult CDOC Minimum/ 550/94% December December 17,590,995 1,671,145
McFarland, CA Correctional Medium 1997 2007
Facility
Golden State Community
Correctional Facility...... Adult CDOC Minimum/ 550/94% December December 17,555,536 1,667,776
McFarland, CA Correctional Medium 1997 2007
Facility
Desert View Community
Correctional Facility...... Adult CDOC Minimum/ 550/86% December December 16,864,731 1,602,149
Adelanto, CA Correctional Medium 1997 2007
Facility
Broward County Work Release
Center..................... Work Release Broward Non- 300/85% February February 15,128,724 1,437,229
Broward County, FL Center County and Secured 1998 2003(9)
BSO(6)
Karnes County Correctional
Center..................... Adult Karnes Multi- 480/91% January July 16,320,000 1,550,400
Karnes County, TX Correctional County Security 1996 1998(10)
Facility
------------ ------------ ------------
Total/Weighted Average...... 3,154/92% $113,041,051 $10,738,901
============ ============ ============
<CAPTION>
LEASE
TERM
FACILITY AND LOCATION (YEARS)
- --------------------- -------
<S> <C>
Aurora INS Processing
Center..................... 10
Aurora, CO
McFarland Community
Correctional Facility...... 10
McFarland, CA
Queens Private Correctional
Facility................... 10
New York, NY
Central Valley Community
Correctional Facility...... 10
McFarland, CA
Golden State Community
Correctional Facility...... 10
McFarland, CA
Desert View Community
Correctional Facility...... 10
Adelanto, CA
Broward County Work Release
Center..................... 10
Broward County, FL
Karnes County Correctional
Center..................... 10
Karnes County, TX
Total/Weighted Average......
</TABLE>
- ---------------
(1) Each facility is identified according to the level of security maintained
as follows: non-secured facilities are facilities which are access
controlled residential facilities; minimum security facilities are
facilities having open-housing within an appropriate designated and
patrolled institutional perimeter; medium security facilities are
facilities having either cells, rooms or dormitories, a secure perimeter,
and some form of external patrol; maximum security facilities are
facilities having single occupancy cells, a secure perimeter and external
patrol or devices; and multi-security facilities are facilities with
various components of the previously described security levels.
(2) Design capacity measures the number of beds, and accordingly the number of
inmates each facility is designed to accommodate. Occupancy rate measures
the percentage of the number of beds which a facility is designed to
accommodate which are occupied at any given time. The facility operating
agreement with respect to any facility may provide for occupancy less than
the facility design capacity. The occupancy rates presented are as of March
26, 1998. The Company believes design capacity and occupancy rate are
appropriate measures for evaluating prison operations because the revenues
generated by each facility are generally based on a per diem or monthly
rate per inmate housed at the facility paid by the corresponding
contracting governmental entities. The ability of Wackenhut Corrections or
another private prison operator to satisfy its financial obligations under
its leases with the Company is based in part on the revenues generated by
their facilities, which in turn depends on the design capacity and
occupancy rate of each facility.
(3) The United States Immigration and Naturalization Service.
(4) The State of California Department of Corrections.
(5) The facility operating agreement for the Queens Private Correctional
Facility includes a minimum guarantee of 150 beds (75% occupancy).
(6) The Broward County Sheriff's Office. The facility operating agreement for
the Broward County Work Release Center includes a minimum guarantee of 300
beds (100% occupancy).
(7) The operating agreement for the Aurora INS Processing Center expired and
has been extended for successive 30 day periods, with the most recent
extension expiring on April 28, 1998. Wackenhut Corrections is presently
negotiating a long-term operating agreement for the Aurora INS Processing
Center. However, there can be no assurance that Wackenhut Corrections will
be successful in entering into such an agreement.
(8) The operating agreement for the Queens Private Correctional Facility may be
extended at the option of the INS for three additional one year periods.
(9) The operating agreement for the Broward County Work Release Center may be
extended at the option of Broward County for successive two year periods.
(10) Wackenhut Corrections began operating this facility in January 1998 under
an interim operating agreement with Karnes County which expires on July 14,
1998. Wackenhut Corrections is negotiating a long-term agreement with
Karnes County, pursuant to which Karnes County will agree to enter into
inter-governmental agreements for the housing of inmates with such
governmental entities as may be designated by Wackenhut Corrections.
However, there can be no assurance that Wackenhut Corrections will be
6
<PAGE> 14
successful in entering into such an agreement with Karnes County or with
other governmental entities for the housing of inmates, both of which are
necessary to the profitable operation of this facility by Wackenhut
Corrections.
THE OPTION FACILITIES
The Company will have the option to purchase each of the three Option
Facilities at any time during the applicable Option Facility Option Period. The
purchase price of each Option Facility (the "Option Facility Purchase Price")
will equal 105% (or such lower percentage as may be agreed to by Wackenhut
Corrections) of the aggregate costs related to the acquisition, development,
design, construction, equipment and start-up of such Option Facility (which, in
the case of goods or services provided by Wackenhut Corrections, will not exceed
the costs which would be paid therefor if purchased from a third party in an
arm's-length transaction) (the "Total Facility Cost"). Accordingly, the Option
Facility Purchase Price for an Option Facility may differ from the fair market
value thereof. If acquired, the Company will lease the Option Facilities to
Wackenhut Corrections (and Wackenhut Corrections will continue to operate such
Option Facilities) pursuant to long-term, non-cancelable, triple-net leases on
substantially the same terms and conditions as the Leases for the Initial
Facilities. The initial annual rental rate for each Option Facility will be 9.5%
of the applicable Option Facility Purchase Price and will escalate annually by
the Base Rent Escalation. The total estimated aggregate purchase price and
first-year rent for the Option Facilities are estimated to be approximately
$109.7 million and approximately $10.4 million, respectively. The Option
Facilities are located in three states and are expected to have an aggregate
design capacity of 2,256 beds.
The following table sets forth certain information with respect to the
Option Facilities:
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED ANTICIPATED LEASE
TYPE OF CONTRACTING SECURITY DESIGN (BED) FACILITY TERM
FACILITY AND LOCATION FACILITY ENTITY LEVEL CAPACITY OCCUPANCY DATE (YEARS)
- --------------------- ------------ ----------- -------- ------------ ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michigan Youth
Correctional
Facility............ Juvenile
Lake County, MI Correctional MDOC(1) Maximum 480 4th Quarter, 1999 10
Facility
Jena Juvenile Justice
Center................ Juvenile LDOC(2) Multi- 276 4th Quarter, 1998 10
Jena, LA Correctional Security
Facility
Lawton Correctional
Facility.............. Prison ODOC(3)(4) Medium 1,500 1st Quarter, 1999 10
Lawton, OK
Total................... 2,256
=====
</TABLE>
- ---------------
(1) State of Michigan Department of Management and Budget for the Department of
Corrections.
(2) State of Louisiana Department of Public Safety and Corrections.
(3) State of Oklahoma Department of Corrections.
(4) Wackenhut Corrections commenced construction of this facility in January
1998 and has responded to a request for proposal issued by the ODOC
soliciting proposals for up to 2,500 beds. There can be no assurance that
Wackenhut Corrections will be successful in entering into an operating
agreement with the ODOC for this facility.
WACKENHUT CORRECTIONS CORPORATION
Wackenhut Corrections is a leading developer and manager of privatized
correctional and detention facilities in the United States and abroad. Wackenhut
Corrections was founded in 1984 by Dr. George C. Zoley as a division of The
Wackenhut Corporation, a leading provider of professional security services, to
capitalize on emerging opportunities in the private correctional services
market. According to the Privatization Reports, Wackenhut Corrections is the
second largest provider of privatized correctional and detention services in the
United States and the largest provider of such services abroad, based upon the
number of beds under management. As of March 26, 1998, Wackenhut Corrections had
46 correctional and detention facilities under contract or award, of which 37
were in operation with an aggregate design capacity of 22,540 beds and an
average occupancy rate of 96% for the period from December 29, 1997 through
March 26, 1998, and of which 9 were under development with an aggregate design
capacity of 6,456 beds. Of the 37 facilities currently operated by Wackenhut
Corrections, three are owned by Wackenhut Corrections and four
7
<PAGE> 15
are owned by the Wackenhut Lease Facility (all of which are included in the
Initial Facilities), and the remainder of which are owned by the contracting
governmental entity or are financed through governmentally-assisted financing
arrangements. Of the nine facilities currently under development by Wackenhut
Corrections, five are owned by the Wackenhut Lease Facility (three of which are
included in the Option Facilities and two of which are subject to an option to
purchase which was previously granted to the contracting governmental entity)
and the balance are owned by the contracting governmental entity or are financed
though governmentally-assisted arrangements. In addition, as of March 26, 1998,
Wackenhut Corrections had outstanding written responses to governmental bid
requests known as Requests for Proposals ("RFPs") for eight projects with an
aggregate design capacity of 3,450 beds. While Wackenhut Corrections was awarded
contracts for 41% of the beds for which it submitted RFPs during 1997, there can
be no assurance that Wackenhut Corrections will be successful in winning any of
the management contracts relating to the RFPs for which it has outstanding
written responses.
Wackenhut Corrections offers governmental entities a comprehensive range of
correctional and detention facility management services, ranging from individual
consulting projects to the integrated design, development and management of such
facilities. In addition to providing the fundamental residential services
relating to the security of facilities and the detention and care of inmates,
Wackenhut Corrections has built a reputation as an effective provider of a wide
array of in-facility rehabilitative and educational programs, such as chemical
dependency counseling and treatment, basic education and job and life skills
training. Additionally, Wackenhut Corrections is continuously seeking to expand
into complementary services such as work release programs, youth detention
services and prisoner transport services. Wackenhut Corrections believes that
its experience in delivering a full range of high-quality correctional and
detention facility management services on a cost-effective basis to government
agencies provides such agencies strong incentives to choose Wackenhut
Corrections when awarding new contracts or renewing existing contracts.
Wackenhut Corrections will be the lessee of, and will continue to operate,
each of the Initial Facilities and, if acquired, the Option Facilities. The
terms of the sale of the Initial Facilities and Option Facilities and the leases
thereof were approved by an independent committee of the Board of Directors of
Wackenhut Corrections. Wackenhut Corrections is expected to sell additional
correctional and detention facilities to the Company in the future and to enter
into long-term, non-cancelable, triple-net leases with the Company with respect
to those facilities. It is not currently contemplated that Wackenhut Corrections
or any of its affiliates will provide administrative or other services to the
Company.
THE FORMATION TRANSACTIONS
Prior to or simultaneously with the consummation of the Offering, the
Company and Wackenhut Corrections will engage in a series of transactions (the
"Formation Transactions") which are designed to consolidate ownership of the
Initial Facilities in the Company, to provide a vehicle for possible future
acquisitions of the Option Facilities and the Future Facilities (in addition to
other facilities the Company may acquire) and to enable the Company to qualify
as a REIT for federal income tax purposes commencing with its taxable year
ending December 31, 1998. These transactions include the following:
- Issuance of Common Shares and Redemption of Founder's Shares. The
Company will sell 6,200,000 Common Shares in the Offering, resulting in
net proceeds to the Company of approximately $113.8 million after
deduction of the underwriting discounts and commissions and estimated
offering expenses. All of the net proceeds to the Company from the
Offering will be either contributed by the Company directly to the
Operating Partnership or contributed by the Company to CPT LP, a wholly-
owned subsidiary of the Company, so as to capitalize CPT LP and enable CPT
LP to fund its investment in the Operating Partnership, in exchange for a
combined 100% interest in the Operating Partnership. The Company will
initially own a 98% limited partnership interest and a 1% general
partnership interest in the Operating Partnership. CPT LP will initially
own a 1% limited partnership interest in the Operating Partnership. The
Company will, contemporaneous with the consummation of the Offering, also
redeem at cost the 1,000 founder's shares which were issued in connection
with the formation of the Company.
8
<PAGE> 16
- Purchase Agreement. The Company will enter into and close upon the
Purchase Agreement with Wackenhut Corrections, pursuant to which the
Company will acquire, directly or as assignee of Wackenhut Corrections'
contract rights, the eight Initial Facilities for an aggregate cash
purchase price of approximately $113.0 million. The total purchase price
of approximately $113.0 million represents approximately 118% of the
estimated cost of the Initial Facilities.
- Option Agreements. The Company will enter into the Option Agreements
with Wackenhut Corrections, pursuant to which Wackenhut Corrections will
grant the Company the option to acquire each of the three Option
Facilities at any time during the applicable Option Facility Option
Period, for a cash purchase price equal to the applicable Option Facility
Purchase Price. If the Company elects to purchase all three Option
Facilities, the aggregate purchase price is estimated to be approximately
$109.7 million.
- Leases. Concurrent with the Company's acquisition of the Initial
Facilities and, if acquired, the Option Facilities, the Company will lease
such Facilities to Wackenhut Corrections (and Wackenhut Corrections will
continue to operate such facilities) pursuant to the Leases for an initial
term of 10 years. Subject to certain limited exceptions, the term of each
of the Leases may be extended by Wackenhut Corrections for three
additional five-year terms at a fair market rental rate as mutually agreed
upon by the Company and Wackenhut Corrections or, in the absence of such
an agreement, as determined by binding arbitration. In addition, the term
of any of the Leases will be automatically extended upon expiration
thereof on the same terms (including the then applicable base rent and
Base Rent Escalation) as reflected in the applicable Lease if there is at
such time an unexpired sublease with respect to such Facility. Under the
terms of the Leases, Wackenhut Corrections will have a 30-day right of
first refusal on the proposed sale by the Company of any of the Initial
Facilities and, if acquired, the Option Facilities.
- Right to Purchase Agreement. The Company will enter into the Right to
Purchase Agreement with Wackenhut Corrections, pursuant to which the
Company will have the right at any time during the Future Facility Option
Period to acquire and lease back to Wackenhut Corrections each of the
Future Facilities, subject to certain limited exceptions where the sale or
transfer of ownership of a facility is restricted under a facility
operating agreement or governmentally assisted financing arrangement. The
purchase price for each Future Facility (the "Future Facility Purchase
Price") will equal 105% (or such lower percentage as may be agreed to by
Wackenhut Corrections) of the Total Facility Cost of such Future Facility,
which may differ from the fair market value of such Facility at such time.
In the case of any Future Facility acquired during the first five years
following the consummation of the Offering, the initial annual rental rate
will be the greater of (i) the fair market rental rate as mutually agreed
upon by the Company and Wackenhut Corrections, and in the absence of such
an agreement, as determined by binding arbitration, or (ii) 9.5% of the
applicable Future Facility Purchase Price. In the case of any Future
Facility acquired thereafter, the initial annual rental rate will be the
fair market rental rate as mutually agreed upon by the Company and
Wackenhut Corrections or, in the absence of such an agreement, as
determined by binding arbitration. Under the terms of any lease between
the Company and Wackenhut Corrections relating to a Future Facility,
Wackenhut Corrections will have a right of first refusal on the proposed
sale by the Company of any such Future Facility. The Right to Purchase
Agreement will continue for 15 years after the consummation of the
Offering so long as there are any leases in force between the Company and
Wackenhut Corrections.
- Credit Facility. The Company has obtained a commitment for a $100
million line of credit from NationsBank, N.A. (the "Bank Credit
Facility"), which may be used to finance the acquisition of additional
correctional and detention facilities (including the Option Facilities and
the Future Facilities), to expand the Facilities and for general working
capital requirements. The Bank Credit Facility is expected to close
following consummation of the Offering. See "The Company -- The Bank
Credit Facility." The Company has also obtained a commitment for a $10
million interim credit facility from NationsBank, N.A. (the "Interim
Credit Facility") on substantially the same terms and conditions as the
Bank Credit Facility.
9
<PAGE> 17
- Issuance of Options. The Company will, contemporaneous with the
consummation of the Offering, grant to certain officers and directors of
Wackenhut Corrections and its affiliates and to the officers and trustees
of the Company options to purchase an aggregate of 590,000 Common Shares
at a purchase price per share equal to the Offering Price, which will be
exercisable in four equal annual installments commencing on the date of
grant.
Additional information regarding the Formation Transactions is set forth
under "The Formation Transactions."
ADVANTAGES AND DISADVANTAGES TO UNAFFILIATED SHAREHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
shareholders of the Company include the ability to participate in the cash flow
generated by the rent from the Initial Facilities through their ownership by the
Company, and in all future acquisitions by the Company. See "The
Company -- Business and Growth Strategies -- Expansion Opportunities." The
potential disadvantages of such transactions to unaffiliated shareholders of the
Company include the lack of arm's-length valuations in determining the
consideration in such transactions and the fact that Dr. Zoley, Chairman of the
Company and Vice Chairman and Chief Executive Officer of Wackenhut Corrections,
Richard Wackenhut, a trustee of the Company and a director of Wackenhut
Corrections, and George Wackenhut, a trustee of the Company and Chairman of
Wackenhut Corrections, will have substantial influence over the management and
operations of the Company and the risk that such influence might be exercised in
a manner which may not be in the best interests of the Company and its
shareholders. See the more complete discussion of such matters under "Risk
Factors."
BENEFITS TO WACKENHUT CORRECTIONS AND CERTAIN AFFILIATES
The benefits of the foregoing transactions to Wackenhut Corrections and its
directors and officers include:
- Wackenhut Corrections will receive approximately $42.3 million in cash
for the three Initial Facilities owned by it and its right to acquire the
remaining five Initial Facilities and the Wackenhut Lease Facility, which
is guaranteed in part by Wackenhut Corrections, will receive approximately
$54.4 million in cash for the four Initial Facilities owned by it. The
cost of the seven Initial Facilities to be acquired from Wackenhut
Corrections and the Wackenhut Lease Facility is approximately $79.2
million;
- In the event the Company elects to exercise its option to acquire any or
all of the three Option Facilities, Wackenhut Corrections would receive
approximately $5.2 million in cash and the Wackenhut Lease Facility would
receive approximately $104.5 million in cash (in total, representing
approximately 105% of the cost of such Option Facilities, regardless of
their market value);
- Wackenhut Corrections will be able to expand its business development
opportunities as a result of the potential increased access to capital
available through its relationship and contractual arrangements with the
Company;
- Wackenhut Corrections will have a right of first refusal with regard to
certain future sales of the Facilities by the Company;
- Wackenhut Corrections has accelerated the vesting of 18,300 options to
purchase shares of Wackenhut Corrections' common stock which were held by
Charles Jones, the Company's President and Chief Executive Officer. Mr.
Jones has exercised these options, as well as 10,200 vested options to
purchase shares of Wackenhut Corrections common stock also held by him,
and has disposed of all such shares received by him upon exercise;
- Dr. Zoley, George Wackenhut, Richard Wackenhut and other directors,
officers and employees of Wackenhut Corrections and its affiliates (other
than Messrs. Jones and Hogan) will be granted, contemporaneous with the
consummation of the Offering, options to purchase an aggregate of 480,000
10
<PAGE> 18
Common Shares at a purchase price per share equal to the Offering Price,
which will be exercisable in four equal annual installments commencing on
the date of grant;
- Messrs. Jones and Hogan, each of whom have agreed to resign their
positions with Wackenhut Corrections upon consummation of the Offering,
will, contemporaneous with the consummation of the Offering, be granted
options to purchase an aggregate of 85,000 Common Shares at a purchase
price per share equal to the Offering Price; and
- Through its operation of the Initial Facilities pursuant to the Leases,
Wackenhut Corrections will be entitled to all of the cash flow from the
Initial Facilities after the payment of operating expenses, taxes and
rent under the Leases.
11
<PAGE> 19
STRUCTURE OF THE COMPANY
The following diagram sets forth the structure of the Company and Operating
Partnership upon the consummation of the Offering and the Formation
Transactions:
(Chart)
- ---------------
(1) Following the consummation of the Offering, WCC RE Holdings, Inc. ("WCCRE
Inc."), a wholly-owned subsidiary of Wackenhut Corrections, will be merged
with and into WCC RE Holdings LLC ("WCCRE LLC"), which will be formed as a
wholly-owned subsidiary of Wackenhut Corrections, with WCCRE LLC being the
surviving entity. WCCRE Inc. and WCCRE LLC are sometimes referred to
together herein as "WCCRE."
(2) The Operating Partnership will lease the following Initial Facilities to
Wackenhut Corrections: the Queens Private Correctional Facility (the "Queens
Facility"); the Aurora INS Processing Center (the "Aurora Facility") and the
Karnes County Correctional Center (the "Karnes Facility").
(3) The Operating Partnership will lease the following Initial Facilities to
WCCRE, each of which will in turn be subleased to Wackenhut Corrections: the
Broward County Work Release Center (the "Broward Facility"); the Central
Valley Community Correctional Facility (the "Central Valley Facility"); the
Golden State Community Correctional Facility (the "Golden State Facility");
the Desert View Community Correctional Facility (the "Desert View
Facility"); and the McFarland Community Correctional Facility (the
"McFarland Facility," and together with the Central Valley Facility, the
Golden State Facility and the Desert View Facility, the "California
Facilities").
(4) The provisions of certain existing facility operating agreements between
Wackenhut Corrections and the respective contracting governmental entities
afford the governmental entity the right to assume a lease of such facility
(or designate another facility operator to assume the lease of such
facility) at a fixed rental rate in the event of the early termination of
the facility operating agreement upon the occurrence of certain events. In
such instances, Wackenhut Corrections has entered into a sublease for the
subject Facility (each a "Sublease" and collectively, the "Subleases") with
WCCRE, a wholly-owned subsidiary of Wackenhut Corrections, with WCCRE as the
lessor and Wackenhut Corrections as the lessee. The contracting governmental
entity has the right to assume the rights of Wackenhut Corrections under
such Sublease on early termination of the operating agreement for the
relevant Facility. However, even if a government entity elects to exercise
its right to assume a sublease relating to a Facility, Wackenhut Corrections
will nevertheless remain liable to the Company under the Lease relating to
such Facility. See "Subleases."
12
<PAGE> 20
THE OFFERING
Common Shares offered by
the Company................ 6,200,000 shares
Common Shares outstanding
after the Offering....... 6,200,000 shares(1)
Use of Proceeds............ To acquire the Initial Facilities and for working
capital. See "Use of Proceeds," "Capitalization"
and "The Formation Transactions."
Proposed NYSE symbol....... "CPV"
- ---------------
(1) Excludes 620,000 Common Shares reserved for issuance under the Correctional
Properties Trust 1998 Employee Share Incentive Plan (the "Employee Incentive
Plan") and 55,000 Common Shares reserved for issuance under the Correctional
Properties Trust 1998 Non-Employee Trustees' Share Option Plan (the
"Non-Employee Trustee Option Plan," and together with the Employee Incentive
Plan, the "Plans"), of which 590,000 Common Shares will be subject to
outstanding options upon the consummation of the Offering. See
"Management -- Employee Incentive Plan" and " -- Non-Employee Trustee Option
Plan" and "The Formation Transactions."
DISTRIBUTIONS
Subsequent to the Offering, the Company intends to pay regular quarterly
distributions to its shareholders. The Board of Trustees, in its sole
discretion, will determine the actual distribution rate based on the Company's
actual results of operations, economic conditions, tax considerations (including
those related to REITs) and other factors. The Company's first distribution, for
the period from the closing of the Offering through June 30, 1998, is expected
to be approximately per Common Share, representing a pro rata
distribution of the anticipated regular quarterly distribution of $0.35 per
share for a full quarter, which on an annualized basis, represents an initial
anticipated distribution rate of $1.40 or approximately 7.0% of the Offering
Price. The Company does not expect to change its estimated initial distribution
per Common Share if the Underwriters' over-allotment option is exercised.
The Company has established the initial annual distribution rate based on
the Company's estimate of Cash Available for Distribution for the twelve months
following the consummation of the Offering, by adding (i) the Company's estimate
of the Funds from Operations (as hereinafter defined) for the year ended
December 31, 1997, based upon the pro forma contractual rental revenue and
related real estate depreciation for the two Initial Facilities that were
operational for the full year ended December 31, 1997 and the four Initial
Facilities that were operational for a portion of the year ended December 31,
1997; (ii) the Company's estimate of the amount necessary to annualize the sum
of the contractual rental income, net of related real estate depreciation, and
the Company's estimate of the related real estate depreciation for the year
ended December 31, 1997 for the four Initial Facilities that were operational
for some portion of such year, based upon the contractual rental revenue payable
on account of such facilities; and (iii) an amount equal to the sum of the
Company's estimate of the contractual rental income, net of related real estate
depreciation, and the Company's estimate of the related real estate depreciation
for the two Initial Facilities that became operational during February 1998,
based upon the contractual rental revenue payable on account of such facilities.
None of the Initial Facilities were owned or operated by the Company and none of
the Leases were in effect prior to consummation of the Offering. All such
Initial Facilities were operated by Wackenhut Corrections prior to consummation
of the Offering. The estimate of Cash Available for Distribution is being made
solely for the purpose of setting the initial distribution and is not intended
to be a forecast of the Company's results of operations or liquidity, nor is the
methodology upon which such adjustments were made necessarily intended to be a
basis for determining future distributions. See "Distributions."
The Company believes that in order to facilitate a clear understanding of
the operating results of the Company, Funds from Operations should be examined
in conjunction with pro forma net income as presented in the pro forma Statement
of Operations and information included elsewhere in this Prospectus. Funds from
Operations does not represent cash generated from operating activities in
accordance with generally accepted accounting principles ("GAAP"), consistently
applied and should not be considered an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions. The Company's Funds from Operations
are not comparable to Funds from Operations
13
<PAGE> 21
reported by other REITs that do not define the term using the current National
Association of Real Estate Investment Trusts ("NAREIT") definition or that
interpret the current NAREIT definition differently than does the Company. The
expected distribution for the 12 months following completion of the Offering
will equal approximately 90.1% of the estimated Cash Available for Distribution
for the twelve months following the consummation of the Offering. The Company's
estimate of Cash Available for Distribution does not include any revenues or
expenses related to the possible purchase of the Option Facilities, the Future
Facilities or additional facilities. The Company intends to maintain its
approximate initial distribution rate for at least 12 months following the
consummation of the Offering unless actual results of operations, economic
conditions or other factors differ from the assumptions used in calculating the
estimate. Based on the Company's pro forma Statement of Operations for the year
ended December 31, 1997, the Company estimates that approximately 15% to 20% of
the anticipated initial annual distribution to shareholders would represent a
return of capital for federal income tax purposes and that the Company would
have been required to distribute $7.0 million or $1.12 per share during such
12-month period in order to maintain its status as a REIT. If future taxable
income increases above or decreases below the estimated taxable income for the
12 months following the Offering, the percentage of the anticipated initial
annual distribution representing a return of capital will decrease or increase,
respectively. See "Distributions" for the calculation of estimated Cash
Available for Distribution and related assumptions.
TAX CONSIDERATIONS AND TAX STATUS OF THE COMPANY
The Company intends to make an election to be taxed as a REIT under
sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable year ending December 31, 1998. If the
Company qualifies for taxation as a REIT, with certain exceptions, the Company
will not be subject to federal income tax at the corporate level on its taxable
income that is distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
distribute at least 95% of its annual real estate investment trust taxable
income. In the opinion of Akerman, Senterfitt & Eidson, P.A., legal counsel to
the Company, commencing with the Company's taxable year ending December 31,
1998, the Company will be organized in conformity with the requirements for
qualification as a REIT, and its proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT. This opinion
will be based upon, and subject to, certain assumptions and various factual
representations of the Company, which will be incorporated into such opinion and
are addressed herein under the heading "Material Federal Income Tax
Considerations." The Company does not intend to request a ruling from the
Internal Revenue Service (the "IRS") as to its REIT status and an opinion of
counsel is not binding on the IRS or the courts. In addition, the opinion is
based upon the Code, regulations promulgated under the Code (the "Treasury
Regulations"), IRS administrative interpretations and court decisions existing
as of the date of this Prospectus, any of which could change with retroactive
effect. Qualification and taxation as a REIT depends upon the Company's ability
to meet, through actual annual operating results, distribution requirements,
diversity of share ownership and the various other qualification tests imposed
under the Code, the results of which will not be reviewed by legal counsel to
the Company. Failure to qualify as a REIT will render the Company subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, and distributions to the shareholders
in any such year will not be deductible by the Company. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain state
and local taxes on its income and property. In connection with the Company's
election to be taxed as a REIT, the Company's Declaration of Trust, as it will
be amended and restated contemporaneous with the consummation of the Offering
(the "Declaration of Trust"), imposes restrictions on the transfer of Common
Shares. The Company has adopted the calendar year as its taxable year. See "Risk
Factors -- Tax Risks -- Adverse Effects of REIT Minimum Distribution
Requirements," "Risk Factors -- Potential Anti-Takeover Effect of Certain
Provisions of Maryland Law and the Company's Declaration of Trust and
Bylaws -- Ownership Limit Necessary to Maintain REIT Qualification," "Material
Federal Income Tax Considerations" and "Description of Shares of Beneficial
Interest -- Restrictions on Ownership."
14
<PAGE> 22
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth (i) summary historical financial information
for the Company and (ii) unaudited selected pro forma financial information for
the Company. The pro forma operating information is presented as if the Offering
had occurred as of the beginning of the period indicated and therefore
incorporates certain assumptions that are included in the Notes to Pro Forma
Statements of Operations. The pro forma balance sheet information is presented
as if the Offering had occurred on February 20, 1998. The pro forma information
does not purport to represent what the Company's financial position or results
of operations actually would have been had the Offering, in fact, occurred on
such date or at the beginning of the period indicated, or to project the
Company's financial position or results of operations at any future date or for
any future period.
15
<PAGE> 23
CORRECTIONAL PROPERTIES TRUST
SUMMARY SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA
-----------------
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS:
Revenue:
Rental income(1).......................................... $ 2,449
Costs and expenses:
Operating and administrative(2)(3)........................ 1,340
Provision for depreciation(4)............................. 567
-------
Total costs and expenses.......................... 1,907
-------
Net income.................................................. $ 542
=======
Net income per share:
Basic..................................................... $ 0.09
Diluted................................................... 0.09
Weighted average number of shares outstanding(5):
Basic..................................................... 6,200
Diluted................................................... 6,200
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
AS OF AS OF
FEBRUARY 20, 1998 FEBRUARY 20, 1998
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Notes payable(3)............................................ $ -- $ --
Real estate before accumulated depreciation................. 113,041 --
Total assets................................................ 113,820 3
Shareholders' equity........................................ 113,820 3
</TABLE>
- ---------------
NOTES TO SUMMARY SELECTED FINANCIAL INFORMATION
(1) Rental income from Wackenhut Corrections recorded in accordance with the
terms of the Leases as if the leases for two of the Initial Facilities (the
Aurora Facility and the McFarland Facility) had commenced January 1997, one
(the Queens Facility) had commenced June 1997, and three (the Central Valley
Facility, the Golden State Facility and the Desert View Facility) had
commenced December 1997. The Company intends to classify and account for the
Leases as operating leases to Wackenhut Corrections in accordance with the
provisions of Statement of Financial Accounting Standards No. 13 "Accounting
for Leases."
(2) Recurring administrative expenses of the Company, including franchise and
excise taxes, are based upon management's estimates of operating and
administrative costs. Salaries were determined taking into account expected
salary levels of employees. Other expenses were determined by evaluating
similar expenses for other public companies.
(3) The Company has obtained a commitment for the $100 million Bank Credit
Facility from NationsBank, N.A. The Company will only obtain the Bank Credit
Facility if the Company elects to purchase the Option Facilities or to make
other acquisitions. Upon such election, the Company expects to incur debt
issuance costs of approximately $1.25 million. Such costs will be
capitalized and subsequently amortized over the expected term of the loan
upon closing of the Bank Credit Facility. Accordingly, no financing costs
have been capitalized in the accompanying Pro Forma Balance Sheet and no
amortization expense has been recognized in the Pro Forma Statement of
Operations.
(4) Depreciation expense on fixed assets purchased from Wackenhut Corrections
based on the estimated useful lives of the Facilities of 40 years.
(5) Weighted average shares outstanding includes Common Shares sold in the
Offering as if such shares were outstanding for the entire period and
excludes the 1,000 founder's shares which will be redeemed in connection
with the Offering.
16
<PAGE> 24
RISK FACTORS
Prospective investors should carefully consider the following risk factors
in conjunction with the other information contained in this Prospectus before
purchasing Common Shares in the Offering. This Prospectus contains certain
forward-looking statements. The Company wishes to caution readers that the
following risk factors, among other factors, may cause the Company's future
results to differ materially from those expressed in any forward-looking
statements contained in this Prospectus.
THE DEPENDENCE OF THE COMPANY ON WACKENHUT CORRECTIONS AS THE LESSEE
OF THE FACILITIES FOR ITS INITIAL REVENUES AND ABILITY TO MAKE DISTRIBUTIONS
Wackenhut Corrections (either alone or together with WCCRE) will be the
lessee of the Initial Facilities and, if acquired, the Option Facilities and the
Future Facilities. The Company's initial revenues, and its ability to make
distributions to its shareholders, will depend solely upon the ability of
Wackenhut Corrections to make rent payments and satisfy its obligations under
the Leases. Any failure or delay by Wackenhut Corrections in making rent
payments may adversely effect the Company's ability to make anticipated
distributions. The Company believes that Wackenhut Corrections has sufficient
assets and income to enable it to satisfy its obligations under the Leases at
this time; however, there can be no assurance that Wackenhut Corrections will
have such assets or income in the future. In addition, although the Company will
have general recourse to Wackenhut Corrections under the Leases, Wackenhut
Corrections' obligations under the Leases will not be secured by any of its
assets.
Failure by Wackenhut Corrections to comply with the material terms of any
Lease would give the Company the right to terminate such Lease and enforce the
obligations of Wackenhut Corrections thereunder, but could also require the
Company to find another lessee for such facility or risk losing its ability to
elect or maintain its REIT status. Similarly, there can be no assurance that
Wackenhut Corrections will elect to renew a Lease upon expiration of its initial
or any subsequent term, which would also force the Company to find a suitable
replacement lessee. In either circumstance, due to the limited number of
qualified operators in the correctional and detention industry, the Company may
be unable to locate a suitable lessee or to attract such a lessee, and may,
therefore, be required to reduce the rent, which would have the effect of
reducing the Company's Cash Available for Distribution. See "Wackenhut
Corrections Corporation" and "Leases."
In order to satisfy Wackenhut Corrections' obligations, including the
Leases, Wackenhut Corrections will be required to generate substantial operating
cash flow. The ability of Wackenhut Corrections to meet debt service, rental and
other obligations will depend on the future performance of Wackenhut
Corrections, which will be subject to prevailing economic conditions and to
financial, business and other factors beyond its control. As with other
operators of privatized correctional and detention facilities, Wackenhut
Corrections' success is largely dependent upon continuation of operating
agreements with governmental entities that are in some cases of limited duration
and subject to termination based upon levels of governmental appropriations. In
addition, the value of the Common Shares and the cost of the Company's
borrowings may be adversely affected by a negative change in Wackenhut
Corrections' credit rating or net worth, which could affect the ability of
Wackenhut Corrections to make payments under the Leases. See "Wackenhut
Corrections Corporation." Presently, Wackenhut Corrections is operating one of
the Initial Facilities, the Karnes Facility, under an interim operating
agreement with Karnes County, Texas, and is seeking to negotiate a long-term
agreement with Karnes County. Additionally, the Lawton Facility, which is an
Option Facility, is being constructed pending the response by the ODOC to its
RFP. There can be no assurance that Wackenhut Corrections will be successful in
entering into agreements with respect to either the Karnes or the Lawton
Facilities. See "The Facilities -- The Initial Facilities" and " -- The Option
Facilities."
To the extent that any of the lessees of the Company's facilities,
including Wackenhut Corrections or WCCRE, were to become a debtor in a
bankruptcy proceeding under the United States Bankruptcy Code (the "Bankruptcy
Code"), such lessee or its bankruptcy trustee could reject the lease. If a lease
were rejected, rental payments thereunder would terminate as to the related
facility, thereby leaving the Company without regular rent payments as to such
facility and with a claim for damages as a source of payment of amounts due
under such lease under Section 502(b)(6) of the Bankruptcy Code. A claim by a
lessor for damages resulting
17
<PAGE> 25
from the rejection by a debtor of a lease of real property (or rejection of a
guarantee of a lease upon the bankruptcy of the guarantor) is limited to an
amount equal to the rent reserved under the lease, without acceleration, for the
greater of one year or 15% (but not more than three years) of the remaining term
of the lease, plus rent already due but unpaid. There can be no assurance that
any such claim for damages would be sufficient to provide for the repayment of
amounts then due under the lease. In addition, in the event of a bankruptcy of
Wackenhut Corrections or WCCRE and a resulting rejection of the Leases, there is
no assurance that the Company will be able to locate a suitable replacement
lessee or to attract such lessee, or that it could obtain a rental rate
comparable to that paid by Wackenhut Corrections under the related Lease.
CONFLICTS OF INTEREST
Several conflicts of interest exist on the part of the Company and its
trustees and officers, on the one hand, and Wackenhut Corrections and its
directors and officers, on the other hand, all of which could lead to decisions
that do not reflect the best interests of the Company and its shareholders. The
following description sets forth the principal conflicts of interest, including
the relationships through which they arise, the potential effects of such
conflicts of interest and the policies and procedures implemented by the Company
to address those conflicts.
GENERAL
Because each of Dr. Zoley, George Wackenhut and Richard Wackenhut will be
both a trustee of the Company and a director of Wackenhut Corrections, there
will be inherent conflicts of interest in the ongoing acquisition, disposition,
lease, operation and management of the Initial Facilities and, if acquired, the
Option Facilities and the Future Facilities. In addition, Charles Jones,
President and Chief Executive Officer and a trustee of the Company, will be,
until the consummation of the Offering, an executive officer of Wackenhut
Corrections, and Patrick Hogan, Chief Financial Officer of the Company, will be,
until consummation of the Offering, an employee of Wackenhut Corrections.
Accordingly, the interests of the Company and its shareholders may not be fully
reflected in all decisions made or to be made or actions taken or to be taken by
certain officers and trustees of the Company. See "The Company," "The Formation
Transactions," "Management," "Certain Relationships and Transactions" and
"Policies and Objectives with Respect to Certain Activities -- Conflicts of
Interest Policies."
NO ARM'S-LENGTH BARGAINING
VALUATION OF THE INITIAL FACILITIES. The valuation of the Initial
Facilities was determined by management of both the Company and Wackenhut
Corrections and was not negotiated on an arm's-length basis. The purchase price
of the Initial Facilities was determined based primarily on an evaluation of the
current and anticipated cash flows and operating results of such facilities. No
independent appraisals were obtained in establishing the purchase price of the
Initial Facilities. It is possible that if such valuations had been determined
on an arm's-length basis, or had been the subject of independent valuations or
appraisals, the purchase price that the Company would pay for the Initial
Facilities might have been less. The terms on which the Initial Facilities will
be acquired, including the valuation thereof, will not be reviewed or approved
by the Company Independent Committee.
VALUATION OF THE OPTION FACILITIES AND THE FUTURE FACILITIES. The
methodology used in determining the Option Facility Purchase Price was
determined by management of both the Company and Wackenhut Corrections and was
not negotiated on an arm's-length basis. The purchase price of each such
Facility is linked directly to the Total Facility Cost of each such Facility,
and may therefore exceed the fair market value thereof. While the Company will
not be obligated to exercise its option or right to acquire any of the Option
Facilities or Future Facilities and such decision will be subject to approval of
the Company Independent Committee, it is possible that the purchase price paid
by the Company therefor might exceed the fair market value thereof.
LEASE TERMS. The Lease payment obligations with respect to the Initial
Facilities and the Option Facilities were determined by management of both the
Company and Wackenhut Corrections and were not negotiated on an arm's-length
basis. However, the Lease payments that Wackenhut Corrections is obligated to
make with respect to each of the Initial Facilities and, if acquired, the Option
Facilities is based on an initial
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lease rate of approximately 9.5% of the respective Initial Facility Purchase
Price or the Option Facility Purchase Price. It is possible that if the Lease
payments were negotiated on an arm's-length basis, the Lease rate payable by
Wackenhut Corrections to the Company would have been greater than the rate
determined by management of the Company and Wackenhut Corrections. In addition,
the Company will not participate in any increased rents or operating revenue
payable to Wackenhut Corrections by governmental entities. The terms of the
Leases for the Initial Facilities and the Option Facilities were not reviewed or
approved by the Company Independent Committee.
POTENTIAL FOR FUTURE CONFLICTS
Upon consummation of the Offering, Wackenhut Corrections and the Company
may be in situations where they have differing interests resulting from the
ongoing relationship between the companies. Such situations include the fact
that upon consummation of the Offering (i) Wackenhut Corrections will lease the
Initial Facilities from the Company, (ii) the Company will have the option to
acquire the Option Facilities and a right to purchase the Future Facilities,
(iii) Wackenhut Corrections will have a right of first refusal on the proposed
sale by the Company of any Facilities and (iv) three of the Company's trustees
(Dr. Zoley, George Wackenhut and Richard Wackenhut) will serve simultaneously on
the Board of Directors of Wackenhut Corrections and the Board of Trustees of the
Company, and two of the Company's trustees (Messrs. Jones and Travisono)
currently serve or previously served as executive officers or directors of
Wackenhut Corrections. Accordingly, the potential exists for future
disagreements as to the compliance with the Leases or the values of the
Facilities or lease payments therefor. Because of the relationship of certain of
the Company's trustees with Wackenhut Corrections, such trustee's decisions
relating to the Company's enforcement of its rights under the Leases and other
matters may not reflect the interest of the Company and its shareholders.
Additionally, the possible need by the Company, from time to time, to finance,
refinance or effect a sale of any of the Facilities may result in a need to
modify the Lease applicable to such Facility. Any such modification will require
the consent of Wackenhut Corrections, and the lack of consent from Wackenhut
Corrections could adversely affect the Company's ability to consummate such
financing or sale. Because of the relationships described above, there is the
risk that the Company will not achieve the same results in its dealings with
Wackenhut Corrections that it might achieve if such relationships did not exist.
In the event revenues from the Initial Facilities increase significantly
over prior periods or, in the case of new facilities, projected operating
expenses with respect thereto are less than historical or projected operating
expenses, Wackenhut Corrections could benefit disproportionately therefrom. In
the event incremental increases in expenses of the Facilities exceed incremental
increases in revenue, conflicts of interest may arise between Wackenhut
Corrections and the Company.
BENEFITS TO WACKENHUT CORRECTIONS
Wackenhut Corrections and certain of its directors and officers will
receive certain material benefits in connection with the Formation Transactions,
including, but not limited to, (i) the receipt by (a) Wackenhut Corrections of
approximately $42.3 million in cash in exchange for the three Initial Facilities
owned by it and its right to acquire the remaining five Initial Facilities
(resulting in a gain to Wackenhut Corrections of approximately $17.7 million),
(b) receipt by the Wackenhut Lease Facility of approximately $54.4 million in
cash in exchange for the four Initial Facilities owned by it and (c) receipt by
Wackenhut Corrections of approximately $5.2 million in cash and receipt by the
Wackenhut Lease Facility of approximately $104.5 million in cash if the Company
elects to exercise its option to purchase the Option Facilities, (ii) receipt by
Dr. Zoley, George Wackenhut, Richard Wackenhut and other directors, officers and
employees of Wackenhut Corrections and its affiliates (other than Messrs. Jones
and Hogan) of options to purchase an aggregate of 480,000 Common Shares at a per
share purchase price equal to the Offering Price, (iii) Wackenhut Corrections'
release from approximately $54.4 million in guarantees resulting from the use of
the proceeds from the sale of the Initial Facilities to reduce the outstanding
balance under the Wackenhut Lease Facility, and (iv) Wackenhut Corrections'
potential profit from the operation of the Initial Facilities after the payment
of operating expenses, taxes and rent under the Lease.
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LACK OF CONTROL OVER DAY-TO-DAY OPERATIONS OF THE FACILITIES
To qualify as a REIT for federal income tax purposes, the Company may not
operate or participate in decisions affecting the operations of any of the
facilities acquired by it. Wackenhut Corrections will control the operations of
the Initial Facilities and, if acquired, the Option Facilities, each of which
will have an initial term of 10 years and three renewal terms of five years
each, exercisable by Wackenhut Corrections. Wackenhut Corrections will also
control the operations of the Future Facilities, if acquired. The Company will
not have the authority to require Wackenhut Corrections to operate the
Facilities in a particular manner or to govern any particular aspect of their
operation except as set forth in the Leases. Thus, even if the Company believes
Wackenhut Corrections is operating the Facilities inefficiently or in a manner
adverse to the Company's interests, the Company may not require Wackenhut
Corrections to change its method of operation. The Company is limited to seeking
redress only if Wackenhut Corrections violates the terms of any Lease, in which
case the Company's primary remedy is to terminate the relevant Lease or, in
certain circumstances, all of the Leases, and seek to recover damages from
Wackenhut Corrections. 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. There is also no assurance that the Company will be able to locate
a suitable replacement lessee or to attract such lessee, or that it could obtain
a rental rate comparable to that paid by Wackenhut Corrections under the related
Lease. See "Risk Factors-- Risks Associated with Permitted Subleases."
PRIVATIZED CORRECTIONS INDUSTRY RISKS
The ownership of the Initial Facilities and, if acquired, the Option
Facilities and the Future Facilities is subject to operating risks generally
inherent in the correctional and detention industry. The ability of the
Company's initial lessee, Wackenhut Corrections, to operate successfully in this
industry depends on a number of factors, the most important of which is the
continuation of demand by governmental agencies for privatized correctional and
detention facilities. A deterioration in the demand for privatized correctional
and detention facilities or a worsening in Wackenhut Corrections' relationships
with governmental entities or the terms upon which Wackenhut Corrections
operates correctional and detention facilities, may adversely affect Wackenhut
Corrections' business. Neither the Company nor Wackenhut Corrections has any
control over whether governmental agencies will contract for private prison
services.
LIMITED CONTRACT DURATION
Correctional and detention facility operating agreements typically have
terms ranging from one to five years, which terms are shorter than the Leases,
and generally contain one or more renewal options for terms ranging from one to
two years. Only the contracting governmental agency may exercise a renewal
option and no assurance can be given that any agency will exercise a renewal
option in the future. Wackenhut Corrections is obligated to continue to make
payments under the Lease for a Facility even if the facility operating agreement
for such Facility is not renewed. There can be no assurance that Wackenhut
Corrections will be able to secure an alternate contract or an alternate source
of inmates under such circumstances. The non-renewal of a facility operating
agreement and inability to secure an alternate agreement or source of inmates
could materially and adversely affect Wackenhut Corrections' ability to make
lease payments to the Company.
LIMITED AVAILABILITY OF ALTERNATE LESSEES
There is a limited number of qualified correctional and detentional
facility operators available to replace Wackenhut Corrections upon expiration or
early termination of a Lease. If the Company elects to terminate a Lease upon
Wackenhut Corrections' failure to pay or other default under a Lease, the
contracting government entity is under no obligation to enter into a facility
operating agreement with a proposed replacement lessee. The Company's ability to
attract a replacement lessee therefore may be dependent on the willingness of
the government entity to contract with the replacement lessee for correctional
and detention facility services. Even if a replacement lessee is identified and
willing to lease the Facility, no assurance can be given that the rental rate
under the replacement lease will equal the rental rate payable to the Company
under the Lease with Wackenhut Corrections.
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RELIANCE UPON GOVERNMENT APPROPRIATIONS FOR PAYMENT UNDER AWARDED CONTRACTS
Correctional and detention facility operating agreements are subject to
either annual or bi-annual governmental appropriations. A failure by a
governmental agency to receive such appropriations could result in termination
of the contract by such agency or a reduction of the management fee payable to
the facility operator. In addition, even if funds are appropriated, delays in
payments may occur which could negatively affect the lessee's cash flow.
Furthermore, the termination of a facility operating agreement by any
governmental entity may adversely affect Wackenhut Corrections' ability to make
lease payments to the Company.
GOVERNMENTAL REGULATION: OVERSIGHT, AUDITS AND INVESTIGATIONS
The correctional and detention business is highly regulated by a variety of
governmental authorities which continuously oversee correctional and detention
business and operations. For example, the contracting agency typically assigns
full-time, on-site personnel to a facility to monitor the facility operator's
compliance with contract terms and applicable regulations. Failure to comply
with contract terms or regulations could expose a facility operator to
substantial penalties, including the loss of a management contract. In addition,
changes in existing regulations could require the facility operator to modify
substantially the manner in which it conducts business and, therefore, could
have a material adverse effect on the facility operator. Additionally, facility
operating agreements give the contracting agency the right to conduct routine
audits of the facilities and operations. An audit involves a governmental
agency's review of the facility operator's compliance with the prescribed
policies and procedures established with respect to the facility. The facility
operator also may be subject to investigations as a result of an audit, an
inmate's complaint or other causes. The termination of a facility operating
agreement or modification of the standards for operation of a facility may
adversely affect a facility operator's ability to make rent payments to the
Company.
POSSIBLE FLUCTUATIONS IN OCCUPANCY LEVELS
A substantial portion of a correctional facility operator's revenues are
generated under facility operating agreements that specify a net rate per day
per inmate (the "Per Diem Rate") based upon occupancy levels (some facility
operating agreements provide for guaranteed minimum occupancy levels), while a
substantial portion of the facility operator's cost structure is fixed. Under a
Per Diem Rate structure, a decrease in occupancy rates could cause a decrease in
revenues and profitability. A facility operator is, therefore, dependent on
government agencies supplying the facilities with a sufficient number of inmates
to meet the facilities' design capacities. A failure to do so may cause the
facility operator to forgo revenues and income or delay recognition of revenues
and income to later periods. Any delay in the receipt of revenues from a
government entity may adversely affect a facility operator's ability to make
rent payments to the Company.
LIMITED ACCEPTANCE OF PRIVATE PRISON OPERATION
Management of correctional and detention facilities by private entities has
not achieved complete acceptance by either governmental entities or the public.
Some sectors of the federal government and some state governments are legally
unable to delegate their traditional management responsibilities for
correctional and detention facilities to private companies. The operation of
correctional and detention facilities by private entities is a relatively new
concept, is not widely understood by the public and has encountered resistance
from certain groups, such as labor unions, local sheriff's departments and
groups that believe correctional and detention facility operations should only
be conducted by governmental entities. Such resistance may cause a change in
government and public acceptance of privatized correctional and detention
facilities. In addition, changes in dominant political parties in any of the
markets in which a facility operator provides services could result in
significant changes to previously established views of privatization in such
markets. If any such events were to materialize, the number of suitable
investments which are available to the Company could be substantially reduced.
COMMUNITY OPPOSITION TO FACILITY LOCATION AND ADVERSE PUBLICITY
A facility operator's success in obtaining new awards and contracts may
depend in part upon its ability to locate land that can be leased or acquired on
economically favorable terms by the facility operator or other
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entities working with the facility operator in conjunction with the facility
operator's proposal to construct and/or operate a facility. Some locations may
be in or near populous areas and, therefore, may generate legal action or other
forms of opposition from residents in areas surrounding a proposed site. A
facility operator's business is subject to public scrutiny. As a result, in
addition to possible negative publicity about privatization in general, an
escape, riot or other disturbance at any privately-managed facility may result
in publicity adverse to the facility operator and the industry in general, which
could adversely affect the facility operator's business, including the renewal
of the governmental entity's contract and the availability of suitable
investment opportunities.
POTENTIAL LEGAL PROCEEDINGS
As an owner of real property, the Company may be subject to certain
proceedings relating to personal injury of persons occurring at the Facilities.
The Company may be held responsible under state laws for claims based on
personal injury to inmates, civil rights assertions by inmates or damage to
certain personal property improvements owned by the lessee. While the Company
has included provisions in its leases with Wackenhut Corrections and will seek
to include provisions in its leases with other operators providing for indemnity
against such claims, there can be no assurance that such indemnity provisions
will be upheld in all circumstances or that the Company will be able to collect
indemnification payments from Wackenhut Corrections or such other operators. The
indemnification obligations of Wackenhut Corrections or such other operators may
adversely affect the ability of such entity to make lease payments to the
Company. Furthermore, the failure of the Company to collect indemnity payments
could adversely affect the Company's ability to make expected distributions to
its shareholders.
LACK OF OPERATING HISTORY OF THE COMPANY
The Company was organized in February 1998 and has no operating history.
Accordingly, there can be no assurance that the Company will be able to generate
sufficient revenue from operations to make anticipated distributions to its
shareholders. The Company also will be subject to the risks generally associated
with the formation of any new business and specifically to the risks associated
with the formation and operation of a REIT. Investors are advised that the
Company's management has no experience operating a REIT.
LIMITED OPERATING HISTORY OF THE FACILITIES
Each of the Facilities has a limited operating history (with only three of
the Initial Facilities having an operating history of more than one year).
Accordingly, the acquisition of the Initial Facilities and, if acquired, the
Option Facilities and the Future Facilities, will be subject to general
investment risks associated with new real estate investments, including the risk
that such real estate investments may fail to perform in accordance with
expectations.
DEBT RISKS
DEPENDENCE ON DEBT
The Company intends to pursue a growth strategy which includes acquiring
correctional and detention facilities. Since substantially all of the net
proceeds from the Offering will be used to fund the purchase of the Initial
Facilities, there is no assurance that adequate funds will be available for the
acquisition of the Option Facilities or the Future Facilities. In this regard,
there is a risk that the Company will not have access to sufficient debt or
equity capital it may need to pursue its acquisition strategy. The Company may
need access to debt or equity capital for several reasons. First, the Company
generally cannot retain cash generated by operating activities. See "Material
Federal Income Tax Considerations." Second, although the current debt policy
(the "Debt Policy") of the Company is to maintain a ratio of total consolidated
indebtedness to total market capitalization plus total consolidated debt
(determined at the time the borrowing occurs) of 50% or less, the Company's
organizational documents, however, do not contain any limitation on the amount
or percentage of indebtedness the Company may incur, and the Board of Trustees
could alter or eliminate the current Debt Policy. If the Debt Policy were
changed or eliminated, the Company could become more highly
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leveraged, resulting in an increase in debt service, which could adversely
affect the Company's Cash Available for Distribution and its ability to make
expected distributions to its shareholders and result in an increased risk of
default on the Company's obligations. While the Company expects to enter into
the Bank Credit Facility following the Offering, there can be no assurance that
the Bank Credit Facility will close, or that the Bank Credit Facility will
continue to be available to the Company when needed. If the Company closes on
the Bank Credit Facility, the Company may, from time to time, incur indebtedness
under such facility to acquire any or all of the Option Facilities or Future
Facilities. Accordingly, since the Company generally cannot retain earnings, and
the amount of debt that it can incur is limited by the Debt Policy, the
Company's ability to continue making acquisitions will depend primarily on its
ability to obtain additional private or public equity financing. There is no
assurance that such financing will be available to the Company when needed.
ADVERSE CONSEQUENCES OF DEBT AND RISKS OF LEVERAGE
The Company expects that it will raise additional funds for its future
operations through debt financing. As a result of incurring debt, the Company
will be subject to the risks normally associated with debt financing, including
the risk that the Company's Funds from Operations will be insufficient to meet
the Company's debt service obligations and, to the extent that it cannot, the
risk that the Company may lose some or all of its assets, including any
Facilities that secure the Bank Credit Facility or other indebtedness, to
foreclosure. Economic conditions could result in higher interest rates, which
could increase debt service requirements on variable rate debt, such as the Bank
Credit Facility, and could reduce the amount of Cash Available for Distribution.
Adverse economic conditions could cause the terms on which borrowings become
available to the Company to be unfavorable. In such circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its terms
or otherwise, it could be required to liquidate one or more investments in
certain of the Facilities, which may result in a financial loss to the Company.
If a Facility is mortgaged to secure payment of indebtedness, and the Company is
unable to meet mortgage payments, the Facility could be foreclosed upon or
otherwise transferred to the mortgagee with a consequent loss of income and
asset value to the Company. See "Policies and Objectives With Respect to Certain
Activities -- Financing Policies."
RISKS ASSOCIATED WITH PERMITTED SUBLEASES
The provisions of certain existing facility operating agreements between
Wackenhut Corrections and the respective contracting governmental entities
afford the governmental entity the right to assume a lease of such facility (or
designate another facility operator to assume the lease of such facility) at a
fixed rental rate in the event of the early termination of the facility
operating agreement or upon the occurrence of certain events. In such instances,
Wackenhut Corrections has entered into a Sublease for the subject Facility with
WCCRE, a wholly-owned subsidiary of Wackenhut Corrections, with WCCRE as the
lessor and Wackenhut Corrections as the lessee. The contracting governmental
entity has the right to assume the rights of Wackenhut Corrections under such
Sublease on early termination of the facility operating agreement for the
relevant Facility. However, even if a government entity elects to exercise its
right to assume a sublease relating to a Facility, Wackenhut Corrections will
nevertheless remain liable to the Company under the Lease relating to such
Facility.
In connection with the Formation Transactions, such Subleases will be in
effect with respect to the Broward Facility, the Golden State Facility, the
Desert View Facility, the Central Valley Facility and the McFarland Facility,
each an Initial Facility. In the case of the Michigan Youth Correctional
Facility (the "Michigan Facility") (an Option Facility), there will be a
Sublease in effect between Wackenhut Corrections and the State of Michigan. The
Company has agreed, as part of the Formation Transactions, to recognize and
leave undisturbed the rights of the governmental entities under the Subleases
with respect to the foregoing Facilities. The terms and provisions of any such
Subleases for Future Facilities must be acceptable to the Company. While
Wackenhut Corrections remains obligated to the Company for rental payments under
a Lease even if a government entity elects to assume a Sublease relating to a
Facility, no assurance can be given that Wackenhut Corrections will not default
under the Lease relating to such Facility, in which case, the Company would
nevertheless be obligated to continue to lease the relevant facility to the
governmental entity
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(or its designated replacement operator) under the terms of the Subleases at a
rental rate which may be less than the rental rate under the Leases. In the case
of the Subleases in effect with respect to the Initial Facilities and the
Michigan Facility, the aggregate amount by which the annual rent payable under
the Subleases would be less than the annual rent payable under the Leases for
the year 2008, the year in which the potential difference between the annual
rent payable under the Subleases and the Leases would be greatest, would be
approximately $1.0 million, assuming a Base Rent Escalation of 4%.
The provisions of the Sublease between Wackenhut Corrections and the State
of Michigan with respect to the Michigan Facility provides the State with the
option to purchase the Facility at any time after the first five years of the
term at a price equal to the replacement cost less depreciation, which purchase
price may be less than the fair market value of such facility at the time such
option is exercised. Wackenhut Corrections will agree in the Lease for this
Facility that in the event the purchase option is exercised and the purchase
price paid by the State of Michigan is less than the net book value of the
Michigan Facility, as shown on the Company's books and records, then Wackenhut
Corrections will pay the shortfall to the Company. There can be no assurance as
to the amount, if any, of any shortfall, or that Wackenhut Corrections will, at
the time of exercise, have the funds necessary to pay such shortfall to the
Company.
TAX RISKS
FAILURE OF COMPANY TO QUALIFY AS A REIT
The Company intends to operate so as to qualify as a REIT under the Code. A
REIT generally is not taxed at the corporate level on income it currently
distributes to its shareholders. Although the Company believes that it will be
so organized and will operate in such a manner, no assurance can be given that
the Company will qualify or remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect its ability to qualify as a REIT. In addition,
no assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification and such changes could have a retroactive effect. The
Company is relying on the opinion of its legal counsel, Akerman, Senterfitt &
Eidson, P.A., to the effect that, based upon various assumptions relating to the
organization and operation of the Company and representations made by the
Company as to certain factual matters, the Company's proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT. However, such opinion is not binding on the IRS or any court.
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 (including
any applicable alternative minimum 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 Cash Available for Distribution to the Company's shareholders would
be reduced for each of the years involved. In addition, to the extent that
distributions to shareholders were made in anticipation of the Company's
continued qualification as a REIT, the Company might be required to borrow funds
or liquidate certain of its assets to pay the applicable corporate income tax
(and interest thereon plus the amount, if any, of penalties) arising from the
Company's failure to maintain its status as a REIT. Although the Company
currently intends to operate in a manner designed to qualify as a REIT, it is
possible that future economic, market, legal or tax considerations may cause the
Company to fail to qualify as a REIT or may cause the Board of Trustees to
revoke the REIT election if the Board of Trustees and the holders of two-thirds
of all outstanding shares of beneficial interest of the Company determine that
such factors make it no longer beneficial to qualify as a REIT. See "Policies
and Objectives with Respect to Certain Activities" and "Material Federal Income
Tax Considerations."
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ADVERSE EFFECTS OF REIT MINIMUM DISTRIBUTION REQUIREMENTS
To obtain the favorable tax treatment accorded to REITs under the Code, the
Company generally will be required each year to distribute to its shareholders
at least 95% of its REIT taxable income. The Company will be subject to income
tax on any undistributed REIT taxable income and net capital gain, and to a 4.0%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85.0%
of its ordinary income for the calendar year, (ii) 95.0% of its capital gain net
income for such year, and (iii) 100.0% of its undistributed income from prior
years.
The Company intends to make distributions to its shareholders to comply
with the distribution provisions of the Code and to avoid federal income taxes
and the nondeductible 4.0% excise tax. The Company's income will consist
primarily of the Company's share of the income of the Operating Partnership, and
the Company's cash flow will consist primarily of its share of distributions
from the Operating Partnership. Differences in timing between the receipt of
income and the payment of expenses in arriving at taxable income (of the Company
or the Operating Partnership) and the effect of nondeductible capital
expenditures, the creation of reserves or required debt amortization payments
could require the Company to borrow funds through the Operating Partnership on a
short-term or long-term basis to meet the distribution requirements that are
necessary to continue to qualify as a REIT. In such circumstances, the Company
might need to borrow funds to avoid adverse tax consequences even if management
believes that the then prevailing market conditions generally are not favorable
for such borrowings or that such borrowings are not advisable in the absence of
such tax considerations.
The Company, as general partner of the Operating Partnership, shall cause
the Operating Partnership to declare and pay quarterly, or more frequently as
determined by the Company, to its partners, including the Company, distributions
of Cash Available for Distribution of the Operating Partnership most of which
the Company intends to distribute to its shareholders. Such distributions will
be dependent on a number of factors, including the amount of the Operating
Partnership's Cash Available for Distribution, the Operating Partnership's
financial condition, any decision by the Company, as general partner, to
reinvest funds rather than to distribute such funds, the Operating Partnership's
capital expenditure requirements, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the trustees deem
relevant. There is no assurance that the Company will be able to continue to
satisfy the annual distribution requirement so as to qualify as a REIT. See
"Material Federal Income Tax Considerations -- Taxation of the Company as a
REIT -- Requirements for Qualification."
FAILURE OF THE OPERATING PARTNERSHIP TO QUALIFY AS A PARTNERSHIP
If the IRS were to challenge successfully the status of the Operating
Partnership as a partnership for federal income tax purposes, the Operating
Partnership would be taxable as a corporation. In such event, the Company would
cease to qualify as REIT for federal income tax purposes. The imposition of a
corporate tax on the Operating Partnership, with a concomitant loss of REIT
status of the Company, would reduce substantially the amount of Cash Available
for Distribution. The Company is relying on the opinion of Akerman, Senterfitt &
Eidson, P.A. that, based upon various assumptions relating to the organization
and operation of the Operating Partnership and representations made by the
Company as to certain factual matters, the Operating Partnership will not be
taxable as a corporation. However, such opinion is not binding on the IRS or any
court. Moreover, there is no assurance that the Operating Partnership will not
become taxable as a corporation in the future whether by reason of a change in
factual matters or circumstances from those assumed as of the Offering or a
change in the tax laws by reason of legislation, new regulations, IRS
administrative interpretations or court decisions. See "Material Federal Income
Tax Considerations -- Tax Aspects of the Operating Partnership."
LACK OF APPRAISALS OF THE FACILITIES
In establishing the purchase price of the Initial Facilities, no
independent appraisals were obtained and there can be no assurance that
independent appraisals will be obtained if the Company elects to purchase any of
the Option Facilities or the Future Facilities. Accordingly, there can be no
assurance that the price paid by the Company for the Initial Facilities does not
exceed the fair market value thereof or that the purchase price paid for any
Option Facilities or Future Facilities will not exceed the fair market value
thereof.
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NO ASSURANCE AS TO VALUATION OF THE COMPANY AND THE COMMON SHARES
The valuation of the Company has been determined based upon a
capitalization of the Company's estimated Cash Available for Distribution and
the other factors discussed under "Underwriting," rather than an asset-by-asset
valuation based on historical cost or current market value. This methodology has
been used because the Company's management believes it appropriate to value the
Company as an ongoing business rather than with the view to values that could be
obtained from a liquidation of the Company or of individual assets owned by the
Company. There can be no assurance that revenues generated by the Initial
Facilities and, if acquired, the Option Facilities and the Future Facilities,
will not decline and that future Cash Available for Distribution will be
sufficient to make expected distributions to the Company's shareholders. If
expected distributions are not made, the market price of the Common Shares
likely would be adversely affected.
RISKS RELATED TO DISTRIBUTION POLICY
The Company's estimated initial annual distribution rate to shareholders is
90.1% of the Company's estimated Cash Available for Distribution. See
"Distributions." The Company's success in implementing its distribution policy
will depend significantly on the Company's ability to acquire additional
facilities at attractive prices. Internal growth through increases in revenues
from the Facilities is not expected to provide as much growth in Cash Available
for Distribution as will the acquisition, development or expansion of additional
facilities. There can be no assurance that Wackenhut Corrections or other
entities engaged in the private correctional and detention industry will develop
or acquire additional facilities to transfer to the Company. See "Risk
Factors -- Privatized Corrections Industry Risks." If the Company is unable to
acquire additional facilities from such entities at attractive prices, the
Company's ability to increase revenues and maintain or increase Cash Available
for Distribution per share may be adversely affected. Should actual Cash
Available for Distribution be less than estimated Cash Available for
Distribution, the Company may not be able to achieve and maintain its proposed
initial distribution rate. Any such failure to make expected distributions could
result in a decrease in the market price of the Common Shares.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its trustees and executive
officers. In particular, the Company expects to utilize the industry knowledge,
experience and contacts of Dr. George Zoley, Chairman of the Company, and
Charles Jones, President and Chief Executive Officer and a trustee of the
Company. The loss of the services of either of these individuals could have a
material adverse effect on the Company. Specifically, if the Company were to
lose the services of either Dr. Zoley or Mr. Jones, it would lose the benefit of
their extensive knowledge of, and experience in, the correctional and detention
industry. Dr. Zoley will simultaneously serve as Vice Chairman and Chief
Executive Officer of Wackenhut Corrections and Chairman of the Company. In this
regard, there is a risk that time commitments which Dr. Zoley will face in his
capacities with Wackenhut Corrections, which pays his entire salary and bonus,
will reduce the time and level of services which he can provide to the Company.
POTENTIAL LIMITATIONS ON ALTERNATIVE ACQUISITION OPPORTUNITIES
The Company's ongoing relationship with Wackenhut Corrections may
discourage other correctional and detention facility operators from offering to
sell facilities to the Company or from otherwise engaging in similar
sale/leaseback transaction with the Company. Such operators may take into
account to the Company's detriment (1) the substantial alignment of interests
between the Company and Wackenhut Corrections, (2) Wackenhut Corrections'
competitive interests to such operators, and (3) the overlap between trustees,
directors and officers of the Company and Wackenhut Corrections. The aforegoing
may have a material and adverse affect on the Company's access to opportunities
with operators other than Wackenhut Corrections.
LIMITATIONS ON THE OPERATIONAL FLEXIBILITY OF THE COMPANY
Wackenhut Corrections will have a right of first refusal in the event the
Company obtains an acceptable third party offer to acquire an interest in any of
the Facilities. Pursuant to such right, prior to selling any interest in any
Facility, the Company must first offer to sell such Facility to Wackenhut
Corrections on the
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same terms and conditions contained in such third party offer. If Wackenhut
Corrections declines to purchase the Facility on such terms and conditions, the
Company will be free to sell such Facility for a specified period of time on
terms and conditions substantially consistent with those offered to Wackenhut
Corrections. No assurance can be given that Wackenhut Corrections' right of
first refusal will not have an adverse effect on the Company's ability to resell
the Facilities from time to time in the future or the sales price the Company
obtains for such facilities.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF
MARYLAND LAW AND THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
Certain provisions of Maryland law and of the Declaration of Trust and the
Company's Bylaws, as they will be amended and restated contemporaneous with the
consummation of the Offering (the "Bylaws") may have the effect of discouraging
a third party from making an acquisition proposal for the Company and could
delay, defer or prevent a transaction or a change in control of the Company
under circumstances that could otherwise give the holders of Common Shares the
opportunity to realize a premium over the then prevailing market prices of the
Common Shares. Such provisions include the following:
OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of the Company's outstanding shares may be owned, actually or
constructively, under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code) at any time during the last half of
any taxable year, other than the first taxable year for which the election to be
taxed as a REIT has been made. Furthermore, if any shareholder or group of
shareholders of Wackenhut Corrections owns, actually, indirectly or
constructively 10% or more in value of any class or series of capital stock of
the Company (including the Common Shares), Wackenhut Corrections could become a
Related Party Tenant (as hereinafter defined under the caption "Material Federal
Income Tax Considerations -- Taxation of the Company as a REIT -- Income Tests")
of the Company, which would result in loss of REIT status for the Company. In
order to protect the Company against the risk of losing REIT status due to the
concentration of ownership among its shareholders, the Declaration of Trust will
limit direct, indirect or constructive ownership (taking into account applicable
ownership provisions of the Code) of more than 9.8% of any class or series of
the Company's capital stock (including the Common Shares) by any person, subject
to certain limited exceptions (the "Ownership Limit"). See "Description of
Shares of Beneficial Interest -- Restrictions on Ownership." The Board of
Trustees could, by a two-thirds vote, waive this restriction with respect to a
particular shareholder if it were satisfied, based upon the advice of tax
counsel and other terms or conditions the Board of Trustees deems necessary or
advisable, that ownership by such shareholder in excess of the Ownership Limits
would not jeopardize the Company's status as a REIT and the Board of Trustees
otherwise decided such action would be in the best interests of the Company. The
Board of Trustees could determine not to waive this restriction, even where the
proposed ownership would not jeopardize the Company's status as a REIT, if the
Board of Trustees determines it to be in the best interests of the shareholders
in a takeover situation to prevent a person from acquiring more than 9.8% of any
class or series of the Company's capital stock (including the Common Shares),
notwithstanding the fact that such failure to waive the restriction could delay,
defer or prevent a transaction that might involve the receipt of a premium price
for the Common Shares. Actual or constructive ownership of Common Shares in
excess of the Ownership Limits will cause the violative transfer or ownership to
be void with respect to the transferee or owner as to that number of shares in
excess of the Ownership Limits and such shares will be automatically transferred
to a trust for the benefit of a person to whom an interest in the Common Shares
may be permissibly transferred. Such impermissible transferee shall have no
right to vote such shares or be entitled to distributions with respect to such
shares.
SUPER-MAJORITY VOTE OF TRUSTEES
The Bylaws will provide that a two-thirds vote of the Board of Trustees
shall be required to approve each of the following transactions: (i) any
transaction or series of transactions which result in (x) any person or group
acquiring 20% or more of the voting power of the Company's securities
(including, without limitation, the voting power of the Common Shares) or (y)
the owners of the voting power of the Company's securities
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(including, without limitation, the voting power of the Common Shares)
immediately prior to such transaction(s) owning less than 80% of such voting
power after giving effect to such transaction(s); (ii) any amendment to the
Declaration of Trust or the Bylaws; (iii) any waiver or modification of the
Company's prohibition of any person or entity owning 9.8% of any class or series
of the Company's capital stock (including the Common Shares); and (iv) certain
issuances of the Company's capital stock. To the extent that one or more
trustees of the Company who are also directors, officers, employees of, or other
persons who have a material financial interest in, Wackenhut Corrections have
the power to veto a change of control of the Company could delay, defer or
prevent a transaction that might involve the receipt of a premium price for the
Common Shares or otherwise be in the best interests of the Company's
shareholders.
PREFERRED SHARES
Pursuant to the Declaration of Trust the Board of Trustees is authorized
without the approval of the shareholders to issue up to 50,000,000 Preferred
Shares (as well as to increase the number of Preferred Shares) and to classify
any unissued Preferred Shares and establish the preferences, rights, and other
terms of such shares (including the right to vote and the right to convert into
Common Shares). See "Description of Shares of Beneficial Interest." Prior to the
issuance of any such shares, the Board of Trustees is required to set, subject
to the provisions of the Declaration of Trust regarding restrictions on
transfers of shares, the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption of the shares. The Board of
Trustees could, but has no present plans to, establish a series of preferred
shares that could have the effect of delaying, deferring or preventing a tender
offer or a change in control of the Company that might involve a premium price
for the Common Shares or otherwise be in the best interests of the shareholders.
The Board of Trustees has the power, without shareholder approval, to classify
and reclassify any previously classified but unissued shares of the Company of
any class or series from time to time.
STAGGERED BOARD
The Board of Trustees will be divided into three classes of trustees as
nearly equal in size as practicable. The initial terms of the first, second and
third classes will expire in 1999, 2000 and 2001, respectively. Trustees of each
class will be chosen for three-year terms upon the expiration of the current
class terms, and, beginning in 1999 and each year thereafter, one class of
trustees will be elected by the shareholders. A trustee may be removed, with or
without cause, by the affirmative vote of two-thirds of the votes entitled to be
cast for the election of trustees, which super-majority vote requirement may
have the effect of delaying, deferring or preventing a change of control of the
Company. The staggered terms of trustees may reduce the possibility of a tender
offer or an attempt to change control of the Company even though a tender offer
or change in control might be in the best interests of the shareholders. See
"Certain Provisions of Maryland Law and of the Company's Declaration of Trust
and Bylaws -- Classification and Removal of Trustees."
MARYLAND BUSINESS COMBINATION LAW
Under the Maryland General Corporation Law, as it may be amended from time
to time (the "MGCL"), and as applicable to Maryland REITs, certain "business
combinations" (including certain issuances of equity securities) between a
Maryland REIT, such as the Company, and any person who beneficially owns 10% or
more of the voting power of the real estate investment trust's shares, or an
affiliate or associate of the real estate investment trust who at any time
within the two-year period prior to the date in question and after the date on
which the real estate investment trust had 100 or more beneficial owners of its
shares, was the beneficial owner of 10% or more of the voting power of the
then-outstanding voting shares of the real estate investment trust (an
"Interested Shareholder") or an affiliate thereof, are prohibited for five years
after the most recent date on which the Interested Shareholder became an
Interested Shareholder. Thereafter, any such business combination must be
approved by two super-majority votes of the holders of Common Shares unless,
among other conditions, the holders of Common Shares receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as
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previously paid by the Interested Shareholder for its shares. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws -- Business Combinations."
MARYLAND CONTROL SHARE ACQUISITION STATUTE
In addition to certain provisions of the Declaration of Trust, the Maryland
control share acquisition statute, as applicable to Maryland REITs, may have the
effect of discouraging a third party from making an acquisition proposal for the
Company. The MGCL provides that Control Shares (as hereinafter defined) of a
Maryland REIT acquired in a Control Share Acquisition (as hereinafter defined)
have no voting rights except to the extent approved by a vote of two-thirds of
the votes eligible under the statute to be cast on the matter (i.e. excluding
all interested shares as defined in the control share acquisition statute).
Control Shares are voting shares, which, if aggregated with all other such
shares previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing trustees within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority of all voting power. Control Shares do not
include shares that the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval. A Control Share Acquisition
means the acquisition of Control Shares, subject to certain exceptions. If
voting rights are not approved at a meeting of shareholders then, subject to
certain conditions and limitations, the issuer may redeem any or all of the
Control Shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for Control Shares are approved at a
shareholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the Control Share Acquisition. A Control Share Acquisition could,
therefore, be impeded and the attempt of any such transaction could be
discouraged even if it were in the best interest of the Company's shareholders.
The Company has opted out of the control share provisions of the MGCL, as
applicable to Maryland REITs, in its Bylaws, but the Board of Trustees may,
without shareholder approval, elect for the Company to become subject to these
provisions of the MGCL in the future.
NO PRIOR MARKET FOR COMMON SHARES
Prior to the Offering, there has been no public market for the Common
Shares. Although the Common Shares have been approved for listing on the NYSE,
subject to official notice of issuance, there can be no assurance that an active
trading market will develop or be sustained or that the Common Shares may be
resold at or above the Offering Price. The Offering Price will be determined
through negotiations between the Company and the Underwriters and may not be
indicative of the market price for the Common Shares after the Offering. See
"Underwriting."
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT VOTE OF SHAREHOLDERS
The Board of Trustees determines the Company's investment and financing
policies with respect to certain activities, including its growth,
capitalization, distribution and operating policies. The current Debt Policy of
the Company is to maintain a ratio of total consolidated indebtedness to total
market capitalization plus total consolidated debt (determined at the time the
borrowing occurs) of 50% or less. However, the Company's organizational
documents do not contain any limitation on the amount or percentage of
indebtedness the Company may incur and the Board of Trustees could alter or
eliminate such Debt Policy without a vote of the Company's shareholders.
Although the Board of Trustees has no present intention to amend or revise these
policies, the Board of Trustees may do so at any time. See "Policies and
Objectives With Respect to Certain Activities -- Investment Policies" and
" -- Financing Policies."
ADVERSE EFFECT OF INCREASE IN INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that may influence the price of the Common Shares in
public trading markets will be the annual yield from distributions by the
Company on the Common Shares as compared to yields on certain
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financial instruments. Thus, an increase in market interest rates will result in
higher yields on certain financial instruments, which could adversely affect the
market price of the Common Shares.
FACTORS AFFECTING MARKET PRICE
The market price of the Common Shares could be subject to significant
fluctuations in response to variations in quarterly and yearly operating
results, the success of the Company's business strategy, general trends in the
correctional and detention industry, competition, changes in the laws affecting
the Company and other factors. The price of the Common Shares in public markets
may also be affected by the amount of the annual distributions paid by the
Company relative to the price paid for the Common Shares. In addition, the stock
market in recent years has experienced price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of
affected companies. These fluctuations may adversely affect the market price of
the Common Shares.
ERISA RISKS
Depending upon the particular circumstances of the plan, an investment in
the Common Shares may not be an appropriate investment for an employee benefit
plan subject to Title I of the Employee Retirement Income Act of 1974, as
amended ("ERISA"), a qualified plan or individual retirement accounts and
individual retirement annuities (collectively, "IRAs"). In deciding whether to
purchase Common Shares, a fiduciary of a plan subject to Title I of ERISA, 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. In addition, the fiduciary of an IRA or of a qualified plan
not subject to Title I of ERISA (e.g., a governmental or church plan) should
consider, in consultation with its advisors, the application of the prohibited
transaction provisions of the Code and the types of investments that are
authorized by the appropriate governing documents and/or applicable state law.
See "ERISA Considerations."
REAL ESTATE INVESTMENT RISKS
GENERAL
Investments in the Initial Facilities and any additional correctional and
detention facilities 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 Initial Facilities and, if acquired, the Option
Facilities and Future Facilities, will generate total rental rates lower than
those anticipated or will yield returns lower than those available through
investment in comparable real estate or other investments. Revenue from the
Initial Facilities and, if acquired, the Option Facilities and Future
Facilities, and yields from investments in such facilities may be affected by
many factors, including changes in government regulation, general or local
economic conditions, the available local supply of prison beds and a decrease in
the need for prison beds.
VALUATION AND LIQUIDITY RISKS
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions
will be limited. Because management believes it is appropriate to value the
Company as an ongoing business rather than through liquidation values of the
Company or the Facilities, the valuation of the Company has been determined
primarily based upon a capitalization of the Company's estimated Cash Available
for Distribution and other factors discussed under "Underwriting," rather than
on the basis of each Facility's cost or appraised value. See "Underwriting." If
the Company must sell an investment, there can be no assurance that the Company
will be able to dispose of it in the time period it desires or that the sale
price of any investment will recoup or exceed the amount of the Company's
investment, particularly given the limited alternate uses of the Facilities.
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ACQUISITION AND EXPANSION RISKS
The Company intends to pursue acquisitions of additional correctional and
detention facilities and, under appropriate circumstances, may pursue expansion
of existing facilities. Acquisitions entail risks that investments will fail to
perform in accordance with expectations and that estimates of the cost of
improvements necessary to acquire such facilities will prove inaccurate, as well
as general investment risks associated with any new real estate investment. New
project development is subject to numerous risks, including risks of
construction delays or cost overruns that may increase project costs, new
project commencement risks such as receipt of zoning, occupancy and other
required governmental approvals and permits and the incurrence of development
costs in connection with projects that are not pursued to completion. The fact
that the Company must distribute 95.0% of REIT taxable income in order to
maintain its qualification as a REIT may limit the Company's ability to rely
upon lease income from the Initial Facilities or, if acquired, the Option
Facilities or the Future Facilities, to finance acquisitions or new
developments. As a result, if debt or equity financing were not available on
acceptable terms, further acquisition or development activities might be
curtailed or Cash Available for Distribution might be adversely affected.
RISKS ASSOCIATED WITH PARTNERSHIP AND JOINT VENTURE PROPERTY OWNERSHIP
STRUCTURES
The Company may also participate with other entities in correctional or
detention facility ownership through joint ventures or partnerships in the
future. Partnership or joint venture investments may, under certain
circumstances, involve risks not otherwise present, including the possibility
that the Company's partners or co-venturers might become insolvent, that such
partners or co-venturers might at any time have economic or other business
interests or goals which are inconsistent with the business interests or goals
of the Company and that such partners or co-venturers may be in a position to
take action contrary to the Company's instructions or requests, or contrary to
the Company's policies or objectives, including the Company's policy with
respect to maintaining its qualification as a REIT. The Company will, however,
seek to maintain sufficient control of such partnerships or joint ventures to
permit the Company's business objectives to be achieved. There is no limitation
under the Company's organizational documents as to the amount of funds that may
be invested in partnerships or joint ventures.
ENVIRONMENTAL MATTERS
Operating costs may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of future legislation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
complying with environmental laws could materially adversely affect Cash
Available for Distribution. Phase I environmental assessments have been obtained
for each of the Initial Facilities and Option Facilities. The purpose of a Phase
I environmental assessment is to identify potential environmental contamination
that is made apparent from historical reviews of facilities, review of certain
public records, visual investigations of the sites and surrounding properties,
toxic substances and underground storage tanks. The Phase I environmental
assessment reports which have been obtained to date have not revealed any
environmental contamination that the Company believes would have a material
adverse effect on the Company's business, assets, results of operations or
liquidity, nor is the Company aware of any such liability. Nevertheless, it is
possible that these reports do not reveal all environmental liabilities or that
there are material environmental liabilities of which the Company is unaware. In
addition, environmental conditions on properties owned by the Company may affect
the operation or expansion of facilities located on the properties.
UNINSURED LOSSES
The Leases require Wackenhut Corrections to maintain insurance with respect
to each of the Facilities. Wackenhut Corrections carries comprehensive
liability, fire, earthquake, flood (for certain Facilities) and extended
insurance coverage with respect to such properties with policy specifications
and insurance limits
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customarily carried for similar properties. There are, however, certain types of
losses which may be either uninsurable or not economically insurable. See
"Leases." The Company will obtain new title insurance policies for each of the
Initial Facilities in connection with the Offering. There is no assurance,
however, that the amount of title insurance coverage for any Initial Facility
will accurately reflect the current value of such Initial Facility or that title
losses would be completely covered by such insurance. Subject to the terms of
the Leases, should an uninsured loss occur, the Company could lose both its
capital invested in, and anticipated profits from, one or more of the Initial
Facilities. In the opinion of management of the Company, the Initial Facilities
are adequately insured in accordance with industry standards.
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THE COMPANY
GENERAL
The Company was formed in February 1998 as a Maryland real estate
investment trust to capitalize on the growing trend toward privatization in the
corrections industry. The principal business strategy of the Company is to
acquire correctional and detention facilities from both private prison operators
and governmental entities and to lease such facilities to experienced
correctional and detention facility operators under long-term, non-cancelable
triple-net leases. The Company intends to operate as a REIT and will be one of
only two publicly-traded REITs which focus on the acquisition and ownership of
correctional and detention facilities.
The Company will, in connection with the consummation of the Offering,
enter into a series of agreements with Wackenhut Corrections, a leading domestic
and international developer of privitized correctional and detention facilities,
which will provide it access to acquisition opportunities in the industry. The
Company will use approximately $113.0 million of the net proceeds of the
Offering to acquire each of the eight Initial Facilities currently operated by
Wackenhut Corrections for the applicable Initial Facility Purchase Price
thereof. The Initial Facilities are located in five states and have an aggregate
design capacity of 3,154 beds. The Company will also have the option to acquire
the three additional Option Facilities which are currently under development by
Wackenhut Corrections during the applicable Option Facility Option Period for
the applicable Option Facility Purchase Price. The Option Facilities are located
in three states and are expected to have an aggregate design capacity of 2,256
beds. In addition, the Company will be granted the right to acquire each of the
Future Facilities during the applicable Future Facility Option Period for the
applicable Future Facility Purchase Price, subject to certain limited exceptions
where the sale or transfer of ownership of a facility is restricted under the
applicable facility operating agreement or governmentally-assisted financing
arrangements. The Company's right to acquire Future Facilities from Wackenhut
Corrections pursuant to the Right to Purchase Agreement will continue for 15
years after consummation of the Offering, so long as there are any lease
contracts in force between the Company and Wackenhut Corrections. The Initial
Facilities and Option Facilities include all of the correctional and detention
facilities which Wackenhut Corrections presently owns or has the right to
acquire, with the exception of two facilities for which Wackenhut Corrections
has previously granted an option to purchase to the contracting governmental
entity. See "The Facilities -- The Excluded Facilities." It is not currently
contemplated that Wackenhut Corrections or its affiliates will provide any
administrative or other services to the Company.
In order to qualify as a REIT, the Company may not operate correctional and
detention facilities. As a result, the Company will lease each of the Initial
Facilities and, if acquired, each of the Option Facilities to Wackenhut
Corrections (which will continue to operate such Facilities) pursuant to the
Leases, which will require Wackenhut Corrections to pay all operating expenses,
taxes, insurance and other costs. Each of the Leases will provide for an initial
term of 10 years and may generally be extended by Wackenhut Corrections for
three additional five-year terms at fair market rental rates to be mutually
agreed upon by the Company and Wackenhut Corrections or, in the absence of such
an agreement, as determined by binding arbitration. The Leases provide for a
base rent equal to 9.5% of the Initial Facility Purchase Price or the Option
Facility Purchase Price, as applicable, and annual rent escalations equal to the
Base Rent Escalation. Wackenhut Corrections will not, under its arrangements
with the Company, be restricted from leasing properties (domestic or foreign)
from parties other than the Company.
While the Company intends to initially focus its acquisition activities on
facilities that are owned and operated by Wackenhut Corrections, the Company may
also pursue other opportunities, including acquisitions and leasebacks of, or
financings for, correctional and detention facilities owned and operated by
various governmental entities and private operators other than Wackenhut
Corrections. Management believes that the privatized corrections industry has
the potential for substantial growth in the United States due to increases in
the inmate population, decreases in the availability of public funding for new
correctional and detention facilities and a growing acceptance of the trend
toward privatization in the corrections industry. Management believes that
recent statistics illustrate this trend. According to the Bureau of Justice
Statistics, the inmate population in federal, state and local facilities in the
United States has grown from 501,886 in 1980 to 1,646,020 in 1996, representing
an increase of approximately 228%. In addition, according to the Bureau of
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Justice Statistics, as of December 31, 1996, state prison systems reported
operating at approximately 16% to 24% overcapacity and the federal corrections
system reported operating at approximately 25% overcapacity resulting in an
increase in the number of beds under management or construction at secure adult
privatized correction and detention facilities in the United States during 1996
from 57,609 to 77,584, representing an increase of approximately 35%. In
addition, according to the Privatization Reports, the number of beds under
private management in the United States is estimated to be 276,455 by the year
2001, representing an increase of approximately 256% from 1996. The Company
believes that it is well-positioned to capitalize on these favorable industry
fundamentals due to (i) the corrections industry knowledge, experience and
contacts of members of its Board of Trustees and management team, (ii) its
relationship and contractual arrangements with Wackenhut Corrections which,
among other things, provides the Company with access to Wackenhut Corrections'
experienced management team and investment opportunities, and (iii) its access
to capital as a publicly-traded company. The Company is, however, limited by
management's inexperience in managing and operating REITs.
The Company is managed by an experienced Board of Trustees and management
team, including Dr. George Zoley, Chairman of the Company and Vice Chairman and
Chief Executive Officer of Wackenhut Corrections, and Charles Jones, President,
Chief Executive Officer and a trustee of the Company. Dr. Zoley and Mr. Jones
have 16 and 12 years experience, respectively, in the privatized corrections
industry. Although Dr. Zoley, Mr. Jones and Patrick Hogan, the Vice President
and Chief Financial Officer of the Company, will manage the Company's day-to-day
operations and negotiate future acquisitions, any such transactions with
Wackenhut Corrections will be subject to approval by the Company Independent
Committee. Dr. Zoley and Mr. Jones, as the only trustees of the Company prior to
the consummation of the Offering, coordinated the formation of the Company with
the cooperation of Wackenhut Corrections.
The Company has obtained a commitment from NationsBank, N.A. for the $100
million Bank Credit Facility, which may be used to finance the acquisition of
additional correctional and detention facilities (including the Option
Facilities and the Future Facilities), the expansion of existing facilities and
for working capital requirements. Upon consummation of the Offering, the Company
will have no outstanding indebtedness. The Company believes that its lack of
indebtedness, coupled with financing that is expected to be available through
the Bank Credit Facility, will provide it with significant financial resources
to pursue correctional and detention facility acquisition and expansion
opportunities, including the acquisition of some or all of the Option
Facilities.
The Company was formed as a Maryland real estate investment trust in
February 1998. The Company's principal executive offices are located at, and its
mailing address is, Gardens Plaza, Suite 430, 3300 PGA Boulevard, Palm Beach
Gardens, Florida 33410. The Company's telephone number is (561) 691-6624.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objectives are to maximize current returns
to shareholders through increases in Cash Available for Distribution and to
increase long-term total returns to shareholders through appreciation in the
value of the Common Shares. The Company intends to achieve these objectives by
(i) pursuing investment opportunities with private prison operators and
governmental entities for the acquisition of correctional and detention
facilities, (ii) working with tenants to identify opportunities to expand
existing and newly acquired facilities and (iii) structuring the Leases to
include rent escalation provisions which provide for annual increases in rent.
Acquisition Opportunities
The Company believes that, because of the increasing demand for additional
prison beds and the lack of public funds available to finance new facilities,
attractive opportunities exist to acquire or develop correctional and detention
facilities from or on behalf of private prison owners and operators and various
government entities. The Company believes it has a competitive advantage in the
acquisition of new correctional and detention facilities due to (i) its
relationship and contractual arrangements with Wackenhut Corrections (which
among other things provides the Company access to Wackenhut Corrections'
experienced management team and the option to acquire any of the Option
Facilities, and, with certain limited exceptions, the
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right to acquire any of the Future Facilities), (ii) the corrections industry
knowledge, experience and contacts of its Board of Trustees and management team
and (iii) its access to significant capital resources as a publicly-traded
company.
In addition to the possible acquisition of the Option Facilities, the
Company intends to acquire from both private prison owners and operators and
governmental entities additional correctional and detention facilities that meet
its investment guidelines, as described herein. The primary source of private
correctional facilities will initially be facilities operated by Wackenhut
Corrections. The Company has the right to acquire and lease back to Wackenhut
Corrections each of the Future Facilities during the applicable Future Facility
Option Period. However, notwithstanding Wackenhut Corrections' significant
presence in the correctional and detention industry, less than 5% of all adult
prison beds in the United States are privately managed. Management believes that
as Wackenhut Corrections and the private prison management industry continue to
grow, opportunities will exist to acquire additional private correctional
facilities from Wackenhut Corrections on attractive terms. See "Risk
Factors -- Privatized Corrections Industry Risks."
The Company also believes that attractive opportunities exist to acquire or
develop correctional facilities from or on behalf of other private prison owners
and operators and various governmental entities. Historically, government
entities have used various methods of construction financing to develop new
correctional and detention facilities, including but not limited to the
following: (i) one-time general revenue appropriations by the government agency
for the cost of the new facility, (ii) general obligation bonds that are secured
by either a limited or unlimited tax levied by the issuing government entity or
(iii) lease revenue bonds secured by an annual lease payment that is subject to
annual or bi-annual legislative appropriation of funds. Many jurisdictions are
operating their correctional and detention facilities at well above their rated
capacities, and as a result are under a federal court order to alleviate prison
overcrowding within a certain time period. These jurisdictions are often not in
a position to appropriate funds or obtain financing to construct a new
correctional or detention facility because of other fiscal demands or
requirements for public approval. Accordingly, the Company believes that, in an
attempt to address fiscal pressures of matching revenue collections with
projected expenses, many such government entities have been and will be forced
to consider private ownership with respect to the development of new
correctional and detention facilities and sale-leaseback transactions or other
financing alternatives with respect to existing correctional and detention
facilities. Management believes that such situations will enable the Company to
acquire and develop correctional or detention facilities from and on behalf of
governmental agencies at all levels, including those which might not be the
subject of a private management contract. In pursuing such opportunities, the
Company expects to utilize the corrections industry knowledge, experience and
contacts of its Board of Trustees and management team. For a discussion of the
general investment guidelines and specific criteria which the Company may
consider in making a specific investment decision, see "Policies and Objectives
with Respect to Certain Activities -- Investment Policies."
Expansion Opportunities
The Company also believes that there may be opportunities for selective
expansion of its existing correctional facilities which could result in
increased cash flows and property values. The Company intends to provide
expansion space as needed by its tenants and expects that such expansion of its
facilities will result in correspondingly higher rental payments. Wackenhut
Corrections has, to date, undertaken expansion of five of the correctional and
detention facilities owned or operated by it. However, there has been no
expansion of any of the Initial Facilities. Except for a planned renovation and
expansion of the Aurora Facility, which is anticipated under the terms of an
operating contract currently being negotiated with the INS, and an approximately
10,000 square foot expansion of one or more of the Desert View, Golden State and
Central Valley Facilities to accommodate a governmentally-assisted private
industry sponsored jobs program, no expansion of any of the Initial Facilities
is currently planned.
Rent Escalations
The Leases provide for a stable source of cash flow and opportunities to
participate in future growth in revenues. The base rent for the first year for
each Initial Facility is initially set at a fixed amount equal to 9.5%
35
<PAGE> 43
of the Initial Facility Purchase Price. Thereafter, minimum rent will escalate
by the Base Rent Escalation. However, there can be no assurance that such
contractual escalations will be realized due to certain factors, including
changing circumstances and the possible renegotiation of the Leases.
THE BANK CREDIT FACILITY
To ensure that the Company has sufficient liquidity to conduct its
operations, the Company has obtained a commitment from NationsBank, N.A. for the
$100 million Bank Credit Facility. The Bank Credit Facility will have a term of
five years, and will be used primarily to finance the acquisition of, and
investment in, correctional and detention facilities, expansion of existing
facilities and for general working capital needs. The Bank Credit Facility will
be secured by the Company's facilities, and will permit aggregate borrowings of
up to 50% of the lesser of the aggregate of the historical cost of the Company's
facilities or the aggregate of the appraised value of such facilities (the
"Total Value"). Under the terms of the Bank Credit Facility, the Company will be
restricted from paying dividends in excess of the lesser of 95% of Funds from
Operations in any calendar year or 100% of funds available for distribution in
any calendar quarter. Borrowings under the Bank Credit Facility are expected to
bear interest at a variable rate equal to (subject to certain exceptions): (w)
LIBOR plus 125 basis points if the Company's total outstanding indebtedness is
less than 25% of the Total Value; (x) LIBOR plus 150 basis points if the
Company's total outstanding indebtedness is greater than 25% but less than or
equal to 35% of the Total Value; (y) LIBOR plus 175 basis points if the
Company's total outstanding indebtedness is greater than 35% but less than or
equal to 40% of the Total Value, and (z) LIBOR plus 200 basis points if the
Company's total outstanding indebtedness is greater than 40% of the Total Value
but less than or equal to 50% of the Total Value; in each case, calculated based
on interest periods of one, two, three or six months at the option of the
Operating Partnership. Economic conditions could result in higher interest
rates, which could increase debt service requirements on borrowings under the
Bank Credit Facility and which could, in turn, reduce the amount of Cash
Available for Distribution. Upon the closing of the Bank Credit Facility, the
Company will be subject to a loan fee of approximately $1.25 million. The
closing of the Bank Credit Facility is subject to the satisfaction of customary
conditions, including the negotiation and execution of customary loan documents.
Accordingly, there can be no assurance that the Bank Credit Facility will close
or that it will close on the terms set forth in its commitment from NationsBank,
N.A. NationsBank N.A. has also agreed in connection with the issuance of its
commitment for the Bank Credit Facility to provide the $10 million Interim
Credit Facility to the Company under substantially the same terms and conditions
as the Bank Credit Facility. The Interim Credit Facility will mature on the
earlier to occur of the closing of the Bank Credit Facility or 120 days after
consummation of the Offering.
THE OPERATING PARTNERSHIP
Upon completion of the Offering, the Company will, directly and indirectly,
acquire a 100% interest in the Operating Partnership, a Delaware limited
partnership. The Company will hold a 1% general partnership interest and a 98%
limited partnership interest in the Operating Partnership. Through CPT LP, the
Company will own a 1% limited partnership interest in the Operating Partnership.
Following the completion of the Offering and the Formation Transactions,
substantially all of the Company's assets will be held by, and its operations
conducted through, the Operating Partnership, which will lease them to Wackenhut
Corrections. The Company is the sole general partner of the Operating
Partnership and will have the exclusive power under the Partnership Agreement to
manage and conduct the business of the Operating Partnership. The limited
partners of the Operating Partnership (the "Limited Partners") will generally
have only limited consent rights. The Board of Trustees will manage the affairs
of the Company by directing the affairs of the Operating Partnership.
The Company's limited and general partner interests in the Operating
Partnership will entitle it to share in cash distributions from, and in the
profits and losses of, the Operating Partnership in proportion to the Company's
percentage interest therein and will entitle the Company to vote on
substantially all matters requiring a vote of the Limited Partners. Upon the
completion of the Offering, the Company's direct and, through CPT LP, indirect
percentage interest, will be 100% and evidenced by units of partnership interest
which will approximate the number of outstanding Common Shares.
36
<PAGE> 44
After the completion of the Offering and the Formation Transactions, the
Operating Partnership expects to make regular quarterly cash distributions to
its partners, including the Company and CPT LP, in proportion to their
percentage interests (i.e., the number of units) in the Operating Partnership.
The Company will, in turn, pay cash distributions to its shareholders in an
amount per Common Share equal to the amount distributed by the Operating
Partnership per unit.
The Operating Partnership was organized to facilitate the tax-advantaged
acquisition of additional correctional and detention facilities from private
owners, although the Company has no present plan to acquire any particular
facility. In the event the Company undertakes such an acquisition, it is
contemplated that the owner of such a facility would become a Limited Partner in
the Operating Partnership and would be issued units of limited partnership
interests under the Operating Partnership, representing an equal undivided
fractional share of each item of the Operating Partnership's income, gain, and
loss and in distribution of the Operating Partnership's assets (the "Units," and
the holder thereof, a "Unitholder") therein as the consideration, in whole or in
part, for the Unitholder's transfer of the facility to the Operating
Partnership. It is also contemplated that the Unitholder would be given the
right after a period of time to exchange Units in the Operating Partnership for
cash based upon their fair market value or, at the Company's option, for Common
Shares on a one-for-one basis. It is also contemplated that substantially all
the Company's assets may be owned indirectly through the Operating Partnership
so that one Unit in the Operating Partnership would generally correspond
economically to one Common Share. In order to accomplish such objective, and
while the Company has no present plan to issue Units to a private prison owner,
the current structure using the Operating Partnership is being utilized in
connection with the Formation Transactions, rather than the Company taking title
to the Initial Facilities, in order to avoid in the future a re-transfer of the
Initial Facilities to such a partnership, and the incurrence at that time of
associated transfer and other costs, which would likely be necessary or
advisable in order to offer a private owner a tax-advantaged acquisition
vehicle. Currently, the Company and CPT LP are the only partners in the
Operating Partnership and possess the power unilaterally to amend and restate
the Partnership Agreement (as hereinafter defined). The Company does not intend
to use the Operating Partnership (or any partnership which is owned by the
Operating Partnership (the "Subsidiary Partnership") as a vehicle for
tax-advantaged acquisitions unless it receives an opinion of tax counsel to the
Company that such use would not result in the disqualification of the Company as
a REIT, including an opinion that the Operating Partnership (or any Subsidiary
Partnership) would not be treated for federal income tax purposes as an
association taxable as a corporation or a publicly-traded partnership.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Shares offered
hereby are estimated to be approximately $113.8 million ($131.1 million if the
Underwriters' over-allotment option is exercised in full) after deduction of the
underwriting discounts and commissions and estimated Offering expenses. Such net
proceeds will be contributed to the Operating Partnership in exchange for the
Company's 100% interest therein. The Operating Partnership will subsequently use
the net proceeds received from the Company as follows: (i) approximately $113.0
million will be used to purchase the eight Initial Facilities and (ii) the
remaining amount of approximately $779,000 will be used for working capital. If
the Underwriters' over-allotment option to purchase 930,000 Common Shares is
exercised in full, the Company expects to use the additional net proceeds (which
will be approximately $17.3 million) either for general corporate purposes or
for the possible future acquisition of additional correctional or detention
facilities consistent with the Company's investment policies, including the
Option Facilities and the Future Facilities. Of the approximately $113.0 million
used to purchase the Initial Facilities, approximately $54.4 million will be
used to repay outstanding indebtedness incurred in connection with the financing
of correctional and detention facilities under the Wackenhut Lease Facility,
which is guaranteed in part by Wackenhut Corrections. The interest rate on this
indebtedness is LIBOR plus 150 to 250 basis points, depending on fixed charge
coverage ratios, and the maturity date is December 18, 2000.
37
<PAGE> 45
Pending the described uses, the remaining net proceeds may be invested in
mutual funds which invest in REITs, 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.
DISTRIBUTIONS
Subsequent to the Offering, the Company intends to pay regular quarterly
distributions to its shareholders. The Board of Trustees, in its sole
discretion, will determine the actual distribution rate based on the Company's
actual results of operations, economic conditions, tax considerations (including
those related to REITs) and other factors. The Company's first distribution, for
the period from the closing of the Offering through June 30, 1998, is expected
to be approximately $ per Common Share, representing a pro rata distribution
of the anticipated regular quarterly distribution of approximately $0.35 per
Common Share for a full quarter, which on an annualized basis will represent an
anticipated distribution of $1.40 per share, or approximately 7.0% of the
Offering Price. The Company does not expect to change its estimated initial
distribution per Common Share if the Underwriters' over-allotment option is
exercised.
The distribution described above is expected to represent approximately
90.1% of the Company's estimate of the Cash Available for Distribution for the
twelve months following the consummation of the Offering. The Company's estimate
of the Cash Available for Distribution for the twelve months following the
consummation of the Offering was determined by adding (i) the Company's estimate
of the Funds from Operations for the year ended December 31, 1997, based upon
the pro forma contractual rental income and related real estate depreciation for
the two Initial Facilities that were operational for the full year ended
December 31, 1997 (the Aurora and McFarland Facilities) and the four Initial
Facilities that were operational for a portion of the year ended December 31,
1997 (the Queens, Central Valley, Desert View and Golden State Facilities); (ii)
the Company's estimate of the amount necessary to annualize the sum of the
contractual rental income, net of related real estate depreciation, and the
Company's estimate of the related real estate depreciation, for the year ended
December 31, 1997, for the four Initial Facilities (the Queens, Central Valley,
Desert View and Golden State Facilities) that were operational for some portion
of such year, based upon the contractual rental income payable on account of
such facilities; and (iii) an amount equal to the sum of the Company's estimate
of the contractual rental income, net of related real estate depreciation, and
the Company's estimate of the related real estate depreciation for the two
Initial Facilities (the Broward and Karnes Facilities) that became operational
during February 1998, based upon the contractual rental income payable on
account of such facilities. None of the Initial Facilities were owned or
operated by the Company and none of the Leases were in effect prior to
consummation of the Offering. All such Initial Facilities were operated by
Wackenhut Corrections prior to consummation of the Offering. The estimate of
Cash Available for Distribution is being made solely for the purpose of setting
the initial distribution and is not intended to be a forecast of the Company's
results of operations or liquidity, nor is the methodology upon which such
adjustments were made necessarily intended to be a basis for determining future
distributions.
38
<PAGE> 46
The following unaudited table describes the calculation of the Company's
estimate of the Cash Available for Distribution for the twelve months following
the consummation of the Offering (amounts in thousands except per share data and
percentages):
<TABLE>
<S> <C>
Pro forma net income for the year ended December 31, 1997... $ 542
Plus: Pro forma real estate depreciation for the year ended
December 31, 1997(1)...................................... 567
------
Estimated Funds from Operations for the year ended December
31, 1997(2)............................................... 1,109
Plus: Annualization of contractual rental income, net of
related real estate depreciation, for the year ended
December 31, 1997(3)................................... 4,340
Plus: Annualization of real estate depreciation for the
year ended December 31, 1997(4)........................ 1,364
Plus: Estimated contractual rental income, net of related
real estate depreciation, from Initial Facilities not
operational during year ended December 31, 1997(5)..... 2,448
Plus: Real estate depreciation related to Initial
Facilities not operational during year ended December
31, 1997(6)............................................ 693
------
Estimate of Funds from Operations for the twelve months
following the consummation of the Offering................ 9,954
Less: Net effect of straight-line rents(7)................ (555)
Plus: Pro forma amortization of non-cash
compensation(8)........................................ 240
------
Estimate of Cash Available for Distribution for the twelve
months following the consummation of the Offering(9)...... $9,639
======
Estimate of initial annual distribution..................... $8,680
======
Estimate of initial annual distribution per share(10)..... $ 1.40
======
Payout ratio based on estimated Cash Available for
Distribution(11)....................................... 90.1%
======
</TABLE>
- ---------------
(1) Represents the sum of (i) pro forma real estate depreciation for the
Initial Facilities which were operational during the entire year ended
December 31, 1997 (the Aurora and McFarland Facilities), and (ii) the pro
forma real estate depreciation for the Initial Facilities which were
operational for some portion of the year ended December 31, 1997 (the
Queens, Central Valley, Golden State and Desert View Facilities) for that
portion of the year during which such Initial Facilities were operational,
based on the estimated useful life of the facilities of 40 years.
(2) Estimated Funds from Operations does not represent cash generated from
operating activities (determined in accordance with GAAP) and should not be
considered as an alternative to net income (determined in accordance with
GAAP), as an indication of the Company's performance or to cash flows from
operating activities (determined in accordance with GAAP), as a measure of
liquidity or as an indication of the Company's ability to make
distributions. Management believes Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flows from operating activities, financing activities and
investing activities, it provides investors with an understanding of the
ability of the Company to incur and service debt and make capital
expenditures. Funds from Operations, as defined by NAREIT, means net income
(loss), computed in accordance with GAAP, excluding significant
non-recurring items, gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures. The
Company computes Funds from Operations in accordance with the NAREIT
definition. The Company's estimate of Funds from Operations are not
comparable to Funds from Operations reported by other REITs that do not
define the term using the current NAREIT definition or that interpret the
current NAREIT definition differently than does the Company. The Company
believes that in order to facilitate a clear understanding of the operating
results of the Company, the Company's estimate of Funds from Operations
should be examined in conjunction with net income as presented in the
combined financial statements and information included elsewhere in this
Prospectus. Pro forma cash flows from financing activities for the year
ended December 31, 1997 consists primarily of estimated proceeds of
$113,820 from the Offering. Pro forma cash flows used in investing
activities for the year ended December 31, 1997 consists primarily of the
purchase of the Initial Facilities for $113,041.
(3) Represents the Company's estimate of the amount necessary to annualize
contractual rental revenues, net of the estimated real estate depreciation
referenced in footnote (4) below, from leases for the four Initial
Facilities (the Queens, Central Valley, Golden State and Desert View
Facilities) that were operational for a portion of the year ended December
31, 1997.
(4) Represents the Company's estimate of the amount necessary to annualize the
real estate depreciation for the four Initial Facilities (the Queens,
Central Valley, Golden State and Desert View Facilities) that were
operational for a portion of the year ended December 31, 1997.
(5) Represents the Company's estimate of the contractual rental revenues, net
of the estimated real estate depreciation referenced in footnote (6) below,
from new leases for the two Initial Facilities (the Broward and Karnes
Facilities) that opened during February 1998.
(6) Represents the Company's estimate of the real estate depreciation for the
two Initial Facilities (the Broward and Karnes Facilities) that commenced
operations in February 1998.
(7) The net effect of straight-line rents represents the effect of adjusting
straight-line rental income from accrual basis under GAAP to a cash basis.
(8) Pro forma amortization of non-cash compensation represents the value of
options granted to non-employees recorded in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123.
(9) To estimate Cash Available for Distribution, Funds from Operations were
adjusted (a) without giving effect to any changes in working capital
resulting from changes in current assets and current liabilities (which
changes are not anticipated to be material) or the amount of cash estimated
to be used for (i) development, acquisition and other activities and (ii)
financing activities, (b) for
39
<PAGE> 47
certain known events and/or contractual commitments that may have occurred
during the period but would not have been in effect for the full year and
(c) for certain non-GAAP adjustments consisting of an estimate of amounts
anticipated for recurring tenant improvements and capital expenditures. The
estimate of Cash Available for Distribution is being made solely for the
purpose of setting the initial distribution rate and is not intended to be
a projection or forecast of the Company's results of operations or its
liquidity, nor is the methodology upon which such adjustments were made
necessarily intended to be a basis for determining future distributions.
(10) Represents the expected initial distribution per Common Share multiplied by
the 6,200,000 Common Shares to be outstanding upon completion of the
Offering.
(11) Represents the anticipated initial aggregate distribution divided by Cash
Available for Distribution.
The Company believes that its estimated Cash Available for Distribution
constitutes a reasonable basis for setting the initial distribution rate on the
Common Shares and intends to maintain its initial distribution rate for the 12
months following the Offering unless actual results from operations, economic
conditions or other factors differ from the assumptions used in its estimate.
The actual return that the Company will realize and the amount available for
distributions to shareholders will be affected by a number of factors, including
the revenues received from the Initial Facilities and, if acquired, the Option
Facilities and the Future Facilities, the operating expenses of the Company, the
interest expense incurred on its borrowings and unanticipated capital
expenditures. No assurance can be given that the Company's estimate will prove
accurate. In addition, Results of Operations do not purport to represent the
actual results that can be expected for future periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company anticipates that Funds from Operations will exceed earnings and
profits due to non-cash expenses, primarily depreciation and amortization,
expected to be incurred by the Company. Distributions by the Company to the
extent of its current or accumulated earnings and profits for federal income tax
purposes will be taxable to shareholders as ordinary dividend income.
Distributions in excess of earnings and profits generally will be treated as a
non-taxable reduction of the shareholder's basis in the Common Shares to the
extent thereof, and thereafter as capital gain. Distributions treated as a
non-taxable reduction in basis will have the effect of deferring taxation until
the sale of a shareholder's Common Shares. The Company does not intend to reduce
the expected initial distribution per share if the Underwriters' over-allotment
option is exercised. Based on the Company's estimated results of operations for
the tax year ended December 31, 1998, the Company estimates that approximately
15% to 20% of the anticipated initial annual distribution to shareholders with
respect to that tax year (assuming a full twelve months of operation) would
represent a return of capital for federal income tax purposes and that the
Company would have been required to distribute $7.0 million or $1.12 per share
with respect to such tax year in order to maintain its status as a REIT. These
dollar estimations will be reduced on a pro rata basis to reflect the fact the
closing of the Offering will occur during the tax year ended December 31, 1998,
and thus, will not reflect a 12-month tax year. If actual Funds from Operations
or taxable income vary from these amounts, the percentage of distributions may
vary substantially in future years. For a discussion of the tax treatment of
distributions to holders of Common Shares, see "Material Federal Income Tax
Considerations -- Taxation of Taxable Domestic Shareholders" and "-- Taxation of
Non-Domestic Shareholders." In order to qualify to be taxed as a REIT, the
Company must make annual distributions to shareholders of at least 95% of its
REIT taxable income (determined by excluding any net capital gain), which the
Company anticipates will be less than its share of Funds from Operations. Under
certain circumstances, the Company may be required to make distributions in
excess of Cash Available for Distribution in order to meet such distribution
requirements. In such a case, the Company may find it necessary to arrange for
short-term (or possible long-term) borrowings or to raise funds through the
issuance of Preferred Shares or additional Common Shares.
Future distributions by the Company will be at the discretion of the Board
of Trustees and will depend on the actual Funds from Operations of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Material Federal Income
Tax Considerations -- Taxation of the Company as a REIT -- Requirements for
Qualification"), and such other factors as the Board of Trustees deems relevant.
See "Risk Factors -- Changes in Investment and Financing Policies Without Vote
of Shareholders."
40
<PAGE> 48
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 20, 1998, (i) after giving effect to the Formation Transactions, and
(ii) as adjusted to reflect the sale by the Company of the 6,200,000 Common
Shares offered hereby and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds." The information set forth in the
following table should be read in conjunction with the financial statements and
notes thereto, the financial information and notes thereto included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
<TABLE>
<CAPTION>
FEBRUARY 20, 1998
-----------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note Payable................................................ $ -- $ --
Shareholders' equity:
Preferred shares, $.001 par value, 50,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common shares, $.001 par value, 150,000,000 shares
authorized, 1,000 shares issued and outstanding;
6,200,000 shares, as adjusted, issued and
outstanding(2)......................................... -- 6
Additional paid-in capital................................ 3 113,814
---- --------
Total shareholders' equity........................ 3 113,820
---- --------
Total capitalization.............................. $ 3 $113,820
==== ========
</TABLE>
- ---------------
(1) Excludes the 1,000 founder's shares issued in connection with the formation
of the Company which will be redeemed at cost in connection with the
consummation of the Offering. See "The Formation Transactions."
(2) Does not include 620,000 Common Shares reserved for issuance under the
Employee Incentive Plan or 55,000 Common Shares reserved for issuance under
the Non-Employee Trustee Option Plan, of which 590,000 Common Shares will be
subject to outstanding options upon the consummation of the Offering. See
"Management -- Employee Incentive Plan" and "-- Non-Employee Trustee Option
Plan."
41
<PAGE> 49
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth (i) summary historical financial information
for the Company and (ii) unaudited selected pro forma financial information for
the Company. The pro forma operating information is presented as if the Offering
had occurred as of the beginning of the period indicated and therefore
incorporates certain assumptions that are included in the Notes to Pro Forma
Statements of Operations. The pro forma balance sheet information is presented
as if the Offering had occurred on February 20, 1998. The pro forma information
does not purport to represent what the Company's financial position or results
of operations actually would have been had the Offering, in fact, occurred on
such date or at the beginning of the period indicated, or to project the
Company's financial position or results of operations at any future date or for
any future period.
42
<PAGE> 50
CORRECTIONAL PROPERTIES TRUST
SUMMARY SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA
-----------------
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
(UNAUDITED)
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS:
Revenue:
Rental income(1).......................................... $ 2,449
Costs and expenses:
Operating and administrative(2)(3)........................ 1,340
Provision for depreciation(4)............................. 567
-------
Total costs and expenses.......................... 1,907
-------
Net income.................................................. $ 542
=======
Net income per share:
Basic..................................................... $ 0.09
Diluted................................................... 0.09
Weighted average number of shares outstanding(5):
Basic..................................................... 6,200
Diluted................................................... 6,200
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
AS OF AS OF
FEBRUARY 20, 1998 FEBRUARY 20, 1998
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Notes payable(3)............................................ $ -- $ --
Real estate before accumulated depreciation................. 113,041 --
Total assets................................................ 113,820 3
Shareholders' equity........................................ 113,820 3
</TABLE>
- ---------------
NOTES TO SUMMARY PRO FORMA FINANCIAL INFORMATION
(1) Rental income from Wackenhut Corrections recorded in accordance with the
terms of the Leases as if the leases for two of the Initial Facilities (the
Aurora Facility and the McFarland Facility) had commenced January 1997, one
(the Queens Facility) had commenced June 1997, and three (the Central Valley
Facility, the Golden State Facility and the Desert View Facility) had
commenced December 1997. The Company intends to classify and account for the
Leases as operating leases to Wackenhut Corrections in accordance with the
provisions of Statement of Financial Accounting Standards No. 13 "Accounting
for Leases."
(2) Recurring administrative expenses of the Company, including franchise and
excise taxes, are based upon management's estimates of operating and
administrative costs. Salaries were determined taking into account expected
salary levels of employees. Other expenses were determined by evaluating
similar expenses for other public companies.
(3) The Company has obtained a commitment from NationsBank, N.A. to provide the
$100 million Bank Credit Facility. The Company will only obtain the Bank
Credit Facility if the Company elects to purchase the Option Facilities or
to make other acquisitions. Upon such election, the Company expects to incur
debt issuance costs of approximately $1.25 million. Such costs will be
capitalized and subsequently amortized over the expected term of the loan
upon closing of the Bank Credit Facility. Accordingly, no financing costs
have been capitalized in the accompanying Pro Forma Balance Sheet and no
amortization expense has been recognized in the Pro Forma Statement of
Operations.
(4) Depreciation expense on fixed assets purchased from Wackenhut Corrections
based on the estimated useful lives of the Facilities of 40 years.
(5) Weighted average shares outstanding includes Common Shares sold in the
Offering as if such shares were outstanding for the entire period and
excludes the 1,000 founder's shares which will be redeemed in connection
with the Offering.
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<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized as a Maryland real estate investment trust in
February 1998, and intends to make an election to qualify under the Code as a
REIT commencing with its taxable year ending December 31, 1998. Substantially
all of the Company's initial revenues are expected to be derived from (i) rents
received under triple-net leases of correctional and detention facilities, and
(ii) interest earned from the temporary investment of funds in short-term
instruments. With respect to Leases for the Initial Facilities, the rent for the
first year is initially set at a fixed amount and will increase each year by the
Base Rent Escalation.
The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, office rental and related occupancy costs and various expenses
incurred in the process of acquiring additional properties. The Company will be
self-administered and managed by its executive officers and staff, and will not
engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company will engage legal, accounting, tax and
financial advisors from time to time.
The primary non-cash expense of the Company will be the depreciation of its
correctional and detention facilities. The Company expects to depreciate
buildings and improvements over a 40-year period for both tax and financial
reporting purposes.
The Company also expects to leverage its portfolio of real estate equity
investments and will incur long and short-term indebtedness, and related
interest expense, from time to time. See "Risk Factors -- Debt Risks."
The Company intends to make distributions to its shareholders in amounts
not less than the amounts required to maintain REIT status under the Code and,
in general, in amounts exceeding taxable income. The Company's ability to make
distributions will depend upon its Cash Available for Distribution.
RESULTS OF OPERATIONS
The Company has had no operations through the date of this Prospectus. The
Company's future results of operations will depend upon the acquisition of the
Initial Facilities and other properties, including the Option Facilities and the
Future Facilities, and the terms of any subsequent investments the Company may
make.
PRO FORMA RESULTS OF OPERATIONS
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Facilities, pro forma revenues would be approximately
$2.4 million for the year ended December 31, 1997. Pro Forma net income would be
approximately $0.5 million or approximately $0.09 per share for the year ended
December 31, 1997. Depreciation would be approximately $0.6 million for the year
ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its initial working capital and cash from
operations, together with the Bank Credit Facility anticipated to be available
to the Company following the consummation of the Offering, will provide adequate
liquidity to conduct its operations, fund administrative and operating costs,
interest payments and acquisitions and allow distributions to the Company's
shareholders in accordance with the Code's requirements for qualification as a
REIT and to avoid any corporate level federal income or excise tax.
In order to qualify as a REIT for federal income tax purposes, the Company
will be required to make substantial distributions to its shareholders. The
following factors, among others, will affect Funds from Operations and will
impact the decisions of the Board of Trustees regarding distributions: (i)
scheduled increases in base rent under the Leases with respect to the
Facilities, and (ii) returns from short-term investments pending application of
the net proceeds of the Offering. Although the Company will receive most
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<PAGE> 52
of its rental payments on a monthly basis, it intends to make distributions
quarterly. Amounts accumulated for distribution will be invested by the Company
in short-term money market instruments.
Under the terms of the Leases, Wackenhut Corrections is responsible for all
operating expenses and taxes, including property and casualty insurance relating
to the Initial Facilities. See "The Facilities" and "Leases." As a result of
these arrangements, the Company does not believe it will be responsible for any
major expenses in connection with the Initial Facilities during the terms of the
respective Leases. The Company anticipates entering into similar leases with
respect to additional properties, including the Option Facilities and the Future
Facilities. After the terms of the respective leases expire, or in the event a
lessee is unable to meet its obligations, the Company anticipates that any
expenditures it might become responsible for in maintaining the facilities will
be funded by cash from operations and, in the case of major expenditures,
possibly by borrowings. To the extent that unanticipated expenditures or
significant borrowings are required, the Company's Cash Available for
Distribution and liquidity may be adversely affected.
The Company has obtained a commitment for the $100 million Bank Credit
Facility, which is expected to close following the Offering and which will be
used to finance the acquisition of additional correctional and detention
facilities (including the Option Facilities and the Future Facilities), to
expand the Facilities and for general working capital requirements. The Company
has also obtained a commitment for the Interim Credit Facility.
Other than the $113.0 million purchase of the Initial Facilities, the
Company has no commitments with respect to other capital expenditures. However,
the Company has options to acquire each of the Option Facilities during the
applicable Option Facility Option Period for the Option Facility Purchase Price
thereof. In addition, the Company has the right to acquire each of the Future
Facilities during the applicable Future Facility Option Period for the Future
Facility Purchase Price thereof.
The Company may raise additional long-term capital by issuing, in public or
private transactions, equity or debt securities, but the availability and terms
of any such issuance will depend upon the market and other conditions. The
Company anticipates that as a result of its lack of debt and its Debt Policy, it
will be able to obtain financing for its long-term capital needs. However, there
can be no assurance that such additional financing or capital will be available
on terms acceptable to the Company. The Company may, under certain
circumstances, borrow additional amounts in connection with the renovation or
expansion of the Initial Facilities, the acquisition of additional properties,
including the Option Facilities and Future Facilities or, as necessary, to meet
certain distribution requirements imposed on REITs under the Code. See "Policies
and Objectives with Respect to Certain Activities -- Investment Policies" and
" -- Financing Policies."
Acquisitions will be made subject to the investment objectives and policies
to maximize both current income and long-term growth in income described
elsewhere in this Prospectus. The Company's liquidity requirements with respect
to future acquisitions may be reduced to the extent the Company uses Common
Shares or Units as consideration for such purchases.
FUNDS FROM OPERATIONS
Funds from Operations does not represent cash generated from operating
activities (determined in accordance with GAAP) and should not be considered as
an alternative to net income (determined in accordance with GAAP), as an
indication of the Company's performance or of cash flows from operating
activities (determined in accordance with GAAP), as a measure of liquidity or as
an indication of the Company's ability to make distributions. Management
believes Funds from Operations is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of the ability of the Company to incur and service debt
and make capital expenditures. Funds from Operations is calculated as net income
(loss) (computed in accordance with GAAP), excluding significant non-recurring
items, gains (or losses) from debt restructuring and sales of property, plus
real estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. The Company computes Funds from
Operations in accordance with standards approved by the NAREIT Board of
Governors in March 1995, which may differ from the methodology for calculating
Funds from Operations utilized by other equity REITs, and,
45
<PAGE> 53
accordingly, may not be comparable to such other REITs. Further, Funds from
Operations does not represent amounts available for management's discretionary
use because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. The Company believes that
in order to facilitate a clear understanding of the results of operations of the
Facilities and the Company, Funds from Operations should be examined in
conjunction with the income (loss) as presented in the Summary Financial
Information included elsewhere in this Prospectus. Funds from Operations should
not be considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash flows
from operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distributions.
INFLATION
Management believes that inflation should not have a material adverse
effect on the operating expenses of the Company because such expenses are
relatively insignificant as a percentage of revenues. Because the Bank Credit
Facility is expected to provide for a variable interest rate, inflation could
have a material adverse effect on the Company's interest expense if interest
rates increase substantially during any year. Accordingly, when appropriate,
based on the then current interest rates, management may seek to replace the
Bank Credit Facility with a credit facility that provides for a fixed interest
rate.
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<PAGE> 54
THE PRIVATIZED CORRECTIONS INDUSTRY
The Company believes that the privatized corrections industry in the United
States is in a period of significant growth. The corrections industry as a whole
has experienced considerable growth since 1980, which the Company believes is
due in part to rising incarceration rates and longer prison sentences. According
to the Bureau of Justice Statistics, the inmate population in federal, state and
local facilities in the United States has increased from 501,886 in 1980 to
1,646,020 in 1996, representing an increase of approximately 228% and the rate
of incarceration has grown from 212 inmates per 100,000 individuals in 1983 to
618 inmates per 100,000 individuals in 1996, representing an increase of
approximately 192%. At the end of 1996, one in every 163 United States residents
was housed in a federal, state or local correctional or detention facility. The
total federal state and local inmate population increased between 1980 and 1996
at a compounded annual growth rate of approximately 7.7%.
According to the Bureau of Justice Statistics, as of December 31, 1996,
state prison systems were operating at approximately 16% to 24% overcapacity and
the federal corrections system was operating at approximately 25% overcapacity.
Furthermore, the Company believes that the overcrowding in United States'
correctional and detention facilities will be exacerbated by the perceived
public demand for longer prison sentences and prison terms for juvenile
offenders.
The Company believes that this problem of overcapacity has forced
governmental entities to seek more cost-effective means of housing inmates.
Governmental entities responsible for correctional and detention facilities have
therefore increasingly looked to privatized facilities in an attempt to address
these mounting pressures. According to the Privatization Reports, during the
period from 1984 to 1996, the number of beds under management at privatized
correctional and detention facilities in the United States increased to 77,584,
with the majority of this growth occurring since 1989. During 1996, the number
of beds under management or construction at privatized correctional and
detention facilities in the United States increased from 57,609 to 77,584,
representing an increase of 35%. Notwithstanding this growth, the 77,584 beds
under management at privatized corrections facilities in the United States in
1996 represented less than 5% of all adult prison beds in the United States.
According to the Privatization Reports, as of December 31, 1996, 27 United
States jurisdictions (including the District of Columbia and Puerto Rico) had
awarded management contracts to private prison operators. There were, as of such
date, a total of 118 facilities with a design capacity of 77,584 beds under
private contract in the United States, of which Wackenhut Corrections had under
contract or award 29 facilities having an aggregate design capacity of 21,143
beds. As of March 26, 1998, Wackenhut Corrections had 46 correctional and
detention facilities under contract or award, 37 of which were in operation,
with an aggregate design capacity of 22,540 beds and an average occupancy rate
of 96%, for the period from December 29, 1997 through March 29, 1998, and 9 of
which were under development, with an aggregate design capacity of 6,456 beds.
The Company believes that this rapid privatization has been fueled by federal,
state and local agencies, all of which are responsible for various types of
correctional and detention facilities. Federal agencies have privatized INS
detention facilities and United States Marshal detention facilities. State
agencies have privatized state prisons, community corrections facilities,
chemical dependency treatment centers, intermediate sanction facilities,
juvenile offender facilities, pre-release centers, work program facilities and
state jail facilities. Local agencies have privatized city jail facilities and
transfer facilities.
In the early stages of the privatized corrections industry, government
agencies continued to finance and own correctional and detention facilities and
sought private operators to manage the facilities. In the face of an increasing
demand for beds and rising fiscal pressures, many of these governmental agencies
are increasingly requiring private operators to develop, finance and own the
facilities themselves. The Company believes that the privatization of
correctional and detention facilities provides governmental entities with a
means of financing projects that would otherwise be funded by bond financing,
thereby permitting such governmental entities to allocate a larger portion of
their capital raising capacity to other public projects (i.e., schools, roads,
infrastructure, etc.). With some correctional and detention facilities costing
well over $50 million, the Company believes that only those private operators
with access to significant sources of capital will be able to continue competing
for such projects. In this regard, the Company believes that its relationship
and contractual arrangements with Wackenhut Corrections present unique growth
opportunities.
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<PAGE> 55
Management believes that the demand for privately-owned facilities may grow
for reasons independent of the expected expansion of the private prison
management industry. In an attempt to address the fiscal pressures of matching
revenue collections with projected expenses, many governmental entities have
been and will continue to be forced to consider private ownership in connection
with the development of new correctional and detention facilities and
sale/leaseback and other financing arrangements with respect to existing
facilities.
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<PAGE> 56
WACKENHUT CORRECTIONS CORPORATION
GENERAL
Wackenhut Corrections is a leading developer and manager of privatized
correctional and detention facilities in the United States and abroad. Wackenhut
Corrections was founded in 1984 by Dr. George Zoley as a division of The
Wackenhut Corporation, a leading provider of professional security services, to
capitalize on emerging opportunities in the private correctional services
market. According to the Privatization Reports, Wackenhut Corrections is the
second largest provider of privatized correctional and detention services in the
United States and the largest provider of such services abroad, based on the
number of beds under management. As of March 26, 1998, Wackenhut Corrections had
46 correctional and detention facilities under contract or award, of which 37
were in operation with an aggregate design capacity of 22,540 beds and an
average occupancy rate of 96% for the period from December 29, 1997 through
March 28, 1998, and of which 9 were under development with an aggregate design
capacity of 6,456 beds. Of the 37 facilities currently operated by Wackenhut
Corrections, three are owned by Wackenhut Corrections and four are owned by the
Wackenhut Lease Facility (all of which are included in the Initial Facilities),
and the remainder of which are owned by the contracting governmental entity or
are financed through governmentally-assisted financing arrangements. Of the nine
facilities currently under development by Wackenhut Corrections, five are owned
by the Wackenhut Lease Facility which is guaranteed in part by Wackenhut
Corrections (three of which are included in the Option Facilities and two of
which are subject to a purchase option previously granted to the contracting
governmental entity) and the balance are owned by the contracting governmental
entity or are financed through governmentally-assisted arrangements.
Wackenhut Corrections offers governmental entities a comprehensive range of
correctional and detention facility management services, ranging from individual
consulting projects to the integrated design, development and management of such
facilities. In addition to providing the fundamental residential services
relating to the security of facilities and the detention and care of inmates
(i.e., food service, laundry service, etc.), Wackenhut Corrections has built a
reputation as an effective provider of a wide array of in-facility
rehabilitative and educational programs, such as chemical dependency counseling
and treatment, basic education and job and life skills training. Additionally,
Wackenhut Corrections is continuously seeking to expand into complementary
services such as work release programs, youth detention services and prisoner
transport services. Wackenhut Corrections believes that its experience in
delivering a full range of high quality correctional and detention facility
management services on a cost-effective basis to government agencies provides
such agencies strong incentives to choose Wackenhut Corrections when awarding
new contracts or renewing existing contracts.
Wackenhut Corrections aggressively pursues business opportunities by
responding to RFPs issued by various government agencies. A typical RFP requires
bidders to provide detailed information, including, but not limited to, the
service to be provided by the bidder, its experience and qualifications, and the
price at which the bidder is willing to provide the services (which services may
include the renovation, improvement or expansion of an existing facility or the
planning, design and construction of a new facility). As of March 26, 1998,
Wackenhut Corrections had outstanding written responses to RFPs for eight
projects with an aggregate design capacity of 3,450 beds. While Wackenhut
Corrections was awarded contracts for 41% of the beds for which it has submitted
RFP responses during 1997, there can be no assurance that Wackenhut Corrections
will be successful in winning any of the management contracts relating to the
RFPs for which it has outstanding written responses.
Wackenhut Corrections has also obtained and is pursuing construction and
management contracts for correctional and detention facilities outside the
United States and presently operates facilities in the United Kingdom and
Australia. Wackenhut Corrections has entered into one joint venture to develop
business opportunities in Australia and has formed five joint ventures to
construct and manage privatized correctional and detention facilities in the
United Kingdom.
Wackenhut Corrections, or a subsidiary thereof, will be the lessee of, and
will continue to operate, each of the Initial Facilities and, if acquired, the
Option Facilities. In situations where a subsidiary of Wackenhut
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<PAGE> 57
Corrections is the lessee under a Lease, Wackenhut Corrections will nonetheless
be a party to and be primarily liable under such Lease. Although the Company
will have general recourse to Wackenhut Corrections under the Lease, Wackenhut
Corrections' obligations under the Leases will not be secured by its assets.
Wackenhut Corrections is expected to sell additional correctional and detention
facilities to the Company in the future and to enter into long-term leases with
the Company with respect to those facilities.
Wackenhut Corrections is a Florida corporation. Wackenhut Corrections'
principal executive offices are located at 4200 Wackenhut Drive, Palm Beach
Gardens, Florida 33410-4243, and its telephone number is (561) 622-5656.
Wackenhut Corrections' common stock is listed on the NYSE under the symbol
"WHC." Wackenhut Corrections is not offering any of the Common Shares offered
hereby.
CERTAIN SELECTED FINANCIAL INFORMATION OF WACKENHUT CORRECTIONS
The following table sets forth (i) certain selected historical financial
information concerning Wackenhut Corrections for each of the previous five years
ended December 28, 1997 and (ii) unaudited selected consolidated pro forma
financial information concerning Wackenhut Corrections. The pro forma operating
information is presented as if the Formation Transactions had occurred as of the
beginning of the period indicated and therefore incorporates certain assumptions
that are included in the Notes to Pro Forma Statement of Operations included
elsewhere in this Prospectus. The pro forma balance sheet information is
presented as if the Formation Transactions had occurred on December 28, 1997.
The pro forma information does not purport to represent what Wackenhut
Corrections' financial position or results of operations actually would have
been had the Formation Transactions, in fact, occurred on such date or at the
beginning of the period indicated, or to project the Company's financial
position or results of operations at any future date or any future period. The
selected historical financial information for each of the previous five years
ended December 28, 1997 is derived from Wackenhut Corrections' audited
consolidated financial statements. The selected historical financial information
for Wackenhut Corrections has been included in this Prospectus due to the
Company's dependence on Wackenhut Corrections as the sole lessee of the
Facilities. All information contained in the following table should be read in
conjunction with the consolidated financial statements and related notes of
Wackenhut Corrections included elsewhere in this Prospectus. Investors should
review the financial statements and other data set forth herein with respect to
Wackenhut Corrections, as well as the financial statements and other data set
forth herein with respect to the Company and the Facilities.
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WACKENHUT CORRECTIONS CORPORATION
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
HISTORICAL(A) PRO FORMA(B)
-------------------------------------------------------------- ------------
1993 1994 1995 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.......................................... $ 58,784 $ 84,026 $ 99,431 $ 137,784 $ 206,930 $ 206,930
Operating expenses................................ 50,573 70,670 82,285 115,848 172,031 173,582
Depreciation & amortization....................... 2,101 2,287 2,303 3, 532 6,303 5,760
---------- ---------- ---------- ---------- ---------- ----------
Contribution from operations...................... 6,110 11,069 14,843 18,404 28,596 27,588
General and administrative expenses............... 4,664 6,623 7,614 8,673 12,051 12,051
---------- ---------- ---------- ---------- ---------- ----------
Operating income.................................. 1,446 4,446 7,229 9,731 16,545 15,537
Interest income (expense)......................... (544) (261) 186 2,195 1,451 1,451
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and equity income
(loss) of affiliates ........................... 902 4,185 7,415 11,926 17,996 16,988
Provision for income taxes........................ 368 1,661 2,862 4,269 7,226 6,823
---------- ---------- ---------- ---------- ---------- ----------
Income before equity income (loss) of
affiliates...................................... 534 2,524 4,553 7,657 10,770 10,165
Equity income (loss) of affiliates................ 261 (331) (113) 604 1,105 1,105
---------- ---------- ---------- ---------- ---------- ----------
Net income................................ $ 795 $ 2,193 $ 4,440 $ 8,261 $ 11,875 $ 11,270
========== ========== ========== ========== ========== ==========
Earnings per share:
Basic........................................... $ 0.06 $ 0.15 $ 0.26 $ 0.39 $ 0.54 $ 0.51
Diluted......................................... $ 0.06 $ 0.15 $ 0.25 $ 0.37 $ 0.52 $ 0.50
Weighted average shares outstanding:
Basic........................................... 13,774 14,692 16,850 21,361 22,015 22,015
Diluted......................................... 13,774 14,692 17,708 22,128 22,697 22,697
OTHER DATA:
Beds in operation (period end).................... 5,654 7,164 8,482 11,772 18,357 18,357
Beds under contract/award (period end)............ 6,154 13,732 16,054 24,371 30,144 30,144
Compensated man days.............................. 1,914,490 2,090,625 2,350,843 3,585,100 5,192,614 5,192,614
Average occupancy................................. 95.0% 97.1% 94.8% 96.8% 97.2% 97.2%
BALANCE SHEET DATA (END OF PERIOD):
Total assets...................................... 19,148 30,333 38,840 106,811 139,203 153,650
Total long-term debt.............................. -- 1,412 980 225 213 213
Total debt........................................ -- 1,422 991 237 225 225
Stockholders' equity.............................. 4,212 19,727 25,229 87,969 102,295 102,295
</TABLE>
- ---------------
(A) The Company's fiscal year ends on the Sunday closest to the calendar year
end. Fiscal years 1993, 1994, 1995, 1996, and 1997 each included 52 weeks.
(B) See Wackenhut Corrections Corporation Pro Forma Consolidated Financial
Statements and related notes thereto appearing elsewhere in this Prospectus.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF WACKENHUT CORRECTIONS
The following financial analysis should be read in conjunction with the
above financial information concerning Wackenhut Corrections and Wackenhut
Corrections' consolidated financial statements and notes thereto which are
covered elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table sets forth certain Statements of Income data expressed
as percentages of total revenues for the following fiscal years:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Operating expenses.......................................... 83.1 84.1 82.8
Depreciation and amortization............................... 3.1 2.5 2.3
----- ----- -----
Contribution from operations................................ 13.8 13.4 14.9
General and administrative expenses......................... 5.8 6.3 7.6
----- ----- -----
Operating income............................................ 8.0 7.1 7.3
Interest income............................................. 0.7 1.6 0.2
----- ----- -----
Income before income taxes and equity income (loss) of
affiliates................................................ 8.7 8.7 7.5
Provision for income taxes.................................. 3.5 3.1 2.9
Equity income (loss) of affiliates, net of income taxes..... 0.5 0.4 (0.1)
----- ----- -----
Net income.................................................. 5.7% 6.0% 4.5%
===== ===== =====
</TABLE>
Fiscal 1997 compared with Fiscal 1996
Revenues increased by 50.2% to $206.9 million in Fiscal 1997 from $137.8
million in the fiscal year ended December 29, 1996 ("Fiscal 1996"). The increase
in revenues in Fiscal 1997 compared with Fiscal 1996 is primarily attributable
to increased compensated resident days resulting from the opening of the
following ten facilities in 1997 (South Bay Correctional Facility, South Bay,
Florida in February 1997; Travis County Community Justice Center, Travis County,
Texas in March 1997; Bayamon Regional Detention Center, Bayamon, Puerto Rico in
March 1997; Queens Private Correctional Facility, Queens, New York in March
1997; Fulham Correctional Centre, Victoria, Australia in March 1997; Taft
Correctional Institution, Taft, California in December 1997; Maribyrnong
Detention Centre, Melbourne, Australia in December 1997; Perth Detention Centre,
Perth, Australia in December 1997; Port Hedland Detention Centre, Port Hedland,
Australia in December 1997 and Villawood Detention Center, Sydney, Australia in
October 1997); and increased compensated resident days at three facilities that
opened in the first half of 1996 (Willacy County Unit, Willacy, Texas in January
1996, Delaware County Prison in April 1996, and Marshall County Correctional
Facility, Marshall County, Mississippi in June 1996).
The following table sets forth the number of facilities under contract or
award at the end of the following fiscal years:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Contracts(1).......................................... 46 34 24
Facilities in operation............................... 32 19 16
Design capacity of contracts.......................... 30,144 24,371 16,054
Design capacity of facilities in operation............ 20,720 12,235 9,135
Compensated resident days(2).......................... 5,192,614 3,585,100 2,350,843
</TABLE>
- ---------------
(1) Comprised of facilities in operation, facilities under development and
facilities for which awards have been obtained.
(2) Compensated resident days are calculated as follows, (a) per diem rate
facilities -- the number of beds occupied by residents on a daily basis
during the fiscal year and, (b) fixed rate facilities -- the design
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<PAGE> 60
capacity of the facility multiplied by the number of days the facility was
in operation during the fiscal year. Amounts exclude compensated resident
days for H.M. Prison Doncaster, England.
The number of compensated resident days in domestic and Australian
facilities increased to 5.2 million in Fiscal 1997 from 3.6 million in Fiscal
1996. As a result of the increase in compensated resident days and minimum
occupancy guarantees at several of the new facilities that opened in Fiscal
1997, average facility occupancy in domestic and Australian facilities increased
to 97.2% of capacity in Fiscal 1997 compared to 96.8% in Fiscal 1996.
Operating expenses increased by 48.5% to $172.0 million in Fiscal 1997 from
$115.8 million in Fiscal 1996 resulting from the ten new facilities that opened
in Fiscal 1997 and three facilities that opened in Fiscal 1996. As a percentage
of revenues, operating expenses decreased to 83.1% from 84.1% due to a greater
mix of design revenue and improving margins from Wackenhut Corrections'
Australian operations.
Depreciation and amortization increased by 78.4% to $6.3 million in Fiscal
1997 from $3.5 million in Fiscal 1996. This increase is due to capital and
deferred charge expenditures incurred by the thirteen facilities that opened in
Fiscal 1997, a full year of depreciation and amortization for the facilities
that opened in Fiscal 1996, and depreciation associated with the purchase of two
facilities in Fiscal 1997.
Contribution from operations increased 55.4% to $28.6 million in Fiscal
1997 from $18.4 million in Fiscal 1996. This increase is due to the ten new
facilities discussed above that opened in Fiscal 1997. As a percentage of
revenues, contribution from operations increased to 13.8% from 13.4%.
General and administrative expenses increased by 38.9% to $12.1 million in
Fiscal 1997 from $8.7 million in Fiscal 1996. This reflects increased business
development activities in response to additional interest in Wackenhut
Corrections' services and increased additional infrastructure to support
Wackenhut Corrections' expanded operations. General and administrative expenses
decreased to 5.8% of total revenues in Fiscal 1997 from 6.3% in Fiscal 1996.
Operating income increased by 70.0% to $16.5 million in Fiscal 1997 from
$9.7 million in Fiscal 1996 as result of the factors described above. As a
percentage of revenue, operating income increased to 8.0% from 7.1% due
primarily to the continued leveraging of overhead.
Interest income was $1.4 million in Fiscal 1997 compared to interest income
of $2.2 million in Fiscal 1996, resulting from a decrease in average invested
cash as Wackenhut Corrections had deployed cash to select project opportunities
and operations.
Income before income taxes and equity income of affiliates increased to
$18.0 million in Fiscal 1997 from $11.9 million in Fiscal 1996 due to the
factors described above.
Provision for income taxes increased to $7.2 million in Fiscal 1997 from
$4.3 million in Fiscal 1996 due to higher taxable income and an increase in
Wackenhut Corrections' effective tax rate.
Equity income of affiliates increased to $1,105,000 in Fiscal 1997 from
$604,000 in Fiscal 1996. This increase is due to three expansions of the H.M.
Prison Doncaster (Doncaster, England) in November 1996, March 1997 and July
1997, and a full year of operations for the two court escort contracts that
commenced in May 1996.
Net income increased by 43.8% to $11.9 million in Fiscal 1997 from $8.3
million in Fiscal 1996 as a result of the factors described above.
Fiscal 1996 compared with Fiscal 1995
Revenues increased by 38.6% to $137.8 million in Fiscal 1996 from $99.4
million in the fiscal year ended December 31, 1995 ("Fiscal 1995"). The increase
in revenues in Fiscal 1996 compared with Fiscal 1995 is primarily attributable
to increased compensated resident days resulting from the increasing occupancy
of two facilities that opened in the second half of Fiscal 1995 (Moore Haven
Correctional Facility, Moore Haven, Florida in July 1995 and John R. Lindsey
Unit, Jack County, Texas in September 1995), the opening of two facilities in
the first half of Fiscal 1996 (Willacy County Unit, Willacy County, Texas in
January 1996 and
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<PAGE> 61
Marshall County Correctional Facility, Marshall County, Mississippi in June
1996), the assumption of operational responsibility for an existing facility
(Delaware County Prison, Delaware County, Pennsylvania in April 1996) the
expansion on one facility (Allen Correctional Center, Kinder, Louisiana) and the
temporary double up at another facility (Arthur Gorrie Correctional Centre,
Wacol, Australia).
The number of compensated resident days in domestic and Australian
facilities increased to 3.6 million in Fiscal 1996 from 2.4 million in Fiscal
1995. As a result of the increase in compensated resident days, average facility
occupancy in domestic and Australian facilities increased to 96.8% of capacity
in Fiscal 1996 compared to 94.8% in Fiscal 1995.
Operating expenses increased by 40.8% to $115.8 million in Fiscal 1996 from
$82.3 million in Fiscal 1995. As a percentage of revenues, operating expenses
increased to 84.1%. This increase is primarily attributable to higher operating
expenses at Wackenhut Corrections' Australian facilities.
Depreciation and amortization increased by 53.4% to $3.5 million in Fiscal
1996 from $2.3 million in Fiscal 1995. This increase is due to the increase in
capital and deferred charge expenditures resulting from the opening of the new
facilities, the assumption of correctional services, the purchase of one
facility and the expansions discussed above.
Contribution from operations increased 24.0% to $18.4 million in Fiscal
1996 from $14.8 million in Fiscal 1995. As a percentage of revenues,
contribution from operations decreased to 13.4% from 14.9%. As discussed above,
this decrease is due primarily to Wackenhut Corrections' Australian operations.
General and administrative expenses increased by 13.9% to $8.7 million in
Fiscal 1996 from $7.6 million in Fiscal 1995. This reflects increased business
development activities in response to additional interest in Wackenhut
Corrections' services and increased infrastructure related to current and future
corporate growth. General and administrative expenses decreased to 6.3% of total
revenues in Fiscal 1996 from 7.7% in Fiscal 1995.
Operating income increased by 34.6% to $9.7 million in Fiscal 1996 from
$7.2 million in Fiscal 1995 as a result of the factors described above. As a
percentage of revenue, operating income decreased to 7.1% from 7.3%.
Interest income was $2.2 million in Fiscal 1996 compared to interest income
of $186,000 in Fiscal 1995. The increase is attributable to interest earned on
the proceeds of the Wackenhut Corrections' January 1996 stock offering.
Income before income taxes and equity (loss) income of affiliates increased
to $11.9 million in Fiscal 1996 from $7.4 million in Fiscal 1996 from $7.4
million in Fiscal 1995 due to the factors described above.
Provision for income taxes increased to $4.3 million in Fiscal 1996 from
$2.9 million in Fiscal 1995 due to higher taxable income.
Equity income (loss) of affiliates increased to $604,000 in Fiscal 1996
from ($113,000) in Fiscal 1995. Current and prior year performance reflects the
activities of Premier Prison Services, a U.K. joint venture. The increase in
current year income results from three expansion at the H.M. Prison Doncaster
(Doncaster, England) in November 1995, June 1996 and November 1996,
respectively, and income earned from two court escort contracts that were
awarded in December 1995 and commenced operations in May 1996.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities amounted to $21,377,000 in Fiscal
1997 versus $9,128,000 in Fiscal 1996. Wackenhut Corrections' primary capital
requirements are for working capital; furniture, fixtures, equipment, and supply
purchases; investments in joint ventures; and investments in facilities. Some of
Wackenhut Corrections' management contracts require Wackenhut Corrections to
make substantial initial expenditures of cash in connection with opening or
renovating a facility. The initial expenditures subsequently are fully or
partially recoverable as pass-through costs or are billable to the contracting
agency over the
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<PAGE> 62
original term of the contract. The cash required for these needs will be derived
from internally generated funds, the proceeds from public stock offerings, and
additional borrowings, if necessary.
Wackenhut Corrections anticipates making cash investments in connection
with future acquisitions. In addition, in line with a developing industry trend
toward requiring private operators to make capital investments in facilities and
to enter into direct financing arrangements in connection with the development
of such facilities, Wackenhut Corrections anticipates utilizing cash to finance
start-up costs, leasehold improvements and equity investments in facilities, if
appropriate, in connection with undertaking new contracts.
Prior to the initial public offering (the "IPO") in July 1994, Wackenhut
Corrections financed its operations through borrowing from The Wackenhut
Corporation. Interest on intercompany indebtedness was computed at rates which
reflected The Wackenhut Corporation's average interest costs on long-term debt,
exclusive of mortgage financing. Subsequent to the IPO and through Fiscal 1997,
financing was obtained from internally generated funds, or third-party
borrowings, or proceeds from public stock offerings.
In January 1996, Wackenhut Corrections sold 4,600,000 shares of its common
stock in connection with a second offering at a price of $12.00 per share,
before deducting underwriting discounts and commissions and estimated offering
expenses. Net proceeds from the offering were approximately $51,581,000. In
1996, Wackenhut Corrections used $5.7 million of the proceeds to acquire the
McFarland Facility.
In Fiscal 1997, Wackenhut Corrections also purchased the Queens Facility
for $6.6 million and spent another $4.7 million to renovate the building.
Additionally, Wackenhut Corrections invested $7.0 million to purchase and
renovate an 86-bed psychiatric hospital.
In June 1997, Wackenhut Corrections entered into a $30,000,000
multi-currency revolving credit facility with a syndicate of banks, the proceeds
of which may be used for working capital, acquisitions and general corporate
purposes. The credit facility also includes a letter of credit of up to
$5,000,000 for the issuance of standby letters of credit. Indebtedness under
this facility bears interest at the alternate base rate (defined as the higher
of prime rate or federal funds plus 1/2 of 1%) or LIBOR plus 150 to 250 basis
points, depending upon fixed charge coverage ratios. The facility requires
Wackenhut Corrections to, among other things, maintain a maximum leverage ratio,
minimum fixed charge coverage ratio and a minimum tangible net worth. The
facility also limits certain payments and distributions. As of December 28,
1997, no amounts were outstanding under this facility. However, at December 28,
1997, Wackenhut Corrections had outstanding four standby letters of credit
outstanding with a bank in an aggregate amount of approximately $222,000.
In June 1997, Wackenhut Corrections also entered into an $80,000,000
operating lease facility that was established to acquire and develop new
correctional institutions used in its business. This facility was increased to
$220,000,000 in December 1997. As a condition of this facility, Wackenhut
Corrections unconditionally agreed to guarantee certain obligations of First
Security Bank, National Association, a party to the aforementioned operating
lease facility. As of December 28, 1997, approximately $69 million of properties
were under development under this lease facility.
The ratio of total debt to total capitalization was 0.2% at the end of
Fiscal 1997 and 0.3% at the end of Fiscal 1996.
Wackenhut Corrections' management is unaware of any other evident trends
that are likely to result in material increases or decreases in the liquidity of
Wackenhut Corrections other than those factors mentioned above. Wackenhut
Corrections' management is constantly reviewing matters that could require
significant outlays of cash with respect to corporate growth strategies;
however, these matters are always reviewed in the light of appropriateness and
availability of financing.
There are no other known material trends, favorable or unfavorable, in the
capital resources of Wackenhut Corrections, except for possible changes in
interest rates. In the event that Wackenhut Corrections would have any
significant requirement beyond the matters discussed above, capital resources
are available under its revolving line of credit with a bank, and management
believes that additional resources may be available to Wackenhut Corrections
through a variety of other methods of financing.
55
<PAGE> 63
YEAR 2000
Wackenhut Corrections has several information system improvement
initiatives under way that will require increased expenditures during the next
few years. These initiatives include the replacement of certain Wackenhut
Corrections computer systems to be in compliance with the date-sensitivity
problem of computer systems and computer applications (the "Year 2000 Issue").
The Year 2000 Issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems will recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the Year 2000 Issue
may cause systems to process critical financial and operational information
incorrectly. Anticipated spending for this modification will be expensed as
incurred and is not expected to have a significant impact on Wackenhut
Corrections' ongoing results of operations.
INTEREST RATE SENSITIVITY
Wackenhut Corrections is exposed to market risks arising from changes in
interest rates with respect to a $220 million operating lease facility (See Note
7 to Wackenhut Corrections -- Consolidated Financial Statements). Monthly lease
payments under this facility are indexed to a variable interest rate. Wackenhut
Corrections' management has determined that a 10% change in the current lease
rate would have an immaterial effect on Wackenhut Corrections' pre-tax earnings
over the next fiscal year.
INFLATION
Management of Wackenhut Corrections believes that inflation has not had a
material effect on Wackenhut Corrections' results of operations during the past
three fiscal years. While some of Wackenhut Corrections' contracts include
provisions for inflationary indexing, since personnel costs represent Wackenhut
Corrections' largest expense in the facilities it manages, inflation could have
a substantial adverse effect on Wackenhut Corrections' results of operations in
the future to the extent that wages and salaries increase at a faster rate than
the per diem or fixed rates received by Wackenhut Corrections for its management
services.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Wackenhut Corrections' Annual Report on Form 10-K for the fiscal year ended
December 28, 1997, which was filed by Wackenhut Corrections with the Securities
and Exchange Commission on February 20, 1998 (SEC File No. 0-24438), pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
incorporated and made a part of this Prospectus by reference, except as
superseded or modified herein.
All documents filed by Wackenhut Corrections pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the Offering shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof from the date of
filing of such documents. Any statement contained herein or 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 documents which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
earlier statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Wackenhut Corrections undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, on the written or oral request of any such person, a copy of any or
all of the documents referred to above which have been or may be incorporated by
reference in the Prospectus, other than exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Requests
for such copies should be directed to Wackenhut Corrections' Corporate Secretary
at 4200 Wackenhut Drive, Palm Beach Gardens, Florida 33410-4243.
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<PAGE> 64
THE FACILITIES
The Company will enter into the Purchase Agreement, pursuant to which it
will acquire the eight Initial Facilities, and the Option Agreements pursuant to
which it will have the option to acquire each of the three Option Facilities
during the Option Facility Option Period. The Company will also enter the Right
to Purchase Agreement, pursuant to which it will have the right to acquire any
Future Facility during the Future Facility Option Period, subject to certain
limited exceptions where the sale or transfer of ownership of a facility is
restricted under the applicable facility operating agreement or
governmentally-assisted financing arrangements. The right to purchase Future
Facilities from Wackenhut Corrections pursuant to the Right to Purchase
Agreement will continue for 15 years after the consummation of the Offering so
long as there are any leases in force between the Company and Wackenhut
Corrections. The Initial Facilities and Option Facilities include correctional
and detention facilities which Wackenhut Corrections presently owns or has the
right to acquire, with the exception of two facilities for which Wackenhut
Corrections has previously granted an option to purchase to the contracting
governmental entity. See "The Facilities -- The Excluded Facilities." The
following is a summary of certain information with respect to the Initial
Facilities and the Option Facilities.
THE INITIAL FACILITIES
The Initial Facilities currently operated by Wackenhut Corrections will be
purchased for an aggregate cash purchase price of approximately $113.0 million.
Wackenhut Corrections will receive approximately $42.3 million in cash for the
three Initial Facilities owned by it and its right to acquire the remaining five
Initial Facilities. The Wackenhut Lease Facility will receive approximately
$54.4 million in cash for the four Initial Facilities owned by it, and the
trustee of the Karnes Facility will receive approximately $16.3 million in cash
for the sale of that facility. The Company will lease the Initial Facilities to
Wackenhut Corrections (and Wackenhut Corrections will continue to operate such
Initial Facilities) pursuant to the Leases, which have initial terms of 10 years
and provide for an aggregate initial annual rents of approximately $10.7
million. Throughout the terms of the initial Leases, annual rents will escalate
by the Base Rent Escalation. Subject to certain exceptions, each of the Leases
may be extended by Wackenhut Corrections for three additional five-year terms,
at a fair market rental rate as mutually agreed upon by the Company and
Wackenhut Corrections or, in the absence of such an agreement, as determined by
binding arbitration. In addition, the Lease of any Initial Facility will be
automatically extended upon expiration thereof on the same terms (including the
then applicable base rent and Base Rent Escalation) if Wackenhut Corrections is
obligated under an unexpired Sublease with respect to such Initial Facility.
Under the terms of the Leases, Wackenhut Corrections will have a right of first
refusal on the proposed sale by the Company of any of the Initial Facilities.
The Initial Facilities are located in five states and have an aggregate design
capacity of 3,154 beds.
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<PAGE> 65
Set forth below are brief descriptions of each of the Initial Facilities.
The Company will own fee title to the Initial Facilities, free and clear of any
material liens. The Initial Facilities are fully operational. Except for a
planned renovation and expansion of the Aurora Facility, which is anticipated
under the terms of an operating contract currently being negotiated with the
INS, and an approximately 10,000 square foot expansion of one or more of the
Desert View Facility, Golden State Facility and Central Valley Facility to
accommodate a governmentally assisted private industry-sponsored jobs program
there are no present plans for the improvement or development of any unimproved
or undeveloped property. All of the Initial Facilities are, in the opinion of
management of the Company, adequately covered by insurance.
<TABLE>
<CAPTION>
EXPIRATION
DESIGN OF INITIAL
CAPACITY AND FACILITY FACILITY FACILITY INITIAL
TYPE OF CONTRACTING SECURITY OCCUPANCY OPENING OPERATING PURCHASE ANNUAL
FACILITY AND LOCATION FACILITY ENTITY LEVEL(1) RATE(2) DATE AGREEMENT PRICE BASE RENT
- --------------------- ------------ ----------- -------- ------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aurora INS Processing
Center..................... INS INS(3) Minimum/ 300/100% May April $7,828,775 $743,734
Aurora, CO Processing Medium 1987 1998(7)
Center
McFarland Community
Correctional Facility...... Pre-Release CDOC(4) Minimum/ 224/86% February January 7,020,219 666,921
McFarland, CA Center Medium 1988 1999
Queens Private Correctional
Facility................... INS INS(5) Minimum/ 200/99% March March 14,732,071 1,399,547
New York, NY Detention Medium 1997 1999(8)
Facility
Central Valley Community
Correctional Facility...... Adult CDOC Minimum/ 550/94% December December 17,590,995 1,671,145
McFarland, CA Correctional Medium 1997 2007
Facility
Golden State Community
Correctional Facility...... Adult CDOC Minimum/ 550/94% December December 17,555,536 1,667,776
McFarland, CA Correctional Medium 1997 2007
Facility
Desert View Community
Correctional Facility...... Adult CDOC Minimum/ 550/86% December December 16,864,731 1,602,149
Adelanto, CA Correctional Medium 1997 2007
Facility
Broward County Work Release
Center..................... Work Release Broward Non- 300/85% February February 15,128,724 1,437,229
Broward County, FL Center County and Secured 1998 2003(9)
BSO(6)
Karnes County Correctional
Center..................... Adult Karnes Multi- 480/91% January July 16,320,000 1,550,400
Karnes County, TX Correctional County Security 1996 1998(10)
Facility
------------ ------------ ------------
Total/Weighted Average...... 3,154/92% $113,041,051 $10,738,901
============ ============ ============
<CAPTION>
LEASE
TERM
FACILITY AND LOCATION (YEARS)
- --------------------- -------
<S> <C>
Aurora INS Processing
Center..................... 10
Aurora, CO
McFarland Community
Correctional Facility...... 10
McFarland, CA
Queens Private Correctional
Facility................... 10
New York, NY
Central Valley Community
Correctional Facility...... 10
McFarland, CA
Golden State Community
Correctional Facility...... 10
McFarland, CA
Desert View Community
Correctional Facility...... 10
Adelanto, CA
Broward County Work Release
Center..................... 10
Broward County, FL
Karnes County Correctional
Center..................... 10
Karnes County, TX
Total/Weighted Average......
</TABLE>
- ---------------
(1) Each facility is identified according to the level of security maintained
as follows: non-secured facilities are facilities which are access
controlled residential facilities; minimum security facilities are
facilities having open-housing within an appropriate designated and
patrolled institutional perimeter; medium security facilities are
facilities having either cells, rooms or dormitories, a secure perimeter,
and some form of external patrol; maximum security facilities are
facilities having single occupancy cells, a secure perimeter and external
patrol or devices; and multi-security facilities are facilities with
various components of the previously described security levels.
(2) Design capacity measures the number of beds, and accordingly the number of
inmates each facility is designed to accommodate. Occupancy rate measures
the percentage of the number of beds which a facility is designed to
accommodate which are occupied at any given time. The facility operating
agreement with respect to any facility may provide for occupancy less than
the facility design capacity. The occupancy rates presented are as of March
26, 1998. The Company believes design capacity and occupancy rate are
appropriate measures for evaluating prison operations because the revenues
generated by each facility are generally based on a per diem or monthly
rate per inmate housed at the facility paid by the corresponding
contracting governmental entities. The ability of Wackenhut Corrections or
another private prison operator to satisfy its financial obligations under
its leases with the Company is based in part on the revenues generated by
their facilities, which in turn depends on the design capacity and
occupancy rate of each facility.
(3) The United States Immigration and Naturalization Service.
(4) The State of California Department of Corrections.
(5) The operating contract for the Queens Private Correctional Facility
includes a minimum guarantee of 150 beds (75% occupancy).
(6) The Broward County Sheriff's Office.
(7) The operating agreement for the Aurora INS Processing Center expired and
has been extended for successive 30 day periods, with the most recent
extension expiring on April 28, 1998. Wackenhut Corrections is presently
negotiating a long-term operating agreement for the Aurora INS Processing
Center. However, there can be no assurance that Wackenhut Corrections will
be successful in entering into such an agreement.
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<PAGE> 66
(8) The operating agreement for the Queens Private Correctional Facility may be
extended at the option of the INS for three additional one year periods.
(9) The operating agreement for the Broward County Work Release Center may be
extended at the option of Broward County for successive two year periods.
(10) Wackenhut Corrections began operating this facility in January 1998 under
an interim operating agreement with Karnes County which expires on July 14,
1998. Wackenhut Corrections is negotiating a long-term agreement with
Karnes County, pursuant to which Karnes County will agree to enter into
inter-governmental agreements for the housing of inmates with such
governmental entities as may be designated by Wackenhut Corrections.
However, there can be no assurance that Wackenhut Corrections will be
successful in securing such an agreement with Karnes County or with other
governmental entities for the housing of inmates, both of which are
necessary to the profitable operation of this facility by Wackenhut
Corrections.
Adult Correctional Facilities. Adult correctional facilities are used to
house adult inmates on a permanent basis for the duration of their sentences.
The adult correctional facilities to be acquired by the Company include the
Karnes Facility, the Central Valley Facility, the Golden State Facility and the
Desert View Facility.
The Karnes Facility is a medium security correctional facility located in
Karnes, Texas with a design capacity of 480 beds. The facility is situated on
approximately 12 acres and contains approximately 77,000 square feet. Wackenhut
Corrections has been granted the option to purchase the Karnes Facility, and has
agreed in connection with the consummation of the Offering to exercise this
option and cause the facility (other than certain of the personal property used
in connection with the facility) to be conveyed to the Company. Wackenhut
Corrections also has an option to acquire an adjacent parcel of unimproved land
containing approximately 30 acres at a total cost of $60,000, which will be
assigned to the Company in connection with the Company's purchase of the Karnes
Facility. Wackenhut Corrections began operating this facility in January 1998
under an interim operating agreement with Karnes County which expires on July
14, 1998. Wackenhut Corrections is negotiating a long-term operating agreement
with Karnes County, pursuant to which the County will enter into
inter-governmental agreements for the housing of inmates with such governmental
entities as may be designated by Wackenhut Corrections. However, there can be no
assurance that Wackenhut Corrections will be successful in securing such an
agreement.
The Central Valley Facility and the Golden State Facility are medium
security facilities located on adjacent properties in McFarland, California. The
Central Valley Facility is situated on approximately 19 acres, and the Golden
State Facility is situated on approximately 33 acres. Each facility contains
approximately 95,901 square foot structure with a design capacity of 550 beds.
Construction of each of the Central Valley Facility and Golden State Facility
was completed in December 1997. Wackenhut Corrections has contracted with the
CDOC to operate each such Facility, which contracts expire in December 2007.
The Desert View Facility is located in Adelanto, California and is a medium
security facility. The facility is situated on approximately 16 acres and
contains approximately 95,901 square feet with a design capacity of 550 beds.
Construction of the facility was completed in December 1997. Wackenhut
Corrections has contracted with the CDOC to operate this facility, which
contract expires in December 2007.
Pre-Release Center. A pre-release center is a minimum to medium security
facility for inmates nearing parole, offering inmates basic education and
pre-employment training as well as alcohol and drug abuse treatment and
counseling. The pre-release center to be acquired by the Company is the
McFarland Facility.
The McFarland Facility is located in McFarland, California. The facility is
situated on approximately 5 acres, and contains approximately 35,000 square
feet. The facility currently has a design capacity of 224 beds. Wackenhut
Corrections has contracted with the CDOC to operate the facility, which contract
expires in January 1999.
Detention Facilities. Detention facilities are used to house undocumented
aliens for the INS and are classified as minimum to medium security facilities.
The detention facilities to be acquired by the Company include the Aurora
Facility and the Queens Facility.
The Queens Facility is located on approximately 1.34 acres in New York, New
York. The facility has a design capacity of 200 beds and contains approximately
61,400 square feet. Wackenhut Corrections began operating the facility in June
1997, and is presently operating the facility under a management contract with
the INS which expires in January 2002.
The Aurora Facility is located on approximately 46 acres in Aurora,
Colorado. Originally designed to accommodate 150 beds, the facility was expanded
in 1992 to contain a design capacity of 300 beds. The approximately 66,000
square foot medium security facility is operated under a management agreement
entered into between the INS and Wackenhut Corrections which has expired, and
has been extended for successive 30 day periods, with the most recent extension
expiring on April 28, 1998. Wackenhut Corrections is presently negotiating a new
long-term agreement for the Aurora Facility. However, there can be no assurance
that Wackenhut Corrections will be successful in securing such an agreement.
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<PAGE> 67
Work Release Centers. A work release center is an access-controlled
community residential center which houses court-ordered residents who work in
the community and participate in programs and residential services at the
center. The work release center to be acquired by the Company is the Broward
Facility.
The Broward Facility is located in Pompano Beach, Florida and is used to
house residents participating in the Broward County Work Release Program. The
facility is located on approximately ten acres and is designed to accommodate
300 beds. The approximately 86,500 square foot structure is operated under a
management agreement between Broward County, the Sheriff of Broward County and
Wackenhut Corrections, which expires in February 2003, but which provides for
options in favor of the Sheriff of Broward County to extend the management
contract for successive two year terms.
Historical Occupancy Rates of the Initial Facilities. The following chart
summarizes the historical occupancy rates of each of the Initial Facilities
which have had operations for any of five years ended December 31, 1997.
HISTORICAL OCCUPANCY OF INITIAL FACILITIES(1)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Aurora INS Processing Center(2)...................... 77% 69% 73% 86% 95%
McFarland Community Correction Facility.............. 94% 95% 96% 96% 96%
Queens Private Correctional Facility(3).............. N/A N/A N/A N/A 79%
</TABLE>
- ---------------
(1) Only those Initial Facilities which Wackenhut Corrections has operated for a
minimum of at least one full calendar year have been included in this table.
Wackenhut Corrections has, however, commenced operations at the remaining
five Initial Facilities.
(2) The operating agreement for the Aurora Facility includes a minimum guarantee
of 250 beds (83% occupancy rate).
(3) The Queens Facility opened on March 26, 1997. The operating agreement with
the INS includes a minimum guarantee of 150 beds (75% occupancy rate).
OTHER DATA ON SIGNIFICANT PROPERTIES
The Queens Facility, Central Valley Facility, Golden State Facility, Desert
View Facility, Broward Facility and the Karnes Facility are deemed "significant"
because they each will account for 10% or more of the Company's total assets
immediately after consummation of the transaction. For federal income tax
purposes, the basis will be equal to their purchase price by the Company. The
real property associated with these properties (other than land) generally will
be depreciated for federal income tax purposes over 40 years using the straight
line method, which equates to a rate of 2.5%. Real estate taxes will be paid by
Wackenhut Corrections pursuant to the terms of the Leases. The occupancy rate of
the Queens Facility, which opened on March 26, 1997, averaged 79% for the fiscal
year ended December 31, 1997. The other significant properties did not have
significant operations during the fiscal year ended December 31, 1997. Wackenhut
Corrections has been and will be the sole occupant of the Facilities.
THE OPTION FACILITIES
The Company will have options to purchase each of the three Option
Facilities at any time during the applicable Option Facility Option Period for a
cash purchase price equal to the applicable Option Facility Purchase Price. The
Option Facility Purchase Price for an Option Facility may differ from the fair
market value thereof. If acquired, the Company will lease the Option Facilities
to Wackenhut Corrections (and Wackenhut Corrections will continue to operate
such Option Facilities) pursuant to long-term, non-cancelable, triple-net leases
on substantially the same terms and conditions as the Leases for the Initial
Facilities. The initial annual rental rate for each Option Facility will be 9.5%
of the applicable Option Facility Purchase Price. Throughout the terms of the
initial Leases, annual rents will escalate by the Base Rent Escalation. The
total aggregate purchase price and first-year rent for the Option Facilities are
estimated to be approximately $109.7 million and approximately $10.4 million,
respectively. Under the terms of the Leases, Wackenhut Corrections will have a
right of first refusal on any proposed sale by the Company of the Option
Facilities.
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<PAGE> 68
Set forth below are brief descriptions of each of the Option Facilities.
Unless otherwise noted, the Company will own fee title to the Option Facilities,
free and clear of any material liens, upon acquisition thereof.
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED ANTICIPATED LEASE
TYPE OF CONTRACTING SECURITY DESIGN (BED) FACILITY TERM
FACILITY AND LOCATION FACILITY ENTITY LEVEL CAPACITY OPENING DATE (YEARS)
- --------------------- ------------ ----------- -------- ------------ ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michigan Youth
Correctional
Facility............. Juvenile MDOC(1) Maximum 480 4th Quarter, 1999 10
Lake County, MI Correctional
Facility
Jena Juvenile Justice
Center............... Juvenile LDOC(2) All 276 4th Quarter, 1998 10
Jena, LA Correctional Levels
Facility
Lawton Correctional
Facility............. Prison ODOC(3)(4) Medium 1,500 1st Quarter, 1999 10
Lawton, OK -----
Total.................. 2,256
=====
</TABLE>
- ---------------
(1) State of Michigan Department of Management and Budget for the Department of
Corrections.
(2) State of Louisiana Department of Public Safety and Corrections.
(3) State of Oklahoma Department of Corrections.
(4) Wackenhut Corrections commenced construction of this facility in January
1998 and has responded to an RFP issued by the ODOC soliciting proposals for
up to 2,500 beds. There can be no assurance that Wackenhut Corrections will
be awarded an operating agreement from the ODOC for this facility.
The Michigan Youth Correctional Facility (the "Michigan Facility") is
located in Lake County, Michigan and is situated on approximately 99 acres. This
approximately 163,250 square foot facility contains a design capacity of 480
beds. Construction of the Michigan Facility is anticipated to be completed
during the fourth quarter of 1999. The State of Michigan has awarded Wackenhut
Corrections an operating agreement for a term of five years from the opening of
the facility. Wackenhut Corrections is currently finalizing the terms of the
operating agreement with the State of Michigan.
The Jena Juvenile Justice Center (the "Jena Facility") is located in Jena,
Louisiana and will be used to house juveniles. The facility will be situated on
100 acres. This approximately 62,400 square foot structure will have a design
capacity for 276 beds. The facility is anticipated to be operational during the
fourth quarter of 1998. The Jena Facility will be operated by Wackenhut
Corrections under an operating agreement with the State of Louisiana, the term
of which is subject to certain qualifications more fully discussed in
"Subleases -- The Jena Facility."
The Lawton Correctional Facility (the "Lawton Facility") is located in
Lawton, Oklahoma and will be used as a medium security prison. The facility is
situated on a 160 acre tract. The approximately 406,000 square foot structure
contains a design capacity for 1,500 beds. Wackenhut Corrections commenced
construction of the Lawton Facility in January 1998 and will respond to an RFP
issued by the ODOC in February 1998, soliciting proposals for up to 2,500 beds.
However, there can be no assurance that Wackenhut Corrections will be awarded an
operating agreement by the ODOC.
OWNERSHIP OF THE FACILITIES
The Aurora Facility and the Queens Facility are owned by Wackenhut
Corrections and the McFarland Facility is owned by WCCRE.
The Central Valley Facility, the Golden State Facility, the Desert View
Facility, the Broward Facility, the Michigan Facility, the Jena Facility and the
Lawton Facility are owned by First Security Bank, National Association, as owner
trustee (the "Owner Trustee"), under the Wackenhut Corrections Trust 1997-1, and
are leased to Wackenhut Corrections or WCCRE pursuant to the Wackenhut Lease
Facility. Within the five-year terms of these operating leases, Wackenhut
Corrections has the option, subject to certain terms and conditions, including
notification of the lender of the facility to be purchased and repayment of
associated facility borrowing costs, to purchase these facilities and to
designate a third party to receive title thereto. As
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part of the Formation Transactions, Wackenhut Corrections will exercise the
option and cause the applicable Facilities to be conveyed by the Owner Trustee
to the Company.
The Karnes Facility is owned by the Karnes County Public Facility
Corporation. The Karnes County Public Facility Corporation has granted Wackenhut
Corrections an option to purchase the Karnes Facility, which may be exercised by
Wackenhut Corrections or its designee on or before July 14, 1998. Wackenhut
Corrections will, in connection with the Formation Transactions, exercise the
option and cause such facility (other than certain personal property used in
connection with the facility) to be conveyed to the Company.
THE EXCLUDED FACILITIES
Wackenhut Corrections will retain two correctional and detention facilities
(the "Excluded Facilities") that are subject to purchase options granted to the
State of New Mexico and the respective counties in which the facilities are
located. The Excluded Facilities consist of (i) an approximately 379,000 square
foot facility in Lea County, New Mexico which has a design capacity of 1,200
beds and (ii) an approximately 201,000 square foot facility in Guadalupe County,
New Mexico which has a design capacity of 600 beds. The Excluded Facilities were
excluded from the Initial Facilities because both the State of New Mexico and
the respective counties previously have been granted an option to acquire one or
both of these facilities. However, in the event the purchase option is not
exercised by the State of New Mexico or the respective county, the Excluded
Facilities will be subject to the Company's acquisition rights pursuant to the
Right to Purchase Agreement and may be acquired in the future.
LEGAL PROCEEDINGS
Owners and operators of privatized correctional and detention facilities
are subject to a variety of legal proceedings arising in the ordinary course of
operating such facilities, including proceedings relating to personal injury and
property damage. Such proceedings are generally brought against the operator of
a correctional or detention facility, but may also be brought against the owner.
Although the Company is not currently a party to any legal proceeding, it is
possible that in the future the Company could become a party to such
proceedings. Wackenhut Corrections is a party to certain litigation relating to
the Facilities arising in the ordinary course of operations. The Company does
not believe that such litigation, if resolved against Wackenhut Corrections,
would have a material adverse effect upon its business, financial position or
results of operations. The Leases provide that Wackenhut Corrections is
responsible for claims based on personal injury and property damage at the
Facilities and require Wackenhut Corrections to maintain insurance for such
purposes.
COMPETITION
The Initial Facilities are, and any additional correctional and detention
facilities acquired by the Company will be subject to competition for inmates
from private prison managers and possibly governmental entities. The number of
inmates in a particular area could have a material effect on the revenues of the
Company's correctional and detention facilities. In addition, revenues of the
Company's correctional and detention facilities will be affected by a number of
factors, including the demand for inmate beds and general economic conditions.
The Company will also be subject to competition for the acquisition of
correctional and detention facilities with other purchasers of correctional and
detention facilities, including, without limitation, CCA Prison Realty Trust, a
publicly-traded REIT which also focuses on the acquisition and ownership of
correctional and detention facilities.
GOVERNMENT REGULATION
Corrections Industry Regulations
The corrections industry is subject to federal, state and local regulations
in the United States which are administered by a variety of regulatory
authorities. Generally, prospective providers of corrections services must be
able to detail their readiness to, and must comply with, a variety of applicable
state and local regulations, including education, health care and safety
regulations. Correctional and detention management contracts frequently include
extensive reporting requirements and require supervision and on-site monitoring
by representatives of contracting governmental agencies. State law also
typically requires corrections officers to
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meet certain training standards. In addition, many state and local governments
are required to enter into a competitive bidding procedure before awarding
contracts for products or services. The laws of certain jurisdictions may also
require the Company to award subcontracts on a competitive basis or to
subcontract with businesses owned by women or members of minority groups.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property. Such
laws often impose such liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. The
presence of such substances, or the failure to remediate such substances
properly when released, may adversely affect the owner's ability to sell such
real estate or to borrow funds if the borrower is using such real estate as
collateral. Neither the Company, Wackenhut Corrections nor any of their
affiliates has been notified by any government authority of any material
non-compliance, liability or other claim in connection with any of the Initial
Facilities or Option Facilities and neither the Company, Wackenhut Corrections
nor any of their affiliates is aware of any other environmental condition with
respect to any of the Facilities that is likely to be material to the Company.
Phase I environmental assessments have been acquired for all of the Initial
Facilities and Option Facilities. No assurance can be given that such
investigation would reveal all potential environmental liabilities, that no
prior or adjacent owner created any material environmental condition not known
to the Company or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations) will not result in
imposition of environmental liability or limitation on use of properties. The
Company does not intend to conduct any further environmental investigation in
connection with the Offering. The Leases provide that Wackenhut Corrections will
indemnify the Company for certain potential environmental liabilities at the
Facilities. See "Leases -- Environmental Matters."
Americans with Disabilities Act
The Facilities are subject to the Americans with Disabilities Act of 1990,
as amended (the "ADA"). The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities" but generally requires that public
facilities, such as correctional facilities, be made accessible to people with
disabilities. These requirements became effective in 1992. Compliance with the
ADA requirements could require removal of access barriers and other capital
improvements at the Facilities. Noncompliance could result in imposition of
fines or an award of damages to private litigants. Receipt of a satisfactory ADA
compliance report will be required prior to the Company's acquisition of each
such Facility. Nonetheless, under the Leases, Wackenhut Corrections is required
to make any necessary modifications or improvements to comply with the ADA and
to indemnify the Company from any liabilities in connection therewith.
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THE FORMATION TRANSACTIONS
Prior to or simultaneously with the consummation of the Offering, the
Company and Wackenhut Corrections will engage in the Formation Transactions
which are designed to consolidate ownership of the Initial Facilities in the
Company, to provide a vehicle for future acquisitions of correctional and
detention facilities (including the Option Facilities and the Future Facilities)
and to enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1998. These transactions
include the following:
- Issuance of Common Shares and Redemption of Founder's Shares. The
Company will sell 6,200,000 Common Shares in the Offering, resulting in
net proceeds to the Company of approximately $113.8 million after
deduction of the underwriting discounts and commissions and estimated
offering expenses. All of the net proceeds to the Company from the
Offering will be either contributed by the Company directly to the
Operating Partnership or contributed by the Company to CPT LP, a wholly-
owned subsidiary of the Company, so as to capitalize CPT LP and enable CPT
LP to fund its investment in the Operating Partnership, in exchange for a
combined 100% interest in the Operating Partnership. The Company will
initially own a 98% limited partnership interest and a 1% general
partnership interest in the Operating Partnership. CPT LP will initially
own a 1% limited partnership interest in the Operating Partnership. The
Company will contemporaneous with the consummation of the Offering also
redeem at cost the 1,000 founder's shares which were issued in connection
with the formation of the Company.
- Purchase Agreement. The Company will enter into the Purchase Agreement
with Wackenhut Corrections, pursuant to which the Company will acquire,
directly or as assignee of Wackenhut Corrections' contract rights, the
eight Initial Facilities for an aggregate cash purchase price of
approximately $113.0 million. The total purchase price of approximately
$113.0 million represents approximately 118% of the estimated cost of the
Initial Facilities.
- Option Agreements. The Company will enter into the Option Agreements
with Wackenhut Corrections, pursuant to which Wackenhut Corrections will
grant the Company the option to acquire each of the three Option
Facilities, at any time during the applicable Option Facility Option
Period, for a cash purchase price equal to the applicable Option Facility
Purchase Price. If the Company elects to purchase all three Option
Facilities, the aggregate purchase price is estimated to be approximately
$109.7 million.
- Leases. Concurrent with the Company's acquisition of the Initial
Facilities and, if acquired, the Option Facilities, the Company will lease
such Facilities to Wackenhut Corrections (and Wackenhut Corrections will
continue to operate such facilities) pursuant to the Leases for an initial
term of 10 years. Subject to certain limited exceptions, the term of each
of the Leases may be extended by Wackenhut Corrections for three
additional five-year terms at a fair market rental rate as mutually agreed
upon by the Company and Wackenhut Corrections or, in the absence of such
an agreement, as determined by binding arbitration. In addition, the term
of any of the Leases will be automatically extended upon expiration
thereof on the same terms (including the then applicable base rent and
Base Rent Escalation) as reflected in the applicable Lease if there is at
such time an unexpired sublease with respect to such Facility. Under the
terms of the Leases, Wackenhut Corrections will have a 30-day right of
first refusal on the proposed sale by the Company of any of the Initial
Facilities and, if acquired, the Option Facilities.
- Right to Purchase Agreement. The Company will enter into the Right to
Purchase Agreement with Wackenhut Corrections, pursuant to which the
Company will have the right at any time during the Future Facility Option
Period to acquire and lease back to Wackenhut Corrections each of the
Future Facilities, subject to certain limited exceptions where the sale or
transfer of ownership of a facility is restricted under a facility
operating agreement or pursuant to a restriction under a governmentally-
assisted financing arrangement. The purchase price for each Future
Facility will equal the applicable Future Facility Purchase Price, which
may differ from the fair market value of such facility at such time. In
the case of any Future Facility acquired during the first five years of
the Right to Purchase Agreement, the initial annual rental rate for such
Facility will be the greater of (i) the fair market
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rental rate as mutually agreed upon by the Company and Wackenhut
Corrections, or in the absence of such agreement, as determined by binding
arbitration, or (ii) 9.5% of the purchase price of such Future Facility.
In the case of any Future Facility acquired thereafter, the initial annual
rental rate will be the fair market rental rate as mutually agreed upon by
the Company and Wackenhut Corrections or, in the absence of such an
agreement, as determined by binding arbitration. Under the terms of any
lease between the Company and Wackenhut Corrections relating to a Future
Facility, Wackenhut Corrections will have a right of first refusal on the
proposed sale by the Company of any Future Facilities. The right of the
Company to purchase Future Facilities from Wackenhut Corrections pursuant
to the Right to Purchase Agreement will continue for 15 years after the
consummation of the Offering, so long as there are any leases in force
between the Company and Wackenhut Corrections.
- Credit Facility. The Company has obtained a commitment for the $100
million Bank Credit Facility from NationsBank, N.A. which may be used to
finance the acquisition of additional correctional and detention
facilities (including the Option Facilities and Future Facilities), to
expand the Facilities and for general working capital requirements. See
"The Company -- Bank Credit Facility." The Company has also obtained a
commitment for the $10 million Interim Credit Facility from NationsBank,
N.A. on substantially the same terms and conditions as the Bank Credit
Facility.
- Issuance of Options. The Company will, contemporaneous with the
consummation of the Offering, grant to certain officers and directors of
Wackenhut Corrections and its affiliates and to the officers and trustees
of the Company, options to purchase an aggregate 590,000 Common Shares at
a purchase price per share equal to the Offering Price, which will be
exercisable in four equal annual installments commencing on the date of
grant.
ADVANTAGES AND DISADVANTAGES TO UNAFFILIATED SHAREHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
shareholders of the Company include their ability to participate in the cash
flow generated by the rent from the Initial Facilities through their ownership
by the Company, and in all future acquisitions by the Company. See "The
Company -- Business and Growth Strategies -- Expansion Opportunities." The
potential disadvantages of such transactions to unaffiliated shareholders of the
Company include the lack of arm's-length valuations in determining the
consideration in such transactions and the fact that Dr. Zoley, Chairman of the
Company and Vice Chairman and Chief Executive Officer of Wackenhut Corrections,
Richard Wackenhut, a trustee of the Company and a Director of Wackenhut
Corrections, and George Wackenhut, a trustee of the Company and Chairman of
Wackenhut Corrections, will have substantial influence over the management and
operations of the Company, and that the risk such influence might be exercised
in a manner which may not be in the best interests of the Company and its
shareholders. See the more complete discussion of such matters under "Risk
Factors."
BENEFITS TO WACKENHUT CORRECTIONS AND CERTAIN AFFILIATES
The benefits of the foregoing transactions to Wackenhut Corrections and its
directors and officers include:
- Wackenhut Corrections will receive approximately $42.3 million in cash
for the three Initial Facilities owned by it and its right to acquire the
remaining five Initial Facilities and the Wackenhut Lease Facility, which
is guaranteed in part by Wackenhut Corrections, will receive approximately
$54.4 million in cash for the four Initial Facilities owned by it. The
cost of the seven Initial Facilities to be acquired from Wackenhut
Corrections and the Wackenhut Lease Facility is approximately $79.2
million;
- In the event the Company elects to exercise its option to acquire any or
all of the three Option Facilities, Wackenhut Corrections would receive up
to approximately $5.2 million in cash and the Wackenhut Lease Facility
would receive approximately $104.5 million in cash (in total representing
approximately 105% of the cost of such Option Facilities, regardless of
market value);
- Wackenhut Corrections will be able to expand its business development
opportunities as a result of the potential increased access to capital
available through its relationship and contractual arrangements with the
Company;
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- Wackenhut Corrections will have a right of first refusal with regard to
certain future sales of Facilities by the Company;
- Wackenhut Corrections has accelerated the vesting of 18,300 options to
purchase shares of Wackenhut Corrections common stock which were held by
Charles Jones, the Company's President and Chief Executive Officer. Mr.
Jones exercised these options, as well as 10,200 vested options to
purchase shares of Wackenhut Corrections common stock, and has disposed of
all such shares;
- Dr. Zoley, George Wackenhut and Richard Wackenhut, and other directors,
officers and employees of Wackenhut Corrections and its affiliates (other
than Messrs. Jones and Hogan) will, contemporaneous with the consummation
of the Offering, be granted options to purchase 480,000 Common Shares at a
per share purchase price equal to the Offering Price, which will be
exercisable in four equal annual installments commencing on the date of
grant;
- Messrs. Jones and Hogan, each of whom has agreed to resign his position
as an employee of Wackenhut Corrections will, contemporaneous with the
consummation of the Offering, be granted options to purchase an aggregate
of 85,000 Common Shares at a per share purchase price equal to the
Offering Price; and
- Through its operations of the Initial Facilities pursuant to the Leases,
Wackenhut Corrections will be entitled to all of the cash flow from the
Initial Facilities after the payment of operating expenses, taxes and rent
under the Leases.
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RELATIONSHIP BETWEEN WACKENHUT CORRECTIONS AND THE COMPANY
AFTER THE FORMATION TRANSACTIONS
For the purpose of governing certain of the ongoing relationships between
the Company and Wackenhut Corrections after the Formation Transactions and to
provide mechanisms for an orderly transition prior to the completion of the
Formation Transactions, the Company and Wackenhut Corrections will have entered
into the various agreements and will have adopted the policies described herein.
Purchase Agreement. Prior to the consummation of the Offering, the Company
will enter into the Purchase Agreement with Wackenhut Corrections pursuant to
which the Company will acquire, directly or as assignee of Wackenhut
Corrections' contract rights, the eight Initial Facilities for an aggregate cash
purchase price of approximately $113.0 million. Pursuant to the Purchase
Agreement, the transfer of the Initial Facilities is subject to the completion
of the Offering as well as the normal and customary conditions to the closing of
real estate transactions. The Purchase Agreement will contain representations
and warranties by Wackenhut Corrections concerning the Initial Facilities
customarily found in agreements of such type that will survive the consummation
of the Offering for a period of one year.
Option Agreements. Prior to the consummation of the Offering, the Company
will enter into the Option Agreements with Wackenhut Corrections, pursuant to
which Wackenhut Corrections will grant the Company the option to acquire each of
the three Option Facilities at any time during the applicable Option Facility
Option Period for a cash purchase price equal to the applicable Option Facility
Option Price. If the Company elects to purchase all three Option Facilities, the
aggregate purchase price is estimated to be $109.7 million.
Leases. Concurrent with the Company's acquisition of the Initial
Facilities and, if acquired, the Option Facilities, the Company will lease such
Facilities to Wackenhut Corrections (and Wackenhut Corrections will continue to
operate such facilities) pursuant to the Leases for an initial term of 10 years.
Subject to certain limited exceptions, the term of each of the Leases may be
extended by Wackenhut Corrections for three additional five-year terms at a fair
market rental rate as mutually agreed upon by the Company and Wackenhut
Corrections or, in the absence of such an agreement, as determined by binding
arbitration. In addition, the term of any of the Leases will be automatically
extended upon expiration thereof on the same terms (including the then
applicable base rent and Base Rent Escalation) as reflected in the applicable
Lease Wackenhut Corrections is obligated under an unexpired sublease with
respect to such Facility. Under the terms of the Leases, Wackenhut Corrections
will have a right of first refusal on the proposed sale by the Company of any of
the Initial Facilities and, if acquired, the Option Facilities.
Right to Purchase Agreement. It is anticipated that Wackenhut Corrections
will acquire or develop additional correctional or detention facilities in the
future. Prior to the consummation of the Offering, the Company will enter into
the Right to Purchase Agreement with Wackenhut Corrections pursuant to which the
Company will have the right, subject to certain limited exceptions where the
sale or transfer of ownership of a facility is restricted under a facility
operating agreement or governmentally-assisted financing arrangements, to
acquire and lease back to Wackenhut Corrections each of the Future Facilities,
at any time during the Future Facility Option Period applicable to such Future
Facility for a cash purchase price equal to the Future Facility Purchase Price
for such Future Facility, which may differ from the fair market value of such
facility at such time. In the case of any Future Facility acquired during the
first five years of the Right to Purchase Agreement, the initial annual rental
rate for such Facility will be the greater of (i) the fair market rental rate as
mutually agreed upon by the Company and Wackenhut Corrections, and in the
absence of such agreement, as determined by binding arbitration, or (ii) 9.5% of
the applicable Future Facility Purchase Price. In the case of any Future
Facility acquired thereafter, the initial annual rental rate will be the fair
market rental rate as mutually agreed upon by the Company and Wackenhut
Corrections or, in the absence of such an agreement, as determined by binding
arbitration. Under the terms of any lease between the Company and Wackenhut
Corrections relating to a Future Facility, Wackenhut Corrections will have a
right of first refusal on the proposed sale by the Company of any such Future
Facility. The right of the Company to purchase Future Facilities from Wackenhut
Corrections pursuant to the Right to Purchase Agreement will continue for 15
years following the consummation of the Offering so long as there are any leases
in force between the Company and Wackenhut Corrections.
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Policies and Procedures for Addressing Conflicts. After completion of the
Formation Transactions, the Company and Wackenhut Corrections will have
significant contractual and other ongoing relationships, as described above and
under the caption "Leases" herein. Such ongoing relationships may present
certain conflict situations for certain trustees and officers of the Company and
certain directors and officers of Wackenhut Corrections. See "Risk
Factors -- Conflicts of Interest." The Company and Wackenhut Corrections will
adopt appropriate policies and procedures to be followed by the Board of
Trustees of the Company and the Board of Directors of Wackenhut Corrections to
attempt to address those conflicts. Such procedures will include requiring Dr.
Zoley, George Wackenhut and Richard Wackenhut to abstain from making management
decisions in their capacity as trustees or officers of the Company or as
directors or officers of Wackenhut Corrections, and to abstain from voting as
directors or trustees of either company with respect to matters that present a
conflict of interest between the companies. Whether or not a conflict of
interest situation exists will be determined by the Company Independent
Committee on a case-by-case basis in accordance with the policies and procedures
to be developed by the Board of Trustees. See "Risk Factors -- Conflicts of
Interest."
Upon the consummation of the Offering, the Board of Trustees will establish
the Company Independent Committee, which will consist of the five trustees who
will be neither officers or employees of the Company or its affiliates, nor
directors, trustees, officers, employees of, or other persons who have a
material financial interest in, any of (i) The Wackenhut Corporation or
Wackenhut Corrections, or (ii) any lessee or tenant of facility owned by the
Company or by the Company's affiliates, or (iii) any owner, lessee or tenant of
any facility financed by the Company or by the Company's affiliates, other than
any such owner, lessee or tenant which is an affiliate of the Company, or (iv)
any management company operating any facility owned or financed by the Company
or by the Company's affiliates, or (v) an affiliate of any of the foregoing.
Pursuant to the Bylaws, the Company Independent Committee must approve the
following actions of the Board of Trustees: (a) the selection of the operators
for the Company's facilities and (b) the entering into or the consummation of
any agreement or transaction with Wackenhut Corrections or its affiliates,
including, but not limited to, the negotiation, enforcement and renegotiation of
the terms of any lease of any of the Company's facilities. Certain other
significant actions of the Board of Trustees will require the approval of a
minimum of two-thirds of the trustees. See "Certain Provisions of Maryland Law
and of the Company's Declaration of Trust and Bylaws -- Super-Majority Vote of
Trustees."
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POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's investment objectives and
policies, financing policies and policies with respect to certain other
activities. These policies are determined by the Board of Trustees and may be
amended or revised from time to time at the discretion of the Board of Trustees
without a vote of the Company's shareholders.
INVESTMENT POLICIES
The Company intends to focus its investments on the acquisition or
development of facilities directly from, or on behalf of, Wackenhut Corrections
or its affiliates or other private prison managers or government entities in the
United States. Additionally, the Company may pursue other opportunities as well,
including investment opportunities abroad and in facilities unrelated to the
correctional and detention industry. The Company may also invest in other
facilities or excess land to the extent necessary to acquire a facility.
The Company will apply the following general guidelines in evaluating
potential investments in correctional and detention facilities: (i) completion
of the construction of the facility, (ii) execution of a government contract for
the operation of the facility, and (iii) documentation of adequate inmate
occupancy levels. Although these investment guidelines are not compulsory but
merely advisory, management of the Company has no present intent to acquire any
facility until construction is completed.
Subject to the general investment guidelines referenced above, the Company
will consider a variety of specific factors in evaluating potential investments
in correctional or detention facilities, including: (i) the reputation and
creditworthiness of the current owner, manager or developer of the facility,
(ii) the proposed terms for purchasing the facility, (iii) the proposed terms
for leasing the facility, including rental payments and lease term, (iv) the
quality of construction of the facility, (v) the quality of operations at an
existing facility or the quality of other operations of a prison manager for a
new facility, (vi) the relationship between the prison manager and the
contracting government entity, and (vii) the status of existing facilities as
facilities accredited by the American Correctional Association (the "ACA"). The
ACA is a multi-disciplinary organization of professionals representing all
levels and facets of the corrections and criminal justice industry, including
federal, state and military correctional facilities in prisons, county jails and
detention centers, probation and parole agencies, and community
corrections/half-way houses. Comprised of 70 chapters and affiliated
organizations, as well as individual members numbering more than 20,000, the ACA
serves as the umbrella organization for all areas of corrections, and provides a
broad base of expertise in this industry.
The Company may purchase or lease properties for long-term investment,
expand and improve the facilities presently owned or sell such properties, in
whole or in part, when circumstances warrant. The Company may also participate
with other entities in property ownership, through joint ventures or other types
of co-ownership. Equity investments may be subject to existing mortgage
financing and other indebtedness which have priority over the equity interest of
the Company.
While the Company emphasizes equity real estate investments, it may, in its
discretion, invest in mortgages, equity or debt securities of other REITs or
partnerships and other real estate interests. Mortgage investments may include
participating in convertible mortgages. The Company does not currently intend to
purchase securities of, or interests in, other entities engaged in real estate
activities.
There are no limitations on the percentage of the Company's assets that may
be invested in any one property, venture or type of security. The Board of
Trustees may establish limitations as it deems appropriate from time to time,
including limitations necessary to maintain the Company's qualification as a
REIT. 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.
DISPOSITION POLICIES; WACKENHUT CORRECTIONS' RIGHT OF FIRST REFUSAL
The Company has no current intention to dispose of any of the Facilities,
although it reserves the right to do so if the Board of Trustees determines that
such action would be in the best interests of the Company. Wackenhut Corrections
shall have a right of first refusal with respect to any sale of the Facilities.
See "The
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Formation Transactions" and "Leases" for a more detailed discussion of the terms
and conditions of Wackenhut Corrections' right of first refusal.
FINANCING POLICIES
The Company presently intends to maintain its Debt Policy (measured at the
time a borrowing occurs), which requires a ratio of total consolidated
indebtedness to total market capitalization of 50% or less. The Board of
Trustees may, however, from time to time reevaluate this policy and decrease or
increase such ratio accordingly. The Company will determine its financing
policies in light of then current economic conditions, relative costs of debt
and equity capital, market values of properties, growth and acquisition
opportunities and other factors. Following consummation of the Offering, the
Company expects to establish the $100 million Bank Credit Facility which may be
used to finance the acquisition of additional correctional and detention
facilities (including the Option Facilities and the Future Facilities), the
expansion of existing facilities and for working capital requirements. If the
Board of Trustees determines that additional funding is desirable, the Company
may raise such funds through additional equity offerings, debt financing or
retention of cash flow (subject to provisions in the Code concerning taxability
of undistributed REIT income and REIT qualification), or a combination of these
methods.
Indebtedness incurred by the Company may be in the form of publicly or
privately placed debt instruments or financings from banks, institutional
investors or other lenders, any of which indebtedness may be unsecured or may be
secured by mortgages or other interests in the facilities owned by the Company.
There are no limits on the number or amounts of mortgages or other interests
which may be placed on any one facilities. In addition, such indebtedness may be
with or without recourse to all or any part of the facilities of the Company or
may be limited to the particular facility to which the indebtedness relates. The
proceeds from any borrowings may be used for the payment of distributions, and
working capital or to refinance indebtedness or to finance acquisitions,
expansions or developments of new facilities.
In the event that the Board of Trustees determines to raise additional
equity capital, the Board of Trustees has the authority, without shareholder
approval, to issue additional Common Shares or Preferred Shares of the Company.
The Bylaws will require the approval of at least two-thirds of the members of
the Board of Trustees for the Company to issue equity securities, other than
Common Shares issued (a) for at least the fair market value thereof at the time
of issuance as determined in good faith by a majority of the Board of Trustees,
(b) pursuant to any share incentive or option plans of the Company, or (c) in a
bona fide underwritten public offering managed by one or more nationally
recognized investment banking firms. Existing shareholders would have no
preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a shareholder's investment in the Company.
WORKING CAPITAL RESERVE POLICIES
The Company will maintain working capital reserves (and when not
sufficient, access to borrowings) in amounts that the Board of Trustees
determines to be adequate to meet normal contingencies in connection with the
operation of the Company's business and the management of its investments.
CONFLICTS OF INTEREST POLICIES
The Company will adopt certain policies designed to minimize potential
conflicts of interest. However, there can be no assurance that these policies
always will be successful in eliminating the influence of such conflicts and, if
they are not successful, decisions could be made that might fail to reflect
fully the best interests of all shareholders.
Declaration of Trust and Bylaw Provisions
The Declaration of Trust will require that at least a majority of the
members of the Board of Trustees be comprised of "Independent Trustees," defined
therein as individuals who qualify as trustees but who are neither an officer
nor an employee of the Company or its affiliates, nor a director, trustee,
officer or employee of, or other person who has a material financial interest
in, any of (i) The Wackenhut Corporation or
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Wackenhut Corrections, or (ii) any lessee or tenant of a facility owned by the
Company or by the Company's affiliates, or (iii) any owner, lessee or tenant of
any facility financed by the Company or by the Company's affiliates, other than
any such owner, lessee or tenant which is an affiliate of the Company, or (iv)
any management company operating any facility owned or financed by the Company
or by the Company's affiliates, or (v) an affiliate of any of the foregoing. The
Declaration of Trust will provide that such provisions relating to Independent
Trustees may be amended with the approval by the shareholders by the affirmative
vote of two-thirds of all of the votes entitled to be cast on such matters. In
addition, the Bylaws provide that the selection of operators for the Company's
facilities and the entering into and consummation of any agreement or
transactions with Wackenhut Corrections or its affiliates, including, but not
limited to, the negotiation, enforcement and renegotiation of the terms of any
lease of any of the Company's facilities with such parties, be approved by the
Company Independent Committee which must consist solely of Independent Trustees.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
(i) to invest in the securities of other issuers for the purpose of exercising
control over such issuer, (ii) to underwrite securities of other issuers or
(iii) to trade actively in loans or other investments.
Although it does not currently intend to do so, the Company may make
investments other than as previously described, provided that such investments
do not disqualify the Company from its REIT status. The Company may repurchase
or otherwise reacquire Common Shares or any other securities it may issue and
may engage in such activities in the future. The Board of Trustees has no
present intention of causing the Company to repurchase any of the Common Shares,
and any such action would be taken only in conformity with applicable federal
and state laws and the requirements for qualifying as a REIT under the Code and
the Treasury Regulations. Although it may do so in the future, the Company has
not issued Common Shares or any other securities in exchange for property, nor
has it reacquired (other than the 1,000 founder's shares) any of its Common
Shares or any other securities. See "The Formation Transactions." The Company
may make loans to third parties, including, without limitation, to its officers
and to joint ventures in which it decides to participate. Such loans will
generally require the approval of the Board of Trustees, and loans to Wackenhut
Corrections and its affiliates or to a joint venture in which Wackenhut
Corrections participates will require the approval of the Company Independent
Committee.
At all times, the Company intends to make investments in such a manner as
to be consistent with the requirements of the Code to qualify as a REIT and the
Board of Trustees shall endeavor to take no action which disqualifies the
Company as a REIT or otherwise causes the revocation of the Company's election
to be taxed as a REIT without the affirmative vote of the holders of not less
than two-thirds of the shares of the Company entitled to vote on such matter.
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OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement and the
descriptions of certain operating provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement, which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership will be organized as a Delaware limited
partnership pursuant to the terms of the partnership agreement that will include
the Company, as general partner, and both the Company and CPT LP as the initial
limited partners (the "Partnership Agreement"). Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Operating Partnership
(the "General Partner"), will have full, exclusive and complete responsibility
and discretion in the management and control of the Operating Partnership, and
the Company and CPT LP, in their capacity as the Limited Partners, will have no
authority to transact business for, or participate in the management activities
or decisions of, the Operating Partnership. Generally, any amendment to the
Partnership Agreement may be made by the General Partner, including, without
limitation, amendments that (i) add to the obligations of the General Partner,
(ii) reflect the admission, substitution or withdrawal of partners, (iii)
reflect the issuance of additional partnership interests issued by the Operating
Partnership, (iv) reflect a change that does not adversely affect Limited
Partners and (v) are necessary to satisfy legal requirements. The consent of
each adversely affected partner is required for any amendment that would require
any partner to make additional capital contributions or restore any negative
balance in its capital account, or which amendment would convert a limited
partnership interest into a general partnership interest, affect a Limited
Partner's liability or right to receive distributions or that would dissolve the
Operating Partnership prior to December 31, 2048 (other than as a result of
certain mergers or consolidations).
TRANSFERABILITY OF INTERESTS
Subject to limited exceptions, the Limited Partners may not withdraw from
the Operating Partnership. With certain exceptions, the Limited Partners may
transfer their Units, in whole or in part, without the consent of the General
Partner. Subject to limited exceptions, the General Partner may not withdraw or
transfer its Units.
CAPITAL CONTRIBUTION
The Company will contribute $20 to the Operating Partnership as its initial
capital contribution as General Partner and $1,960 as its initial capital
contribution as Limited Partner, and CPT LP will contribute $20 as its initial
capital contribution as a Limited Partner. The Company will receive a 1% general
partnership interest and a 98% limited partnership interest, and CPT LP will
receive a 1% limited partnership interest, in the Operating Partnership. The
Company, directly as a General Partner and a Limited Partner, and indirectly
through CPT LP, will contribute on a pro rata basis to the Operating Partnership
as additional capital contributions the net proceeds of the Offering. Upon
contribution of such additional capital to the Operating Partnership, the
Company and CPT LP will receive additional Units in the Operating Partnership
which will equal the number of outstanding Common Shares issued in the Offering,
and their percentage interests in the Operating Partnership will be adjusted, on
a proportionate basis based upon the amount of such additional capital
contributions and the value of the Operating Partnership at the time of such
contributions.
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses of the Company (the "Company Expenses"), and
the Company Expenses will be treated as expenses of the Operating Partnership.
The
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Company Expenses generally will include (i) all expenses relating to the
formation of the Company and the Operating Partnership, (ii) all expenses
relating to the Offering, (iii) all expenses associated with the preparation and
filing of any periodic reports by the Company and the Operating Partnership
under federal, state or local laws or regulations, (iv) all expenses associated
with compliance by the Company and the Operating Partnership with laws, rules
and regulations promulgated by any regulatory body, and (v) all other operating
or administrative costs of the Company incurred in the ordinary course of its
business on behalf of the Operating Partnership. If the Company acquires assets
outside of the Operating Partnership or an entity wholly-owned by the Operating
Partnership, the percentage of Company Expenses allocated to the Operating
Partnership shall be reduced to an amount that is fair and equitable to the
Operating Partnership under the circumstances, as determined by the Company as
General Partner.
DISTRIBUTIONS AND ALLOCATIONS
The Partnership Agreement provides that the Operating Partnership will
distribute cash from operations (including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the Operating Partnership's property in
connection with the liquidation of the Operating Partnership) on a quarterly
(or, at the election of the General Partner, more frequent) basis, in amounts
determined by the General Partner in its sole discretion, to the partners in
accordance with their respective percentage interests in the Operating
Partnership. Upon liquidation of the Operating Partnership, after payment of, or
adequate provision for, debts and obligations of the Operating Partnership,
including any partner loans, any remaining assets of the Operating Partnership
will be distributed to all partners in accordance with their respective positive
capital account balances.
Profit and loss of the Operating Partnership for each fiscal year of the
Operating Partnership generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership. Taxable
income and loss will be allocated in the same manner, subject to compliance with
the provisions of Code sections 704(b) and 704(c) and Treasury Regulations
promulgated thereunder.
TERM
The Operating Partnership will continue until December 31, 2048, or until
sooner dissolved upon (i) the sale of all or substantially all the assets and
properties of the Operating Partnership, (ii) the withdrawal of the General
Partner (unless there remains at least one other General Partner or a majority
of remaining partners elect to continue the business of the Operating
Partnership and appoint a replacement General Partner), (iii) the acquisition by
a single person of all of the partnership interests, (iv) the entry of a decree
of judicial dissolution of the Operating Partnership, or (v) the election by the
General Partner, with consent of the holders of at least 50% of the Units, other
than those owned by the Company or its affiliates, to dissolve the Operating
Partnership.
TAX MATTERS
Pursuant to the Partnership Agreement, the General Partner will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
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LEASES
The following summary of the Leases between the Company and Wackenhut
Corrections is qualified in its entirety by reference to the Leases, a form of
which is filed as an exhibit to the Registration Statement, of which this
Prospectus is a part. The following description of the Leases does not purport
to be complete but contains a summary of all material provisions thereof.
Capitalized terms used below but not otherwise defined have the meanings set
forth in the "Glossary."
Concurrent with Wackenhut Corrections' conveyance of the Initial Facilities
and, if acquired, the Option Facilities to the Company, the Company will lease
each such Facility to Wackenhut Corrections or to WCCRE. Each such Facility will
be the subject of a separate Lease that will incorporate the provisions of a
master lease (the "Master Lease") between the Company and Wackenhut Corrections.
The Lease of each such Facility will include the land, the buildings and
structures and other improvements thereon, easements, rights and similar
appurtenances to such land and improvements, and permanently affixed equipment,
machinery, and other specified fixtures relating to the operation of the
Facility (the "Leased Property"). The Lease of each such Facility provides for
an initial term of 10 years (the "Fixed Term") and may be extended by Wackenhut
Corrections for three additional five-year terms beyond the Fixed Term (the
"Extended Terms") at a fair market rental rate as mutually agreed upon by the
Company and Wackenhut Corrections or, in the absence of such an agreement, as
determined by binding arbitration. In addition, an individual Lease will be
automatically extended on the same terms (including the then applicable base
rent and Base Rent Escalation) as reflected in the applicable Lease if there is
at such time an unexpired sublease with respect to such Facility. The Fixed Term
and Extended Terms under each Lease shall be subject to earlier termination upon
the occurrence of certain contingencies described in the Lease. Any additional
Future Facilities will be leased upon terms and conditions substantially similar
to the Leases except that the rental rate in the case of any Future Facility
acquired during the first five years following the Offering will be the greater
of (i) the fair market rental rate as mutually agreed upon by the Company and
Wackenhut Corrections or, in the absence of such agreement, by binding
arbitration or (ii) 9.5% of the applicable Future Facility Option Price. In the
case of any Future Facility acquired thereafter, the initial annual rental rate
will be the fair market rental rate as mutually agreed upon by the Company and
Wackenhut Corrections or in the absence of such an agreement, as determined by
binding arbitration.
USE OF THE FACILITIES
Each Lease permits Wackenhut Corrections to operate the Leased Property
solely as a correctional or detention facility, unless otherwise mutually agreed
upon by the Company and Wackenhut Corrections. Wackenhut Corrections has the
responsibility in each Lease to obtain and maintain all licenses, certificates
and permits in order to use and operate the respective Facility and to provide
the Company with evidence of compliance with this obligation.
AMOUNTS PAYABLE UNDER THE LEASES; NET PROVISIONS
During the Fixed Term and the Extended Terms, Wackenhut Corrections will
pay annual base rent ("Annual Base Rent"), which will be payable in monthly
installments. Annual Base Rent for each Leased Property will be increased each
year by the Base Rent Escalation. Annual Base Rent and Base Rent Escalation are
collectively referred to in the Master Lease as "Rent."
Each Lease of a Leased Property is what is commonly known as a triple-net
lease or absolute net lease, under which Wackenhut Corrections is required to
pay Annual Base Rent and any additional charges related to the Leased Property,
including every fine, penalty, interest expense and cost which may be added for
nonpayment or late payment thereof, all taxes, assessments and levies, excises,
fees, and all other government charges with respect to each Leased Property, and
all charges for utilities and services, including, without limitation,
electricity, telephone, trash disposal, gas, oil, water, sewer, communication
and all other utilities used in each Leased Property.
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MAINTENANCE, MODIFICATION AND CAPITAL ADDITIONS
Under each Lease, Wackenhut Corrections will, at its sole cost and expense,
maintain each Leased Property in good order, repair and appearance and will make
structural and non-structural, interior and exterior, foreseen and unforeseen,
and ordinary and extraordinary repairs which may be necessary and appropriate to
keep such Leased Property in good order and repair. The Company will not be
required to build or rebuild any improvements to any Leased Property, or to make
any repairs, replacements, alterations, restorations or renewals to any Leased
Property.
Wackenhut Corrections, at its sole cost and expense, may make alterations,
additions, changes and/or improvements to each Leased Property, provided that
with respect to an improvement which has a cost of more than $500,000 or which,
when aggregated with the cost of all such improvements for any individual Leased
Property in the same lease year, would cause the total cost of all such
improvements to exceed $1,000,000 (each such threshold amount increasing 4% per
year, cumulatively) the value and primary intended use of such Leased Property
(determined in the Company's reasonable judgment) is not impaired and the prior
written consent of the Company is obtained. All machinery, equipment, furniture,
furnishings, and other personal property (except certain excluded proprietary
property) installed at the expense of Wackenhut Corrections on any Leased
Property, will remain the property of Wackenhut Corrections until the expiration
or earlier termination of the Lease, at which time the Company will have an
option to purchase such property at appraised fair market value, as determined
pursuant to terms of the Master Lease, upon such expiration or termination.
However, the Company's option in certain cases may be subject to a contracting
governmental entity's superior right to acquire all or a portion of such
removable personal property under the terms of its operating contract with
Wackenhut Corrections.
Each Lease provides that, at the request of Wackenhut Corrections, the
Company may construct one or more new buildings or other improvements to a
particular Leased Property which are not normal or recurring to the maintenance
of such Leased Property (a "Capital Addition"). A Capital Addition to a Leased
Property may necessitate an amendment to an existing Lease or new lease
agreement setting forth any changes in the premises, rent, or other similar
terms of the Lease as a result of the Capital Addition. In certain situations, a
Capital Addition to a Leased Property may be made directly by Wackenhut
Corrections and financed by third parties with the prior written consent of the
Company. In the case of a Capital Addition not undertaken or financed by the
Company, the Company will have an option to acquire and lease back to Wackenhut
Corrections such Capital Addition for a period of one year following the date
Wackenhut Corrections first receives inmates or detainees in such Capital
Addition. The purchase price of such Capital Addition shall be 105% (or such
lower percentage as may be agreed to by Wackenhut Corrections) of the aggregate
costs related to the acquisition, development, design, construction, equipment
and start-up of such Capital Addition which, in the case of goods and services
provided by Wackenhut Corrections, will not exceed the costs which would be paid
therefor if purchased from a third party in an arm's-length transaction. Fair
market rental rates for a Capital Addition acquired or undertaken by the Company
will be as mutually agreed upon by the Company and Wackenhut Corrections, and in
the absence of such an agreement, as determined by binding arbitration.
INSURANCE
Each Lease provides that Wackenhut Corrections will maintain insurance on
each Leased Property under Wackenhut Corrections' insurance policies providing
for the following coverages: (i) fire, vandalism, earthquake and malicious
mischief, extended coverage perils, and all physical loss perils, (ii)
comprehensive general public liability (including personal injury and property
damage), (iii) loss of rental value or business interruption and (iv) workers'
compensation. Under the Lease, the Company will have the right to periodically
review Wackenhut Corrections' insurance coverage and provide input with respect
thereto. Management of the Company believes that the insurance coverage
currently maintained by Wackenhut Corrections on each Initial Facility is
adequate in scope and amount and expects that adequate insurance will be
maintained by Wackenhut Corrections on each such facility in the future. The
Company is expected to be named on such policies as an additional insured or
loss payee, as the case may be.
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ENVIRONMENTAL MATTERS
Each Lease provides that Wackenhut Corrections makes various
representations and warranties relating to environmental matters with respect to
each Leased Property. Each Lease also requires Wackenhut Corrections to
indemnify and hold harmless the Company and any holder of a mortgage, deed of
trust or other security agreement on a Leased Property (a "Company Mortgagee")
from and against all liabilities, costs and expenses imposed upon or asserted
against the Company or the Leased Property on account of, among other things,
any federal, state or local law, ordinance, regulation, order or decree relating
to the protection of human health or the environment in respect of the Leased
Property. The Leases provide, however, that Wackenhut Corrections will not be
liable with respect to matters or events that arise after the commencement date
of the applicable Lease as a result of the gross negligence or intentional
misconduct of the Company.
ASSIGNMENT AND SUBLETTING
The Leases provide that with certain exceptions for service agreements for
portions of the Leased Property in favor of various licensees providing
incidental services customarily associated with or incidental to the operations
of the Leased Property, Wackenhut Corrections may not, without the prior written
consent of the Company, assign, sublease, mortgage, pledge, hypothecate,
encumber or otherwise transfer (except to an affiliate of Wackenhut Corrections)
any Lease or any interest therein, or all or any part of the Leased Property.
The Leases further state that except as provided in connection with governmental
subleases meeting certain requirements such consent may be granted or withheld
by the Company in its sole discretion. An assignment of a Lease will be deemed
to include any change of control (a "Change of Control") of Wackenhut
Corrections, as if such Change of Control were an assignment of the Lease. A
"Change of Control" of Wackenhut Corrections means, for purposes of the Leases,
the sale by Wackenhut Corrections of a controlling interest in Wackenhut
Corrections, or the sale or other transfer of all or substantially all of the
assets of Wackenhut Corrections. A Change of Control also means any transaction
pursuant to which Wackenhut Corrections is merged with or consolidated into
another entity, and Wackenhut Corrections is not the surviving entity. The
Leases further provide that no assignment or sublease will in any way impair the
continuing primary liability of Wackenhut Corrections under the Leases. The
Company will not unreasonably withhold its consent to subleases in favor of
governmental entities which are required in connection with an award of an
operating contract to Wackenhut Corrections, provided that, among other
requirements, (i) any such subleases are inferior and subordinate to the
Company's interest in the Facility and (ii) the term of the sublease does not
extend beyond the term of the Lease between the Company and Wackenhut
Corrections.
In addition, if requested by Wackenhut Corrections in order to respond to a
RFP for an operating agreement, the Company may agree to provide nondisturbance
agreements in favor of governmental entities pursuant to which the Company will
agree to recognize and leave the rights of any such governmental sub-tenant
undisturbed in the event of a termination of the Lease, but only upon a
determination by the Company that the provisions of any such governmental
subleases are acceptable in the Company's sole and absolute discretion.
DAMAGE TO, OR CONDEMNATION OF, A LEASED PROPERTY
In the event of any damage or destruction to any Facility, Wackenhut
Corrections has the obligation to fully repair or restore the same at Wackenhut
Corrections' expense, with the Annual Base Rent, real estate taxes and other
impositions on the particular Facility being proportionately abated during the
time of restoration, but only to the extent of any rental interruption insurance
proceeds actually received by the Company. If any Facility is damaged to such an
extent that 50% of the inmate beds at the Leased Facility are rendered unusable,
and if Wackenhut Corrections has fully complied with the insurance obligations
with respect to such Facility (including maintaining insurance against loss of
rents), Wackenhut Corrections may terminate the Lease of that facility upon
turning over all insurance proceeds and payment of any deductible or uninsured
loss with respect to such Facility to the Company. Additionally, if the Facility
is damaged within the last 24 months of the Lease term and cannot be restored
within six months of the date of the damage, either the Company or Wackenhut
Corrections may terminate the Lease. However, if Wackenhut Corrections
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exercises an option to extend the Lease term, the Company may not terminate upon
such casualty damage or destruction.
In the event of a condemnation or taking of any Leased Property neither
party shall be obligated to compensate the other for any damage or loss suffered
as a consequence of such a taking. In the event of a partial taking, Wackenhut
Corrections is obligated to repair the portion not taken, if the same does not
render the Leased Property unsuitable for Wackenhut Corrections' then use and
occupancy, but only to the extent of the condemnation award. The total
condemnation award shall be payable to the Company, except that Wackenhut
Corrections may recover its business damages, the value of its trade fixtures,
personal property and improvements which are not capital additions purchased or
financed by the Company and the value of its leasehold interest.
INDEMNIFICATION GENERALLY
Under each Lease, Wackenhut Corrections indemnifies, and is obligated to
save harmless, the Company from and against any and all demands, claims, causes
of action, fines, penalties, damages (including consequential damages), losses,
liabilities (including strict liability), judgments, and expenses (including,
without limitation, reasonable attorneys' fees, court costs, and related
expenses) incurred in connection with or arising from: (i) the use, condition,
operation or occupancy of each Leased Property; (ii) any activity, work, or
thing done, or permitted or suffered by Wackenhut Corrections in or about the
Leased Property; (iii) any acts, omissions, or negligence of Wackenhut
Corrections or any person claiming under Wackenhut Corrections, or the
contractors, agents, employees, invitees, or visitors of Wackenhut Corrections
or any such person; (iv) any claim of any person incarcerated, held or detained
in the Leased Property, including claims alleging breach or violation of such
person's civil or legal rights; (v) any breach, violation, or nonperformance by
Wackenhut Corrections or the employees, agents, contractors, invitees, or
visitors of Wackenhut Corrections, of any term, covenant, or provision of any
Lease or any law, ordinance, or governmental requirement of any kind; (vi) any
injury or damage to the person, property or business of Wackenhut Corrections,
its employees, agents, contractors, invitees, visitors, or any other person
entering upon the Leased Property under the express or implied invitation of
Wackenhut Corrections; (vii) any accident, injury to or death of persons or loss
of damage to any item of property occurring at the Leased Property; and (viii)
any improvements to the Leased Property in order to comply with the requirements
of the ADA.
Under each Lease, the Company indemnifies, and is obligated to save
harmless, Wackenhut Corrections from and against all liabilities, costs and
expenses (including reasonable attorneys' fees) imposed upon or asserted against
Wackenhut Corrections as a result of the Company's gross negligence or
intentional misconduct.
EVENTS OF DEFAULT
An event of default will be deemed to have occurred under the Master Lease
and any individual Lease if Wackenhut Corrections fails to perform any covenant
and does not diligently undertake to cure the same after 30 days' notice from
the Company; if the interest of Wackenhut Corrections in any Leased Property is
levied upon or attached and is not discharged in a specified period of time; or
if any representation or warranty of Wackenhut Corrections is incorrect. An
event of default will be deemed to have occurred under the Master Lease and all
of the Leases, if, among other things, Wackenhut Corrections fails to pay any
rent within 15 days after notice of non-payment from Company, if any bankruptcy
proceedings are instituted by or against Wackenhut Corrections and, if against
Wackenhut Corrections, such bankruptcy proceedings are not dismissed within 90
days; if any material part of the property of Wackenhut Corrections is levied
upon or attached in any proceeding and not discharged within a specified period
of time; if Wackenhut Corrections defaults in any payment of any obligations for
borrowed money having a principal balance in excess of $25.0 million; or if
Wackenhut Corrections is the subject of a non-appealable final judgment in an
amount greater than $10.0 million, which is not covered by insurance or
discharged by Wackenhut Corrections within a specified period of time.
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In the event of any event of default referable to a specific Leased
Property, the Company may evict Wackenhut Corrections from such Leased Property
and either terminate the Lease or re-let the Leased Property. However, the
Company will have certain duties to mitigate its losses in the exercise of such
remedies. In either event, Wackenhut Corrections shall remain responsible for
the rental value of such Leased Property for the remainder period of the term in
excess of rents received by the Company from any successor occupant.
Alternatively, at the Company's option, the Company will be entitled to recover
all unpaid Rent then due plus the present value of the Rent for the unexpired
term at the time of the award, subject to the Company's obligation to deliver
and pay-over to Wackenhut Correction any net rentals or proceeds actually
received from the lease, sale or other disposition of the Leased Property
thereafter, up to the amount paid by Wackenhut Corrections. In addition, the
Company may exercise any other rights that it may have under law. In the event
the Company evicts Wackenhut Corrections from a Leased Property, the Master
Lease will remain in full force and effect for all other Leased Properties. With
respect to Wackenhut Correction's failure to timely pay Rent and with respect to
certain nonmonetary events of default under the Master Lease, the Company shall
have all of the foregoing rights, remedies and obligations with respect to all
of the Leased Properties.
The Leases will be governed by and construed in accordance with Florida law
(but not including Florida's conflict of laws rules) except for certain
procedural laws which must be governed by the laws of the location of each
Leased Property. Because the Facilities are located in various states, the
Leases may be subject to restrictions imposed by applicable local law. Neither
the Master Lease nor any of the other agreements entered into by Wackenhut
Corrections in connection with the Formation Transactions prohibits or otherwise
restricts the Company's ability to lease properties to parties (domestic or
foreign) other than Wackenhut Corrections.
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SUBLEASES
The provisions of certain existing operating agreements awarded to
Wackenhut Corrections for the Initial Facilities afford the governmental entity
a right to assume an existing Sublease of the subject facility created between
WCCRE and Wackenhut Corrections (or to designate another facility operator to
assume such sublease) at a fixed rental rate in the event of early termination
of the operating agreement upon the occurrence of certain events. The rental
payments and other material terms of these existing Subleases differ from
comparable provisions of the Leases, and there is no requirement that the
governmental entity or its designee comply with the provisions of the Leases. In
such cases, Wackenhut Corrections will, nevertheless, remain primarily liable to
the Company under the Leases.
Concurrently with the conveyance of certain of the Initial Facilities and
the Option Facilities and the execution of the Leases with respect thereto, the
Company will agree to recognize and leave undisturbed such rights of the
governmental entities. Such Subleases are presently in effect with respect to
the Broward Facility, the McFarland Facility, the Central Valley Facility, the
Desert View Facility, and the Golden State Facility. In the case of the Michigan
Facility, the Company will recognize and leave undisturbed the rights of the
State of Michigan under an existing Sublease with Wackenhut Corrections in the
event the option relating to such Facility is exercised by the Company.
Wackenhut Corrections has agreed that the term of the individual Leases between
Wackenhut Corrections and the Company for these Facilities will be automatically
extended, if necessary, in order to insure that the Lease between the Company
and Wackenhut Corrections will be commensurate with the term of any such
Subleases. Some of the material differences between the terms and provisions of
the existing Subleases and the Leases are discussed below.
THE BROWARD FACILITY SUBLEASE
WCCRE has entered into a Sublease (the "Broward Sublease") with Wackenhut
Corrections for the use of the Broward Facility. In connection with the
Offering, the Company will enter into a Lease with WCCRE pursuant to which it
will recognize and agree to leave undisturbed the Broward Sublease. While the
Broward Sublease is a triple-net lease, the annual rent payable under the
Broward Sublease is below the annual rent payable under the relevant Lease and
the provisions of the Sublease are generally not as favorable to the lessor as
the comparable provisions of the relevant Lease. If the operating agreement
between Wackenhut Corrections and Broward County is terminated for a reason
other than a default by Wackenhut Corrections during the initial five-year term
expiring in February 2003, the Broward County Sheriff is required under the
operating agreement to assume the obligations of Wackenhut Corrections under the
Broward Sublease through February, 2003, and in the event of such assumption,
may exercise the three consecutive five year renewal options contained in the
Broward Sublease. Wackenhut Corrections will nevertheless remain obligated to
the Company for performance under the Lease for the entire term of the Broward
Sublease. If Wackenhut Corrections defaults on its obligations under the Lease,
the Company will be required to permit the Broward County Sheriff to occupy the
Broward Facility under the terms of the Broward Sublease at a rental rate and
upon terms which are not as favorable to the Company as those of the Lease.
THE CALIFORNIA FACILITIES SUBLEASES
WCCRE has entered into a series of Subleases (collectively the "California
Subleases") with Wackenhut Corrections for the use of the California Facilities.
In connection with the Offering, the Company will enter into a series of Leases
with WCCRE pursuant to which it will recognize and agree to leave undisturbed
the California Subleases. Except for the base rent, the terms and provisions of
each of the California Subleases are identical. With the exception of the
Sublease of the McFarland Facility which expires January 1999, the term of each
of the California Subleases is 120 months expiring December 16, 2007 and is
coterminous with a ten year facility operating agreement entered into between
Wackenhut Corrections and the State of California for each such Facility. Each
of the California Subleases provides for certain "termination rights" in favor
of the State of California under which the State of California has the option,
in the event of early termination of the operating agreement between the State
of California and Wackenhut Corrections, to cause Wackenhut Corrections'
interest under each of the California Subleases to be assigned to the State of
California or to a replacement operator approved by the State. The California
Subleases may not be modified without the prior written approval of the State of
California. While the California Subleases are triple-net leases, the provisions
of such Subleases are generally not as favorable to the lessor as the comparable
provisions of the relevant
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Leases. If Wackenhut Corrections defaults on its obligations under the Leases,
the Company will be required to permit the contracting government entity to
occupy the California Facilities under the provisions of the Sublease. The
annual base rent under the Sublease is not subject to adjustment for cost of
living increases or any other reason. As a result, the annual rent payable under
the California Subleases may, during some portion of the term of the applicable
Leases, fall below the annual rent payable under the Leases. Wackenhut
Corrections will nevertheless remain obligated to the Company for performance
under the Leases for the entire term of the California Subleases.
THE MICHIGAN FACILITY SUBLEASE
Wackenhut Corrections entered into a lease agreement (the "Michigan
Sublease") with the State of Michigan in January 1998 for an initial term of
twenty years to commence on the later to occur of September 1, 1999 or occupancy
of the Michigan Facility (estimated to occur no later than November 1, 1999).
The lease may be extended at the option of the State of Michigan for two
consecutive five year terms. The annual base rent is payable monthly at a fixed
rate for the entire term and is subject to annual adjustments only in the amount
of any increase or decrease in the cost of insurance, taxes, maintenance and
repair (excluding building system replacement costs) after the base year ending
August 31, 2000. The Michigan Sublease contains broad indemnification provisions
obligating Wackenhut Corrections to indemnify the State of Michigan for any
actions taken by it on the premises and for any breach in the performance of its
obligations under the Michigan Sublease. The Michigan Sublease grants the State
of Michigan the right to terminate the Michigan Sublease upon the occurrence of
certain events, including nonappropriation. In the event the operating agreement
with Wackenhut Corrections is terminated during the term of the Michigan
Sublease, the State of Michigan has the unilateral right to appoint a
replacement operator of the Facility. If Wackenhut Corrections defaults on its
obligations under the Lease for the Michigan Facility, the Company will be
required to permit the State of Michigan to continue to occupy the Facility
under the terms of the Michigan Sublease which would result in the Company
receiving reduced rental income from this Facility. In addition, the provisions
of the Michigan Sublease are not as favorable to the lessor as comparable
provisions of the Lease.
The State of Michigan is also granted an option to purchase the Facility
under the Sublease at any time after the first five years of the term at a price
equal to the replacement cost less depreciation. Wackenhut Corrections will
agree in the Lease for this Facility that Wackenhut Corrections will pay the
shortfall to the Company in the event the purchase option is exercised and the
purchase price paid by the State of Michigan is less than the net book value of
the Michigan Facility as shown on the Company's books and records at the time
the purchase option is exercised.
The Michigan Sublease requires the consent of the State of Michigan prior
to a transfer of ownership of the Facility. The Company will not exercise its
option to acquire the Michigan Facility unless and until it has received such
required consent.
THE JENA FACILITY
In March 1997, Wackenhut Corrections acquired, by assignment, all of the
right, title and interest of the LaSalle Parish Hospital District No. 2 (the
"Hospital District") under a Cooperative Endeavor Agreement dated January 30,
1995 (the "Louisiana Operating Agreement") entered into between the LDOC and the
Hospital District. The Louisiana Operating Agreement contemplates the
construction of at minimum a 276-bed juvenile correctional facility through the
issuance of bonds secured by a mortgage on the Jena Facility (the "Mortgage
Debt"). The contemplated Mortgage Debt for the facility was not obtained and
Wackenhut Corrections, upon its acquisition of the interest of the Hospital
District under the Louisiana Operating Agreement, privately financed the cost of
construction of the facility. The Louisiana Operating Agreement, however,
provides that the LDOC may elect to assume the operation of the facility if
Wackenhut Corrections fails to cure operational defects, upon the condition that
the LDOC assumes payment of principal, interest and other obligations under the
contemplated Mortgage Debt. In addition, the term of the Louisiana Operating
Agreement was intended to be commensurate with the contemplated 25 year Mortgage
Debt. The Option Agreement for this Facility will require Wackenhut Corrections
to use reasonable efforts to obtain a
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clarification from the State of Louisiana acknowledging the private ownership
and financing of the Jena Facility. If the Company is not satisfied with the
terms of any such amendment to the Louisiana Operating Agreement or other
clarification, it may elect not to exercise its option to purchase this
facility.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The Company's Board of Trustees currently consists of two members and, upon
consummation of the Offering, will consist of nine members and be divided into
three classes serving staggered three-year terms. Of the nine trustees, five
will be Independent Trustees who are neither officers nor employees of the
Company or its affiliates, nor a director, trustee, officer or employee of, or
other person who has a material financial interest in, (i) Wackenhut
Corrections, or (ii) any tenant or lessee of any facility owned by the Company,
(iii) any owner, lessee or tenant of any facility financed by the Company, (iv)
any management company operating the Company's facilities, or (v) an affiliate
of any of the foregoing. The first annual meeting of shareholders of the Company
after the Offering at which trustees will be elected will be held in 1999.
Executive officers of the Company serve at the discretion of the Board of
Trustees.
Set forth below is information with respect to the current trustees and
executive officers of the Company, each of whom has served in such capacity
since the formation of the Company, and those individuals nominated to become
trustees upon the consummation of the Offering.
<TABLE>
<CAPTION>
YEAR TERM
AS TRUSTEE
NAME AGE POSITION EXPIRES
- ---- --- -------- ----------
<S> <C> <C> <C>
George C. Zoley.................................... 48 Chairman 2001
Charles R. Jones................................... 49 President, Chief 2001
Executive Officer,
Assistant Secretary and
Trustee
George R. Wackenhut................................ 78 Trustee Nominee 2000
Richard R. Wackenhut............................... 50 Trustee Nominee 1999
Anthony D. Travisono............................... 72 Trustee Nominee 2000
Clarence E. Anthony................................ 48 Trustee Nominee 2000
James D. Motta..................................... 42 Trustee Nominee 2001
William M. Murphy.................................. 47 Trustee Nominee 1999
Robert R. Veach, Jr................................ 47 Trustee Nominee 1999
Patrick T. Hogan................................... 30 Vice President, Chief --
Financial Officer,
Secretary and Treasurer
</TABLE>
GEORGE C. ZOLEY has been the Chairman of the Board of Trustees since
February 1998. Dr. Zoley has also served as Vice Chairman of the Board of
Directors of Wackenhut Corrections since January 1997, as President and a
Director of Wackenhut Corrections since it was incorporated in 1988 and as Chief
Executive Officer of Wackenhut Corrections since April 1994. Dr. Zoley
established the correctional division for The Wackenhut Corporation in 1984 and
was, and continues to be, a major factor in Wackenhut Corrections' development
of its privatized correctional and detention facility business. Dr. Zoley is
also a director of each of the entities through which Wackenhut Corrections
conducts its international operations. From 1981 through 1988, as manager,
director, and then Vice President of Government Services of Wackenhut Services
Incorporated, Dr. Zoley was responsible for the development of opportunities in
the privatization of government services by Wackenhut Services Incorporated. Dr.
Zoley continues to serve as Senior Vice President of The Wackenhut Corporation.
Prior to joining Wackenhut Services Incorporated, Dr. Zoley held various
administrative and management positions for city and county governments in South
Florida. He received his Bachelor of Arts and Masters of Public Administration
Degrees from Florida Atlantic University and a Doctorate in Public
Administration from Nova University.
CHARLES R. JONES has served as President and Chief Executive Officer and as
a trustee of the Company since February 1998. Mr. Jones also serves as Senior
Vice President, Business Development of Wackenhut
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Corrections where he is responsible for all phases of business development and
marketing, including legislative initiatives, proposal development, facility
finance and acquisition strategies, and contract negotiations. Mr. Jones will
resign from such position upon consummation of the Offering. Mr. Jones served as
Vice President, Business Development of Wackenhut Corrections from June 1996 to
January 1997. Previously, Mr. Jones was a senior investment banker specializing
in project finance and privatization consulting for the private corrections
industry with Rauscher, Pierce, Refsnes, Inc. in Dallas, Texas. He was
responsible for structuring the first private prison financing in Texas, Florida
and Virginia. From 1973 to 1980 Mr. Jones, a certified public accountant,
practiced with Peat, Marwick, Mitchell & Co., in Denver, Colorado specializing
in the taxation of commercial real estate and financial institutions. Mr. Jones
received a B.B.A. in Accounting from the University of Colorado.
GEORGE R. WACKENHUT has been nominated to become a trustee of the Company
upon consummation of the Offering. Mr. Wackenhut has also served as a director
of Wackenhut Corrections since it was incorporated in 1988 and has been the
Chairman of the Board of Wackenhut Corrections since July 1996. Mr. Wackenhut is
the Chairman of the Board, Chief Executive Officer and founder of The Wackenhut
Corporation, the parent of Wackenhut Corrections. Mr. Wackenhut was President of
The Wackenhut Corporation from the time of its founding in 1955 until 1986.
Prior to that, Mr. Wackenhut had been a Special Agent of the Federal Bureau of
Investigation from 1950 to 1954. He received a Bachelor of Science Degree from
the University of Hawaii and a Masters of Education Degree from Johns Hopkins
University. Mr. Wackenhut is on the Dean's Advisory Board of the University of
Miami School of Business, the National Council of Trustees, Freedom Foundation
at Valley Forge, the President's Advisory Council for the Small Business
Administration, Region IV, and a member of the National Board of the National
Soccer Hall of Fame. Mr. Wackenhut is a past member of the Law Enforcement
Council, National Council on Crime and Delinquency, and the Board of Visitors of
the United States Army Military Police School. His son, Richard R. Wackenhut, is
a trustee nominee of the Company.
RICHARD R. WACKENHUT has been nominated to become a trustee of the Company
upon the consummation of the Offering. Mr. Wackenhut has served as a Director of
Wackenhut Corrections since it was incorporated in 1988, and has been the
President and Chief Operating Officer of The Wackenhut Corporation since 1986,
and was Senior Vice President, Operations from 1983 to 1986. Mr. Wackenhut
joined The Wackenhut Corporation in 1973 and served in a number of positions of
increasing responsibility, including field positions of Area and District
Manager. He received a Bachelor of Arts Degree in Political Science from The
Citadel and has completed advanced executive programs at Harvard University
School of Business Administration. Mr. Wackenhut is a Director of Associated
Industries of Florida. He is also a member of the American Society of Industrial
Security and a member of the International Security Management Association. Mr.
Wackenhut is the son of George R. Wackenhut, a trustee nominee of the Company.
ANTHONY P. TRAVISONO has been nominated to become a trustee of the Company
upon the consummation of the Offering. Mr. Travisono served as a director of
Wackenhut Corrections from April 1994 to February 1998. Mr. Travisono is on the
faculty at Salve Regina University in Rhode Island He serves as an International
consultant on correctional issues. From 1974 to 1991, Mr. Travisono was
Executive Director of the American Correctional Association. His career in the
correctional field extends over 48 years, during which Mr. Travisono has been
Director, Rhode Island Department of Corrections; Director, Rhode Island
Department of Mental Health, Retardation and Hospitals; Director, Rhode Island
Department of Social Welfare; Superintendent, Iowa Training School for Boys; and
Superintendent, Rhode Island Training School for Boys. He serves on the Advisory
Committee for Women at the Rhode Island Department of Corrections and on the
Advisory Committee for the Rhode Island Salvation Army Rehabilitation Center.
Mr. Travisono is a 1950 graduate of Brown University and received a Maters
Degree in Social Work from Boston University in 1963.
CLARENCE E. ANTHONY has been nominated to become a trustee of the Company
upon the consummation of the Offering. Mr. Anthony has been the President and
Chief Executive Officer of Emerge Consulting Corporation, a government contracts
consulting and marketing firm located in South Bay, Florida, since October 1997.
Prior thereto, Mr. Anthony was the Director, Client Management Services of CH2M
Hill, a government consulting firm located in West Palm Beach, Florida from 1995
to 1997 where his duties included developing and implementing tactical action
plans for client procurements. From 1992 to 1995, Mr. Anthony
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served as Vice President of William R. Hough & Company, an investment banking
firm in Palm Beach Gardens, Florida where he was responsible for developing
financial strategies for municipal capital projects. Mr. Anthony is a former
President of the Florida League of Cities and President-Elect of the National
League of Cities. He has been the Mayor of South Bay, Florida since 1984 and
serves on the Board of Directors of the National Conference of Black Mayors.
JAMES D. MOTTA has been nominated to become a trustee of the Company upon
the consummation of the Offering. Mr. Motta is President and Chief Executive
Officer for St. Joe/ARVIDA, L.P., ARVIDA, a master plan community development
company with a 39-year history of creating master-planned communities
nationwide. An Arvida executive with more than 18 years experience, Mr. Motta is
responsible for the operations of Arvida's activities in Florida, Georgia and
North Carolina. His other positions with Arvida have included President of
Arvida's South Florida Division, President -- Community Development in Florida,
Georgia, North Carolina, Texas, California and most recently Executive Vice
President and Chief Operating Officer for Arvida. Mr. Motta is a graduate of the
University of Florida.
WILLIAM M. MURPHY has been nominated to become a trustee of the Company
upon the consummation of the Offering. Since 1984, Mr. Murphy has been a self
employed real estate developer and construction manager in Fort Lauderdale,
Florida. During this period he has developed several commercial and retail
developments, many of which he currently owns and manages. From 1975 to 1984,
Mr. Murphy was a Vice President with Chase Manhattan Bank specializing in real
estate workouts and construction lending. Prior to 1975, he was employed by
Travelers Associates performing real estate feasibility studies. He earned
Masters Degrees in Urban Planning from New York University and a Bachelors
Degree in Civil Engineering from the National University of Ireland.
ROBERT R. VEACH, JR. has been nominated to become a trustee upon the
consummation of the Offering. Mr. Veach is an attorney in private practice in
Dallas, Texas specializing in corporate finance. Mr. Veach received a J.D. from
Southern Methodist University and a B.S. in Accounting from Arizona State
University. From 1987 to 1997, Mr. Veach was a Senior Shareholder of the law
firm of Locke Purnell Rain Harrell (A Professional Corporation) and represented
clients in financial transactions including mortgage and asset securitization,
mortgage loan purchase and servicing, synthetic lease transactions and
collateralized debt offerings. From 1983 to 1987, Mr. Veach was an officer of
Rauscher Pierce Refsnes, Inc. responsible for its asset and mortgage-backed
securities investment banking activities. He has been responsible for
structuring over $12 billion in secured debt and real estate transactions.
Previously Mr. Veach was an officer of a national real estate finance firm where
he was involved with administration of tax-exempt mortgage revenue bond housing
programs, origination of residential and commercial mortgage-backed pass-through
securities and participation in the pension and institutional real estate
advisory group. From 1975 to 1980, Mr. Veach was a law clerk to the United
States District Court and Court of Appeals Judge and an attorney with Locke
Purnell.
PATRICK T. HOGAN has been the Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since February 1998. Mr. Hogan also
serves as Manager of Financial Reporting for Wackenhut Corrections, where he has
assisted in negotiation, documentation and syndication of Wackenhut Corrections'
senior credit facilities. Mr. Hogan will resign from such position upon the
consummation of the Offering. Mr. Hogan received his J.D. from Notre Dame Law
School in 1996 and a B.B.A. in Accountancy from the University of Notre Dame in
1989. From 1994 through 1995, Mr. Hogan worked for a Commissioner of the Federal
Communications Commission. In 1993, Mr. Hogan served for a judge in the Chancery
Division, General Equity section of a New Jersey Superior Court. Prior thereto,
Mr. Hogan worked for a telecommunications holding company and in public
accounting with Coopers & Lybrand.
COMMITTEES OF THE BOARD OF TRUSTEES
Company Independent Committee
Upon the consummation of the Offering, the Board of Trustees intends to
establish a committee of the Independent Trustees to approve Interested Trustee
Transactions consisting of the five Independent Trustees (the "Company
Independent Committee"). Pursuant to the Bylaws, the Company Independent
Committee will be required to approve the following actions of the Board of
Trustees (the "Interested Trustee Transactions"): (i) the selection of the
operators for the Company's facilities and (ii) the entering into or the
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consummation of any agreement or transaction with Wackenhut Corrections or its
affiliates, including, but not limited to, the negotiation, enforcement and
renegotiation of the terms of any lease of any of the Company's facilities.
Action by the Company Independent Committee shall be in lieu of action of the
full Board of Trustees, except as otherwise required by law or as otherwise
expressly provided in the Bylaws.
Audit Committee
Upon the consummation of the Offering, the Board of Trustees will establish
an audit committee consisting of three trustees (the "Audit Committee"). All of
the members of the Audit Committee will be required to be Independent Trustees.
The Audit Committee will make recommendations concerning the engagement of
independent public accountants, review with the independent public accountants
the plans and results of the audit engagement, approve professional services
provided by the independent public accountants, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls.
Compensation Committee
Upon the consummation of the Offering, the Board of Trustees will establish
a compensation committee consisting of three trustees (the "Compensation
Committee"). All of the members of the Compensation Committee will be required
to be Independent Trustees. The Compensation Committee will determine
compensation, including awards under the Employee Option Plan, for the Company's
executive officers and consultants, and the Non-Employee Trustee Option Plan.
The Compensation Committee will also administer the Plans.
Executive Committee
Upon consummation of the Offering, the Board of Trustees will establish an
executive committee consisting of three trustees (the "Executive Committee").
The Executive Committee exercises the authority of the Board of Trustees, to the
extent permitted by law, in the management of the business of the Company
between meetings of the Board of Trustees.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Trustees.
COMPENSATION OF TRUSTEES
The Company intends to pay its non-employee trustees annual compensation of
$10,000 for their services. In addition, non-employee trustees will receive a
fee of $1,000 for each Board of Trustees meeting attended. Non-employee trustees
attending any committee meetings will receive an additional fee of $500 for each
committee meeting attended (the Chairman will receive $750), unless the
committee meeting is held on the day of a meeting of the Board of Trustees.
Non-employee trustees will also be reimbursed for reasonable expenses incurred
to attend trustee and committee meetings. Officers of the Company who are
trustees will not be paid any trustees' fees. Non-employee trustees will also
participate in the Non-Employee Trustee Option Plan. See
"Management -- Non-Employee Trustee Option Plan."
INDEMNIFICATION
The Declaration of Trust provides for the indemnification of the Company's
trustees and officers against certain liabilities to the fullest extent
permitted under Maryland law. The Declaration of Trust also provides that the
trustees and officers of the Company be exculpated from monetary damages to the
fullest extent permitted under Maryland law. The trustees and officers of the
Company have entered into separate indemnification agreements with the Company
pursuant to which the Company has agreed to indemnify such trustees and officers
against certain liabilities. In addition, the trustees, officers and controlling
persons of the Company will be indemnified against certain liabilities by the
Underwriters.
The Company intends to obtain trustees' and officers' liability insurance.
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EXECUTIVE COMPENSATION
Prior to the consummation of the Offering, the Company will not pay any
compensation to its executive officers. The following table sets forth the
annual base salary rates and other compensation expected to be paid by the
Company in the fiscal year ending December 31, 1998 to the executive officers of
the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
OTHER ANNUAL OPTIONS/SARS COMPENSATION
NAME YEAR SALARY($)(1) COMPENSATION (#)(2) ($)
- ---- ---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles R. Jones..................... 1998 $150,000 $45,000 75,000 --
Patrick T. Hogan..................... 1998 80,000 20,000 10,000 --
</TABLE>
- ---------------
(1) Amounts given are annualized projections for fiscal year ending December 31,
1998.
(2) Upon the consummation of the Offering, options to purchase a total of
565,000 Common Shares will be granted to employees and consultants of the
Company under the Employee Incentive Plan at an exercise price equal to the
Offering Price. All such options vest in four equal annual installments
commencing on the date of grant. See "-- Employee Incentive Plan."
The executive officers of the Company receive health insurance benefits
which do not exceed 10% of their respective salaries. These benefits are also
provided to all other employees of the Company.
INCENTIVE COMPENSATION
The Company may award incentive compensation to employees of the Company,
including incentive awards under the Employee Incentive Plan, that may be earned
upon the attainment of performance objectives determined by the Compensation
Committee.
EMPLOYEE INCENTIVE PLAN
The Company has established the Employee Incentive Plan to enable executive
officers and other key employees of and consultants to the Company to
participate in the ownership of the Company. The Employee Incentive Plan is
designed to attract and retain executive officers and other key employees of and
consultants to the Company and to provide incentives to such persons to maximize
the Company's Funds From Operations. The Employee Incentive Plan provides for
the award to executive officers and other key employees of and consultants to
the Company (subject to the Ownership Limit) of a broad variety of share-based
compensation alternatives such as nonqualified share options, incentive share
options, restricted shares, deferred shares and other share-based awards.
Prior to the consummation of the Offering, the Employee Incentive Plan will
be administered by the Board of Trustees of the Company. Upon consummation of
the Offering, the Employee Incentive Plan will be administered by the
Compensation Committee, which is authorized to select from among the eligible
employees of or consultants to the Company individuals to whom options,
restricted shares, deferred shares and other share-based awards are to be
granted and to determine the number of shares to be subject thereto and the
terms and conditions thereof. The Compensation Committee is also authorized to
adopt, amend and rescind rules relating to the administration of the Employee
Incentive Plan. No member of the Compensation Committee will be eligible to
participate in the Employee Incentive Plan.
Awards Available for Issuance under the Employee Incentive Plan
Nonqualified options, if granted, will provide for the right to purchase
Common Shares at a specific price which may not be less than fair market value
on the date of grant and usually will become exercisable in
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installments after the grant date. Nonqualified options may be granted for any
reasonable term and may be transferable in certain limited circumstances.
Incentive options, if granted, will be designed to comply with the
"incentive stock option" provisions of the Code and will be subject to
restrictions contained therein, including that the exercise price must generally
equal at least 100% of fair market value of Common Shares on the grant date and
that the term generally must not exceed ten years. Incentive options may be
modified after the grant date to disqualify them from treatment as an "incentive
stock option."
Restricted shares, if issued, may be sold to participants at various prices
(or issued without monetary consideration) and may be made subject to such
restrictions as may be determined by the Compensation Committee. Restricted
shares typically may be repurchased by the Company at the original purchase
price if the conditions or restrictions are not met. In general, restricted
shares may not be sold, or otherwise transferred or hypothecated, until
restrictions are removed or expired. Purchasers of restricted shares, unlike
recipients of options, will have voting rights and will receive dividends or
distributions prior to the time when the restrictions lapse.
Deferred shares, if issued, will obligate the Company to issue Common
Shares upon the occurrence or nonoccurrence of conditions specified in the
deferred share award. Under a typical deferred share award, the Company may
agree to issue Common Shares to an employee if he or she achieves certain
performance goals or remains employed by the Company for a specified period of
time. Recipients of deferred shares will not have voting rights or receive
dividends or distributions until the shares are actually issued.
Other share-based awards, if granted, may be granted by the Compensation
Committee on an individual or group basis. Generally, these awards will be based
upon specific agreements and may be paid in cash or in Common Shares or in a
combination of cash and Common Shares. Other share-based awards may include
share appreciation rights and "phantom" share awards that provide for payments
based upon increases in the price of the Company's Common Shares over a
predetermined period. They may also include bonuses which may be granted by the
Compensation Committee on an individual or group basis and which may be payable
in cash or in Common Shares or in a combination of cash and Common Shares.
Shares Subject to the Employee Incentive Plan
A maximum of 620,000 shares will be reserved for issuance under the
Employee Incentive Plan. The Employee Incentive Plan provides that no single
individual may be granted in any one year options to purchase greater than
100,000 Common Shares. Otherwise, there is no limit on the number of awards that
may be granted to any one individual so long as the grant does not violate the
Ownership Limit or cause the Company to fail to qualify as a REIT for federal
income tax purposes. See "Description of Shares of Beneficial
Interest -- Restrictions on Ownership."
The Board will approve, prior to the completion of the Offering, but
contingent and effective upon such completion, the grant of options to executive
officers and certain key employees of and consultants to the Company, to
purchase, in each case subject to the Ownership Limit, an aggregate of 565,000
Common Shares. The term of each of such options will be ten years from the date
of grant. Each such option will vest in four equal annual installments, with the
first increment vesting immediately upon the date of grant, and will be
exercisable, at a price per share equal to the initial public offering price.
Certain Federal Income Tax Consequences
In general, a participant will not recognize taxable income upon the grant
or exercise of an option that qualifies as an "incentive stock option" ("ISO").
However, upon the exercise of an ISO, the excess of the fair market value of the
shares received on the date of exercise over the exercise price of the shares
will be treated as an adjustment to alternative minimum taxable income. When a
participant disposes of shares acquired by exercise of an ISO, the participant's
gain (the difference between the sale proceeds and the price paid by the
participant for the shares) upon the disposition will be taxed as capital gain
provided the participant does not dispose of the shares within two years after
the date of grant nor within one year after the date of exercise, and
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exercises the option while an employee of the Company or a subsidiary of the
Company or within three months after termination of employment for reasons other
than death or disability. If the first condition is not met, the participant
generally will realize ordinary income in the year of the disqualifying
disposition. If the second condition is not met, the participant generally will
recognize ordinary income upon exercise of the ISO.
In general, a participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the option. Special timing rules may apply
to a participant who is subject to Section 16(a) of the Exchange Act.
A participant will recognize income on account of the settlement of a
performance share award or incentive award. A participant will recognize income
equal to any cash that is paid and with respect to performance share awards,
which are settled in shares, will recognize the fair market value of Common
Stock (on the date that the shares are first transferable or not subject to a
substantial risk of forfeiture) that is received in settlement of the award.
The employer (either the Company or its affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a
nonqualified option, the vesting of a restricted share award, payment under an
incentive award and the settlement of a performance share award. The amount of
the deduction will be equal to the ordinary income recognized by the
participant. The employer will not be entitled to a federal income tax deduction
on account of the grant or the exercise of an ISO. The employer may claim a
federal income tax deduction on account of certain disqualifying dispositions of
Common Stock acquired upon the exercise of an ISO.
The transfer of a non-qualified stock option to a permitted family member
will have no immediate tax consequences to the Company, the participant or the
permitted family member. Upon the subsequent exercise of the transferred option
by the permitted family member, the participant will realize ordinary income in
an amount measured by the difference between the option exercise price and the
fair market value of the shares on the date of exercise, and the employer will
be entitled to a deduction in the same amount. Any difference between such fair
market value and the price at which the permitted family member may subsequently
sell such shares will be treated as capital gain or loss to the permitted family
member, long-term or short-term depending on the length of time the shares have
been held by the permitted family member. There has been no formal pronouncement
on the tax consequences of the transfer of other awards. Accordingly, if such
transfers are permitted, participants will be directed to consult their own tax
advisers.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to certain executive officers of a publicly-held
corporation that may be deducted for federal income tax purposes. This
limitation does not apply to certain performance-based compensation paid under a
plan that meets the requirements of the Code and the Treasury Regulations
promulgated thereunder. While the Employee Incentive Plan generally complies
with the requirements for performance-based compensation, the $1,000,000
deduction limitation may apply to the exercise of certain options granted to
executive officers upon the consummation of this Offering.
NON-EMPLOYEE TRUSTEE OPTION PLAN
The Company has established the Non-Employee Trustee Option Plan to
maintain the Company's ability to attract and retain the services of experienced
and highly qualified non-employee trustees and to increase their proprietary
interest in the Company's continued success.
Shares Subject to the Non-Employee Trustee Option Plan
A maximum of 55,000 Common Shares have been authorized and reserved for
issuance under the Non-Employee Trustee Option Plan. The shares so reserved for
issuance and the terms of outstanding awards shall be adjusted as the
Compensation Committee deems appropriate in the event of a share dividend, share
split, combination, reclassification, recapitalization or other similar event.
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Transferability
The Non-Employee Trustee Option Plan provides that the options may be
transferred by a non-employee trustee in certain limited circumstances to
certain family members and affiliates. The options under the Non-Employee
Trustee Option Plan are nonqualified options intended not to qualify as
incentive stock options under Section 422 of the Code.
Eligibility
The Non-Employee Trustee Option Plan provides for the grant of options to
purchase Common Shares to each eligible trustee of the Company. No trustee who
is an employee of the Company is eligible to participate in the Non-Employee
Trustee Option Plan.
Options
The Non-Employee Trustee Option Plan provides that each non-employee
trustee who is a member of the Board of Trustees as of the date of the
consummation of the Offering will be awarded nonqualified options to purchase
5,000 Common Shares on that date (each such trustee, a "Founding Trustee"). Each
non-employee trustee who is not a Founding Trustee (a "Non-Founding Trustee")
will receive nonqualified options to purchase 5,000 Common Shares on the date
the Non-Founding Trustee is first elected or appointed to the Board of Trustees.
In addition, each non-employee trustee will receive an option to purchase 2,000
Common Shares upon his or her reelection to the Board, subject to the
availability of shares under the Non-Employee Trustee Option Plan. The options
granted to Founding Trustees will have an exercise price equal to the initial
public offering price and will vest on the date of grant. The exercise price of
options under future grants will be 100% of the fair market value of the Common
Shares on the date of grant and will vest in four equal annual installments
beginning on the date of grant, subject to the ability of the Board of Trustees
to accelerate vesting in its discretion under appropriate circumstances. The
exercise price may be paid in cash, cash equivalents, Common Shares or a
combination thereof, as acceptable to the Compensation Committee. The term of
options granted under the Non-Employee Trustee Option Plan generally will be ten
years from the date of grant.
Certain Federal Income Tax Consequences Relating to Options
Generally, an eligible director does not recognize any taxable income, and
the Company is not entitled to a deduction upon the grant of an option. Upon the
exercise of an option, the eligible director recognizes ordinary income equal to
the excess of the fair market value of the shares acquired over the option
exercise price, if any. Special rules may apply as a result of Section 16 of the
Exchange Act. The Company is generally entitled to a deduction equal to the
compensation taxable to the eligible director as ordinary income. Eligible
directors may be subject to backup withholding requirements for federal income
tax.
The transfer of a non-qualified stock option to a permitted family member
will have no immediate tax consequences to the Company, the director or the
permitted family member. Upon the subsequent exercise of the transferred option
by the permitted family member, the director will realize ordinary income in an
amount measured by the difference between the option exercise price and the fair
market value of the shares on the date of exercise, and the employer will be
entitled to a deduction in the same amount. Any difference between such fair
market value and the price at which the permitted family member may subsequently
sell such shares will be treated as capital gain or loss to the permitted family
member, long-term or short-term depending on the length of time the shares have
been held by the permitted family member.
DEFERRED COMPENSATION PLAN
The Company may establish a deferred compensation plan under which
executive officers of the Company may elect to defer receiving a portion of
their cash compensation otherwise payable in one tax year until a later tax year
and thereby postpone payment of tax on the deferred amount. If the plan is
established prior to the beginning of any taxable year, such executive officer
may elect to defer such amount of cash compensation until a future date or until
an event selected by such persons pursuant to the terms of the plan. Deferred
compensation may be invested in a separate trust account.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
In connection with the consummation of the Formation Transactions and the
Offering, the Company will enter into a series of contractual arrangements with
Wackenhut Corrections. Dr. Zoley, the Chairman of the Company, and George
Wackenhut and Richard Wackenhut, each a trustee of the Company, are members of
the Board of Directors of Wackenhut Corrections. In addition Charles R. Jones,
the President and Chief Executive Officer of the Company, and Patrick T. Hogan,
the Vice President and Chief Financial Officer of the Company, are both
currently employed by Wackenhut Corrections. Messrs. Jones and Hogan will,
however, resign their positions with Wackenhut Corrections upon the consummation
of the Offering.
INITIAL FACILITIES
The Company and Wackenhut Corrections will enter into the Purchase
Agreement, pursuant to which the Company will acquire, directly or as assignee
of Wackenhut Corrections' contract rights, the eight Initial Facilities for an
aggregate cash purchase price of approximately $113.0 million. The Purchase
Agreement will contain representations and warranties by Wackenhut Corrections
customarily found in agreements of such types that will survive the consummation
of the Offering for a period of one year.
OPTION FACILITIES
The Company and Wackenhut Corrections will enter into the Option Agreements
pursuant to which Wackenhut Corrections will grant the Company the option to
acquire each of the three Option Facilities at any time during the applicable
Option Facility Option Period for a cash purchase price equal to the applicable
Option Facility Purchase Price. If the Company elects to purchase all three
Option Facilities, the aggregate purchase price is estimated to be approximately
$109.7 million.
LEASES
Concurrent with the Company's acquisition of the Initial Facilities and, if
acquired, the Option Facilities, the Company will lease such Facilities to
Wackenhut Corrections pursuant to the Leases for an initial term of 10 years.
Subject to certain limited exceptions, the term of each of the Leases may be
extended by Wackenhut Corrections for three additional five-year terms at a fair
market rental rate as mutually agreed upon by the Company and Wackenhut
Corrections or, in the absence of such an agreement, as determined by binding
arbitration. In addition, the term of any of the Leases will be automatically
extended upon expiration thereof on the same terms as provided in the Leases
(including the then applicable base rent and Base Rent Escalation) if Wackenhut
Corrections is obligated under an unexpired sublease with respect to such
Facility. Under the terms of the Leases, Wackenhut Corrections will have a right
of first refusal on the proposed sale by the Company of any of the Initial
Facilities and, if acquired, the Option Facilities.
RIGHT TO PURCHASE
The Company and Wackenhut Corrections will enter into the Right to Purchase
Agreement pursuant to which the Company will have the right, subject to certain
limited exceptions where Wackenhut Corrections is restricted from transferring
ownership of a facility, to acquire and lease back to Wackenhut Corrections each
of the Future Facilities at any time during the applicable Future Facility
Option Period for a cash purchase price equal to the applicable Future Facility
Purchase Price. In the case of any Future Facilities acquired during the first
five years of the Right to Purchase Agreement, the initial annual rental rate
for such Future Facilities will be the greater of (i) the fair market rental
rate as mutually agreed upon by the Company and Wackenhut Corrections, and in
the absence of such agreement, as determined by binding arbitration, or (ii)
9.5% of the purchase price of such Future Facility. For facilities acquired
thereafter, the initial annual rental rate will be the fair market rental rate
as mutually agreed upon by the Company and Wackenhut Corrections, or in the
absence of such agreement, as determined by binding arbitration.
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PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of Common Shares by each trustee of the Company, by each executive
officer of the Company, by all trustees (and trustee nominees) and officers of
the Company as a group and by each person who is expected to be the beneficial
owner of 5% or more of the outstanding Common Shares immediately following
completion of the Offering. The table assumes (i) the consummation of the
Formation Transactions and (ii) that the Underwriters' over-allotment option
will not be exercised. Each person named in the table has sole voting and
investment power with respect to all the Common Shares shown as beneficially
owned by such person, except as otherwise set forth in the notes to the table.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
BENEFICIALLY
OWNED FOLLOWING PERCENTAGE OF
NAME AND BUSINESS ADDRESS OF BENEFICIAL OWNER(1) THE OFFERING(2) COMMON SHARES
- ------------------------------------------------ --------------- -------------
<S> <C> <C>
Dr. George C. Zoley......................................... 40,000(4) *
Charles R. Jones(3)......................................... 29,750(5) *
George R. Wackenhut......................................... 45,000(4) *
Richard R. Wackenhut........................................ 45,000(4) *
Anthony P. Travisono........................................ 10,000(6) *
Clarence E. Anthony......................................... 5,500(6) *
James D. Motta.............................................. 5,900(6) *
William M. Murphy........................................... 10,000(6) *
Robert R. Veach, Jr......................................... 6,000(6) *
Patrick T. Hogan(3)......................................... 3,000(7) *
All executive officers and trustees as a group (10
persons).................................................. 202,750 3.3%
</TABLE>
- ---------------
* Represents less than 1% of the class.
(1) Unless provided otherwise, the business address of each beneficial owner is
4200 Wackenhut Drive #100, Palm Beach Gardens, Florida 33410.
(2) Unless otherwise indicated by notes 4 through 7 below, represents the Common
Shares expected to be acquired in the Offering by the respective
shareholder.
(3) The business address for Messrs. Jones and Hogan is Gardens Plaza, Suite
430, 3300 PGA Boulevard, Palm Beach Gardens, Florida 33410.
(4) Includes options to purchase 20,000 Common Shares, which vest immediately
upon grant on the consummation of the Offering. Does not include options to
purchase 60,000 Common Shares which vest in three equal annual installments
beginning on the first anniversary of the consummation of the Offering.
(5) Includes options to purchase 18,750 Common Shares, which vest immediately
upon grant on the consummation of the Offering. Does not include options to
purchase 56,250 Common Shares which vest in three equal annual installments
beginning on the first anniversary of the consummation of the Offering.
(6) Includes options to purchase 5,000 Common Shares which vest immediately upon
grant on the consummation of the Offering.
(7) Includes options to purchase 2,500 Common Shares, which vest immediately
upon grant on the consummation of the Offering. Does not include options to
purchase 7,500 Common Shares which vest in three equal annual installments
beginning on the first anniversary of the consummation of the Offering.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the material terms of the shares of beneficial
interest of the Company does not purport to be complete and is subject to and
qualified in its entirety by reference to the Declaration of Trust and Bylaws,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
GENERAL
Under the Declaration of Trust, the total number of shares of all classes
that the Company will have authority to issue is 200,000,000, consisting of
150,000,000 Common Shares, which may be issued from time to time upon
authorization by the Board of Trustees, and 50,000,000 Preferred Shares, which
may be issued from time to time upon authorization by the Board of Trustees in
such series and with such preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or distributions,
qualifications or terms or conditions of redemption or other provisions as may
be fixed by the Board of Trustees, except as otherwise set forth in the
Declaration of Trust. The 1,000 Common Shares outstanding will be redeemed from
the sole existing record holder concurrently with the consummation of the
Offering. No Preferred Shares are currently outstanding or will be outstanding
immediately after consummation of the Offering. Under Maryland law, shareholders
generally are not personally liable for the Company's obligations solely as a
result of their status as shareholders. Under the Declaration of Trust, the
trustees, by majority vote, will be able to amend the Declaration of Trust to
increase or decrease the aggregate number of shares or the number of shares of
any series or class that the Company has authority to issue. The Board of
Trustees also will have the power to classify and reclassify any unissued shares
of the Company of any class or series including the Common Shares, from time to
time by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or distributions,
qualifications or terms or conditions of redemption of the shares. The Board of
Trustees may also authorize the issuance of debt instruments, shares and
securities convertible into shares of the Company for such consideration as the
Board of Trustees may deem advisable. For a description of certain provisions
that could have the effect of delaying, deferring or preventing a change in
control, see "Risk Factors -- Potential Anti-Takeover Effect of Certain
Provisions of Maryland Law and the Company's Declaration of Trust and Bylaws,"
and "Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws."
COMMON SHARES
Subject to the provisions of the Declaration of Trust regarding the
restrictions on transfer of shares of beneficial interest, and subject to the
preferential rights of any other class or series of beneficial interest, the
holders of Common Shares will be entitled to one vote per share on all matters
voted on by holders, including elections of trustees. The holders of Preferred
Shares will have no voting rights and no right to receive notice of any
meetings, except as required by law or as expressly provided for by the Board of
Trustees, in accordance with law and the rules of any stock exchange on which
the shares of the Company may be listed or traded, in establishing any series or
class thereof. Except as provided with respect to any other class or series of
shares, the holders of the Common Shares will possess the exclusive voting
power. The Declaration of Trust will not provide for cumulative voting in the
election of trustees, which means 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 Common Shares will not be able to elect any trustees.
The holders of Common Shares shall be entitled to vote only on (a) subject to
any voting rights granted to the holders of Preferred Shares, election or
removal of trustees, (b) amendment of the Declaration of Trust, with certain
exceptions (c) certain mergers of the Company, (d) any modification to the Board
of Trustees' obligations to take no action to disqualify the Company as a REIT
or to otherwise revoke the Company's election to be taxed as a REIT, (e)
termination of the Company, (f) matters on which a vote of the holders of Common
Shares may be required by law or pursuant to the rules of any stock exchange on
which the Common Shares may be listed, and (g) matters as may be determined by
the Board of Trustees from time to time. Subject to the preferential rights of
any other class or series of beneficial interest, and to the provisions of the
Declaration of Trust regarding the restrictions on the transfer of shares of
beneficial interest, within 30 days after the end of each fiscal year in each
calendar
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year after the calendar year ending December 31, 1998 and, in the discretion of
the Board of Trustees, more frequently, the Board of Trustees shall use
commercially reasonable efforts to declare and pay to the shareholders such
dividends and distributions as may be necessary to continue to qualify the
Company as a REIT as well as such additional dividends and distributions as the
trustees in their discretion may declare. After preferential dividends or
distributions of any Preferred Shares have been satisfied, all Common Shares
will participate equally in dividends and distributions payable to holders of
Common Shares when and as declared by the trustees in their discretion. Subject
to any preferential rights of any outstanding series of Preferred Shares, the
holders of Common Shares are entitled, upon liquidation, to receive pro rata all
assets of the Company available for distribution to such holders. All Common
Shares issued in the Offering will be fully paid and nonassessable and the
holders thereof will not have preemptive rights.
PREFERRED SHARES
The Board of Trustees will be empowered by the Declaration of Trust,
without the approval of shareholders, to classify any unissued Preferred Shares
and to reclassify any previously classified but unissued Preferred Shares of any
series from time to time. Prior to the issuance of any such shares, the Board of
Trustees will be required to set, subject to the provisions of the Declaration
of Trust regarding the restriction on transfers of shares, the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption for such shares. Upon the consummation of the Offering,
no Preferred Shares will be outstanding and the Company has no present plans to
issue any Preferred Shares following the closing of the Offering.
POWER TO AUTHORIZE AND ISSUE ADDITIONAL COMMON SHARES AND PREFERRED SHARES
The Company believes that the power of the Board of Trustees to issue
additional authorized but unissued Common Shares or Preferred Shares, and to
increase the authorized number of Common Shares and Preferred Shares, and to
classify or reclassify unissued Common Shares or Preferred Shares and thereafter
to cause the Company to issue such classified or reclassified shares of
beneficial interest will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional classes or series, as well as the Common
Shares, will be available for issuance without further action by the Company's
shareholders, unless such action is required by applicable law or the rules of
any stock exchange on which the Company's securities may be listed. Although the
Board of Trustees has no intention at the present time of doing so, it could
authorize the Company to issue a class or series that could, depending upon the
terms of such class or series, delay, defer or prevent a transaction or a change
in control of the Company that might involve a premium price for holders of
Common Shares or otherwise be in their best interest.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares. Specifically,
not more than 50% in value of the Company's outstanding shares may be owned,
directly, indirectly or constructively, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of a taxable year,
and the Company must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of 12 months or during a proportionate part of
a shorter taxable year. See "Material Federal Income Tax
Considerations -- Taxation of the Company as a REIT -- 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. Rent from real property does not include amounts received
by the Company from a tenant if the Company owns directly, indirectly or
constructively 10% or more of the ownership interests in a tenant. See "Material
Federal Income Tax Considerations -- Taxation of the Company as a REIT -- 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, will provide that no person may own,
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or be deemed to own by virtue of the attribution provisions of the Code, more
than 9.8% of (i) the number of shares of any class or series of Common Shares or
(ii) the number of shares of any class or series of Preferred Shares (the
"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 Provision, (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 real property of the Company's or
the Operating Partnership's (or any of their subsidiaries) real property, within
the meaning of Section 856(d)(2)(B) of the Code, shall be null and void to the
extent that such transfer violates (i), (ii), (iii) or (iv), 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 Provision, (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
real property of the Company, the Operating Partnership or any direct or
indirect subsidiary thereof, within the meaning of Section 856(d)(2)(B) of the
Code, will, to the extent that such transfer violates (i), (ii), (iii) or (iv),
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"Shares-In-Trust") in
accordance with the terms of the Declaration of 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 per share on the date
that the Company, or its designee, accepts such offer. The Company will have the
right to accept such offer for a period of 90 days after the later of (i) the
date of the purported transfer which resulted in such Shares-in-Trust or (ii)
the date the Company determines in good faith that a transfer resulting in such
Shares-in-Trust occurred.
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"Market Price" means the last reported sales price of the Common Shares or
Preferred Shares reported on the NYSE on the trading day immediately preceding
the relevant date, or if such shares are not then traded on the NYSE, the last
reported sales price of such shares on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over which such
shares may be traded, or if such shares are not then traded over any exchange or
quotation system, then the market price of such shares on the relevant date as
determined in good faith by the Board of Trustees.
Any person who acquires or attempts to acquire Common Shares or Preferred
Shares in violation of the foregoing restrictions, or any person who owned
Common Shares or Preferred Shares that were transferred to a Share Trust, will
be required (i) to give immediately written notice to the Company of such event,
and (ii) to provide to the Company such other information as the Company may
request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding Common Shares and Preferred Shares must, within 30 days after the
close of the Company's taxable year of each year, provide to the Company a
written notice 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 Provision 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 Provisions under certain circumstances as it may deem necessary
or desirable in order to maintain the Company's status as a REIT.
All certificates representing Common Shares or Preferred Shares will bear a
legend referring to the restrictions described above.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and the
Declaration of Trust and Bylaws does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and the
Declaration of Trust and Bylaws, copies of which are exhibits to the
Registration Statement of which this Prospectus is a part.
CLASSIFICATION AND REMOVAL OF TRUSTEES
The Declaration of Trust will provide that the number of trustees may be
increased or decreased from time to time by a majority of the Board of Trustees
but may not be greater than 15 or less than three. The Declaration of Trust will
require that at all times a majority of the trustees shall be Independent
Trustees. Following the Offering, there will be nine trustees, five of whom will
be Independent Trustees. The Declaration of Trust will provide for a staggered
Board of Trustees consisting of three classes as nearly equal in size as
practicable. Each class holds office until the third annual meeting for
selection of trustees following the election of such class, except that the
initial terms of the three classes expire in 1999, 2000, and 2001 respectively.
As the term of each class expires, trustees in that class will be elected for a
term of three years and until their successors are duly elected and qualify. The
Company believes that classification of the Board of Trustees will help to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Trustees. Because holders of the Common
Shares will have no right to cumulative voting in the election of trustees, at
each annual meeting of shareholders, the holders of a majority of the Common
Shares will be able to elect all of the successors of the class of trustees
whose terms expire at that meeting, subject to the voting rights of Preferred
Shares, if any.
The classified trustee provision could have the effect of making the
removal of incumbent trustees more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Trustees. Thus, the classified board provision could
increase the likelihood that incumbent trustees will retain their positions.
The Declaration of Trust will provide that a trustee may be removed only by
the affirmative vote of at least two-thirds of the votes entitled to be cast
generally in the election of trustees. This provision will preclude shareholders
from removing incumbent trustees except upon a substantial affirmative vote. The
fact that the Bylaws prohibit any person, including a shareholder, other than
the Chairman of the Board of Trustees, a majority of the trustees or a majority
of a duly authorized committee of the trustees, from calling a meeting means
that the shareholders may be compelled to wait until the next annual meeting of
shareholders in order to remove a trustee.
MEETINGS OF SHAREHOLDERS
Pursuant to the Bylaws, an annual meeting of the Company's shareholders for
the election of trustees and the transaction of other business shall be held
each year following the delivery of the Company's annual report, but in no event
later than 120 days after the end of the Company's fiscal year. A special
meeting of the shareholders of the Company may be called by (i) the Chairman of
the Board of Trustees, (ii) a majority of the members of the Board of Trustees
or (iii) a majority of a committee of the Board of Trustees which has been duly
designated by the Board of Trustees and whose powers and authority include the
power to call such meetings. The Bylaws prohibit any other person or persons,
including any shareholders, from calling special meetings. For nominations or
other business to be properly brought before an annual meeting of shareholders
by a shareholder, the Bylaws will require such shareholder to deliver a notice
to the Secretary, absent specified circumstances, not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting and, with respect to the first annual meeting, not less than 60 days nor
more than 90 days prior to the date established for such first annual meeting,
setting forth; (i) as to each person whom the shareholder proposes to nominate
for election or reelection as a trustee, all information relating to such person
that is
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required to be disclosed in solicitations of proxies for the election of
trustees, pursuant to Regulation 14A of the Exchange Act; (ii) as to any other
business that the shareholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the shareholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such shareholder as they appear on the
Company's books, and of such beneficial owner and (y) the number of Common
Shares which are owned beneficially and of record by such shareholder and such
beneficial owner, if any.
LIMITATIONS ON SHAREHOLDER LIABILITY
Under Maryland law and the Declaration of Trust, no shareholder of the
Company will be liable personally for any obligation of the Company. The
Declaration of Trust will further provide that the Company shall, upon prompt
notice by the shareholder, indemnify each shareholder against any claim or
liability to which the shareholder may become subject solely by reason of such
shareholder being or having been a shareholder (except with respect to matters
adjudged to have arisen out of a shareholder's bad faith, wilful misconduct or
gross negligence), and that the Company shall reimburse each shareholder for all
legal and other expenses reasonably incurred by such shareholder in connection
with such claim or liability. In addition, it will be the Company's policy to
include a clause in its contracts which provides that shareholders assume no
personal liability for obligations entered into on behalf of the Company.
However, in respect of tort claims, contractual claims where shareholder
liability is not so negated, claims for taxes and certain statutory liabilities,
the shareholders, in some jurisdictions, may be liable personally to the extent
that such claims are not satisfied by the Company. Inasmuch as the Company will
carry public liability insurance which it considers adequate, any risk of
personal liability to shareholders is limited to situations in which the
Company's assets plus its insurance coverage would be insufficient to satisfy
the claims against the Company and its shareholders.
BUSINESS OPPORTUNITIES
The Bylaws will provide that each trustee may engage in other business
activities of the type conducted by the Company and is not required to present
to the Company any investment opportunities presented to such trustee even
though the investment opportunities may be within the scope of the Company's
investment policies.
SUPER-MAJORITY VOTE OF TRUSTEES
The Bylaws will provide that a two-thirds vote of the Board of Trustees
shall be required to approve each of the following transactions: (i) any
transaction or series of transactions which result in (x) any person or group
acquiring 20% or more of the voting power of the Company's securities (including
without limitation, votes of the Common Shares) or (y) the owners of the voting
power of the Company's securities (including, without limitation, votes of the
Common Shares) immediately prior to such transaction(s) will own less than 80%
of such voting power after giving effect to such transaction(s); (ii) any
amendment to the Declaration of Trust or the Bylaws; (iii) any waiver or
modification of the Company's prohibition of any person or entity owning more
than 9.8% of any class or series of the Company's capital stock (including the
Common Shares); and (iv) certain issuances of the Company's equity securities.
The fact that the trustees of the Company that are also directors, officers,
employees of, or other persons who have a material financial interest in,
Wackenhut Corrections have the power to veto a change of control of the Company
could delay, defer or prevent a transaction that might involve the receipt of a
premium price for the Common Shares or otherwise be in the best interests of the
shareholders.
BUSINESS COMBINATIONS
Under Maryland law, certain "business combinations" (including, with
certain exceptions, a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of
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equity securities, and the receipt of certain special tax and other financial
advantages) between a Maryland real estate investment trust and any person who
beneficially owns 10% or more of the voting power of the real estate investment
trust's shares, or an affiliate or associate of the real estate investment trust
who at any time within the two-year period prior to the date in question and
after the date on which the real estate investment trust had 100 or more
beneficial owners of its shares, was the beneficial owner of 10% or more of the
voting power of the then-outstanding voting shares of the real estate investment
trust (an "Interested Shareholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Shareholder became
an Interested Shareholder. Thereafter, any such business combination must be
recommended by the Board of Trustees of such real estate investment trust and
approved by the affirmative vote of at least (a) 80% of the votes entitled to be
cast by holders of outstanding voting shares of the real estate investment trust
and (b) two-thirds of the votes entitled to be cast by holders of outstanding
voting shares of the real estate investment trust other than shares held by the
Interested Shareholder with whom the business combination is to be effected,
unless among other things, the real estate investment trust's shareholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Shareholder for its shares. The trustees of the real estate
investment trust may, by resolution, exempt business combinations specifically,
generally, or generally by types so as to specifically identified or
unidentified existing or future interest shareholders or their affiliates, from
the prohibitions of the business combinations law, but such exemption with
respect to a potential acquiror must be in place before the acquiror becomes an
Interested Shareholder.
CONTROL SHARE ACQUISITIONS
Maryland law provides that Control Shares (as hereinafter defined) of a
Maryland real estate investment trust acquired in a Control Share Acquisition
(as hereinafter defined) have no voting rights except to the extent authorized
by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror, or by officers of the Company or
directors who are employees of the Company. Control Shares are voting shares
which, if aggregated with all other such shares previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except by virtue of a revocable proxy), would entitle
the acquiror to exercise, directly or indirectly, voting power in electing
trustees within one of the following ranges of voting power (i) one-fifth or
more but less than one- third, (ii) one-third or more but less than a majority
or (iii) a majority of all voting power. Control shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A Control Share Acquisition means the acquisition
of Control Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share Acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Trustees to call a special meeting of shareholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the real estate investment trust may itself
present the question at any shareholder's meeting.
If voting rights are not authorized at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the real estate
investment trust may redeem any or all of the Control Shares (except those for
which voting rights have previously been authorized) for fair value determined
without regard to the absence of voting rights for the Control Shares, as of the
date of the last Control Share acquisition or of any meeting of shareholders at
which the voting rights of such shares are considered and not authorized. If
voting rights for Control Shares are authorized at a shareholders meeting and
the acquiror becomes entitled to vote a majority of the shares entitled to vote,
all other shareholders may exercise appraisal rights. The fair value of the
shares as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquiror in the Control Share
Acquisition.
The Maryland control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if the real estate
investment trust is a party to the transaction, or to an acquisition authorized
or exempted by the declaration of trust or bylaws of the real estate investment
trust.
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The Bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions, by any person, of any shares of the Company.
INTERESTED TRUSTEE TRANSACTIONS
The Bylaws will contain a provision requiring approval by the Independent
Trustees of the Company of the following actions of the Board of Trustees: (i)
the selection of the operators for the Company's facilities and (ii) the
entering into or the consummation of any agreement or transaction with Wackenhut
Corrections or its affiliates, including, but not limited to, the negotiation,
enforcement and renegotiation of the terms of any lease of any of the Company's
facilities.
AMENDMENTS TO THE DECLARATION OF TRUST AND BYLAWS
Under Maryland law, a real estate investment trust generally cannot amend
its Declaration of Trust without the affirmative vote of two-thirds of all the
votes entitled to be cast by shareholders on the matter. The Declaration of
Trust will provide generally that its provisions may be amended in accordance
with Maryland law, and, as permitted by Maryland law, without any shareholder
approval, the Declaration of Trust will permit the following amendments upon the
following vote of the Board of Trustees: (a) by a majority vote to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
any series or class that the Company has authority to issue, (b) by a two-thirds
vote to amend the Declaration of Trust to qualify, or continue to qualify, the
Company as a real estate investment trust under the Code or Maryland law, and
(c) to the extent permitted by the Maryland real estate investment trust law, as
it may be amended, by a majority vote of the entire Board of Trustees to amend
the Declaration of Trust to change (i) the name of the Company, (ii) the name or
designation of any class or series of shares of the Company and (iii) the par
value of any class or series of the Company.
The Bylaws will provide that the Board of Trustees has the exclusive power
to adopt, alter or repeal any provision of the Bylaws and to make new Bylaws in
accordance with the provisions as set forth in the Bylaws.
DISSOLUTION OF THE COMPANY
Subject to any voting rights granted to holders of Preferred Shares, the
existence of the Company may be terminated upon the affirmative vote of holders
of not less than two-thirds of the Common Shares at any meeting of the
shareholders called for that purpose.
RESTRICTIONS ON INVESTMENT
Maryland law requires that a Maryland real estate investment trust hold,
either directly or indirectly through other parties, at least 75% of the value
of its assets in real estate assets, mortgages or mortgage related securities,
government securities, cash and cash equivalent items, including high-grade
short-term securities and receivables. Maryland law prohibits a Maryland real
estate investment trust from using or applying land for farming, agriculture,
horticulture or similar purposes.
LIMITATIONS ON CHANGES IN CONTROL
The provisions of the Declaration of Trust and the Bylaws which will
provide for ownership limitations, a staggered Board of Trustees, eliminating
the ability of the shareholders to call special meetings of shareholders, the
advance notice provisions of the Bylaws, and authorizing the Board of Trustees
to issue Preferred Shares without shareholder approval could have the effect of
delaying, deferring or preventing a change in control of the Company or the
removal of existing management, and as a result could prevent the shareholders
of the Company from being paid a premium for their Common Shares. In addition,
Maryland's business combinations law makes it difficult to acquire control of
the Company by means of a tender offer, open market purchase, a proxy fight or
otherwise, if the acquisition is not authorized in advance by the Board of
Trustees. The Company has, however, elected not to be governed by the provisions
of Maryland law concerning control share acquisitions.
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LIMITATION OF LIABILITY AND INDEMNIFICATION OF TRUSTEES
Maryland law provides that shareholders and trustees of a Maryland real
estate investment trust are not personally liable for the obligations of the
real estate investment trust; provided, however, that a trustee is not relieved
from any liability to a trust or its security holders for any act that
constitutes (a) bad faith, (b) willful misfeasance, (c) gross negligence or (d)
reckless disregard of the Trustee's duties.
Maryland law permits a Maryland real estate investment trust to include in
its declaration of trust provisions limiting the liability of its trustees and
officers to the trust and its shareholders for money damages except for, in
general, liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services for the amount of the benefit or profit in
money, property or services actually received or (b) active and deliberate
dishonesty established by a final judgment as being material to the matter
giving rise to the cause of action. The Declaration of Trust of the Company will
contain a provision which eliminates a trustee's or officer's liability to the
Company and its shareholders for money damages to the maximum extent permitted
by Maryland law.
The Declaration of Trust and the Bylaws of the Company will require the
Company to indemnify and advance expenses to a trustee or officer of the Company
to the maximum extent permitted by Maryland law.
Maryland law permits a Maryland real estate investment trust to indemnify
and advance expenses to its trustees, officers, employees and agents to the same
extent as permitted by the MGCL for directors, officers, employees and agents of
Maryland corporations. The MGCL permits a Maryland corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. Maryland law requires a Maryland corporation to
indemnify against reasonable expenses a director or officer who has been
successful on the merits or otherwise, in the defense of any proceeding to which
he is made a party by reason of his service in that capacity. In accordance with
the MGCL, the Bylaws require the Company as a condition to advancing expenses,
to obtain (a) a written affirmation by the trustee or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written undertaking by or on
his behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met. The Bylaws
will permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company as a trustee, director, officer, or partner
and to any employee or agent of the Company or a predecessor of the Company.
TRANSFER AGENT AND REGISTRAR
The Company has appointed ChaseMellon Shareholder Services Group, Inc. as
its transfer agent and registrar.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The Company intends to operate in such a manner so as to meet the Code
requirements for qualification as a REIT for federal income tax purposes.
However, no assurance can be given that such requirements will be met or that
the Company will be so qualified at any time. In the opinion of the Company's
counsel, Akerman, Senterfitt & Eidson, P.A. ("Company Counsel"), the Operating
Partnership will not be taxed as a corporation for federal income tax purposes
and, commencing with the Company's year ending December 31, 1998, the Company
will be organized in conformity with the requirements for qualification as a
REIT, and the Operating Partnership's proposed method of operation will enable
the Company to meet the requirements for qualification and taxation as a REIT.
This opinion is based upon, and subject to, certain assumptions and various
factual representations of the Company and the Operating Partnership, which are
incorporated into such opinion and are addressed in this discussion of material
Federal income tax considerations. Company Counsel will not review the Company's
operating results and no assurance can be given that the Company's actual
operating results will meet the REIT requirements on a continuing basis.
The opinions described herein represent Company Counsel's best legal
judgment as to the most likely outcome of an issue if the matter were litigated.
Opinions of counsel have no binding effect or official status of any kind with
the IRS or the courts and, in the absence of a ruling from the IRS, there can be
no assurance that the IRS will not challenge the conclusion or propriety of any
of Company Counsel's opinions. The Company does not intend to apply for a ruling
from the IRS that it qualifies as a REIT. The provisions governing the treatment
of a business entity as a REIT are highly technical and complex. In addition,
the opinion and the summary below are based upon the Code, Treasury Regulations,
IRS administrative interpretations and court decisions in effect as of the date
of this Prospectus. These legal authorities are subject to change and the
changes could have a retroactive effect.
The following summary includes a discussion of the material federal income
tax considerations associated with an investment in the Common Shares being sold
in the Offering. The summary should not be construed as tax advice. Moreover,
this summary does not deal with all tax aspects that might be relevant to a
particular prospective shareholder in light of his personal circumstances and it
does not deal with particular types of shareholders that are subject to special
treatment under the Code, such as tax-exempt organizations, insurance companies,
financial institutions or broker-dealers, and (with the exception of the general
discussion below) foreign corporations and persons who are not citizens or
residents of the United States.
INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING BOTH
THE TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND SALE OF COMMON
SHARES, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE IN THEIR PARTICULAR CIRCUMSTANCES AND THE
POTENTIAL CHANGES IN APPLICABLE LAWS.
TAXATION OF THE COMPANY AS A REIT
General
The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code, commencing with its taxable year ending December
31, 1998. The Company believes that, commencing with such taxable year, it will
be organized and will operate in such a manner as to qualify for taxation as a
REIT under the Code.
In the opinion of Company Counsel, the Company will, commencing with its
taxable year ending December 31, 1998, be organized in conformity with, and its
proposed method of operation will enable it to meet, the requirements for
qualification and taxation as a REIT under the Code. Investors should be aware,
however, that opinions of counsel are not binding upon the IRS or any court. In
providing its opinion, Company Counsel is relying upon certain assumptions and
representations received from the Company. If these assumptions or
representations are not accurate, the opinion of Company Counsel could change.
The \qualification and taxation of the Company as a REIT depends upon its
ability to meet, through actual annual operating results, distribution levels,
share ownership requirements and the various qualification tests imposed
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under the Code. Accordingly, while the Company intends to qualify to be treated
as a REIT, no assurance can be given that the actual results of the Company's
operations for any particular year will satisfy such requirements. Company
Counsel will not monitor the compliance of the Company with the requirements for
REIT qualification on an ongoing basis.
The sections of the Code applicable to REITS are highly technical and
complex. Certain aspects thereof are summarized below.
As a REIT, the Company 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) that generally results from investment in a regular
corporation. However, the Company will be subject to federal income tax as
follows. First, the Company will be taxed at regular corporate rates on any
undistributed real estate investment trust taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying 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, other than foreclosure property, held primarily for sale to customers
in the ordinary course of business), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross 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 should fail to distribute during each
calendar year at least the sum of (i) 85% of its real estate investment trust
ordinary income for such year, (ii) 95% of its real estate investment trust
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually distributed.
Seventh, if the Company acquires any asset from a C corporation (i.e., generally
a corporation subject to full corporate-level tax) in certain transactions in
which the basis of the asset in the hands of the Company is determined by
reference to the basis of the asset (or any other property) in the hands of the
C corporation, and the Company recognizes gain on the disposition of such asset
during the ten-year period beginning on the date on which such asset was
acquired by the Company (the "Recognition Period"), then, to the extent of the
excess of the fair market value of the asset as of the date of the Company's
acquisition over the Company's adjusted basis in such asset on such date, such
gain will be subject to tax at the highest regular corporate rate. The results
described above with respect to assets acquired from a C corporation 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 otherwise be taxable as a domestic
corporation, but for Sections 856 through 859 of the Code, (iv) which is neither
a financial institution nor an insurance company subject to certain provisions
of the Code, (v) the beneficial ownership of which is held by 100 or more
persons, (vi) during the last half of each taxable year, not more than 50% in
value of the outstanding shares 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) 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.
The Declaration of Trust provides for restrictions regarding the ownership
and transfer of the Company's shares of beneficial interest, which restrictions
are intended to assist the Company in satisfying the share ownership
requirements described in (v) and (vi) above. The ownership and transfer
restrictions pertaining to
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the Common Shares are described under the heading "Description of Shares of
Beneficial Interest -- Restrictions on Ownership."
The failure to satisfy the requirement in (vi), above, will not result in
the Company losing its status as a REIT if the Company (i) satisfies conditions
specified in Treasury Regulations under the Code for ascertaining the actual
ownership of Common Shares or Preferred Shares of the Company (the "Required
Ownership Inquiry"), and (ii) does not otherwise know, or exercising reasonable
due diligence would not have known, whether the Company failed to satisfy the
share ownership requirement in (vi) above.
The Required Ownership Inquiry obligates the Company to demand written
statements from certain shareholders of record disclosing the actual or
beneficial owners of the Common Shares or Preferred Shares. Demands must be made
by the Company no later than January 30 from shareholders of record owning at
least 5%, 1% of 0.5% of the Common Shares and Preferred Shares when the Company
has 2,000, more than 200, or 200 or less, respectively, shareholders of record.
In the demand, the Company is required to inform each shareholder of a duty to
include the information requested by the Company in the shareholder's tax return
if the shareholder fails or refuses to comply with the Company's demand for
written statements including that information. Moreover, the Company is required
to maintain in its records a list of the shareholders failing or refusing to
comply in whole or in part with the Company's demand for written statements. A
failure to comply with the Required Ownership Inquiry could result in a loss of
the Company's status as a REIT or subject the Company to penalties. The Company
intends to comply with the Required Ownership Inquiry.
If a REIT owns a corporate subsidiary that is a "qualified REIT
subsidiary," the subsidiary is disregarded as an entity for federal income tax
purposes. Instead, all of the subsidiary's assets, liabilities and items of
income, deduction and credit are treated as assets, liabilities and such items
of the REIT itself. A "qualified REIT subsidiary" is any corporation, 100% of
the outstanding stock of which is owned by the REIT. CPT LP should be a
"qualified REIT subsidiary." Therefore, the assets, liabilities and items of
income, deduction and credit of CPT LP will be treated for federal income tax
purposes as the assets, liabilities and tax items of the Company. The Company
also may have additional corporate subsidiaries in the future.
If a REIT is a member of a partnership, it will be treated as realizing its
proportionate share of the income or loss of the partnership, as well as the
character of such income or loss, and other partnership items, as if the REIT
owned directly its proportionate share of the assets owned by the partnership.
This rule applies to allow a REIT to satisfy requirements regarding the nature
of the REIT's income and assets. See " -- Income Tests" and " -- Assets Tests."
Income Tests
In order to qualify, and 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") 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). In applying these
income tests, if a REIT is a direct or indirect partner in a partnership, the
REIT will be treated as realizing its proportionate share of the income or loss
of the partnership, as well as the character of such income or loss, and other
partnership items, as if the REIT owned directly its proportionate share of the
assets owned by the partnership.
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 net income or profits of any person. However, an amount
received or accrued generally will not be excluded from the terms "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of gross receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, directly or under the applicable
attribution rules, owns at any time during its taxable year a 10% or
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greater interest in such tenant (a "Related Party Tenant"). The applicable
attribution rules, however, are highly complex and difficult to apply, and the
Company may inadvertently enter into leases with tenants who, through
application of such rules, will constitute Related Party Tenants. In such event,
rent paid by the Related Party Tenant will not qualify as "rents from real
property,"which may jeopardize the Company's status as a REIT. 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;
provided, however, that the Company may directly perform certain services that
are "usually or customarily rendered" in connection with the rental of space for
occupancy only or are not considered "rendered to the occupant" of the property.
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 net income
or profits of any person (except by reason of being based on a fixed percentage
of gross receipts or sales, as described above); (ii) not to rent any property
to a Related Party Tenant (taking into account the applicable 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); and (iv) not to perform services considered to be
rendered to the occupant of the property, other than through an independent
contractor from whom the Company derives no revenue or if the provisions of such
services will not jeopardize the Company's status as a REIT. 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 as a REIT."
Rents will constitute "rents from real property" only if the Leases are
treated as true leases for federal income tax purposes and are not treated as
service contracts, joint ventures, financing arrangements or some other type of
arrangement. The determination of whether the Leases are true leases depends on
an analysis of all surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties; (ii) the form of the agreement; (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement); (iv) the extent to which the
property owner retains the risk of loss with respect to the operation of the
property (e.g., whether the lessee bears the risk of increases in operating
expenses or the risk of damage to the property); and (v) the extent to which the
property owner retains the burdens and benefits of ownership of the property.
Section 7701(e) of the Code provides that a contract that purports to be a
service contract (or a partnership agreement) will be treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property; (ii) the service recipient controls the
property; (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property); (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract; (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient; and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
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The Leases should be treated as leases rather than service contracts, joint
venture or partnership arrangements or financing or disguised sale arrangements,
for federal income tax purposes, based, in part, on the following facts: (i) the
Company and Wackenhut Corrections intend for their relationship to be that of a
lessor and lessee and such relationship will be documented by lease agreements;
(ii) Wackenhut Corrections will have the right to exclusive possession and use
and quiet enjoyment of the Facilities during the term of the Leases; (iii)
Wackenhut Corrections will bear the cost of, and be responsible for, day-to-day
maintenance and repair of the Facilities, and will dictate how the Facilities
are operated, maintained, and improved; (iv) Wackenhut Corrections will bear all
of the costs and expenses of operating the Facilities during the terms of the
Leases; (v) Wackenhut Corrections will benefit from any savings in the costs of
operating the Facilities during the terms of the Leases; (vi) Wackenhut
Corrections will generally 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) Wackenhut Corrections'
use, management, maintenance or repair of the Facilities; (vii) Wackenhut
Corrections is obligated to pay substantial fixed rent for the period of use of
the Facilities; (viii) Wackenhut Corrections 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 Wackenhut Corrections 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 Rent 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 leased with a facility is
deemed to be 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 leased in
connection with the lease of 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 Adjusted Basis Ratio
applies to each separate Facility. If the Adjusted Basis Ratio with respect to a
Facility is less than 15%, then all Rent payable under a Lease constitutes
"rents from real property." If the Adjusted Basis Ratio with respect to a
Facility exceeds 15%, the Rent attributable to personal property would not
constitute qualifying income under either the 75% or 95% gross income tests.
The term "real property" for purposes of the REIT provisions means land or
improvements thereon such as buildings or other inherently permanent structures
thereon (including items which are structural components of buildings or such
structures). State or local law definitions or characterizations of property as
real property will not be controlling for purposes of the characterization of
property as "real property" under Section 856 of the Code. Examples of
structural components of a building qualifying as "real property" include but
are not limited to the wiring in the structure, plumbing systems, central
heating or air-conditioning machinery, pipes or ducts, and elevators installed
in a building. Treasury Regulations provide that the term "real property" does
not include assets accessory to the operation of a business such as machinery,
printing press, transportation equipment, refrigerators, individual air
conditioning units, grocery counters, or furnishings of a hotel or office
building, even though such items may be characterized as fixtures under state or
local law.
The Company will lease to Wackenhut Corrections, pursuant to the Leases,
certain property located in an Initial Facility which may be considered personal
property for federal income tax purposes. The Company does not intend to lease
personal property which is not a fixture under state or local law in connection
with the Lease of the Initial Facilities. The Adjusted Basis Ratio with respect
to each such Lease is anticipated to be
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less than 15%. Accordingly, Rent received by the Company should satisfy this
requirement with respect to the Leases of the Initial Facilities.
A second requirement for qualification of the Rent as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of Wackenhut Corrections or any other tenant of the Facilities. The
constructive ownership rules generally provide that if 10% or more in value of
the shares of the Company are owned, directly or indirectly, by or for any
person, the Company is considered as owning the shares owned, directly or
indirectly, by or for such person. The Declaration of Trust provides that no
person may own, directly or constructively, more than 9.8% of the Company. See
"Description of Shares of Beneficial Interest -- Restrictions on Ownership."
Assuming the Declaration of Trust is complied with, neither Wackenhut
Corrections nor any direct or indirect shareholder of Wackenhut Corrections
should ever own, directly or constructively, 10% or more of the Company, and
thus the constructive ownership rules should not be triggered.
A third requirement for qualification of the Rent as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the tenants of its properties, or manage or operate such properties, 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
with respect to the Rent because it will not be performing for Wackenhut
Corrections any services. As described above, however, if the Leases are
recharacterized as service contracts or partnership agreements, the Rent likely
would be disqualified as "rents from real property" because the Company would be
considered to furnish or render services to the occupants of the properties and
to manage or operate the properties other than through an independent contractor
from whom the Company derives or receives no income. If the Company provides
services to Wackenhut Corrections or any other tenant that are other than those
usually or customarily provided in connection with the rental of space for
occupancy only, amounts received by the Company for such services will not be
treated as "rents from real property" for purposes of the REIT gross income
tests but will not cause other amounts received with respect to the property to
fail to be treated as "rents from real property" unless the amounts received in
respect of such services, together with amounts received for certain management
services, exceeds 1% of all amounts received or accrued by the Company during
the taxable year with respect to such property. If the 1% threshold is exceeded,
then all amounts received or accrued by the Company with respect to the property
will not qualify as "rents from real property." Because the Company cannot
operate a Facility and while the failure by Wackenhut Corrections to comply
materially with the terms of a lease would give the Company the right to
terminate such lease and enforce the obligations thereunder, such a lease
termination would in the case of certain Facilities force the Company to find
another lessee and locate and hire an independent contractor to operate the
Facilities. Moreover, there can be no assurance that Wackenhut Corrections 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 and independent
contractor to manage the particular Facility. If the Company fails to take such
steps, it risks losing its ability to elect or maintain REIT status. Because of
the nature of the correctional and detention industry, the Company may be unable
to locate suitable lessees or independent contractors to lease or operate a
Facility or, even if such persons could be located, the rent from the new lease
of the Facility and the expense of the independent contractor could be
materially less than current rent or cause a material increase in projected
expenses and, therefore, reduce the Company's Cash Available for Distribution.
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 assert
successfully a contrary position and, therefore, prevent the Company from
qualifying as a REIT. Interest payable to the Company on Rent which is past due
will not qualify under the 75% gross income test but will qualify under the 95%
gross income test.
Income that is "qualified temporary investment income" constitutes gross
income which satisfies the 75% and 95% gross income tests. Income constitutes
"qualified temporary investment income" if the income constitutes dividends or
interest which are attributable to the investment of new capital in stock or
debt securities and which is received or accrued during the 1-year period
beginning on the date a REIT receives new capital. Such income also includes
gain from the sale, exchange or other disposition of the stock or debt
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instruments acquired with new capital. For this purpose, "new capital" includes
the receipt of proceeds from a stock offering. Investments of new capital in
stock or debt securities need not be investments in issuers that are REITs. In
the Offering, the Company anticipates receiving proceeds which will not be used
immediately to acquire the Initial Facilities. The Company intends to invest
such proceeds in a manner as to produce qualified temporary investment income.
The Company's rate of return from its temporary investments may be less than its
rate of return from the lease of the Initial Facilities causing the Company to
be unable to maintain its planned distribution amounts to shareholders.
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 generally be 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 federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above under "-- General," even if these relief
provisions apply, a tax would be imposed with respect to the excess income.
Prepaid Rent
Because the Facilities will be acquired from, and will be leased to,
Wackenhut Corrections, the IRS could assert that the Company realized prepaid
rental income in the year of purchase to the extent that the value of such
Facilities exceeds the purchase price paid by the Company for such Facilities.
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 the 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 assurances 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. The Company believes that the purchase price paid for the
Facilities is approximately equal to the fair market value of the Facilities.
Other Issues
Additionally, Section 467 of the Code (concerning leases with increasing
rents) may apply to the 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 (as hereinafter defined), 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 Wackenhut Corrections have represented that the principal
purpose of rent increases under the Leases is not the avoidance of federal
income taxes. Furthermore, under 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 provision of the Code.
Asset Tests
The Company, at the close of each quarter of its taxable year, must also
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by real estate
assets (including (i) real estate assets held by the Company's qualified REIT
subsidiaries and the Company's allocable share of real estate assets held by
partnerships in which the Company owns an interest, (ii) for a period of one
year from the date of the Company's receipt of proceeds of an offering of its
shares of beneficial interest or long-term (at least five years) debt, stock or
debt instruments purchased with such
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proceeds and (iii) stock issued by another REIT), 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 (other than securities issued by another REIT) 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's allocable share of assets owned by the Operating
Partnership or a qualified REIT subsidiary such as CPT LP will be treated as
owned by it for purposes of these asset tests.
The Company has represented that, as of the date of the Offering, at least
75% of the value of its total assets will be represented by real estate assets,
cash, cash items and government securities and it will not own securities which
do not satisfy the 75% asset class (except for all of the outstanding stock of
CPT LP or other qualified REIT subsidiaries and excluding partnership
interests). The Company has also represented that it will not acquire or
dispose, or cause the Operating Partnership to acquire or dispose, of assets in
the future in a way which would cause the Company to violate either the 75% or
25% asset requirement. Based upon the foregoing, the Company should satisfy both
asset requirements for REIT status.
Annual Distribution Requirements
The Company, in order 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 (A) the sum of (i) 95% of the Company's "real estate
investment trust taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of non-cash income. In addition, if the Company disposes of any asset
acquired from a C corporation in a carryover basis transaction 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 "real estate investment trust 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 ordinary income for such year,
(ii) 95% of its capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to satisfy the annual distribution
requirements.
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 or to pay dividends in the form of taxable share
dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY AS A REIT
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
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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 "Domestic Shareholder" means a holder of Common
Shares who (for United States federal income tax purposes) is (i) a citizen or
resident of the United States or (ii) a corporation, or other taxable entity
created or organized in or under the laws of the United States or of any
political subdivision thereof.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable Domestic Shareholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of Domestic
Shareholders that are corporations. Distributions made by the Company that are
properly designated by the Company as capital gain dividends will be taxable to
Domestic Shareholders as gain from the sale and exchange of a capital asset held
for more than one 1 year (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a Domestic Shareholder has held his Common Shares. In addition, IRS Notice
97-64 allows the Company to designate capital gain dividends attributable to the
sale or exchange of a capital asset held for more than 18 months. Domestic
Shareholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each Domestic Shareholder, reducing the adjusted basis which such
Domestic Shareholder has in his Common Shares for tax purposes by the amount of
such distribution (but not below zero), with distributions in excess of a
Domestic Shareholder's adjusted basis in his shares taxable as capital gains
(provided that the Shares have been held as a capital asset). Dividends
authorized by the Company in October, November or December of any year and
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company on or before January 31 of the following calendar year. Shareholders may
not include in their own income tax returns any net operating losses or capital
losses of the Company.
Distributions made by the Company and gain arising from the sale or
exchange by a Domestic Shareholder of Common Shares will not be treated as
passive activity income, and, as a result, Domestic Shareholders generally will
not be able to apply any "passive losses" against such income or gain.
Upon any sale or other disposition of Common Shares, a Domestic Shareholder
will recognize gain or loss for federal income tax purposes in an amount equal
to the difference between (i) the amount of cash and the fair market value of
any property received on such sale or other disposition, and (ii) the holder's
adjusted basis in the Common Shares for tax purposes. Such gain or loss will be
capital gain or loss if the Common Shares have been held by the Domestic
Shareholder as a capital asset. Long-term capital gain of an individual Domestic
Shareholder is generally subject to a maximum tax rate of 28% in respect of
property held for more than one year and the maximum rate is reduced to 20% in
the case of property held in excess of 18 months. In general, any loss
recognized by a Domestic Shareholder upon the sale or other disposition of
shares of the Company that have been held for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss, to
the extent of distributions received by such Domestic Shareholder from the
Company which were required to be treated as long-term capital gains.
Domestic Shareholders holding Common Shares at the close of the Company's
taxable year will be required to include, in computing their long-term capital
gains for the taxable year in which the last day of the
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Company's taxable year falls, such amount as the Company may designate in a
written notice mailed to its shareholders. The Company may not designate amounts
in excess of the Company's undistributed net capital gain for the taxable year.
Each Domestic Shareholder required to include such a designated amount in
determining such shareholder's long-term capital gains will be deemed to have
paid, in the taxable year of the inclusion, the tax paid by the Company in
respect of such undistributed net capital gains. Domestic Shareholders subject
to these rules will be allowed a credit or a refund, as the case may be, for the
tax deemed to have been paid by such shareholders. Domestic Shareholders will
increase their basis in their Common Shares by the difference between the amount
of such includible gains and the tax deemed paid by the shareholder in respect
of such gains.
The discussion above applicable to Domestic Shareholders applies as well to
a Domestic Shareholder which is a partner of a partnership or member of a
similar non-taxable, "flow-through" entity. Because a partnership or such an
entity is not a taxable entity, a Domestic Shareholder will take into account
his distributive share of distributions and items of income and gain realized by
the partnership or similar non-taxable, flow-through entity related to the
partnership's or entity's ownership of Common Shares. The character of the
income and gain realized by the partnership or other non-taxable, flow-through
entity retains the same character when taken into account by a Domestic
Shareholder. If the Domestic Shareholder is a partner or member of a partnership
or similar non-taxable, flow-through entity organized outside the United States,
the Domestic Shareholder will take into account its distributive share of any
U.S. withholding tax imposed on the non-U.S. partnership or other similar entity
either as a credit against such Domestic Shareholder's U.S. federal income tax
liability or as a refund, as applicable.
The discussion above applicable to Domestic Shareholders generally applies
to an estate or trust, the income of which is subject to United States federal
income taxation regardless of its source. However, an estate or trust may also
be entitled to a deduction for distributions made to beneficiaries who would
take into account the income or gain realized by the estate or trust. Executors
of estates and trustees of trusts should consult their own tax advisors
respecting the federal income tax consequences arising from their acquisition,
ownership and sale of Common 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 Domestic 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 to any shareholders who fail to
certify their non-foreign status to the Company.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a REIT generally
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax exempt shareholders described below) has not held its Common
Shares as "debt financed property" within the meaning of the Code and such
Common Shares are not otherwise used in a trade or business, the dividend income
from Common Shares will not be UBTI to a tax-exempt shareholder. Similarly,
income from the sale of Common Shares will not constitute UBTI unless such
tax-exempt shareholder has held such Common Shares as "debt financed property"
within the meaning of the Code or has used the Common Shares in a trade or
business.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation
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under Sections 501(c)(7), (c)(9), (c)(17), and (c)(20) of the Code,
respectively, income from an investment in the Common Shares will constitute
UBTI unless the organization is able to properly deduct amounts set aside or
placed in reserve for certain purposes so as to offset the income generated by
its Common Shares. Such prospective investors should consult their own tax
advisors concerning these "set aside" and reserve requirements.
Notwithstanding the foregoing, however, a portion of the dividends paid by
a "pension-held REIT" will be treated as UBTI to any trust which (i) is
described in 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 equity interests in
the REIT. Tax-exempt pension, profit sharing and stock bonus 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 qualified trust holds more
than 25% (by value) of the interests in the REIT or (B) one or more 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 Gross income (less direct expenses related thereto) of the REIT from
unrelated trades or businesses (determined as though the REIT were a qualified
trust) to (ii) the total gross income (less direct expenses related thereto) of
the REIT. A de minimis exception applies where this percentage is less than 5%
for any year. The Company does not expect to be classified as a "pension-held
REIT."
Tax-exempt entities will be subject to the rules described under this
heading "-- Taxation of Taxable Domestic Shareholders" concerning the inclusion
of the Company's designated undistributed net capital gains in the income of its
shareholders. Thus, such entities will, after satisfying filing requirements, be
allowed a credit or refund of the tax deemed paid by such entities in respect of
such includible gains.
TAXATION OF NON-DOMESTIC SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, and other foreign shareholders (collectively,
"Non-Domestic Shareholders") are complex and no attempt will be made herein to
provide more than a limited summary of such rules. Prospective Non-Domestic
Shareholders should consult with their own tax advisors to determine the impact
of U.S. federal, state and local income tax laws with regard to an investment in
Shares, including any reporting requirements.
Ordinary Dividends
Distributions, other than distributions that are treated as attributable to
gain from sales or exchanges by the Company of U.S. real property interests
(discussed below) and other than distributions designated by the Company as
capital gain dividends, will be treated as ordinary income to the extent that
they are made out of current or accumulated earnings and profits of the Company.
Such distributions to Non-Domestic Shareholders will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution, unless an
applicable tax treaty reduces that tax. However, if income from the investment
in the Common Shares is treated as effectively connected with the Non-Domestic
Shareholder's conduct of a U.S. trade or business, the Non-Domestic Shareholder
generally will be subject to tax at graduated rates in the same manner as
Domestic Shareholders are taxed with respect to such dividends (and may also be
subject to the 30% branch profits tax if the shareholder is a foreign
corporation). The Company expects to withhold U.S. tax at the rate of 30% on the
gross amount of any dividends, other than dividends treated as attributable to
gain from sales or exchanges of U.S. real property interests and capital gain
dividends, paid to a Non-Domestic Shareholder, unless (i) a lower treaty rate
applies and the required information evidencing eligibility for that reduced
rate is filed with the Company or the appropriate withholding agent or (ii) the
Non-Domestic Shareholder files an IRS Form 4224 (or a successor form) with the
Company or the appropriate withholding agent claiming that the distributions are
"effectively connected" income.
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Distributions to a Non-Domestic Shareholder that are designated by the
Company at the time of distribution as capital gain dividends which are not
attributable to or treated as attributable to the disposition by the Company of
a U.S. real property interest generally will not be subject to U.S. federal
income taxation, except as described below.
Return of Capital
Distributions in excess of current and accumulated earnings and profits of
the Company, which are not treated as attributable to the gain from disposition
by the Company of a U.S. real property interest, will not be taxable to a
Non-Domestic Shareholder to the extent that they do not exceed the adjusted
basis of the Non-Domestic Shareholder's Common Shares, but rather will reduce
the adjusted basis of such Common Shares. To the extent that such distributions
exceed the adjusted basis of a Non-Domestic Shareholder's Common Shares, they
will give rise to tax liability if the Non-Domestic Shareholder otherwise would
be subject to tax on any gain from the sale or disposition of its Common Shares,
as described below. If it cannot be determined at the time a distribution is
made whether such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to dividends. However, the Non-Domestic Shareholder may seek a
refund of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company.
Capital Gain Dividends
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-Domestic Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a
Non-Domestic Shareholder as if such gain were effectively connected with a U.S.
business. Thus, Non-Domestic Shareholders will be taxed on such distributions at
the normal capital gain rates applicable to Domestic Shareholders (subject to
any applicable alternative minimum tax and special alternative minimum tax in
the case of nonresident alien individuals). The Company is required by
applicable Treasury Regulations under FIRPTA to withhold 35% of any distribution
that could be designated by the Company as a capital gain dividend. However, if
the Company designates as a capital gain dividend a distribution made prior to
the day the Company actually effects such designation, then (although such
distribution may be taxable to a Non-Domestic Shareholder) such distribution is
not subject to withholding under FIRPTA; rather, the Company must effect the 35%
FIRPTA withholding from distributions made on and after the date of such
designation, until the distributions so withheld equal the amount of the prior
distribution designated as a capital gain dividend. The amount withheld is
creditable against the Non-Domestic Shareholder's U.S. tax liability.
Sales of Shares
Gain recognized by a Non-Domestic Shareholder upon a sale or exchange of
Common Shares generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in respect of which
at all times during a specified testing period less than 50% in value of the
stock is and was held directly or indirectly by foreign persons. It is currently
anticipated that the Company will continue to be a "domestically controlled
REIT," and, therefore, that the sale of Common Shares will not be subject to
taxation under FIRPTA. However, gain not subject to FIRPTA will be taxable to a
Non-Domestic Shareholder if (i) investment in the Shares is treated as
"effectively connected" with the Non-Domestic Shareholder's U.S. trade or
business, in which case the Non-Domestic Shareholder will be subject to the same
treatment as U.S. Shareholders with respect to such gain, or (ii) the
Non-Domestic Shareholder is a nonresident alien individual who was present in
the United States for 183 days or more during the taxable year and has a "tax
home" in the United States, or maintains an office or a fixed place of business
in the United States to which the gain is attributable, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. A similar rule will apply to capital gain dividends not subject
to FIRPTA.
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If the Company were not a domestically-controlled REIT, a Non-Domestic
Shareholder's sale of Common Shares would be subject to tax under FIRPTA only if
the selling Non-Domestic Shareholder owned more than 5% of the class of Common
Shares sold at any time during a specified period (generally the shorter of the
period that the Non-Domestic Shareholder owned the Common Shares sold or the
five-year period ending on the date of disposition). If the gain on the sale of
Common Shares were to be subject to tax under FIRPTA, the Non-Domestic
Shareholder would be subject to the same treatment as Domestic Shareholders with
respect to such gain (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of such Common Shares would be required to withhold 10% of the
gross purchase price.
Treaty Benefits
The United State is a party to bilateral income tax treaties with various
foreign countries. These income tax treaties may change one or more of the above
general rules for a particular Non-Domestic Shareholder depending on the terms
and conditions of the particular treaty and whether the particular Non-Domestic
Shareholder qualifies under such treaty for any benefits thereunder. In general,
a Non-Domestic Shareholder may take advantage of benefits, such as a reduced
withholding rate, offered by an income tax treaty between the United States and
a foreign country only if such Non-Domestic Shareholder is a resident (as
defined in the treaty) of that foreign country.
In order to claim a reduced rate of withholding tax under an income tax
treaty, a Non-Domestic Shareholder may be required to present to the Company or
other intermediary IRS forms or other documentary evidence confirming such
Non-Domestic Shareholder's status as a resident of the particular treaty country
under whose treaty the reduced rate of tax is claimed. Accordingly, Non-Domestic
Shareholders should consult their own tax advisors regarding the applicability
of income tax treaties to an investment in the Common Shares.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership and Subsidiary Partnerships. The discussion does not cover state or
local tax laws or any federal tax laws other than income tax laws.
Classification as a Partnership
A substantial portion the Company's real estate investments will be made
through the Operating Partnership (and possibly one or more Subsidiary
Partnerships). In general, partnerships are "pass-through" entities which are
not subject to federal income tax. Instead, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are subject to tax thereon, without regard to whether the
partners receive cash distributions from the partnership. The Company will be
entitled to include in its REIT taxable income its distributive share of the
income of any partnership (including the Operating Partnership) in which it has
an interest and to deduct its distributive share of the losses of any
partnership (including the Operating Partnership) in which it has an interest
only if each such partnership is not classified for federal income tax purposes
as an association taxable as a corporation.
Under recently issued regulations (the "Check the Box Regulations"), an
organization with two or more members will be classified as a partnership unless
it elects to be treated as an association (and therefore taxable as a
corporation) or falls within one of several specific provisions which define a
corporation. The Company does not intend to cause the Operating Partnership (or
any Subsidiary Partnership) to elect to treat the Operating Partnership (or any
Subsidiary Partnership) as an association (and therefore taxable as a
corporation). An exception to partnership classification under the Check the Box
Regulations exists for a partnership in which interests are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent thereof (a "Publicly Traded Partnership"). A Publicly
Traded Partnership is treated and taxed as a corporation unless at least 90% of
the gross income of such partnership, for each taxable year the partnership is a
Publicly Traded Partnership, consists of "qualifying income," which
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includes income from real property rents, gain from the sale or other
disposition of real property, interest and dividends (the "Passive Income
Exception").
The IRS has issued final regulations providing limited safe harbors from
the definition of a Publicly Traded Partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all of the partnership interests are issued in a
transaction that is not required to be registered under the Securities Act and
(ii) the partnership does not have more than 100 partners at any time during the
taxable year (taking into account as a partner each person who indirectly owns
an interest in the partnership through a partnership, grantor trust, or S
corporation (a "flow-through entity"), but only if (a) substantially all the
value of the beneficial owner's interest in the flow-through entity is
attributable to the flow-through entity's interest (direct or indirect) in the
partnership, and (b) a principal purpose of the use of the tiered arrangement is
to permit the partnership to satisfy the 100-partner limitation).
Under the Check the Box Regulations, a business entity such as the
Operating Partnership (or any Subsidiary Partnership) is disregarded as an
entity separate from its owner if it has a single owner, unless the entity
elects to be treated as an association taxable as a corporation or falls within
one of the several specific provisions which define a corporation, such as the
Publicly Traded Partnership provision discussed above. The Operating Partnership
will not make such an election. In addition, so long as the Company and one or
more wholly-owned qualified REIT subsidiaries of the Company are the only direct
or indirect partners of the Operating Partnership (or any Subsidiary
Partnership), the Operating Partnership (and any Subsidiary Partnership) will
not be treated as a Publicly Traded Partnership. Since CPT LP is a "qualified
REIT subsidiary," the Company is considered to own the assets actually owned by
CPT LP. Thus, the Company is considered to own for federal income tax purposes
the limited partnership interest owned by CPT LP. The Company also owns all of
the general partnership interests in the Operating Partnership, and all of the
limited partnership interests in the Operating Partnership not owned by CPT LP.
Since the Company will be considered to own all of the partnership interests in
the Operating Partnership, the Check the Box Regulations do not recognize the
Operating Partnership (or any Subsidiary Partnership) as an entity separate from
the Company for federal income tax purposes so long as the Company and one or
more qualified REIT subsidiaries are the only direct and indirect partners of
the Operating Partnership (or any Subsidiary Partnership) and, therefore, the
existence of such Partnership will not affect the ability of the Company to
elect or maintain REIT status while the Company and one or more qualified REIT
subsidiaries are the only partners.
The Operating Partnership was organized to facilitate the tax-advantaged
acquisition of additional correctional and detention facilities from private
owners, although the Company has no present plan to acquire any particular
facility. In the event the Company undertakes such an acquisition, it is
contemplated the owner of such a facility would become a limited partner in the
Operating Partnership and would be issued Units therein as the consideration, in
whole or in part, for the Unitholder's transfer of the facility to the Operating
Partnership. It is also contemplated that the Unitholder would be given the
right after a period of time to exchange Units of limited partnership interest
in the Operating Partnership for cash based upon their fair market value or, at
the Company's option, for Common Shares on a one-for-one basis. It is also
contemplated that substantially all the Company's assets may be owned indirectly
through the Operating Partnership so that one Unit would generally correspond
economically to one Common Share. In order to accomplish such objective, and
while the Company has no present plan to issue Units to a private prison owner,
the current structure using the Operating Partnership is used in connection with
the Offering, rather than the Company taking title to the Initial Facilities, in
order to avoid in the future a re-transfer of the Initial Facilities (or any
Option Facilities if acquired by the Company) to such a partnership, and the
incurrence at that time of associated transfer and other costs, which would
likely be necessary or advisable in order to offer a private owner a
tax-advantaged acquisition vehicle. In the event the Company undertakes a
tax-advantaged acquisition, it is also contemplated that the Partnership
Agreement for the Operating Partnership would be amended and restated at the
time of such acquisition to reflect the terms and conditions of the particular
acquisition. Currently, the Company and CPT LP are the only partners in the
Operating Partnership and possess the power unilaterally to amend and restate
the Limited Partnership Agreement. If a private prison
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owner is admitted as a partner to the Operating Partnership and issued Units
therein as consideration for the owner's transfer of a correctional or detention
facility to the Operating Partnership, the Operating Partnership would cease
under the Check the Box Regulations to be disregarded as an entity separate from
the Company for federal income tax purposes. At such time, the Company would not
cause the Operating Partnership to elect to be treated as an association taxable
as a corporation. The Company would also use its best efforts to issue Units to
private prison owners in transactions which qualify for the Private Placement
Exclusion. Moreover, because the Company intends to operate in a manner to
qualify, and maintain qualification, as a REIT and, through the Operating
Partnership, generally must earn passive income, the Operating Partnership could
qualify for the Passive Income Exception although there is no assurance the
Operating Partnership would so qualify for each of its taxable years. The
Company intends to use the Operating Partnership (or any Subsidiary Partnership)
as a tax-advantaged vehicle to acquire correctional and detention facilities
from private owners only if, in addition to other terms, conditions or
limitations it may establish, the Company receives an opinion from tax counsel
to the Company that, based upon the law then in effect and the facts underlying
the particular acquisition (or acquisitions), such use of the Operating
Partnership would not result in the disqualification of the Company as a REIT.
See "Income Taxation of the Operating Partnership and its Partners" for a
discussion of the federal income tax consequences on the Company upon the
treatment of the Operating Partnership as a partnership.
If for any reason any partnership in which the Company has an interest was
taxable as a corporation rather than as a partnership for federal income tax
purposes, the Company would not be able to satisfy the asset requirements for
REIT status. See "-- Taxation of the Company as a REIT -- Asset Tests." Failure
to satisfy this test would result in the Company's loss of its status as a REIT.
In addition, any change in the partnership status of such entities for tax
purposes might be treated as a taxable event in which case the Company might
incur a tax liability without any related cash distribution. See "-- Income
Taxation of the Operating Partnership and its Partners." Further, items of
income and deduction of such partnerships would not pass through to its partners
(including the Company), and such partners would be treated as shareholders for
tax purposes. The partnerships in which the Company has an interest would be
required to pay income tax at corporate tax rates on their net income, and
distributions to their partners would constitute dividends that would not be
deductible in computing the relevant entities' taxable income.
Under a regulatory "anti-abuse" rule (the "Anti-Abuse Rule"), the IRS may
(i) recast a transaction involving the use of a partnership to reflect the
underlying economic arrangement under the partnership provisions of the Code
(the "Partnership Provisions"), or (ii) prevent the use of a partnership to
circumvent the intended purpose of a Code provision. The Anti-Abuse Rule
contains an example in which a corporation that elects to be treated as a REIT
contributes substantially all of the cash proceeds from a public offering to a
partnership in exchange for a general partnership interest and property owners
contribute property in exchange for limited partnership interests which can be
exchanged for cash or stock of the corporation. The example concludes that the
use of the partnership is not inconsistent with the intent of the Partnership
Provisions and, thus, cannot be recast by the IRS. However, the Anti-Abuse Rule
is extraordinarily broad in scope and is applied based on an analysis of all of
the facts and circumstances. As a result, there can be no assurance that the IRS
will not attempt to apply the Anti-Abuse Rule to the Company. If the conditions
of the Anti-Abuse Rule are met, the IRS is authorized to take appropriate
enforcement action, including disregarding the Operating Partnership for federal
income tax purposes or treating one or more of the partners as nonpartners. Any
such action potentially could jeopardize the Company's status as a REIT.
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS
The discussion below applies when a private prison owner or third party
(other than the Company, CPT LP or a qualified REIT subsidiary of the Company)
becomes a partner in the Operating Partnership. The discussion below assumes
that the Operating Partnership will not be taxed as a corporation at such time
(whether as an association taxable as a corporation or a Publicly Traded
Partnership which fails to meet the Passive Income Exception).
Under Section 721 of the Code, a partner does not generally recognize gain
when it transfers property to a partnership in exchange for a partnership
interest. Section 721 should apply to the Company when a third
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party becomes a partner in the Operating Partnership. There are two relevant
exceptions to Section 721. First, non-recognition for a partner would not apply
if the transferee partnership is an "investment company." Based upon the planned
method of operations and the nature of the assets to be acquired by the
Operating Partnership, the Operating Partnership should not be considered an
investment company for purposes of Section 721 of the Code.
A partner can also recognize income to the extent (i) the amount of the
liabilities subject to the assets transferred to a partnership, exceeds (ii) the
sum of (a) the adjusted tax basis of the transferred assets, and (b) the
transferring partner's share of the liabilities of the transferee partnership
immediately after the transfer. While the Company does not anticipate that it
will recognize income upon the admission of a third party as a partner in the
Operating Partnership, there is no assurance that it will not recognize at least
some income upon such an event.
Operating Partnership Allocations
As noted above, the Company must include in its REIT taxable income its
distributive share of the income and losses of any partnership in which it has
an interest. Although the provisions of a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Code if they do
not have "substantial economic effect" or otherwise do not comply with the
provisions of Section 704(b) of the Code and Treasury Regulations.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners in respect of such item. The allocations of taxable income and
loss of partnerships in which the Company has an interest are intended to comply
with the requirements of Section 704(b) of the Code and Treasury Regulations.
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed by a
partner to a partnership must be allocated for federal income tax purposes in a
manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is generally
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of such property
at the time of contribution (referred to as "Book-Tax Difference"). It is
anticipated that at the time a third party becomes a member of the Operating
Partnership, there could exist a substantial amount of Book-Tax Difference with
respect to the assets.
The partnership agreement of the Operating Partnership will also require
allocations of income, gain, loss and deduction attributable to the contributed
assets be made in a manner that is consistent with Section 704 of the Code.
Based upon the Treasury Regulations under Section 704(c), partners can generally
be allocated income in excess of its economic or "book" income in order to
reduce the Book-Tax Difference. In addition, if assets with a Book-Tax
Difference are sold, any Book-Tax Difference remaining at the time they are sold
must be allocated exclusively to the contributing partner.
Basis in Operating Partnership Interest
The Company's adjusted tax basis in each of the partnerships in which it
has an interest generally (i) will be equal to the amount of cash and the basis
of any other property contributed to such partnership by the Company, (ii) will
be increased by (a) its allocable share of such partnership's income and (b) its
allocable share of any indebtedness of such partnership and (iii) will be
reduced, but not below zero, by the Company's allocable share of (a) such
partnership's loss and (b) the amount of cash and the fair market value of any
property distributed to the Company, and by constructive distributions resulting
from a reduction in the Company's share of indebtedness of such partnership.
If the Company's allocable share of the loss (or portion thereof) of any
partnership in which it has an interest would reduce the adjusted tax basis of
the Company's partnership interest in such partnership below
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zero, the recognition of such loss will be deferred until such time as the
recognition of such loss (or portion thereof) would not reduce the Company's
adjusted tax basis below zero. To the extent that distributions from a
partnership to the Company, or any decrease in the Company's share of the
nonrecourse indebtedness of a partnership (each such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) would constitute taxable income to the Company. Such
distributions and constructive distributions normally would be characterized as
long-term capital gain if the Company's interest in such partnership has been
held for longer than the long-term capital gain holding period (currently one
year).
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "Status of the Company under ERISA," to a prospective
purchaser that is not an employee benefit plan, another qualified plan, or an
IRA). This discussion does not purport to deal with all aspects of ERISA or
Section 4975 of the Code or, to the extent not preempted, state law that may be
relevant to particular employee benefit plan shareholders (including plans
subject to Title I of ERISA, other retirement plans and IRAs subject to the
prohibited transaction provisions of Section 4975 of the Code and governmental
plans or church plans that are exempt from ERISA and Section 4975 of the Code
but that may be subject to state law requirements) in light of their particular
circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN COMMON SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A QUALIFIED PLAN OR AN IRA OR
OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE AND (TO THE EXTENT NOT PREEMPTED) STATE LAW WITH RESPECT TO THE PURCHASE,
OWNERSHIP OR SALE OF COMMON SHARES BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan") should carefully consider whether
an investment in Common Shares is consistent with his fiduciary responsibilities
under ERISA. The fiduciary requirements of Part 4 of Title I of ERISA generally
require that an ERISA Plan's investments be (i) prudent and for the exclusive
benefit of the ERISA Plan, its participants and beneficiaries, (ii) diversified
in order to reduce the risk of large losses, unless it is clearly prudent not to
do so, and (iii) authorized under the terms of the governing documents of the
ERISA Plan. In determining whether any investment in Common Shares is prudent
for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should
consider all of the facts and circumstances, including those matters described
under "Risk Factors" and "Material Federal Income Tax Considerations."
Fiduciaries of IRAs, retirement plans for self-employed individuals ("Keogh
Plans") and other plans subject to Section 4975 of the Code but not subject to
ERISA (IRAs, Keogh Plans and such other plans are referred to herein as
"Non-ERISA Plans") should consider that a Non-ERISA Plan may only make
investments that are authorized by the appropriate governing documents and under
applicable state law.
Fiduciaries of ERISA Plans, as well as fiduciaries of Non-ERISA Plans,
should also consider in making their investment decision the application of the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Code. Administrators of ERISA Plans and Non-ERISA Plans and individuals with
IRAs should consult their own legal advisors regarding potential prohibited
transaction issues and whether an exemption is applicable.
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STATUS OF THE COMPANY UNDER ERISA
This section discusses certain principles that apply in determining whether
the fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and the Code apply to an entity because one or more investors in the
entity's acquired interests is an ERISA Plan or a Non-ERISA Plan. This section
also identifies considerations that would be relevant in the unlikely event that
the ERISA fiduciary requirements were applicable to the Company's operation.
In certain circumstances, where equity interests in any entity are owned by
one or more ERISA Plans or Non-ERISA Plans, the investing plans will, for
purposes of ERISA and Section 4975, be considered to own not only the equity
interest in the entity, but a proportionate individual interest in the
underlying assets of the entity. In such a case, the underlying assets of the
entity are deemed to be "plan assets" and, as described below, ERISA's fiduciary
requirements and the excise tax under Section 4975 of the Code would be relevant
to the operations of the entity. As described below, the Company does not
believe that its assets will be considered "plan assets" of investing plans for
these purposes.
The U.S. Department of Labor ("DOL"), which has certain administrative
responsibility with respect to ERISA Plans and certain Non-ERISA Plans, has
issued a regulation defining the term "plan assets" (the "DOL Regulation"). The
DOL Regulation generally provides that when an ERISA Plan or a Non-ERISA Plan
acquires a security that is an equity interest in an entity and that security is
neither a "publicly offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the ERISA Plan's or
Non-ERISA Plan's assets include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless it is
established either that the entity is an "operating company" or that equity
participation in the entity by benefit plan investors is not significant.
The DOL Regulation defines a publicly offered security as a security that
is "widely held," "freely transferable" and either part of a class of securities
registered under the Exchange Act or sold pursuant to an efffective registration
statement under the Securities Act (provided the class of securities of which
such security is part is registered under the Exchange Act within 120 days after
the end of the fiscal year of the issuer during which the offering occurred).
The Common Shares are being sold in an offering registered under the Securities
Act and the class of securities of which the Common Shares are part will be
registered under the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company anticipates that upon completion of the Offering, the Common Shares will
be "widely held."
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulation further provides that where
a security is part of an offering in which the minimum investment is $10,000 or
less (as is the case with the Offering), certain restrictions ordinarily will
not, alone or in combination, affect a finding that such securities are freely
transferable. The restrictions on transfer enumerated in the DOL Regulation as
ordinarily not affecting that finding include: (i) any restriction on or
prohibition against any transfer or assignment that would result in a
termination or reclassification of the Company for Federal or state tax
purposes, or that would otherwise violate any state or Federal law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the Company, (iii) any requirement that either the transferor or the
transferee, or both, execute documentation setting forth representations as to
compliance with any restrictions on transfer that are among those enumerated in
the final DOL Regulation as not affecting free transferability, (iv) any
administrative procedure that establishes an effective date, or any event (such
as completion of the Offering) prior to which a transfer or assignment will not
be effective, and (v) any limitation or restriction on transfer or assignment
that is not imposed by the issuer or a person acting on behalf of the issuer.
The Company believes that the restrictions imposed under the Declaration of
Trust on the transfer of Common Shares are limited to restrictions on transfer
which, under the DOL Regulation, ordinarily do not affect a finding of free
transferability, and are unlikely to result in the failure of the Common Shares
to be considered
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"freely transferable" for purposes of the DOL Regulation. In addition, the
Company is not aware of any other facts or circumstances limiting the
transferability of the Common Shares that are not included among those
enumerated as not affecting their free transferability under the DOL Regulation,
and the Company does not expect or intend to impose in the future (or to permit
any person to impose on its behalf) any limitations or restrictions on transfer
that would not be among the enumerated permissible limitations or restrictions.
The DOL Regulation only establishes a presumption in favor of a finding of free
transferability, and no assurances can be given that the DOL, the Treasury
Department or a court will not reach a contrary conclusion.
Assuming that Common Shares will be "widely held" and that no other facts
and circumstances exist that restrict transferability of Common Shares, the
Company believes that the Common Shares should be treated as a "publicly offered
security" within the meaning of the DOL Regulation and, accordingly, that the
underlying assets of the Company should not be considered to be "plan assets" of
any ERISA Plan or Non-ERISA Plan investing in Common Shares.
If the assets of the Company were deemed to be "plan assets" under ERISA
and Section 4975 of the Code, (i) the prudence standards and other provisions of
Part 4 of Subtitle B of Title 1 of ERISA would be applicable to any transactions
involving the Company's assets, (ii) persons who exercise any authority or
control over the Company's assets, or who provide investments advice to the
Company, would (for purposes of the fiduciary responsibility provisions of ERISA
and Section 4975 of the Code) be fiduciaries of each ERISA Plan or Non-ERISA
Plan that acquires Common Shares, (iii) transactions involving the Company's
assets undertaken at the direction or pursuant to the advice of such fiduciaries
might be violative of their fiduciary responsibilities under ERISA, especially
with regard to conflicts of interest, (iv) a fiduciary exercising its investment
discretion over the assets of the ERISA Plan to cause it to acquire or hold
Common Shares could be liable under the aforementioned Part 4 of Subtitle B of
Title I of ERISA for transactions entered into by the Company that do not
conform to ERISA standards of prudence and fiduciary responsibility, (v) certain
transactions that the Company might enter into in the ordinary course of its
business and operations might constitute "prohibited transactions" under ERISA
and the Code, and (vi) fiduciaries of ERISA Plans may violate ERISA's
prohibition against the improper delegation of control or responsibility for
"plan assets" and may be liable for breaches of ERISA's fiduciary duties
committed by co-fiduciaries.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement, dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter, the
number of Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
-------------
<S> <C>
Smith Barney Inc. ..........................................
Prudential Securities Incorporated..........................
SBC Warburg Dillon Read Inc. ...............................
Genesis Merchant Group Securities...........................
SunTrust Equitable Securities Corporation...................
------------
Total............................................. 6,200,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Shares offered hereby
are subject to the approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
Common Shares offered hereby (other than those covered by the Underwriters'
over-allotment option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Prudential Securities
Incorporated, SBC Warburg Dillon Read Inc., Genesis Merchant Group Securities,
and SunTrust Equitable Securities Corporation are acting as representatives (the
"Representatives"), propose to offer part of the Common Shares directly to the
public at the public offering prices set forth on the cover page of this
Prospectus and to offer part of the Common Shares to certain dealers at a price
which represents a concession not in excess of $ per share under the
public offering price. The Underwriter may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers.
After the initial offering of the Common Shares to the public, the public
offering price, concessions and reallowances to dealers may be changed by the
Representatives. The Representatives have advised the Company that the
Underwriters do not intend to confirm any sales to any account over which they
exercise discretionary authority.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 930,000 additional Common
Shares at the price to public set forth on the cover page of this Prospectus
minus the underwriting discounts and commissions. The Underwriters may exercise
such option solely for the purpose of covering over-allotments, if any, in
connection with the Offering.
In connection with the Offering and in compliance with applicable law, the
Underwriters may over allot (i.e., sell more Common Shares than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Shares at levels above those which might otherwise prevail
in the open market. Such transactions may include placing bids for the Common
Shares or effecting purchases of the Common Shares for the purpose of pegging,
fixing or maintaining the price of the Common Shares or for the purpose of
reducing a syndicate short position created in connection with this Offering. A
syndicate short position may be covered by exercise of the option described
above in lieu of or in addition to open market purchases. The Underwriters are
not required to engage in any of these activities and any such activities, if
commenced, may be discontinued at any time.
The Company will pay an advisory fee of 0.75% of the gross proceeds of the
Offering (including any exercise of the Underwriters' over-allotment option) to
Smith Barney Inc. for advisory services in connection with the evaluation,
analysis and structuring of the Company's formation and the Offering.
Furthermore, in connection with the Offering, the Operating Partnership and
the Company have agreed, subject to certain limited exceptions, not to sell,
offer to sell, solicit an offer to buy, contract to sell, grant any option to
purchase or otherwise transfer or dispose of any Common Shares or Units or any
securities convertible into or exchangeable or exercisable for Common Shares or
Units ("Transfers") for a period of
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180 days after the date of this Prospectus, without the prior written consent of
Smith Barney Inc. Additionally, the officers, trustees and directors of the
Company, Wackenhut Corrections and The Wackenhut Corporation have agreed that,
subject to certain limited exceptions, for a period of one year after the date
of this Prospectus, they will not, without the prior written consent of Smith
Barney Inc., Transfer any Common Shares or Units.
Prior to the Offering, there has been no public market for the Common
Shares. Therefore, the initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in such negotiations will be the prevailing market conditions, the
expected results of operations of the Company, evaluation of the Initial
Facilities and the Option Facilities, estimates of the business potential and
earnings prospects of the Company, the current state of the Company's industry
and the economy as a whole. The evaluation of the Initial Facilities and the
Option Facilities will be based on an evaluation of Wackenhut Corrections'
operation of such Facilities as a whole rather than the valuation of individual
properties. The initial public offering price to be set forth on the cover page
of this Prospectus should not, however, be considered an indication of the
actual value of the Common Shares. Such price is subject to change as a result
of market conditions and other factors.
At the request of the Company, the Underwriters have reserved up to 620,000
Common Shares for sale at the public Offering Price to certain trustees and
employees of the Company, their business affiliates and related parties who have
expressed an interest in purchasing shares. Such purchases will be made under
the same terms and conditions as will be offered by the Underwriters in the
Offering. Such reserved Common Shares, with the exception of up to 120,000
Common Shares, are to be subject to an agreement not to Transfer such Common
Shares without the prior written consent of Smith Barney Inc. for a period of
one year after the date of this Prospectus.
The Company and Wackenhut Corrections, on the one hand, and the
Underwriters on the other hand, have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
The Common Shares have been approved for listing on the NYSE, subject to
official notice of issuance under the symbol "CPV." In order to meet one of the
requirements for listing the Common Shares on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more Common Shares to a minimum of 2,000
beneficial holders.
EXPERTS
The audited financial statements of Wackenhut Corrections Corporation for
each of the three years in the period ended December 28, 1997 and the audited
balance sheet of Wackenhut Corrections Corporation as of December 28, 1997 and
December 29, 1996, which are included in this Prospectus, have been included in
reliance on the reports of Arthur Andersen LLP, independent public accountants,
given on the authority of that firm as experts in giving said reports.
The audited balance sheet of the Company as of February 20, 1998, which is
included in this Prospectus, has been included in reliance on the report of
Arthur Andersen LLP, independent public accountants, given on the authority of
that firm as experts in giving said reports.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Venable, Baetjer and Howard, LLP, Baltimore, Maryland, and
certain legal matters will be passed upon for the Underwriters by Battle Fowler
LLP, New York, New York. Akerman, Senterfitt & Eidson, P.A. will opine as to
certain other matters for the Company. Certain matters relating to the purchase
and leasing of the Facilities will be passed upon for the Company by Josias,
Goren, Cherof, Doody & Ezrol, P.A. Akerman, Senterfitt and Eidson, P.A., Josias,
Goren, Cherof, Doody & Ezrol, P.A. and Battle Fowler LLP will rely as to all
matters of Maryland law on the opinion of Venable, Baetjer and Howard, LLP. The
description of federal income tax consequences contained in this Prospectus
under the heading entitled "Material Federal Income Tax Considerations" will be
based upon the opinion of Akerman, Senterfitt & Eidson, P.A. In addition to
providing services to the Company, each of Akerman, Senterfitt & Eidson, P.A.
and Venable, Baetjer and Howard, LLP also provide legal services to Wackenhut
Corrections, including, without limitation, in connection with certain
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of the Formation Transactions, and to The Wackenhut Corporation, the parent of
Wackenhut Corrections. Benjamin R. Civiletti, a member of Venable, Baetjer and
Howard, LLP, is a member of the Board of Directors of Wackenhut Corrections.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-11 (the "Form S-11") under the
Securities Act, and Wackenhut Corrections has filed with the Commission a
Registration Statement on Form S-3 (the "Form S-3," and together with the Form
S-11, the "Registration Statement") under the Securities Act, with respect to
the Common Shares offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and financial schedules thereto. Any
statements contained herein concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such document, which is incorporated by reference.
For further information with respect to the Company, Wackenhut Corrections
and the Common Shares, reference is made to the Registration Statement and such
exhibits and financial schedules, copies of which may be examined without charge
at, or copies obtained upon payment of prescribed fees from, the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and will also be available for inspection and copying at the regional
offices of the Commission located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and at Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511. The Commission also maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file documents with the Commission, including the
Company and Wackenhut Corrections, and the address is http://www.sec.gov.
Moreover, the Common Shares have been approved for listing on the NYSE subject
to official notice of issuance. Accordingly, upon official notice of issuance,
periodic reports, proxy material, and other information concerning the Company,
when filed, may be inspected at the offices of the NYSE, Operations, 20 Broad
Street, New York, New York 10005.
Following consummation of the Offering, the Company will be subject to the
informational requirements of the Exchange Act, and will, therefore, be required
to file reports, proxy and information statements and other information with the
Commission pursuant to the reporting requirements of Section 13(a) thereof, in
addition to any other legal or NYSE requirements. Wackenhut Corrections is
currently subject to such informational requirements, and, in accordance
therewith, files all such reports, statements and information with the
Commission. Such reports, statements and information may also be inspected and
copied at the Commission's offices and web site listed above.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus:
"ACA" means the American Correctional Association.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Adjusted Basis Ratio" means the amount of Rent attributable to the
personal property associated with a property 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 property 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 property at the beginning and at the end of
such taxable year.
"Annual Base Rent" means the annual base rent payable under the Leases.
"Anti-Abuse Rule" means a regulatory rule whereby the IRS may (i) recast a
transaction involving the use of a Partnership Provision, or (ii) prevent the
use of a partnership to circumvent the intended purpose of a Code provision.
"Audit Committee" means the committee established by the Board of Trustees,
consisting of independent trustees, to make recommendations concerning the
engagement of independent public accountants, review with the independent public
accountants the plans and results of the audit engagement, approve professional
services provided by the independent public accountants, review the independence
of the independent public accountants, consider the range of audit and non-audit
fees and review the adequacy of the Company's internal accounting controls.
"Aurora Facility" means the Aurora INS Processing Center.
"Bank Credit Facility" means the $100 million line of credit with
NationsBank, N.A. and NationsBanc Montgomery Securities LLC which may be used
for the acquisition of additional correctional and detention facilities
(including the Option Facilities and the Future Facilities), to expand the
facilities and for general working capital requirements.
"Bankruptcy Code" means the United State Bankruptcy Code, as amended.
"Base Rent Escalation" means annual rent escalations equal to the increase
in the CPI, subject to a minimum annual increase of 3% during the first three
years, and thereafter, a maximum annual increase of 4%.
"Beneficiary" means one or more charitable organizations that are
designated by the Company as the beneficiary of a Share Trust.
"Board of Trustees" means the Board of Trustees of the Company.
"Book Tax Difference" means the difference between the fair market value of
the contributed property at the time of contribution and the adjusted tax basis
of such property at the time of contribution.
"Broward Facility" means the Broward County Work Release Center.
"Broward Sublease" means the Sublease between WCCRE Inc. and Wackenhut
Corrections for use of the Broward Facility.
"BSO" means the Broward County Sheriff's Office.
"Bureau of Justice Statistics" means United States Bureau of Justice
Statistics.
"Bylaws" means the bylaws of the Company, as amended and restated
contemporaneous with the consummation of the Offering.
"California Facilities" means the McFarland Facility, the Central Valley
Facility, the Golden State Facility and the Desert View Facility, collectively.
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"California Subleases" means the series of subleases between WCCRE Inc. and
Wackenhut Corrections for use of the California Facilities.
"Capital Addition" means construction or other capital improvements to a
particular leased property which are not normal or recurring to the maintenance
of such leased property.
"Cash Available Distribution" means Funds from Operations, adjusted (a)
without giving effect to any changes in working capital resulting from changes
in current assets and current liabilities (which changes are not anticipated to
be material) or the amount of cash estimated to be used for (i) development,
acquisition or other activities and (ii) financing activities, (b) for certain
known events and/or contractual commitments that may have occurred during the
period but would not have been in effect for the full year and (c) for certain
non-GAAP adjustments consisting of an estimate of amounts anticipated for
recurring tenant improvements and capital expenditures.
"CDOC" means the State of California Department of Corrections.
"Central Valley Facility" means the Central Valley Community Correctional
Facility.
"Change of Control" with respect to Wackenhut Corrections means, for
purposes of the Leases, any of the following transactions: (i) the sale by
Wackenhut Corrections of a controlling interest in Wackenhut Corrections; (ii)
the sale of all or substantially all of the assets of Wackenhut Corrections; or
(iii) any transaction pursuant to which Wackenhut Corrections is merged with or
consolidated into another entity and Wackenhut Corrections is not the surviving
entity.
"Check the Box Regulations" means regulations under the Code pursuant to
which an organization with two or more members will be classified as a
partnership unless it elects to be treated as an association or falls within one
of several specific provisions which define a corporation.
"Code" means Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest, par value
$.001 per share, of the Company.
"Company" means Correctional Properties Trust, a Maryland real estate
investment trust, together with its wholly-owned subsidiaries, CPT LP and the
Operating Partnership.
"Company Counsel" means Akerman, Senterfitt & Eidson, P.A.
"Company Expenses" means all administrative costs and expenses of the
Company and CPT LP.
"Company Independent Committee" means the Committee of Independent Trustees
established to approve Interested Trustee Transactions.
"Company Mortgagee" means any holder of a mortgage, deed of trust or other
security agreement on a Leased Property.
"Compensation Committee" means the committee established by the Board of
Trustees to determine compensation, including awards under the Employee Share
Option Plan and the Non-Employee Trustee Option Plan, and to administer the
Plans.
"Control Share Acquisition" means the acquisition of Control Shares,
subject to certain exceptions.
"Control Shares" means, generally, voting shares which, if aggregated with
all other such shares previously acquired by the acquiror, or in respect of
which the acquiror is able to exercise or direct the exercise of voting power,
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more, but less
than one-third, (ii) one-third or more, but less than a majority, or (iii) a
majority of all voting power.
"CPI" means the Consumer Price Index -- All Urban Consumers, as published
by the Bureau of Statistics of the United States Department of Labor.
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"CPT LP" means CPT Limited Partner Inc., a Delaware corporation.
"Debt Policy" means the Company's policy to maintain a ratio of total
consolidated indebtedness to total market capitalization plus total consolidated
debt (determined at the time the borrowing occurs) of 50% or less.
"Declaration of Trust" means the Declaration of Trust of the Company as
will be amended and restated contemporaneous with the consummation of the
Offering.
"Desert View Facility" means the Desert View Community Correctional
Facility.
"Disqualified Leaseback Agreement" means a lease provision providing for
rents that increase from one period to the next such that the Code requires
rental income to be accrued at a constant rate.
"DOL" means U.S. Department of Labor.
"DOL Regulation" means the regulation issued by DOL defining the term "plan
assets."
"Domestic Shareholder" means a holder of Common Shares who (for United
States federal income tax purposes) is (i) a citizen or resident of the United
States, or (ii) a corporation, partnership or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof.
"Employee Incentive Plan" means the Correctional Properties Trust 1998
Employee Share Option Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, or other employee benefit
plan subject to Title I of ERISA.
"Event of Default" means an event which constitutes a default under the
Leases between the Company, as landlord and Wackenhut Corrections, as tenant.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Facilities" means the two correctional and detention facilities
that are subject to purchase options granted to the State of New Mexico and the
respective counties in which the Facilities are located.
"Executive Committee" means the committee established by the Board of
Trustees to exercise the authority of the Board of Trustees, to the extent
permitted by law, in the management of the business of the Company.
"Extended Terms" means Wackenhut Corrections' options to extend the term of
each Lease for three additional five-year terms beyond the Fixed Terms.
"Facility" or "Facilities" means the Initial Facilities, the Option
Facilities and the Future Facilities.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Fiscal 1995" means Wackenhut Corrections fiscal year ended December 31,
1995.
"Fiscal 1996" means Wackenhut Corrections fiscal year ended December 29,
1996.
"Fiscal 1997" means Wackenhut Corrections fiscal year ended December 28,
1997.
"Fixed Term" means the initial term of 10 years under the Master Lease.
"Formation Transactions" means the series of transactions which are
designed to consolidate ownership of the Initial Facilities in the Company, to
provide a vehicle for possible future acquisition of the Option Facilities and
the Future Facilities and to enable the Company to qualify as a REIT.
"Founding Trustee" means any non-employee trustee who is a member of the
Board of Trustees as of the date of the consummation of the Offering.
"Funds from Operations" means, in accordance with the resolution adopted by
the Board of Governors of NAREIT, net income (loss) (computed in accordance with
generally accepted accounting principals),
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excluding significant non-recurring items, gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures.
"Future Facility" or "Future Facilities" means any correctional or
detention facility or facilities which Wackenhut Corrections acquires or has the
right to acquire subsequent to the consummation of the Offering.
"Future Facility Option Period" means the earlier of (i) four years from
the receipt of a certificate of occupancy for a Future Facility developed by
Wackenhut Corrections or from the date of acquisition of a Future Facility
acquired by Wackenhut Corrections, or (ii) six months after the Future Facility
attains an occupancy level of 75% of the number of beds authorized under the
certificate of occupancy for the Future Facility.
"Future Facility Purchase Price" means the amount equal to 105% (or such
lower percentage as may be agreed to by Wackenhut Corrections) of the Total
Facility Cost of such Future Facility.
"GAAP" means generally accepted accounting principles, consistently
applied.
"General Partner" means the Company as the sole general partner of the
Operating Partnership.
"Golden State Facility" means the Golden State Community Correctional
Facility.
"Hospital District" means the LaSalle Parish Hospital District No. 2.
"Indemnification Agreements" means agreements between the Company and the
Indemnitees to provide such Indemnitees indemnification to the maximum extent
allowable by or not in violation of any law of the State of Maryland.
"Indemnitee" means a trustee or executive officer of the Company who is
party to the Indemnification Agreement.
"Independent Trustee" means an individual who qualifies as a trustee under
the Company's Bylaws but who is neither (a) an officer or an employee of the
Company or its affiliates nor (b) a director, trustee, officer or employee of,
or other person who has a material financial interest in, (i) Wackenhut
Corrections or The Wackenhut Corporation, or (ii) any lessee or tenant of a
facility owned by the Company or by the Company's affiliates, or by (iii) any
owner, lessee or tenant of any facility financed by the Company or by the
Company's affiliates, other than any such owner, lessee or tenant which is an
affiliate of the Company, or (iv) any management company operating any facility
owned or financed by the Company or by the Company's affiliates, or (v) an
affiliate of any of the foregoing.
"Initial Facilities" means the eight correctional and detention facilities
currently operated by Wackenhut Corrections which will be acquired by the
Company pursuant to the Purchase Agreement.
"Initial Facility Purchase Price" means the total purchase price of an
Initial Facility.
"INS" means the U.S. Immigration and Naturalization Service.
"Interested Shareholder" means, under the MGCL as applied to a REIT, any
person who, beneficially owns 10% or more of the voting power of the real estate
investment trust's shares, or an affiliate or associate of the real estate
investment trust who at any time within the two-year period prior to the date in
question and after the date on which the real estate investment trust had 100 or
more beneficial owners of its shares, was the beneficial owner of 10% or more of
the voting power of the then-outstanding voting shares of the real estate
investment trust.
"Interim Credit Facility" means the $10 million interim line of credit with
NationsBank, N.A.
"IPO" means Wackenhut Corrections' initial public offering which closed in
July 1994.
"IRAs" means, collectively, a plan subject to Title I of ERISA, a qualified
plan, an individual retirement accounts and individual retirement annuities.
"IRS" means the United States Internal Revenue Service.
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"ISO" means an inventive stock option.
"Jena Facility" means the Jena Juvenile Justice Center.
"Karnes Facility" means the Karnes County Correctional Center.
"Keogh Plan" means a retirement plan for self-employed individuals.
"Lawton Facility" means the Lawton Correctional Facility.
"LDOC" means State of Louisiana Department of Public Safety and
Corrections.
"Lease" or "Leases" means the long-term, non-cancelable triple-net leases
between the Company, as landlord, and Wackenhut Corrections, as tenant, with
respect to the Initial Facilities.
"Leased Property" means the land, the buildings and structures and other
improvements thereon, assessments, rights and similar appurtenances to such land
and improvements, and permanently affixed equipment, machinery, and other
fixtures relating to the operation of a Facility.
"Limited Partner" or "Limited Partners" means those entities who will own a
limited partnership interest in the Operating Partnership.
"Louisiana Operating Agreement" means the Cooperative Endeavor Agreement,
dated January 30, 1995, between the State of Louisiana and the Hospital
District.
"Market Price" means the last reported sales price of the Common Shares or
Preferred Shares reported on the NYSE on the trading day immediately preceding
the relevant date, or if such stock is not then traded on the NYSE, the last
reported sales price of such stock on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over which such
stock may be traded, or if such stock is not then traded over any exchange or
quotation system, then the market price of such stock on the relevant date as
determined in good faith by the Board of Trustees.
"Master Lease" means the lease agreement, the provisions of which are
incorporated into the individual Leases, between the Company, as landlord, and
Wackenhut Corrections or WCCRE, as tenant.
"McFarland Facility" means the McFarland Community Correctional Facility.
"MDOC" means State of Michigan Department of Management and Budget for the
Department of Corrections.
"MGCL" means the Maryland General Corporation Law, as may be amended from
time to time.
"Michigan Facility" means the Michigan Youth Correctional Facility.
"Michigan Sublease" means the lease agreement between Wackenhut
Corrections, as lessee and the State of Michigan, as lessor, with respect to the
Michigan Facility.
"Mortgage Debt" means the bonds secured by a mortgage encumbering the Jena
Facility.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Non-Domestic Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"Non-Employee Trustee Option Plan" means the Correctional Properties Trust
1998 Non-Employee Trustees' Share Option Plan.
"Non-ERISA Plans" mean IRAs, Keogh Plans and other plans subject to Section
4975 of the Code, but not subject to ERISA.
"Non-Founding Trustee" means any non-employee trustee who is not a Founding
Trustee.
"NYSE" means the New York Stock Exchange.
"ODOC" means State of Oklahoma Department of Corrections.
127
<PAGE> 135
"Offering" means the offering of Common Shares of the Company pursuant to
this Prospectus.
"Offering Price" means the initial public offering price of the Common
Shares.
"Operating Partnership" means CPT Operating Partnership L.P., a Delaware
limited partnership, together with each of its subsidiaries.
"Option Agreements" means the agreements between Wackenhut Corrections and
the Company pursuant to which Wackenhut Corrections will grant the Company the
option to acquire each of the three Option Facilities.
"Option Facilities" means the three correctional and detention facilities
currently under development by Wackenhut Corrections, which the Company has the
option to acquire pursuant to the Option Agreements.
"Option Facility Option Period" means the earlier of (i) four years after
receipt of a certificate of occupancy for the subject facility, or (ii) six
months after such facility achieves an occupancy level of 75% of the number of
beds authorized under the certificate of occupancy for the facility.
"Option Facility Purchase Price" means the purchase price of an Option
Facility, equal to 105% (or such lower percentage as may be agreed to by
Wackenhut Corrections) of such Option Facility's Total Facility Cost.
"Ownership Limit" means the direct, indirect or constructive ownership
(taking into account applicable ownership provisions of the Code) of more than
9.8% of any class or series of the Company's capital stock (including the Common
Shares) by any person, subject to certain limited exceptions.
"Ownership Limit Provision" means the provision of the Declaration of Trust
that will prohibit the direct, indirect or constructive ownership by any person
or group of more than 9.8% of the number of outstanding shares of any class or
series of Common Shares or Preferred Shares.
"Owner Trustee" means First Security Bank, National Association, not
individually, as owner trustee.
"Partnership Agreement" means the agreement by which the Operating
Partnership was organized as a Delaware limited partnership which includes the
Company, as the sole general partner and as a limited partner, and CPT LP as a
limited partner.
"Passive Income Exception" exempts a Publicly Traded Partnership from being
treated and taxed as a corporation if at least 90% of the gross income of such
partnership, for each taxable year the partnership is a Publicly Traded
Partnership, consists of "qualifying income", which includes income from real
property rent, gain from the sale or other disposition of real property,
interest and dividends.
"Per Diem Rate" means the net rate of revenue per day per inmate, based
upon occupancy levels.
"Plans" means the Employee Option Plan together with the Non-Employee
Trustee Option Plan.
"Preferred Shares" means preferred shares of beneficial interest of the
Company, par value $.001 per share.
"Private Placement Exclusion" means one of the safe harbors from the
definition of Publicly Traded Partnership pursuant to IRS regulations.
"Privatization Reports" means the reports on privatization from the Private
Corrections Project Center for Studies in Criminology and Law, University of
Florida.
"Prohibited Owner" means one who would be record owner of Common Shares or
Preferred Shares but for the ownership limitations set forth in the Declaration
of Trust.
"Publicly Traded Partnership" means a partnership in which interests are
traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent thereof.
128
<PAGE> 136
"Purchase Agreement" means the agreement entered into by the Company,
pursuant to which the Company will acquire the eight Initial Facilities.
"Queens Facility" means the Queens Private Correctional Facility.
"Recognition Period" pertains to Built-in Gain, as defined pursuant to
Treasury Regulations to be issued under Section 337(d) of the Code.
"Registration Statement" means the Registration Statement filed by the
Company and Wackenhut Corrections on Form S-11 and Form S-3, respectively.
"REIT" means real estate investment trust, as defined in Section 856 of the
Code.
"Related Party Tenant" means a tenant of a REIT in which the REIT, or an
owner of 10% or more of the REIT, directly or constructively owns a 10% or
greater ownership interest.
"Rent" means the Annual Base Rent together with the Base Rent Escalation,
paid by Wackenhut Corrections pursuant to the Leases.
"Representatives" mean Smith Barney Inc., Prudential Securities
Incorporated, SBC Warburg Dillon Read Inc., Genesis Merchant Group Securities
and SunTrust Equitable Securities Corporation.
"Required Ownership Inquiry" means that level of inquiry which satisfies
the conditions specified in Treasury Regulations under the Code ascertaining the
actual ownership of Common Shares or Preferred Shares.
"RFPs" means Request for Proposals, which are government bid requests.
"Right to Purchase Agreement" means the agreement between Wackenhut
Corrections and the Company pursuant to which the Company has the right to
acquire any Future Facility for a cash purchase price equal to the Future
Facility Purchase Price.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares-in-Trust" means Common Shares or Preferred Shares designated as
Shares-in-Trust pursuant to the Declaration of Trust, which is held in trust by
the Share Trustee for the benefit of the Beneficiary.
"Share Trust" means any separate trust created pursuant to the Declaration
of Trust to hold Shares-in-Trust for the benefit of the Beneficiary.
"Share Trustee" means any person or entity unaffiliated with both the
Company and any Prohibited Owner which is designated by the Company to serve as
trustee of the Share Trust.
"Sublease" and "Subleases" means one or more subleases for a Facility
between Wackenhut Corrections, as lessee, and the lessor of such Facility.
"Subsidiary Partnership" and "Subsidiary Partnerships" means any
partnerships which are owned by the Operating Partnership as a vehicle for
tax-advantaged acquisitions.
"Total Facility Cost" means the aggregate cost related to the acquisition,
development, design, construction, equipment and start-up of a Facility (which
in the case of goods and services provided by Wackenhut Corrections, will not
exceed the costs which would be paid therefor if purchased from a third party in
an arm's-length transaction).
"Total Value" means the sum of the lesser of (a) the aggregate historical
cost of the Company's facilities; or (b) the aggregate of the appraised value of
such facilities.
"Transfer" means the sale, offer to sell, solicitation of an offer to buy,
contract to sell, grant of any option to purchase or otherwise transfer or
dispose of any Common Shares or Units of any securities convertible into or
exchangeable or exercisable for Common Shares or Units.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"UBTI" means "unrelated business taxable income" as defined in Section
512(a) of the Code.
"Unitholder" means the holder of the Units.
129
<PAGE> 137
"Units" means, under the Operating Partnerships, and with respect to each
class of partnership, those units representing an equal undivided fractional
share of each item of the Operating Partnership's income gain, and loss and in
distribution of the Operating Partnership's assets.
"Wackenhut Corrections" means Wackenhut Corrections Corporation, a Florida
corporation, together with each of its subsidiaries.
"Wackenhut Lease Facility" means operating lease facility outstanding in
the amount of approximately $54.4 million.
"WCCRE" means collectively WCCRE Inc. and WCCRE LLC.
"WCCRE Inc." means WCC RE Holdings, Inc., a wholly-owned subsidiary of
Wackenhut Corrections.
"WCCRE LLC" means WCC RE Holdings LLC.
"Year 2000 Issue" means the date-sensitivity problem of computer systems
and computer applications.
130
<PAGE> 138
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CORRECTIONAL PROPERTIES TRUST
Financial Statements
Report of Independent Certified Public Accountants..... F-2
Balance Sheet as of February 20, 1998.................. F-3
Notes to Balance Sheet................................. F-4
Pro Forma Financial Statements............................ F-5
Pro Forma Balance Sheet as of February 20, 1998........ F-6
Pro Forma Statement of Operations for the year ended
December 31, 1997..................................... F-7
WACKENHUT CORRECTIONS CORPORATION........................... F-8
Pro Forma Condensed Consolidated Financial Statements..... F-8
Pro Forma Condensed Consolidated Balance Sheet as of
December 28, 1997..................................... F-9
Pro Forma Consolidated Statement of Income for the year
ended December 28, 1997............................... F-11
Consolidated Financial Statements
Report of Independent Certified Public Accountants..... F-12
Consolidated Balance Sheets as of December 28, 1997 and
December 29, 1996..................................... F-13
Consolidated Statements of Income for the fiscal years
ended December 28, 1997, December 29, 1996 and
December 31, 1995..................................... F-14
Consolidated Statements of Cash Flows for the fiscal
years ended December 28, 1997, December 29, 1996 and
December 31, 1995..................................... F-15
Consolidated Statements of Shareholders' Equity for the
fiscal years ended December 28, 1997, December 29,
1996 and December 31, 1995............................ F-16
Notes to the Consolidated Financial Statements......... F-17
</TABLE>
F-1
<PAGE> 139
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Correctional Properties Trust:
We have audited the accompanying balance sheet of Correctional Properties
Trust (a Maryland real estate investment trust) as of February 20, 1998. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Correctional Properties Trust as of
February 20, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
February 20, 1998.
F-2
<PAGE> 140
CORRECTIONAL PROPERTIES TRUST
(A MARYLAND REAL ESTATE INVESTMENT TRUST)
BALANCE SHEET
FEBRUARY 20, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $2,500
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity:
Preferred shares, $.001 par value; 50,000,000 shares
authorized; none outstanding........................... $ --
Common shares, $.001 par value; 150,000,000 shares
authorized; 1,000 shares issued and outstanding........ 1
Additional paid in capital................................ 2,499
------
$2,500
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 141
CORRECTIONAL PROPERTIES TRUST
(A MARYLAND REAL ESTATE INVESTMENT TRUST)
NOTES TO BALANCE SHEET
FEBRUARY 20, 1998
1. ORGANIZATION
Correctional Properties Trust (the "Company") was formed February 18, 1998
as a Maryland real estate investment trust. The Company has had no operations to
date but has issued 1,000 Common Shares to founding shareholders.
2. FEDERAL INCOME TAXES
At the earliest possible date, the Company plans to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code and,
accordingly, will not be subject to federal income taxes on amounts distributed
to shareholders provided that it distributes at least 95% of its real estate
investment trust taxable income and meets certain other requirements.
3. PREFERRED SHARES
No Preferred Shares are outstanding. Preferred Shares may be issued from
time to time without shareholder approval with terms and conditions established
by the Board of Trustees of the Company.
4. INTENTIONS OF THE COMPANY (UNAUDITED)
The Company has announced its intention to sell 6,200,000 Common Shares in
an initial public offering. Immediately after the closing of the Offering, the
Company intends to consummate the following transactions with Wackenhut
Corrections Corporation ("Wackenhut Corrections"): (a) purchase of eight
correctional and detention facilities for $113.0 million and enter into
triple-net leases with Wackenhut Corrections for original fixed terms of 10
years with renewal terms upon the mutual agreement of both parties for three
additional five-year terms, (b) option agreements to purchase an additional
three correctional and detention facilities at a total estimated purchase price
of $109.7 million with similar leaseback terms, (c) trade name agreement between
the Company and Wackenhut Corrections and (d) an agreement that provides the
Company a right to purchase other facilities from Wackenhut Corrections.
Upon consummation of the Offering, the Company plans on establishing a $75
million credit facility with a bank for the purpose of financing the acquisition
of correctional and detention facilities, to expand existing facilities and for
general working capital needs.
The Company will be dependent on Wackenhut Corrections for its initial
revenues. Also, due to the nature of the business and the contractual
relationships with Wackenhut Corrections, including the operating leases, the
Company's ability to be successful is dependent on a number of factors including
key personnel, continuing qualification as a REIT and continued availability of
financial resources.
F-4
<PAGE> 142
PRO FORMA FINANCIAL STATEMENTS
The following financial statements represent the unaudited pro forma
Balance Sheet for the Company as of February 20, 1998 and the Pro Forma
Statement of Operations for the year ended December 31, 1997. The Pro Forma
Statements of Operations are presented as if the Offering had occurred as of the
beginning of the period indicated and therefore incorporate certain assumptions
that are included in the Notes to Pro Forma Financial Information. The Pro Forma
Balance Sheet is presented as if the Offering had occurred on December 31, 1997.
The Company is accounting for the Facility acquisitions under the purchase
method of accounting. The pro forma information does not purport to represent
what the Company's financial position or results of operations actually would
have been had the Offering, in fact, occurred on such date or at the beginning
of the period indicated, or to project the Company's financial position or
results of operations at any future date or for any future period.
The Company's audited historical balance sheet as of February 20, 1998, and
notes thereto are included elsewhere in this Prospectus along with the Report of
the Independent Public Accountants. Total assets and shareholders' equity
totaled $2,500 each at February 20, 1998.
F-5
<PAGE> 143
CORRECTIONAL PROPERTIES TRUST
PRO FORMA BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
FEBRUARY 20, 1998
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Land and buildings, net.............................. $ -- $ 113,041(a) $113,041
Cash................................................. 3 113,817(b)
-- (113,041)(a) 779
-- -- --
------- --------- --------
$ 3 $ 113,817 $113,820
======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable......................................... $ -- --(c) $ --
------- --------- --------
Preferred shares, $0.001 par value; 50,000,000
shares authorized; none outstanding............. -- -- --
Common shares, $0.001 par value; 150,000,000 shares
authorized, 6,200,000 issued and outstanding, as
adjusted........................................ -- 6(b) 6
Additional paid-in capital......................... 3 113,811(b) 113,814
------- --------- --------
$ 3 $ 113,817 $113,820
======= ========= ========
</TABLE>
- ---------------
(a) To record the purchase of the eight Initial Facilities using the purchase
method of accounting.
(b) Reflects issuance of 6,200,000 Common Shares, $0.001 par value, in
connection with the Offering at an assumed initial public offering price of
$20.00 per share and redemption of 1,000 founder's shares at cost. The
estimated costs of the Offering, including the underwriting discount and
estimated Offering expenses, totalling $10.2 million have been reflected as
an offset to additional paid-in capital. The resulting net cash proceeds of
the Offering total $113.8 million.
(c) The Company has obtained a commitment for the $100 million Bank Credit
Facility from
NationsBank N.A. The Company will only obtain the Bank Credit Facility if
the Company elects to purchase the Option Facilities or for other
acquisitions. Upon such election, the Company expects to incur debt issuance
costs of approximately $1.25 million. Such costs will be capitalized and
subsequently amortized over the expected term of the loan upon closing of
the Bank Credit Facility. Accordingly, no financing costs have been
capitalized in the Pro Forma Balance Sheet.
F-6
<PAGE> 144
CORRECTIONAL PROPERTIES TRUST
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Pro Forma Statement of Operations:
Revenues:
Rental income(a)....................................... $-- $2,449 $2,449
--- ------ ------
Cost and expenses:
Operating and administrative(b)(c)..................... -- 1,340 1,340
Provision for depreciation(d).......................... -- 567 567
--- ------ ------
Total cost and expenses........................... -- 1,907 1,907
--- ------ ------
Net income................................................ -- $ 542 $ 542
=== ====== ======
Net income per share:
Basic.................................................. $ .09
Diluted................................................ $ .09
Weighted average number of shares outstanding(e):
Basic.................................................. 6,200
Diluted................................................ 6,200
------
</TABLE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(a) Rental income from Wackenhut Corrections recorded in accordance with the
terms of the Leases as if the leases for two of the Initial Facilities (the
Aurora Facility and the McFarland Facility) had commenced January 1997, one
(the Queens Facility) had commenced June 1997, and three (the Central Valley
Facility, the Golden State Facility and the Desert View Facility) had
commenced December 1997. The Company intends to classify and account for the
Leases as operating leases to Wackenhut Corrections in accordance with the
provisions of Statement of Financial Accounting Standards No. 13 "Accounting
for Leases."
(b) To record the following recurring administrative expenses of the Company
based upon management's estimates of operating and administrative costs:
<TABLE>
<S> <C>
Salaries, including payroll taxes and benefits.............. $653
Legal, accounting, SEC reporting and other shareholder 260
costs.....................................................
Administrative.............................................. 352
Marketing and business development.......................... 75
</TABLE>
Salaries were determined taking into account expected salary levels of
employees. Other expenses were determined by evaluating similar expenses
for other public companies.
(c) The Company has obtained a commitment for the $100 million Bank Credit
Facility from
NationsBank N.A. The Company will only obtain the Bank Credit Facility if
the Company elects to purchase the Option Facilities or for other
acquisitions. Upon such election, the Company expects to incur Debt Issuance
costs of approximately $1.25 million. Such costs will be capitalized and
subsequently amortized over the expected term of the loan upon closing of
the Bank Credit Facility. Accordingly, no amortization expense has been
recognized in the Pro Forma Statement of Operations.
(d) Depreciation expense on fixed assets purchased from Wackenhut Corrections
based on the estimated useful lives of the Facilities of 40 years.
(e) Weighted average shares outstanding includes Common Shares sold in the
Offering as if such shares were outstanding for the entire period and
excludes the 1,000 founder's shares which will be redeemed in connection
with the Offering.
F-7
<PAGE> 145
WACKENHUT CORRECTIONS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The following unaudited pro forma condensed consolidated financial
statements represent the unaudited pro forma financial results for Wackenhut
Corrections Corporation as of December 28, 1997 and the fiscal year ended
December 28, 1997. The Pro Forma Consolidated Statements of Income is presented
as if the Formation Transactions had occurred as of the beginning of the period
indicated and incorporate certain assumptions that are included in the Notes to
Pro Forma Consolidated Statement of Income. The Pro Forma Condensed Consolidated
Balance Sheet is presented as if the Formation Transactions had occurred on
December 28, 1997. The pro forma information does not purport to represent what
Wackenhut Corrections' financial position or results of operations actually
would have been had the Formation Transactions, in fact, occurred on such date
or at the beginning of the period indicated, or to project Wackenhut
Corrections' financial position or result of operations at any future date or
any future period.
F-8
<PAGE> 146
WACKENHUT CORRECTIONS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 28, 1997
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 28,960 $ 39,134(a) $ 68,094
Accounts receivable, net............................... 36,755 -- 36,755
Other.................................................. 9,457 -- 9,457
-------- -------- --------
Total current assets........................... 75,172 39,134 114,306
-------- -------- --------
Property and equipment, net............................ 38,754 (24,687)(a) 14,067
Investments in and advances to affiliates.............. 7,325 -- 7,325
Deferred charges, net.................................. 14,218 -- 14,218
Unamortized cost in excess of net assets of acquired
companies, net...................................... 2,359 -- 2,359
Other.................................................. 1,375 -- 1,375
-------- -------- --------
$139,203 $ 14,448 $153,650
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 6,160 $ -- $ 6,160
Accrued payroll and related taxes...................... 8,316 -- 8,316
Accrued expenses....................................... 11,717 -- 11,717
Current portion of deferred income..................... -- 1,445(a) 1,445
Current portion of long term debt...................... 12 -- 12
Deferred tax liability, net............................ 391 -- 391
-------- -------- --------
Total current liabilities...................... 26,596 1,746 28,342
-------- -------- --------
Deferred income tax liability, net....................... 10,099 -- 10,099
-------- -------- --------
Deferred income.......................................... -- 13,003(a) 13,003
Long-term debt........................................... 213 -- 213
-------- -------- --------
Total shareholders' equity............................... 102,295 -- 102,295
-------- -------- --------
$139,203 $ 14,448 $153,650
======== ======== ========
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
Wackenhut Corrections' anticipated transactions, reflected on a pro forma
basis, as if the transactions had occurred on December 28, 1997, are as follow:
(a) To record the sale of six of the Initial Facilities (the Aurora
Facility, the McFarland Facility, the Queens Facility, the Central
Valley Facility, the Golden State Facility, and the Desert View
Facility) to the Company. The six Initial Facilities that were
operational or commenced operations in fiscal 1997 are being sold to
the Company for approximately $81.6 million, $39.1 million of which
will be paid to Wackenhut Corrections and $42.5 million will be paid to
the Wackenhut Lease Facility. The total net proceeds to Wackenhut
Corrections are $39.1 million, consisting of $29.6 million for the sale
of facilities owned by Wackenhut Corrections (the Aurora Facility, the
McFarland Facility and the Queens Facility) and $9.5 million
representing the differences between the option price for which
Wackenhut Corrections can acquire the other Initial Facilities from the
Wackenhut Lease Facility and the selling price to the Company. The sale
of six of the Initial
F-9
<PAGE> 147
Facilities results in a total gain of $14.4 million which is calculated
as the difference between the sales price of the Initial Facilities and
their net book value (for owned facilities) or Wackenhut Corrections'
option purchase price (for the non-owned facilities).
Wackenhut Corrections will account for the sales as sale-leasebacks and
will classify and account for the leases as operating leases. In
accordance with Financial Accounting Standards No. 13. accordingly, the
total $14.4 million gain on the sale will be deferred and amortized
over the ten year lives of the leases entered into coincident with the
sale.
F-10
<PAGE> 148
WACKENHUT CORRECTIONS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 28, 1997
-------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues................................................. $206,930 $ -- $206,930
Operating expenses....................................... 172,031 1,551(a) 173,582
Depreciation & amortization.............................. 6,303 (543)(b) 5,760
-------- ------- --------
Contribution from operations............................. 28,596 (1,008) 27,588
General and administrative expenses...................... 12,051 -- 12,051
-------- ------- --------
Operating income......................................... 16,545 (1,008) 15,537
Interest income (expense)................................ 1,451 --(c) 1,451
-------- ------- --------
Income before income taxes and equity income (loss) of
affiliates............................................. 17,996 (1,008) 16,988
Provision for income taxes............................... 7,226 (403)(d) 6,823
-------- ------- --------
Income before equity income (loss) of affiliates....... 10,770 (605) 10,165
Equity income (loss) of affiliates..................... 1,105 -- 1,105
-------- ------- --------
Net income............................................. $ 11,875 $ (605) $ 11,270
======== ======= ========
Earnings per share:
Basic.................................................. $ 0.54 $ 0.51
Diluted................................................ $ 0.52 $ 0.50
Weighted average shares outstanding:
Basic.................................................. 22,015 22,015
Diluted................................................ 22,697 22,697
</TABLE>
- ---------------
Wackenhut Corrections' anticipated transactions, reflected on a pro forma
basis, as if the transactions had occurred on December 30, 1996 are as follows:
(a) To record rent expense of $2,449 in accordance with the terms of the Leases
with Correctional Properties Trust as if the leases for two of the Initial
Facilities (the Aurora Facility and the McFarland Facility) had commenced
January 1997, one (the Queens Facility) had commenced June 1997, and three
(the Central Valley Facility, the Golden State Facility and the Desert View
Facility) had commenced December 1997, net of the amortized gain on the sale
of the Initial Facilities of $621 and lease expense under the Wackenhut
Lease Facility of $277.
(b) To reduce depreciation expense on facilities sold.
(c) The pro forma statement has not provided for interest income on the cash
balances expected as a result of the sale of the facilities. Assuming a
return of 5%, average cash balances on hand after the sale, payment of
related taxes, and payment of monthly lease payments would yield interest
income of $783 for the year ended December 28, 1997.
(d) To adjust income tax expense for adjustments to pre-tax income.
F-11
<PAGE> 149
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of Wackenhut Corrections Corporation:
We have audited the accompanying consolidated balance sheets of Wackenhut
Corrections Corporation (a Florida corporation) and subsidiaries as of December
28, 1997 and December 29, 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three fiscal years
in the period ended December 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wackenhut Corrections
Corporation and subsidiaries as of December 28, 1997 and December 29, 1996, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 28, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
February 6, 1998.
F-12
<PAGE> 150
WACKENHUT CORRECTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND DECEMBER 29, 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 28,960 $ 44,368
Accounts receivable, net.................................. 36,755 24,879
Other..................................................... 9,457 6,066
-------- --------
Total current assets.............................. 75,172 75,313
Property and equipment, net................................. 38,754 18,975
Investments in and advances to affiliates................... 7,325 1,810
Deferred charges, net....................................... 14,218 7,522
Unamortized cost in excess of net assets of acquired
companies, net............................................ 2,359 2,224
Other....................................................... 1,375 967
-------- --------
$139,203 $106,811
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 6,160 $ 4,020
Accrued payroll and related taxes......................... 8,316 4,558
Accrued expenses.......................................... 11,717 3,717
Current portion of long-term debt......................... 12 12
Deferred income tax liability, net........................ 391 876
-------- --------
Total current liabilities......................... 26,596 13,183
-------- --------
Deferred income tax liability, net.......................... 10,099 5,434
-------- --------
Long-term debt.............................................. 213 225
-------- --------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized............................................. -- --
Common stock, $.01 par value, 60,000,000 shares
authorized, 22,168,542 and 21,937,992 shares issued and
outstanding............................................ 222 219
Additional paid-in capital................................ 78,006 72,986
Retained earnings......................................... 26,223 14,348
Cumulative translation adjustment......................... (2,156) 416
-------- --------
Total shareholders' equity........................ 102,295 87,969
-------- --------
$139,203 $106,811
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
F-13
<PAGE> 151
WACKENHUT CORRECTIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................... $206,930 $137,784 $ 99,431
Operating expenses (including amounts related to The
Wackenhut Corporation ("TWC") of $5,337, $3,693 and
$6,008)................................................... 172,031 115,848 82,285
Depreciation and amortization............................... 6,303 3,532 2,303
-------- -------- --------
Contribution from operations................................ 28,596 18,404 14,843
General and administrative expenses (including amounts
related to TWC of $1,566, $1,432 and $1,264).............. 12,051 8,673 7,614
-------- -------- --------
Operating income............................................ 16,545 9,731 7,229
Interest income (including amounts related to TWC of $(10),
$(40), and $172).......................................... 1,451 2,195 186
-------- -------- --------
Income before income taxes and equity income (loss) of
affiliate................................................. 17,996 11,926 7,415
Provision for income taxes.................................. 7,226 4,269 2,862
-------- -------- --------
Income before equity income (loss) of affiliate............. 10,770 7,657 4,553
Equity income of affiliate (loss), net of income tax
(benefit) of $692, $378 and ($70)......................... 1,105 604 (113)
-------- -------- --------
Net income........................................ $ 11,875 $ 8,261 $ 4,440
======== ======== ========
Basic earnings per share (Note 9)........................... $ 0.54 $ 0.39 $ 0.26
======== ======== ========
Diluted earnings per share (Note 9)......................... $ 0.52 $ 0.37 $ 0.25
======== ======== ========
Basic weighted average shares outstanding................... 22,015 21,361 16,850
======== ======== ========
Diluted weighted average shares outstanding................. 22,697 22,128 17,708
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-14
<PAGE> 152
WACKENHUT CORRECTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 11,875 $ 8,261 $ 4,440
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense..................... 6,303 3,532 2,303
Equity (income) loss of affiliates........................ (1,797) (982) 183
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable.................................... (12,623) (6,943) (7,355)
Other current assets................................... (3,606) (2,384) (1,966)
Other assets........................................... (201) 34 (76)
Deferred income tax asset.............................. -- 51 20
Unamortized cost in excess of net assets acquired...... (782) -- --
Increase (decrease) in liabilities:
Accounts payable and accrued expenses.................. 10,739 2,003 (238)
Accrued payroll and related taxes...................... 4,027 1,152 1,293
Deferred income taxes, net............................. 7,442 4,404 2,741
-------- -------- -------
Net cash provided by operating activities......... 21,377 9,128 1,345
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in affiliates................................... (3,718) (428) (372)
Capital expenditures........................................ (23,965) (12,476) (2,720)
Deferred charge expenditures................................ (9,625) (4,505) (3,693)
-------- -------- -------
Net cash used in investing activities............. (37,308) (17,409) (6,785)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................. -- 51,581 --
Proceeds from exercise of stock options..................... 1,760 766 977
Retirement of debt.......................................... (12) (792) (381)
Advances from TWC........................................... 116,019 102,431 66,502
Repayments to TWC........................................... (116,019) (102,431) (66,629)
-------- -------- -------
Net cash provided by financing activities......... 1,748 51,555 469
-------- -------- -------
Effect of exchange rate changes on cash..................... (1,225) 185 (101)
-------- -------- -------
Net (decrease) increase in cash............................. (15,408) 43,459 (5,072)
Cash, beginning of period................................... 44,368 909 5,981
-------- -------- -------
Cash, end of period......................................... $ 28,960 $ 44,368 $ 909
======== ======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Income taxes.............................................. $ 100 $ 976 $ 1,156
Interest.................................................. $ 59 $ 114 $ 20
Non-cash activities:
Impact on equity from tax benefit related to the exercise
of options issued under the company's non-qualified
stock option plan...................................... $ 3,263 $ 1,827 $ 170
======== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-15
<PAGE> 153
WACKENHUT CORRECTIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL CUMULATIVE TOTAL
NUMBER PAID-IN RETAINED TRANSLATION SHAREHOLDER'S
OF SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
--------- ------ ---------- -------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.................... 16,370 $164 $17,720 $ 1,647 $ 196 $ 19,727
Translation adjustment...................... -- -- -- -- (85) (85)
Proceeds from stock option exercises........ 709 7 970 -- -- 977
Tax benefit related to employee stock
options................................... -- -- 170 -- -- 170
Net income......................... -- -- -- 4,440 -- 4,440
------ ---- ------- ------- ------- --------
BALANCE, DECEMBER 31, 1995.................. 17,079 171 18,860 6,087 111 25,229
Translation adjustment...................... -- -- -- -- 305 305
Proceeds from stock offering................ 4,600 46 51,535 -- -- 51,581
Proceeds from stock option exercises........ 259 2 764 -- -- 766
Tax benefit related to employee stock
options................................... -- -- 1,827 -- -- 1,827
Net income......................... -- -- -- 8,261 -- 8,261
------ ---- ------- ------- ------- --------
BALANCE, DECEMBER 29, 1996.................. 21,938 219 72,986 14,348 416 87,969
Translation adjustment...................... -- -- -- -- (2,572) (2,572)
Proceeds from stock option exercises........ 231 3 1,757 -- -- 1,760
Tax benefit related to employee stock
options................................... -- -- 3,263 -- -- 3,263
Net income......................... -- -- -- 11,875 -- 11,875
------ ---- ------- ------- ------- --------
BALANCE DECEMBER 28, 1997................... 22,169 $222 $78,006 $26,223 $(2,156) $102,295
====== ==== ======= ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-16
<PAGE> 154
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR INFORMATION: IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND
DECEMBER 31, 1995
1. GENERAL
Wackenhut Corrections Corporation, a Florida corporation, and subsidiaries
(Company), a majority owned subsidiary of The Wackenhut Corporation (TWC), is a
leading developer and manager of privatized correctional and detention
facilities located in the United States, the United Kingdom and Australia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to the calendar year
end. Fiscal 1997, 1996 and 1995 each included 52 weeks.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Investments in 20 percent to 50 percent owned affiliates
are accounted for under the equity method. All significant intercompany
transactions and balances between the Company and its subsidiaries have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Maintenance and repairs are expensed as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of related assets.
Accelerated methods of depreciation are generally used for income tax purposes.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease.
UNAMORTIZED COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES (GOODWILL)
Goodwill represents the cost of an acquired enterprise in excess of the
fair market value of the net tangible and identifiable intangible assets
acquired. Goodwill is amortized on a straight-line basis over the period which
represents management's estimation of the related benefit to be derived from the
acquired business, not to exceed twenty-five years. Accumulated amortization
totaled approximately $1.1 million and $969,000 at December 28, 1997 and
December 29, 1996, respectively.
DEFERRED CHARGES
Facility start-up costs, which consist of costs of initial employee
training, travel and other direct expenses incurred in connection with the
opening of new facilities, are capitalized and amortized on a straight-line
basis over the lesser of the initial term of the contract plus renewals or five
years.
F-17
<PAGE> 155
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Project development costs consisting of direct and incremental costs paid
to unrelated third parties that can be directly associated with a specific
anticipated contract are deferred until the anticipated contract has been
awarded. At the time the contract is awarded to the Company, the deferred
project development costs are either capitalized as part of property and
equipment or are amortized over five years as project development costs.
Internal costs associated with securing new contracts are expensed as incurred.
Project development costs are charged to general and administrative expenses
when the success of obtaining a new contract is considered doubtful. Accumulated
amortization totaled $7,332,000 and $4,440,000 in Fiscal 1997 and 1996,
respectively.
In April 1997, the Financial Accounting Standards Board issued an Exposure
Draft that proposed the issuance of a Statement of Position (SOP) on Accounting
for the Costs of Start-up Activities. If adopted, this SOP would require the
expensing of start-up costs, defined as pre-opening, pre-operating and
pre-contract type costs, as incurred. Management expects the effects of adoption
would be reported as a cumulative change in accounting principle; thus, any
costs previously capitalized would be written off at the time the SOP is
adopted. If this SOP is adopted in 1998, the Company anticipates a pre-tax
write-off of approximately $18.2 million (or $10.9 million after-tax) to record
the cumulative effect of the change in accounting principle.
REVENUES AND OPERATING PROFIT
Facility management revenues are recognized as services are provided based
on a net rate per day per inmate or on a fixed monthly rate. Project development
and design revenues are recognized as earned on a percentage of completion
basis. Except for the major customers noted in the following table, no single
customer provided more than 10% of consolidated revenues during Fiscal 1997,
1996 and 1995:
<TABLE>
<CAPTION>
CUSTOMER 1997 1996 1995
- -------- ---- ---- ----
<S> <C> <C> <C>
Various agencies of the State of Texas...................... 32% 39% 37%
Louisiana Department of Public Safety and Corrections....... 6 9 11
State of Florida Correctional Privatization Committee....... 13 9 8
New South Wales Department of Corrective Services........... 7 10 13
Queensland Corrective Services Commission................... 7 11 13
</TABLE>
Concentration of credit risk related to accounts receivable is reflective
of the related revenues.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under this method, deferred income taxes are determined on the estimated future
tax effects of differences between the financial reporting and tax basis of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions and benefits are based on changes to the asset or liability from
year to year.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the disclosure of
basic and diluted earnings per share for periods ending after December 15, 1997
and restatement of prior periods to conform with the new disclosure format. The
computation under SFAS 128 differs from the primary and fully diluted earnings
per share computed under APB Opinion No. 15 primarily in the manner in which
potential common stock is treated. Basic earnings per share is computed by
dividing net income by the weighted-average number of common shares outstanding.
In the computation of diluted earnings per share, the weighted-average number of
common shares outstanding is adjusted for the effect of all potential common
stock.
F-18
<PAGE> 156
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents all interest-bearing deposits or
investments with original maturities of three months or less.
FOREIGN CURRENCY TRANSLATION
The Company's foreign operations use the local currency as their functional
currency. Assets and liabilities of the operations are translated at the
exchange rates in effect on the balance sheet date. Income statement items are
translated at the average exchange rates for the year. The impact of currency
fluctuation is included in shareholders' equity as a translation adjustment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable, and
long-term debt approximates fair value.
INTEREST RATE SENSITIVITY
The Company is exposed to market risks arising from changes in interest
rates with respect to a $220 million operating lease facility (Note 7). Monthly
lease payments under this facility are indexed to a variable interest rate.
Management has determined that a 10% change in the current lease rate would have
an immaterial effect on the Company's pre-tax earnings over the next fiscal
year.
STOCK-BASED COMPENSATION PLANS
In 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows either adoption of a fair value
based method of accounting for stock-based compensation or continuation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has chosen to continue to account for
stock-based compensation using the intrinsic value based method prescribed in
APB 25. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the corporation's stock at the
date of the grant over the amount an employee must pay to acquire the stock. Pro
forma disclosures of net income and earnings per share as if the fair value
method had been adopted are presented in Note 11.
LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 121 requires that long-lived assets, including certain identifiable
intangibles, and the goodwill related to those assets, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset in question may not be recoverable. Management has
reviewed the Company's long-lived assets and has determined that there are no
events requiring impairment loss recognition.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" which requires adoption in Fiscal
1998. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in financial statements and
(b) display the accumulated balance of other comprehensive income
F-19
<PAGE> 157
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
separately from retained earnings and additional paid-in capital in the equity
section of statements of financial position. Comprehensive income is defined as
the change in equity during the financial reporting period of a business
enterprise resulting from non-owner sources.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which requires adoption in Fiscal 1998. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments including, among other things, a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at fiscal year end:
<TABLE>
<CAPTION>
YEARS 1997 1996
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land........................................................ -- $ 4,527 $ 1,698
Building and improvements................................... 20-40 34,107 16,430
Equipment................................................... 3-20 2,786 2,677
Furniture and fixtures...................................... 3-20 2,307 1,251
------- -------
43,727 22,056
Less -- accumulated depreciation............................ (4,973) (3,081)
------- -------
$38,754 $18,975
======= =======
</TABLE>
4. DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international operations is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Domestic operations................................... $167,223 $108,245 $72,852
International operations.............................. 39,707 29,539 26,579
-------- -------- -------
Total revenues................................ 206,930 137,784 99,431
Operating Income
Domestic operations................................... 12,388 7,087 4,501
International operations.............................. 4,157 2,644 2,728
-------- -------- -------
Total operating income........................ 16,545 9,731 7,229
Assets
Domestic operations................................... 120,538 96,872 30,641
International operations.............................. 18,665 9,939 8,199
-------- -------- -------
Total assets.................................. $139,203 $106,811 $38,840
======== ======== =======
</TABLE>
The Company's international operations represent its wholly-owned
Australian subsidiaries which are pursuing construction and management contracts
for correctional and detention facilities. Through its wholly-owned subsidiary,
Wackenhut Corrections Corporation Australia Pty. Limited, the Company currently
manages three correctional facilities, four immigration detention centers, and
the State of Victoria's correctional health care services.
The Company's 50% owned United Kingdom joint venture (Premier Prison
Services, Ltd.), accounted for under the equity method, commenced management of
a correctional facility in Fiscal 1994 and two court
F-20
<PAGE> 158
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
escort and transport contracts in Fiscal 1996. Equity in the undistributed
income (loss) for Fiscal 1997, 1996, and 1995 was $1,797,000, $982,000, and
($183,000), respectively.
A summary of financial data for the Company's equity affiliate is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................................................. $51,009 $28,953 $17,705
Operating income (loss)................................... 3,884 1,764 (357)
Net income (loss)......................................... 2,209 1,208 (225)
BALANCE SHEET DATA
Current assets............................................ $14,595 $13,145 $ 1,783
Noncurrent assets......................................... 517 538 509
Current liabilities....................................... 8,115 8,518 3,702
Noncurrent liabilities.................................... 4,029 5,075 --
Stockholders' equity/(deficit)............................ 2,968 90 (1,410)
</TABLE>
The Company provided management services to the U.K. affiliate in Fiscal
1997 and 1996. The management fees for such services totaled $484,000 and
$450,000 for Fiscal 1997 and 1996, respectively.
5. INCOME TAXES
The provision for income taxes in the consolidated statements of income
consists of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal Income Taxes:
Current................................................... $ 175 $ -- $ --
Deferred.................................................. 6,131 3,588 2,497
------ ------ ------
$6,306 $3,588 $2,497
------ ------ ------
State Income Taxes:
Current................................................... $ 300 $ 30 $ 30
Deferred.................................................. 620 488 335
------ ------ ------
920 518 365
Foreign Income Taxes........................................ -- 163 --
------ ------ ------
Total............................................. $7,226 $4,269 $2,862
====== ====== ======
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of revenue and expense for tax and financial reporting purposes.
F-21
<PAGE> 159
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal temporary differences and their tax effects are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortization of deferred charges............................ $ 2,921 $1,561 $1,605
Income of foreign subsidiary................................ 1,681 617 1,062
Accrued liabilities......................................... (1,136)
NSO benefit, booked to equity............................... 3,263 1,827 170
Other, net.................................................. 22 71 (5)
------- ------ ------
$ 6,751 $4,076 $2,832
======= ====== ======
</TABLE>
A reconciliation of the statutory U.S. federal tax rate (35% in 1997, 34%
in 1996 and 1995) and the effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision using statutory federal income tax rate........... $ 6,299 $4,054 $2,521
State income tax............................................ 818 508 354
Effect of foreign operations, net of foreign income tax
provision................................................. -- (264) --
Other, net.................................................. 109 (29) (13)
------- ------ ------
$ 7,226 $4,269 $2,862
======= ====== ======
</TABLE>
The components of the net current deferred income tax liability/(asset) at
fiscal year end are as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Uniforms.................................................... $ 244 $ 160
Accrued vacation............................................ (291) (123)
Deferred charges............................................ 1,630 895
Accrued liabilities......................................... (1,192) (56)
------- ------
$ 391 $ 876
======= ======
</TABLE>
The components of the net non-current deferred income tax liability at
fiscal year end are as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred charges............................................ $ 4,909 $2,724
Income of foreign subsidiaries and affiliates............... 5,284 2,911
Other, net.................................................. (94) (201)
------- ------
$10,099 $5,434
======= ======
</TABLE>
As of December 28, 1997, the Company had federal and state net operating
loss carry forwards of approximately $4,616,000, and $4,051,000, respectively.
The federal net operating losses will expire between 2010 and 2011, while
certain state net operating losses will expire between 2000 and 2011.
Utilization of net operating losses in future years may be subject to annual
limitations due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. Such limitations, if any, are
not expected to impact the ultimate utilization of the carryforwards.
The Company's loss carryforwards are attributable to compensation
deductions on its income tax return which were not recognized for financial
accounting purposes. The exercise of non-qualified stock options which have been
granted under the Company's stock option plans give rise to compensation which
is includable in the taxable income of the applicable employees and deducted by
the Company for federal and
F-22
<PAGE> 160
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
state income tax purposes. Such compensation results from increases in the fair
market value of the Company's common stock subsequent to the date of grant. In
accordance with Accounting Principles Board Opinion No. 25, such compensation is
not recognized as an expense for financial accounting purposes and related tax
benefits are credited directly to additional paid-in-capital. In the years ended
December 28, 1997 and December 29, 1996, such deductions resulted in significant
federal and state deductions which may be carried forward. Utilization of such
deductions will increase additional paid-in-capital.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
----- -----
(IN THOUSANDS)
<S> <C> <C>
Note payable for property -- 8%............................. $225 $237
Less -- current portion..................................... 12 12
---- ----
$213 $225
==== ====
</TABLE>
In June 1994, the Company signed an unsecured note payable in the amount of
$262,000 for the purchase of land for the construction of a correctional
facility. The note bears interest at 8.0% and matures in July 2009. The Company
makes monthly principal and interest payments of $2,504.
In June 1997, the Company entered into a $30,000,000 multi-currency
revolving credit facility with a syndicate of banks, the proceeds of which may
be used for working capital, acquisitions and general corporate purposes. The
credit facility also includes a letter of credit of up to $5,000,000 for the
issuance of standby letters of credit. Indebtedness under this facility will
bear interest at the alternate base rate (defined as the higher of prime rate or
federal funds plus 1/2 of 1%) or LIBOR plus 150 to 250 basis points, depending
upon fixed charge coverage ratios. The facility requires the Company to, among
other things, maintain a maximum leverage ratio; minimum fixed charge coverage
ratio; and a minimum tangible net worth. The facility also limits certain
payments and distributions. As of December 28, 1997, no amounts were outstanding
under this facility. However, at December 28, 1997, the Company had four standby
letters of credit outstanding with a bank in an aggregate amount of
approximately $222,000.
Aggregate annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
ANNUAL
FISCAL YEAR MATURITY
- ----------- --------------
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 12
1999........................................................ 13
2000........................................................ 15
2001........................................................ 16
2002........................................................ 17
Thereafter.................................................. 152
----
$225
====
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The nature of the Company's business results in claims for damages arising
from the conduct of its employees or others. In the opinion of management, there
are no pending legal proceedings that would have a material effect on the
consolidated financial statements of the Company.
F-23
<PAGE> 161
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases correctional facility office space, computers and
vehicles under non-cancelable operating leases expiring between 1998 and 2002.
The future minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ANNUAL RENTAL
- ----------- --------------
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 5,544
1999........................................................ 5,307
2000........................................................ 4,820
2001........................................................ 4,517
2002........................................................ 4,093
-------
$24,281
</TABLE>
In December 1997, the Company also entered into an $220 million operating
lease facility that has been established to acquire and develop new correctional
institutions used in its business. As a condition of this facility, the Company
unconditionally agreed to guarantee certain obligations of First Security Bank,
National Association, a party to the aforementioned operating lease facility. As
of December 28, 1997, approximately $69 million of properties were under
development.
Rent expense was approximately $3,351,000, $2,143,000 and $1,512,000 for
Fiscal 1997, 1996, and 1995 respectively.
The Company contracted with third parties to provide meals for inmates at
two correctional facilities operated by the Company under agreements expiring in
1995 and 1996. Food service expense related to these agreements was $53,000 and
$580,000 in Fiscal 1996 and 1995 respectively.
8. COMMON AND PREFERRED STOCK
On April 25, 1996, the Company's Board of Directors declared a two-for-one
split effected in the form of a 100% common stock dividend paid on June 4, 1996.
Except as otherwise noted, all share data relating to the Company's common stock
has been restated to reflect the two-for-one stock split.
In April 1994, the Company's Board of Directors authorized 10,000,000
shares of "blank check" preferred stock. The Board of Directors is authorized to
determine the rights and privileges of any future issuance of preferred stock
such as voting and dividend rights, liquidation privileges, redemption rights
and conversion privileges.
The Company follows the practice of recording amounts received upon the
exercise of stock options by crediting common stock and additional
paid-in-capital. No charges are reflected in the consolidated statements of
income as a result of the grant of stock options, since all grants under the
Company's stock option plans (Note 11) have been made at not more than the fair
value at the date of grant. The Company realizes an income tax benefit from the
exercise of certain stock options of the Company's non-qualified stock options.
Since no compensation cost resulted from the grant of stock options in Fiscal
1997 and 1996, this benefit results in a decrease in current income taxes
payable and an increase in additional paid-in capital.
F-24
<PAGE> 162
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share
in accordance with SFAS 128 and the effects on income and the weighted average
number of shares of potential dilutive common stock. The number of shares used
in the calculations for 1996 and 1995 reflect a 100% common stock dividend paid
on June 4, 1996.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ---------------
INCOME SHARES INCOME SHARES INCOME SHARES
------- ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME................................. $11,875 $8,261 $4,440
BASIC EPS:
Income available to common
shareholders.......................... $11,875 22,015 $8,261 21,361 $4,440 16,850
Per share amount......................... 0.54 0.39 0.26
EFFECT OF DILUTIVE SECURITIES:............. $ (0.02) 682 $(0.02) 767 $(0.01) 858
DILUTED EPS:
Income available to common
shareholders.......................... $11,875 22,697 $8,261 22,128 $4,440 17,708
Per share amount......................... 0.52 0.37 0.25
</TABLE>
10. RELATED PARTY TRANSACTIONS
Related party transactions occur in the normal course of business between
the Company and TWC. Such transactions include the purchase of goods and
services and corporate costs for management support, office space, insurance and
interest expense.
The Company incurred the following expenses related to transactions with
TWC in the following years:
<TABLE>
<CAPTION>
DESCRIPTION 1997 1996 1995
----------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Food services............................................... $ 461 $ 450 $3,903
General and administrative expenses......................... 1,200 1,100 1,093
Casualty insurance premiums................................. 4,957 3,306 2,169
Interest (income) charges................................... 10 40 (172)
Rent........................................................ 285 269 106
------ ------ ------
$6,913 $5,165 $7,099
====== ====== ======
</TABLE>
Food services represent charges for meals for inmates at certain
correctional facilities operated by the Company. In third quarter 1995, the
Company began to provide its own in-house food services at all but one of its
facilities. General and administrative expenses represent charges for management
and support services. Beginning in Fiscal 1994, TWC provided various general and
administrative services to the Company under a Services Agreement. The Agreement
expired December 31, 1997 and provides for one year renewal periods at the
Company's option. Expenses under the Agreement for Fiscal 1997, Fiscal 1996 and
Fiscal 1995 were $1,200,000, $1,100,000 and $1,093,000, respectively. Casualty
insurance premiums related to workers' compensation, general liability and
automobile insurance coverage are provided through an insurance subsidiary of
TWC. In addition, the Company is charged or charges interest on intercompany
indebtedness at rates which reflect TWC's average interest costs on long-term
debt, exclusive of mortgage financing. For purposes of computing interest
expense (income) is calculated based on the average intercompany indebtedness.
The Company's corporate offices are located in TWC's corporate office building
for which it is allocated rent based upon space occupied under separate lease
agreements.
Management believes that the difference between these expenses and those
that would have been incurred on a stand alone basis is not material.
F-25
<PAGE> 163
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTIONS
The Company has three stock option plans, the Wackenhut Corrections
Corporation 1994 Stock Option Plan (First Plan), the Wackenhut Corrections
Corporation Stock Option Plan (Second Plan) and the 1995 Non-Employee Director
Stock Option Plan (Third Plan).
Under the First Plan, the Company may grant up to 897,600 shares of common
stock to key employees and consultants. All options granted under this plan are
exercisable at the fair market value of the common stock at date of grant, vest
100% after a minimum of six months and no later than ten years after the date of
grant.
Under the Second Plan, the Company may grant options to key employees for
up to 1,500,000 shares of common stock. Under the terms of this plan, the
exercise price per share and vesting period is determined at the sole discretion
of the Board of Directors. All options that have been granted under this plan
are exercisable at the fair market value of the common stock at date of grant.
Generally, the options vest and become exercisable ratably over a five-year
period, beginning immediately on the date of grant. However, the Board of
Directors has exercised its discretion and has granted options that vest 100%
after a minimum of six months. All options under the Second Plan expire no later
than ten years after the date of grant.
Under the Third Plan, the Company may grant up to 60,000 shares of common
stock to non-employee directors of the Company. Under the terms of this plan,
options are granted at the fair market value of the common stock at date of
grant, become 100% exercisable immediately, and expire ten years after the date
of grant.
A summary of the status of the Company's three stock option plans as of
December 31, 1995, December 29, 1996, and December 28, 1997, and changes during
the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- --------------------- ---------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year..... 987,534 $ 7.13 1,210,132 $ 5.58 1,595,726 $ 2.32
Granted.............................. 156,500 21.03 60,000 22.63 343,000 11.90
Exercised............................ 230,550 7.16 258,598 2.96 709,394 1.38
Forfeited/Canceled................... 22,000 11.88 24,000 12.77 19,200 2.32
--------- ---------
Options outstanding at end of year... 891,484 9.44 987,534 7.13 1,210,132 5.58
======= ========= =========
Options exercisable at year end...... 629,084 -- 744,734 -- 939,732 --
======= ========= =========
</TABLE>
The following table summarizes information about the stock options
outstanding at December 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------
NUMBER WTD. AVG. WTD. AVG. NUMBER WTD. AVG.
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/28/97 CONTRACTUAL LIFE PRICE AT 12/28/97 PRICE
- ------------------------ ------------ ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.20-$ 3.75........................... 496,984 6.3 $ 3.54 496,984 $ 3.54
$11.88-$13.75........................... 189,600 7.9 11.91 77,600 11.97
$16.63-$16.88........................... 15,000 9.2 16.77 7,000 16.86
$20.25-$29.56........................... 189,900 8.9 21.84 47,500 22.12
------- -------
891,484 629,084
======= =======
</TABLE>
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined based on the fair value at date of
F-26
<PAGE> 164
WACKENHUT CORRECTIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant in accordance with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
PRO FORMA DISCLOSURES 1997 1996
- --------------------- ------------- -------------
<S> <C> <C>
Pro forma net earnings.................................. $11,197 $7,750
Pro forma basic net earnings per share.................. 0.51 0.37
Pro forma diluted net earnings per share................ 0.49 0.35
Pro forma weighted average fair value of options $11.07 $11.80
granted...............................................
Risk free interest rates................................ 5.52%-5.70% 6.25%-6.55%
Expected lives.......................................... 4-8 years 4-8 years
Expected volatility..................................... 48% 46%
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the Company and its subsidiaries for
the fiscal years ended December 28, 1997 and December 29, 1996 is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Revenues................................................ $41,227 $51,509 $55,104 $59,090
Operating income........................................ 3,272 3,789 4,801 4,683
Net income.............................................. 2,581 2,723 3,188 3,383
Basic earnings per share................................ 0.12 0.12 0.14 0.15
Diluted earnings per share.............................. 0.11 0.12 0.14 0.15
1996
Revenues................................................ $29,433 $33,416 $36,785 $38,149
Operating income........................................ 1,719 1,913 2,939 3,160
Net income.............................................. 1,468 1,814 2,411 2,568
Basic earnings per share................................ 0.07 0.08 0.11 0.12
Diluted earnings per share.............................. 0.07 0.08 0.11 0.11
</TABLE>
F-27
<PAGE> 165
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................ 1
Risk Factors.............................. 17
The Company............................... 33
Use of Proceeds........................... 37
Distributions............................. 38
Capitalization............................ 41
Summary Selected Financial Information.... 42
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 44
The Privatized Corrections Industry....... 47
Wackenhut Corrections Corporation......... 49
The Facilities............................ 57
The Formation Transactions................ 64
Relationship Between Wackenhut Corrections
and the Company After the Formation
Transactions............................ 67
Policies and Objectives with Respect to
Certain Activities...................... 69
Operating Partnership Agreement........... 72
Leases.................................... 74
Subleases................................. 79
Management................................ 82
Certain Relationships and Transactions.... 90
Principal Shareholders of the Company..... 91
Description of Shares of Beneficial
Interest................................ 92
Certain Provisions of Maryland Law and the
Company's Declaration of Trust and
Bylaws. ................................ 96
Material Federal Income Tax
Considerations.......................... 101
ERISA Considerations...................... 117
Underwriting.............................. 120
Experts................................... 121
Legal Matters............................. 121
Available Information..................... 122
Glossary.................................. 123
Index to Financial Statements............. F-1
</TABLE>
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the securities offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
6,200,000 SHARES
CORRECTIONAL
PROPERTIES TRUST
COMMON SHARES
OF BENEFICIAL INTEREST
CP TRUST LOGO
------------------
PROSPECTUS
APRIL , 1998
------------------
SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
SBC WARBURG DILLON READ INC.
GENESIS MERCHANT GROUP
SECURITIES
SUNTRUST EQUITABLE SECURITIES
======================================================
<PAGE> 166
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are certain registration, filing and listing fees, as well
as an estimate of the other fees and expenses to be incurred in connection with
the issuance and distribution of the Common Shares offered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... 45,000
NASD Filing Fee............................................. 35,000
New York Stock Exchange Original Listing Fee................ 100,000
Accounting Fees and Expenses................................ 200,000
Attorneys' Fees and Expenses................................ 400,000
Financial Advisory Fee...................................... 930,000
Printing and Engraving Expenses............................. 300,000
Transfer Agent's Fees....................................... 25,000
Trustees' and Officers' Insurance........................... 140,000
Miscellaneous Expenses...................................... 255,000
---------
Total............................................. 2,430,000
=========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
The Company was formed as a Maryland real estate investment trust on
February 18, 1998, with one shareholder being issued 1,000 Common Shares in
consideration of $2,500. Such Common Shares will be redeemed in connection with
the Offering.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
All of the Common Shares issued by the Company discussed in Item 32 above
were issued pursuant to an exemption from the registration requirements of the
Securities Act contained in Section 4(2) of the Securities Act. The shares will
be redeemed upon the consummation of the Offering.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Declaration of Trust of the Company provides for indemnification of
trustees and officers of the Company to the full extent permitted by the laws of
the State of Maryland.
Section 8-301 of the Corporation and Associations Article of the Annotated
Code of Maryland permits a Maryland real estate investment trust to indemnify
and advance expenses to trustees, officers, employees and agents of the real
estate investment trust to the same extent as is permitted for directors,
officers, employees and agents of a Maryland corporation under Section 2-418 of
the MGCL.
Section 2-418 of the MGCL generally permits indemnification of any trustee
made a party to any proceedings by reason of service as a trustee unless it is
established that (i) the act or omission of such person was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; or (ii) such person actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, such person had reasonable cause to
believe that the act or omission was unlawful. The indemnity may include
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by the trustee in connection with the proceeding; but, if the
proceeding is one by, or in the right of, the corporation, indemnification is
not permitted with respect to any proceeding in which the trustee has been
adjudged to be liable to the corporation, or if the proceeding is one charging
improper personal benefit to the trustee, whether or not involving action in the
trustee's official capacity, indemnification of the trustee is not permitted if
the trustee was adjudged to be liable on the basis that personal benefit was
improperly received. The termination of any proceeding by conviction or upon a
plea
II-1
<PAGE> 167
of nolo contendere or its equivalent, or an entry of an order of probation prior
to judgment, creates a rebuttable presumption that the trustee did not meet the
requisite standard of conduct required for permitted indemnification. The
termination of any proceeding by judgment, order or settlement, however, does
not create a presumption that the trustee failed to meet the requisite standard
of conduct for permitted indemnification.
Indemnification under the provisions of the MGCL is not deemed exclusive of
any other rights, by indemnification or otherwise, to which a trustee may be
entitled under the declaration of trust, bylaws, any resolution of shareholders
or trustees, any agreement or otherwise.
The statute permits a Maryland real estate investment trust to indemnify
its officers, employees and agents to the same extent as its trustees. The
Company's Declaration of Trust and the Bylaws each mandates indemnification and
the advancement of expenses to the Company's trustees and officers to the
fullest extent permitted by law and permits indemnification and advancement of
expenses to employees and agents of the Company to the extent permitted by the
Board of Trustees.
The Company will enter into indemnification agreements (the
"Indemnification Agreements") with its trustees and certain of its executive
officers. The Indemnification Agreements are intended to provide indemnification
to the maximum extent allowable by or not in violation of any law of the State
of Maryland. Each Indemnification Agreement will provide that the Company shall
indemnify a trustee or executive officer who is a party to the agreement (the
"Indemnitee") if he or she was or is a party to or otherwise involved in any
proceeding (other than, generally, a derivative proceeding in which the
Indemnitee will be adjudged to be liable to the Company for gross negligence or
intentional misconduct) by reason of the fact that he or she was or is a trustee
or officer of the Company, against losses incurred in connection with the
defense or settlement of such proceeding. The indemnification provided under
each Indemnification Agreement is limited to instances where the act or omission
giving rise to the claim for which indemnification is sought was not otherwise
indemnified or insured against by the Company, was not established to have been
committed in bad faith (i.e., other than in good faith and in a manner in which
the Indemnitee reasonably believed to be in, or not opposed to, the best
interests of the Company), or the result of active and deliberate dishonesty,
material to the cause of action, with actual dishonest purpose and intent, did
not involve receipt of improper personal benefit, generally did not result in a
judgment of liability to the Company for gross negligence or intentional
misconduct in a proceeding by or in the right of the Company, did not involve an
accounting of profits pursuant to Section 16(b) of the Exchange Act and, with
respect to any criminal proceeding, the Indemnitee had no reasonable cause to
believe his or her conduct was unlawful.
The Company will obtain trustees and officers liability insurance.
ITEM 35. TREATMENT OF PROCEEDS FROM SECURITIES BEING REGISTERED
Not applicable.
II-2
<PAGE> 168
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements Included in this Registration Statement, including
the Prospectus:
The financial statements filed with this Registration Statement are
itemized on page F-1 of the Prospectus which forms a part of this Registration
Statement.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement**
2 -- Form of Agreement of Sale and Purchase between Wackenhut
Corrections Corporation and CPT Operating Partnership L.P.*
3.1 -- Declaration of Trust of Correctional Properties Trust*
3.2 -- Form of Articles of Amendment and Restatement of Declaration
of Trust of Correctional Properties Trust*
3.3 -- Bylaws of Correctional Properties Trust*
3.4 -- Form of Amended and Restated Bylaws of Correctional
Properties Trust*
3.5 -- Specimen of certificate representing the Common Shares*
4.1 -- Provisions defining the rights of shareholders are found in
the Form of Amended and Restated Declaration of Trust and
the Form of Amended and Restated Bylaws, respectively, of
Correctional Properties Trust (included as Exhibits 3.2 and
3.4 to the Registration Statement)*
4.2 -- Commitment for Arrangement of Bank Credit Facility and
Financing with Summary of Terms and Conditions from
NationsBank, N.A. and accepted by Correctional Properties
Trust
4.3 -- Commitment for Arrangement of Interim Credit Facility and
Bridge Financing with Summary of Terms and Conditions from
NationsBank, N.A. and accepted by Correctional Properties
Trust
5.1 -- Opinion of Venable, Baetjer and Howard, LLP., regarding the
validity of the Common Shares
8.1 -- Opinion of Akerman, Senterfitt & Eidson, P.A., regarding
certain federal income tax matters
10.1 -- Agreement of Limited Partnership of CPT Operating Limited
Partnership L.P.*
10.2 -- Form of Master Agreement to Lease between CPT Operating
Partnership L.P. and Wackenhut Corrections Corporation.*
10.3 -- Form of Lease Agreement between CPT Operating Partnership
L.P. and Wackenhut Corrections Corporation*
10.4 -- Form Right to Purchase Agreement between Wackenhut
Corrections Corporation and CPT Operating Partnership L.P.*
10.5 -- Form of Option Agreement between Wackenhut Corrections
Corporation and CPT Operating Partnership L.P.*
10.6 -- Form of Trustee and Officer Indemnification Agreement
between Correctional Properties Trust and its trustees and
officers*
10.7 -- Form of Correctional Properties Trust 1998 Employee Share
Incentive Plan
10.8 -- Form of Correctional Properties Trust 1998 Non-Employee
Trustees' Share Option Plan
21 -- List of Subsidiaries of Correctional Properties Trust
23.1 -- Consent of Venable, Baetjer and Howard, LLP. (included in
Exhibit 5.1)
23.2 -- Consent of Akerman, Senterfitt & Eidson, P.A. (included in
Exhibit 8.1)
23.3 -- Consent of Arthur Andersen LLP
23.4 -- Consent of George R. Wackenhut to Become a Trustee*
23.5 -- Consent of Richard R. Wackenhut to Become a Trustee*
</TABLE>
II-3
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
23.6 -- Consent of Anthony D. Travisono to Become a Trustee*
23.7 -- Consent of Clarence E. Anthony to Become a Trustee*
23.8 -- Consent of James D. Motta to Become a Trustee*
23.9 -- Consent of William M. Murphy to Become a Trustee*
23.10 -- Consent of Robert R. Veach, Jr. to Become a Trustee*
24 -- Powers of Attorney*
</TABLE>
- ---------------
* Previously filed
** To be filed by Amendment
ITEM 37. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the Common Shares, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A under the Securities
Act and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement on
Form S-11 to be signed on its behalf by the undersigned, thereunto duly
approved, in the City of Palm Beach Gardens, State of Florida, on the day of
April 8, 1998.
CORRECTIONAL PROPERTIES TRUST
By: /s/ CHARLES R. JONES
------------------------------------
Charles R. Jones
President, Chief Executive Officer
and Trustee
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement on Form S-11 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board April 8, 1998
- -----------------------------------------------------
Dr. George C. Zoley
/s/ CHARLES R. JONES President and Chief Executive April 8, 1998
- ----------------------------------------------------- Officer and Trustee (principal
Charles R. Jones executive officer)
* Vice President and Chief April 8, 1998
- ----------------------------------------------------- Financial Officer (principal
Patrick T. Hogan financial and accounting
officer)
*By: /s/ CHARLES R. JONES
------------------------------------------------
Charles R. Jones
Attorney-in-fact
</TABLE>
II-5
<PAGE> 171
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Wackenhut Corrections Corporation certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this Amendment No. 2 to Registration Statement on Form S-3 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Palm Beach Gardens, State of Florida, on the 8th day of April, 1998.
WACKENHUT CORRECTIONS CORPORATION
By: /s/ JOHN G. O'ROURKE
------------------------------------
John G. O'Rourke
Senior Vice President -- Finance,
Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the 8th day of April, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Vice Chairman of the Board and Chief
- --------------------------------------------- Executive
George C. Zoley Officer (principal executive officer)
/s/ JOHN G. O'ROURKE Senior Vice President -- Finance, Treasurer
- --------------------------------------------- and
John G. O'Rourke Chief Financial Officer (principal
financial officer)
* Controller, Chief Accounting Officer and
- --------------------------------------------- Assistant Treasurer (principal accounting
David N.T. Watson officer)
* Director
- ---------------------------------------------
George R. Wackenhut
* Director
- ---------------------------------------------
Richard R. Wackenhut
* Director
- ---------------------------------------------
Norman A. Carlson
* Director
- ---------------------------------------------
Benjamin R. Civiletti
* Director
- ---------------------------------------------
Manuel J. Justiz
* Director
- ---------------------------------------------
John F. Ruffle
*By: /s/ JOHN G. O'ROURKE
- ---------------------------------------------
John G. O'Rourke
Attorney-in-fact
</TABLE>
II-6
<PAGE> 172
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<C> <C> <S> <C>
1 -- Form of Underwriting Agreement**............................
2 -- Form of Agreement of Sale and Purchase between Wackenhut
Corrections Corporation and CPT Operating Partnership
L.P.*.......................................................
3.1 -- Declaration of Trust of Correctional Properties Trust*......
3.2 -- Form of Articles of Amendment and Restatement of Declaration
of Trust of Correctional Properties Trust*..................
3.3 -- Bylaws of Correctional Properties Trust*....................
3.4 -- Form of Amended and Restated Bylaws of Correctional
Properties Trust*...........................................
3.5 -- Specimen of certificate representing the Common Shares*.....
4.1 -- Provisions defining the rights of shareholders are found in
the Form of Amended and Restated Declaration of Trust and
the Form of Amended and Restated Bylaws, respectively, of
Correctional Properties Trust (included as Exhibits 3.2 and
3.4 to the Registration Statement)*.........................
4.2 -- Commitment for Arrangement of Bank Credit Facility and
Financing with Summary of Terms and Conditions from
NationsBank, N.A. and accepted by Correctional Properties
Trust.......................................................
4.3 -- Commitment for Arrangement of Interim Credit Facility and
Bridge Financing with Summary of Terms and Conditions from
NationsBank, N.A. and accepted by Correctional Properties
Trust.......................................................
5.1 -- Opinion of Venable, Baetjer and Howard, LLP., regarding the
validity of the Common Shares...............................
8.1 -- Opinion of Akerman, Senterfitt & Eidson, P.A., regarding
certain federal income tax matters..........................
10.1 -- Agreement of Limited Partnership of Correctional Properties
Trust Operating Limited Partnership L.P.*...................
10.2 -- Form of Master Agreement to Lease between CPT Operating
Partnership L.P. and Wackenhut Corrections Corporation*.....
10.3 -- Form of Lease Agreement between CPT Operating Partnership
L.P. and Wackenhut Corrections Corporation*.................
10.4 -- Form Right to Purchase Agreement between Wackenhut
Corrections Corporation and CPT Operating Partnership
L.P.*.......................................................
10.5 -- Form of Option Agreement between Wackenhut Corrections
Corporation and CPT Operating Partnership L.P.*.............
10.6 -- Form of Trustee and Officer Indemnification Agreement
between Correctional Properties Trust and its trustees and
officers*...................................................
10.7 -- Form of Correctional Properties Trust 1998 Employee Share
Incentive Plan..............................................
10.8 -- Form of Correctional Properties Trust 1998 Non-Employee
Trustees' Share Option Plan.................................
21 -- List of Subsidiaries of Correctional Properties Trust.......
23.1 -- Consent of Venable, Baetjer and Howard, LLP. (included in
Exhibit 5.1)................................................
23.2 -- Consent of Akerman, Senterfitt & Eidson, P.A. (included in
Exhibit 8.1)................................................
23.3 -- Consent of Arthur Andersen LLP..............................
23.4 -- Consent of George R. Wackenhut to Become a Trustee*.........
23.5 -- Consent of Richard R. Wackenhut to Become a Trustee*........
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<C> <C> <S> <C>
23.6 -- Consent of Anthony D. Travisono to Become a Trustee*........
23.7 -- Consent of Clarence E. Anthony to Become a Trustee*.........
23.8 -- Consent of James D. Motta to Become a Trustee*..............
23.9 -- Consent of William M. Murphy to Become a Trustee*...........
23.10 -- Consent of Robert R. Veach, Jr. to Become a Trustee*........
24 -- Powers of Attorney*.........................................
</TABLE>
- ---------------
* Previously Filed
** To be filed by Amendment
<PAGE> 1
Exhibit 4.2
NationsBank Tel 305 533-2418
Corporate Finance Fax 305 533-2437
100 Southeast 2nd Street
14th Floor, FL7-950-14-02
Miami, FL 33131
NATIONSBANK
April 1, 1998
Mr. Patrick Hogan
Chief Financial Officer
Correctional Properties Trust
4200 Wackenhut Drive
Palm Beach Gardens, Florida 33410
Re: $ 100 Million Senior Credit Facility
Gentlemen:
NationsBank, N.A. ("NationsBank") is pleased to offer to be the Administrative
Agent (in such capacity, the "Agent") for a $100,000,000 Senior Credit Facility
to Correctional Properties Trust (the "Borrower") and to commitment to
underwrite the entire amount of the Senior Credit Facility, upon and subject to
the terms and conditions of this letter and the Summary of Terms and Conditions
attached hereto as Annex I (the "Term Sheet"). All capitalized terms used and
not otherwise defined herein shall have the meanings set forth in the Term
Sheet. NationsBanc Montgomery Securities LLC ("NMS") is pleased to advise you of
its commitment, as Arranger for the Senior Credit Facility, to form a syndicate
of financial institutions (the "Lenders") reasonably acceptable to you for the
Senior Credit Facility.
The commitments of NationsBank and NMS hereunder are subject to the satisfaction
of each of the following conditions precedent in a manner acceptable to
NationsBank and NMS in their sole discretion:
(a) each of the terms and conditions set forth herein;
(b) each of the terms and conditions set forth in the Term Sheet;
(c) execution of a fee letter among the Borrower, NationsBank and NMS
prior to or concurrently with the acceptance of this letter by the Borrower;
(d) the negotiation, execution and delivery of definitive documentation
with respect to the Senior Credit Facility consistent with the Term Sheet and
otherwise satisfactory to NationsBank and NMS; and
(e) there not having occurred and being continuing since the date
hereof a material adverse change in the market for syndicated bank credit
facilities or a material disruption of, or a material adverse change in,
financial, banking or capital market conditions, in each case as determined by
NationsBank and NMS in their sole discretion.
NationsBank will act as Agent for the Senior Credit Facility and NMS will act as
Arranger for the Senior Credit Facility. No additional agents will be appointed
without the prior approval of NationsBank and NMS.
Member FDIC
<PAGE> 2
CORRECTIONAL PROPERTIES TRUST
COMMITMENT LETTER
PAGE 2
Furthermore, the commitments of NationsBank and NMS hereunder are based upon the
financial and other information regarding the Borrower and its subsidiaries
previously provided to NationsBank and NMS and are subject to the condition,
among others, that there shall not have occurred after the date of such
information, in the opinion of NationsBank and NMS, any material adverse change
in the business, assets, liabilities (actual or contingent), operations,
condition (financial or otherwise) or prospects of the Borrower and its
subsidiaries taken as a whole. If the continuing review by NationsBank and NMS
of the Borrower discloses information relating to conditions or events not
previously disclosed to NationsBank and NMS or relating to new information or
additional developments concerning conditions or events previously disclosed to
NationsBank and NMS which NationsBank and NMS in their sole discretion believe
may have a material adverse effect on the condition (financial or otherwise),
assets, properties, business, operations or prospects of the Borrower and its
subsidiaries taken as a whole, NationsBank and NMS may, in their sole
discretion, suggest alternative financing amounts or structures that ensure
adequate protection for the Lenders or decline to participate in the Senior
Credit Facility.
You agree to actively assist NationsBank and NMS in achieving a syndication of
the Senior Credit Facility that is satisfactory to NationsBank, NMS and you. In
the event that such syndication can not be achieved in a manner satisfactory to
NationsBank and NMS under the structure outlined in the Term Sheet you agree to
cooperate with NationsBank and NMS in developing an alternative structure that
will permit a satisfactory syndication of the Senior Credit Facility.
Syndication of the Senior Credit Facility will be accomplished by a variety of
means, including direct contact during the syndication between senior management
and advisors of the Borrower and the proposed Lenders. To assist NationsBank and
NMS in the syndication efforts, you hereby agree to (a) provide and cause your
advisors to provide NationsBank and NMS and the other Lenders upon request with
all information reasonably deemed necessary by NationsBank and NMS to complete
syndication, (b) assist NationsBank and NMS upon their reasonable request in the
preparation of an Offering Memorandum to be used in connection with the
syndication of the Senior Credit Facility and (c) otherwise assist NationsBank
and NMS in their syndication efforts, including by making available officers and
advisors of the Borrower and its subsidiaries from time to time to attend and
make presentations regarding the business and prospects of the Borrower and its
subsidiaries, as appropriate, at a meeting or meetings of prospective Lenders.
You further agree to refrain from engaging in any additional financings for the
Borrower and its subsidiaries during such syndication process unless otherwise
agreed to by NationsBank and NMS. Subject to the aforementioned conditions, and
each of the terms and conditions set forth in the Term Sheet, NationsBank and
NMS will use its best efforts to close the Senior Credit Facility no later than
120 days from the execution of the Initial Public Offering of Correctional
Properties Trust.
It is understood and agreed that NationsBank and NMS, after consultation with
you, will manage and control all aspects of the syndication, including decisions
as to the selection of proposed Lenders and any titles offered to proposed
Lenders, when commitments will be accepted and the final allocations of the
commitments among the Lenders. It is understood that no Lender participating in
the Senior Credit Facility will receive compensation from you outside the terms
contained herein and in the Term Sheet in order to obtain its commitment. It is
also understood and agreed that the amount and distribution of the fees among
the Lenders will be at the sole discretion of NationsBank and NMS and that any
syndication prior to execution of definitive documentation will reduce the
commitment of NationsBank.
You hereby represent, warrant and covenant that (i) all information, other than
the Projections (as defined below), which has been or is hereafter made
available to NationsBank and NMS or the Lenders by you or any of your
representatives in connection with the
<PAGE> 3
CORRECTIONAL PROPERTIES TRUST
COMMITMENT LETTER
PAGE 3
transactions contemplated hereby ("Information") is and will be complete and
correct in all material respects and does not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements contained therein not misleading and (ii) all financial
projections concerning the Borrower that have been or are hereafter made
available to NationsBank and NMS or the Lenders by you or any of your
representatives (the "Projections") have been or will be prepared in good faith
based upon reasonable assumptions. You agree to furnish us with such Information
and Projections as we may reasonably request and to supplement the Information
and the Projections from time to time until the closing date for the Senior
Credit Facility so that the representation and warranty in the preceding
sentence is correct on such date. In arranging and syndicating the Senior Credit
Facility, NationsBank and NMS will be using and relying on the Information and
the Projections without independent verification thereof.
By acceptance of this offer, the Borrower agrees to pay all reasonable
out-of-pocket fees and expenses (including reasonable attorneys' fees and
expenses and expenses of due diligence) incurred before or after the date hereof
by the Agent or NMS in connection with the Senior Credit Facility and the
syndication thereof, regardless of whether or not the Senior Credit Facility are
closed. Total legal fees (excluding expense and disbursements) will be limited
to a maximum of $60,000, excluding legal fees in connection with obtaining liens
on any properties or assignments of leases, or any other issues relating to any
specific property, or any changes to the transaction after the closing date of
the transaction referred to in the Term Sheet.
In the event that NationsBank or NMS becomes involved in any capacity in any
action, proceeding or investigation in connection with any matter contemplated
by this letter, the Borrower will reimburse NationsBank and NMS for their legal
and other expenses (including the cost of any investigation and preparation) as
they are incurred by NationsBank or NMS. The Borrower also agrees to indemnify
and hold harmless NationsBank, NMS and their affiliates and their respective
directors, officers, employees and agents (the "Indemnified Parties") from and
against any and all losses, claims, damages and liabilities, joint or several,
related to or arising out of any matters contemplated by this letter, unless and
only to the extent that it shall be finally judicially determined that such
losses, claims, damages or liabilities resulted primarily from the gross
negligence or willful misconduct of NationsBank or NMS.
The provisions of the immediately preceding two paragraphs shall remain in full
force and effect regardless of whether definitive financing documentation for
the Senior Credit Facility shall be executed and delivered and notwithstanding
the termination of this letter or the commitments of NationsBank and NMS
hereunder.
Neither this offer nor the undertaking and commitment contained herein may be
disclosed to or relied upon by any other person or entity other than your
accountants, attorneys and other advisors, without the prior written consent of
NationsBank and NMS, except that following your acceptance hereof you may make
public disclosure hereof as required by law.
As described herein and in the Term Sheet, NMS will act as Arranger and
Documentation Agent for the Senior Credit Facility. NationsBank reserves the
right to allocate, in whole or in part, to NMS certain fees payable to
NationsBank in such manner as NationsBank and NMS agree in their sole
discretion. You acknowledge and agree that NationsBank may share with any of its
affiliates (including specifically NMS) any information relating to the Senior
Credit Facility, the Borrower and its subsidiaries and affiliates.
<PAGE> 4
CORRECTIONAL PROPERTIES TRUST
COMMITMENT LETTER
PAGE 4
This letter shall be governed by the laws of the State of Florida without regard
to its principles of conflicts of laws. This letter may be modified or amended
only in writing. This letter is not assignable by the Borrower without the prior
written consent of NationsBank and NMS. This letter supersedes and replaces any
and all proposals or commitment letters previously delivered by NationsBank or
NMS to the Borrower relating to the Senior Credit Facility.
This offer will expire at 12:00 noon time on April 7, 1998 unless the Borrower
executes this letter and returns it to the Agent (together with the Fee Letter
and the non-refundable fee described therein) prior to that time (which may be
by facsimile transmission), whereupon this letter shall become a binding
agreement. Thereafter, this undertaking and commitment will expire at 12:00 noon
time on August 15, 1998 unless definitive documentation for the Senior Credit
Facility is executed and delivered prior to that time.
Very truly yours,
NATIONSBANK, N.A.,
Individually and as Agent
By: /s/ Adam Kaplan
------------------------------------
Title: Vice President
NATIONSBANC MONTGOMERY SECURITIES LLC
By: /s/ Jeffrey H. Dunn
------------------------------------
Title: Vice President
Accepted and Agreed To:
CORRECTIONAL PROPERTIES TRUST
By: /s/ Patrick T. Hogan
------------------------------------
Title: Vice President and Chief Financial Officer
<PAGE> 5
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
PURPOSE: To provide a senior secured revolving credit line (the
"Facility") to be used for general corporate purposes
including acquisition financing of correctional and
detention facilities
BORROWER: CPT Operating Partnership, L.P. on full recourse basis,
including full environmental indemnification.
GUARANTOR: Correctional Properties Trust, CPT Limited Partner,
Inc. and each subsidiary of the Borrower or Guarantor
currently existing or that is created in the future.
ADMINISTRATIVE/ NationsBank, N.A. (the "Agent") will act as sole and
DOCUMENTATION AGENT: exclusive Administrative and Documentation Agent. As
such, the Agent will negotiate with the Borrower, act
as the primary contact for the Borrower and perform all
other duties associated with the role of exclusive
Administrative and Documentation Agent.
ARRANGER: NationsBanc Montgomery Securities LLC ("NMS").
LENDERS: A syndicate of financial institutions (including the
Agents, and collectively the "Lenders") arranged by
NMS, which institutions shall be acceptable to the
Borrower and the Agent. NationsBank agrees to
underwrite 100% of the Facility Amount and will
syndicate the Facility prior to closing.
FACILITY AMOUNT: $100,000,000 ("Facility Amount"). Availability under
the Facility will be subject to Pledge Pool
availability.
INTEREST RATE: Principal shall bear interest, at the Borrower's
option, at either the Libor plus a margin or Prime Rate
plus a margin. In each case the applicable interest
spread shall be based on the Borrower's Total
Indebtedness to Total Value ratio, as shown below:
<TABLE>
<S> <C>
less than or equal to 25%
greater than 25% - less than or equal to 35%
greater than 35% - less than or equal to 40%
greater than 40% - less than or equal to 50%
Libor Margin 125 bps 150 bps 175 bps 200 bps
Prime Rate Margin 0 bps 0 bps 25 bps 50 bps
</TABLE>
Assuming the Borrower obtains a senior unsecured debt
rating from Standard & Poor's or Moodys, pricing would
convert to the following grid:
<TABLE>
<CAPTION>
RATING LIBOR PRIME
------ ----- -----
<S> <C> <C>
greater than or equal to BBB+/Baa1 1.125% 0.00%
greater than or equal to BBB/Baa2 1.250% 0.00%
greater than or equal to BBB-/Baa3 1.375% 0.125%
less than BBB-/Baa3 2.00% 0.500%
</TABLE>
The Borrower may select interest periods of one, two,
three, or six months. The credit agreement will contain
certain customary Libor provisions, including, but not
limited to, increased costs, illegality, changed
circumstances, funding loss indemnity, and minimum
notices of borrowing/conversion. The monthly per annum
interest rates (payable in arrears) applicable to the
Credit Facility will be determined based upon the
quarterly calculation of Total
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
1
<PAGE> 6
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
Indebtedness to Total Value ratio as defined in
the Financial Covenants Section hereinwith. Rates
shall be effective as of the Reporting Date (to be
determined, but possibly 45 to 60 days following
the end of each quarter.)
UNUSED FACILITY Calculated on the daily un-borrowed amount of the
FEE: Facility Amount, calculated and payable quarterly
in arrears.
UNUSED PORTION UNUSED FEE
-------------- ----------
greater than or equal to 50% 37.5 bps
less than than 50% 25.0 bps
SWING LINE: Within the Swing Line Lender's portion of the
Facility Amount will be a $5,000,000 sublimit for
Swing Line advances, made available on a revolving
basis. Swing Line loans shall be made available
for same day borrowings in even dollar amounts
with no minimum advance amount. In no event shall
the Swing Line Lender be required to fund a Swing
Line Loan if it would increase the total aggregate
outstanding advances to an amount in excess of the
lesser of the Facility Amount or the amount
available pursuant to the Financial Covenants. All
Swing Line advances shall bear interest on a Prime
rate basis or adjusted CD rate basis. Interest
shall be payable in arrears on the first day of
each month. For purposes of calculating the Unused
Fee, outstandings under the Swing Line will not be
counted as outstandings. Upon request of the Swing
Line Lender, within one day (i.e. the next day),
each Lender irrevocably agrees to purchase its
pro-rata share of any Swing Line advance made by
the Swing Line Lender regardless of whether the
conditions for disbursement are satisfied at the
time of such purchase, including the existence of
a default.
SWING LINE LENDER: NationsBank, in its capacity as a Lender.
TERM: 5 years.
COLLATERAL: Cross collateralized and cross-defaulted first
liens on all properties and improvements in the
Pledge Pool. An assignment of leases associated
with the properties included in the Pledge Pool.
An assignment of the Guarantor's partnership units
in CPT Operating Partnership, L.P.
PLEDGE POOL: The Borrower will provide first liens on a
specific group of correctional and detention
properties (the "Pledged Property"). Potential
Pledged Properties will be subject to customary
individual property due diligence and
documentation. Each Pledged Property must be (i)
located in either the 50 United States or United
States territories, (ii) wholly owned by Borrower
or Guarantor or its subsidiaries, (iii)
unencumbered, (iv) free of structural and title
defects and has passed a structural inspection by
an architect or engineer engaged by the Agent, (v)
free of environmental concerns as evidenced by an
acceptable environmental site assessment dated
within six months of admittance and addressed to
Agent, (vi) fully operating with a minimum
occupancy level (to be determined), and (vii) be
in full compliance with the terms contained in the
facility management agreement between the lessee
and the governmental entity contracted, (viii) be
in full compliance with the terms
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
2
<PAGE> 7
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
contained in the lease or sublease (where
applicable) between the Borrower and Lessee or
subleasee (where applicable), and (ix) otherwise
acceptable to the greater of (i) 51% of the
Lenders, including the Agents or (ii) the Agents
plus one additional Lender. Additionally, there
will be certain restrictions on the aggregate
composition of entities with whom Wackenhut
Corrections Corporation and other permitted
operators have entered into contracts with in the
Pledged Pool. Admittance criteria for Potential
Pledged Properties not leased or sub-leased by
Wackenhut Corrections Corporation will be
determined upon further due diligence. Lenders
(including Agent) retain the unconditional right
to accept or reject any Pledged Property for
inclusion in the Pledge Pool. A time frame for
acceptance or rejection of a facility by Lenders
will be established prior to Facility closing.
Advances shall be made against the Pledged
Properties in the Pledge Pool. Availability for
each Pledged Property owned shall be equal to the
lesser of the following:
(i) 45% times the Lender historical cost
(including, without limitation, Borrower's
verifiable pre-acquisition due diligence costs,
purchase price, closing costs and real estate
commissions paid to third parties) of each Pledged
Property; or
(ii) 45% times the Agent approved appraised value
(the lesser of Leased Fee value or Fee Simple
value)of each Pledged Property (Agent will not
require appraisals to be updated more frequently
than annually).
REQUIREMENTS TO ADD When properties are proposed to be added to the
PROPERTIES TO THE Pledge Pool, the Borrower shall provide
BORROWING BASE: information including, but not limited to,
proforma compliance certificate which includes an
annualized calculation of projected quarterly
EBITDA , the Pledge Pool, lease, sub-lease,
management contract, title information sufficient
to ensure no liens or other encumbrances,
historical and proforma operating statements and
occupancy reports, site plan, a satisfactory
engineering report/structural engineer report,
survey, title policy, ESA, appraisal (agent
ordered, reviewed and approved by Agent),
insurance, and a general description of the
property's location, features, etc.
REMOVAL FROM PLEDGE POOL: Borrower may remove any property from the Pledge
Pool, provided such property is being sold by the
Borrower (under an arms-length contract) and
provided at least one of the following provisions
is satisfied: (i) the Borrower provides substitute
correctional or detention property acceptable to
the Lenders, or (ii) the outstanding principal
balance of the Facility is reduced to an amount no
greater than the reduced Pledge Pool availability.
In addition, in order to remove the property, all
covenants must still be met as evidenced by a pro
forma compliance certificate.
OPTIONAL PREPAYMENTS: The Borrower may prepay the Facility, in whole or
in part, at any time without fees or penalty,
subject to reimbursement of the Lenders' breakage
and redeployment costs in the case of prepayment
of LIBOR borrowings.
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
3
<PAGE> 8
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
CONDITIONS PRECEDENT The closing of the Facility will be subject to
TO CLOSING: satisfaction of the conditions precedent deemed
appropriate by the Agent and the Lenders for
financings of this type generally and for this
transaction in particular including, but not
limited to, the following:
(i) The completion of all due diligence with
respect to the Borrower and the Pledged Properties
in scope and determination satisfactory to the
Agent and Lenders.
(ii) The negotiation, execution and delivery of
definitive documentation with respect to the
Facility satisfactory to the Agent and the
Lenders.
(iii) Assurance that there shall not have occurred
a material adverse change since the date of the
most recent pro-forma financial statements,
provided in the S-11, in the business, assets,
operations, condition (financial or otherwise) or
prospects of the Borrower, Guarantor or
subsidiaries of either one, or in the facts and
information regarding such entities as represented
to date.
(iv) The absence of any action, suit,
investigation or proceeding, pending or
threatened, in any court or before any arbitrator
or governmental authority that purports to affect
the Borrower, Guarantor or subsidiaries of either
one or any transaction contemplated hereby, or
that could have a material adverse effect on the
Borrower, Guarantor or subsidiaries of either one
or any transaction contemplated hereby or on the
ability of the Borrower, Guarantor, or
subsidiaries of either one to perform its
obligations under the documents to be executed in
connection with the Facility.
(v) The Borrower, Guarantors and subsidiaries of
either one shall be in compliance with all
covenants as demonstrated via a pro forma
compliance certificate that is acceptable to the
Agent and Lenders.
(vi) The Borrower successfully issues public
equity with net proceeds of at least $100 million.
REPRESENTATIONS AND Usual and customary for transactions of this type,
WARRANTIES: to include without limitation: (i) no violation of
law or contracts or organizational documents; (ii)
no material litigation; (iii) correctness of
specified financial statements and no material
adverse change; (iv) no required governmental or
third party approvals; (v) unencumbered title to
Pledge Pool Properties; and (vi) environmental
indemnities on Pledge Pool Properties.
COVENANTS: Usual and customary for transactions of this type,
to include, without limitation: (i) delivery of
financial statements and other reports; (ii)
delivery of quarterly compliance certificates;
(iii) notices of default, material litigation and
material governmental and environmental
proceedings; (iv) compliance with laws; (v)
payment of taxes; (vi) maintenance of insurance;
(vii) maintenance of properties; and (viii)
obtaining an opinion of counsel opining on the
REIT status, power and authority/enforceability of
CPT; and (viii) limitation on liens.
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
4
<PAGE> 9
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
COVENANTS ON CORRECTIONAL Usual and customary for structures of this type,
PROPERTIES TRUST: to include, without limitation: (i) Correctional
Properties Trust shall remain the sole general
partner of the Borrower; (ii) At inception,
Correctional Properties Trust shall maintain a 99%
limited partner interest in the Borrower.
Subsequently, any dilution in Correctional
Properties Trust's interest in the Borrower shall
be solely related to the issuance of operating
partnership units associated with the acquisition
of third party prison facilities. At all times,
Correctional Properties Trust must remain the sole
general partner of the Borrower and hold a 75%
interest in the Borrower; (iii) CPT Limited
Partner Inc. shall be wholly owned by Correctional
Properties Trust; (iv) CPT Limited Partner, Inc.
shall maintain a 1% limited partner interest in
the Borrower; (iv) the Borrower shall represent
100% of the combined book value of Correctional
Properties Trust and CPT Limited Partner Inc.; and
(v) the revenues of the Borrower for any fiscal
year shall represent 100% of the total revenues of
Correctional Properties Trust and CPT Limited
Partner Inc. for such year.
FINANCIAL COVENANTS: All covenants and conditions outlined for the
Pledge Pool must be met at all times, but will be
only reported on a regular quarterly basis and
when properties are added or removed from the
Pledge Pool. All covenants shall be measured on a
consolidated basis for the Borrower, Guarantor and
all subsidiaries. For covenant calculation
purposes, "Adjusted EBITDA" is defined as EBITDA
less actual cash outlays by CPT for capital
expenditures. Adjusted EBITDA will be comprised of
actual rolling four quarter historical EBITDA plus
proforma annualized EBITDA for those Properties
not operational for the entire period.
MINIMUM INTEREST At no time shall the ratio of Adjusted EBITDA to
COVERAGE: Interest Expense (accrued, paid, capitalized or
preferred stock dividends) on all debt, including
the Borrower, Guarantors and their subsidiaries,
to fall below 3.00:1.00.
TOTAL INDEBTEDNESS At no time shall Total Indebtedness exceed the
LIMITATION: lesser of
(i) 4.0x the aggregate Adjusted EBITDA;
(ii) or 50% of the Cost in all correctional and
detention facilities. "Total Indebtedness"
shall include all recourse, non-recourse,
secured or unsecured obligations of the
Borrower, Guarantor and their
subsidiaries, amounts payable under any
interest rate protection products,
takeout commitments or purchase
contracts; the face amount of any
letters of credit; the amount of any
contingent or guaranty obligations, and
other amounts considered debt by rating
agencies.
TOTAL INDEBTEDNESS TO At no time shall Total Indebtedness exceed the
CAPITALIZATION LIMITATION: lesser of (i) 50% of the sum of Total Liabilities
(as determined in accordance with GAAP) and the
Market Equity Capitalization, or (ii) 50% of the
sum of Total Liabilities and Shareholder's Equity
(both as determined in accordance with GAAP).
Market Equity Capitalization means the sum of the
following: (i) the market value of issued and
outstanding common stock of Correctional
Properties Trust based on the average closing
price over the last twenty trading days, (ii) the
market value of
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
5
<PAGE> 10
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
issued and outstanding preferred stock of
Correctional Properties Trust based on the average
closing price over the last twenty days, and (iii)
the value of the limited partnership units of the
Borrower if each such unit were converted to a
share of common stock of Correctional Properties
Trust.
TOTAL INDEBTEDNESS TO At no time shall Total Indebtedness exceed 50% of
TOTAL VALUE: Total Value. Total Value shall be equal to the
sum of the lesser of (a) the Historical Cost of
the property or (b) the Appraised Value of the
property.
SECURED INDEBTEDNESS TO At no time shall Secured Indebtedness exceed 45%
TOTAL VALUE: of Total Value.
LIMIT ON ADDITIONAL 1) At no time may Borrower, Guarantor and any
INDEBTEDNESS: subsidiary incur additional secured
indebtedness which is recourse, subject to a
de minimis basket; and
2) At no time may Borrower, Guarantor and any
subsidiary in the aggregate incur secured, but
non-recourse, indebtedness which exceeds 20% of
Total Value.
MINIMUM NET WORTH: Guarantor shall at all times maintain a minimum
net worth equal to 90% of its GAAP net worth
projected subsequent to its initial public
offering on or about April 30, 1998 plus 85% of
the net cash proceeds of any new equity (common or
preferred) offering.
OTHER COVENANTS: During any fiscal period, and provided no default,
event of default or potential default has
occurred, Guarantor may declare and pay dividends
on common or preferred stock and similar
distributions in an amount not to exceed 100% of
Funds Available for Distribution or 95% of its
Funds from Operations (FFO), as defined by NAREIT,
attributable to such period, unless a larger
distribution is required in order for the
Guarantor to maintain its REIT status. Not
withstanding the above, the Guarantor will not
permit dividends in excess of the lesser of (i)
95% of FFO in any calendar year; or (ii) 100% of
Funds Available for distribution in any calendar
year.
Borrower, Guarantor and subsidiaries shall be
limited to making Non-conforming Investments not
to exceed 5% of its total assets. Non-conforming
Investments include undeveloped land, non-income
producing properties, properties other than
correctional and detention facilities or other
investments not considered the
Borrower's/Guarantor's primary course of business.
This facility will be cross defaulted to any
indebtedness of the Borrower, Guarantor and
subsidiaries, subject to a de minimis basket.
Borrower, Guarantor or any subsidiaries of either
one have not and shall not grant any other entity
a negative pledge on any assets.
EVENTS OF DEFAULT: Customary events of default in credit agreements
for transactions of this nature, including, but
not limited to:(i) non-payment of principal,
interest and fees; (ii) breach of representations,
warranties and covenants; (iii) insolvency and
bankruptcy;
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
6
<PAGE> 11
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
(iv) condemnation or seizure of properties; (v)
judgments and attachments; (vi) ERISA; (vii)
environmental matters, and (viii) any default on
any other indebtedness of Borrower, Guarantor or
subsidiaries.
ASSIGNMENTS/PARTICIPATIONS: Each Lender will be permitted to make assignments
(in minimum amounts of $10,000,000) to other
permitted financial institutions as approved by
the Agent and Borrower with approval not
reasonably withheld. Lenders will also be
permitted to sell participations with voting
rights limited to significant matters such as
changes in amount, rate, and maturity date. A fee
of $3,500 is payable by the Lender to the Agent
upon any such assignment occurring (including but
not limited to, an assignment by a Lender to
another Lender.
DISSEMINATION OF Each Lender shall be authorized to disseminate
INFORMATION: any information it obtains pertaining to the
Facility, including, without limitation, any
credit or other information on the Borrower,
Guarantor or any subsidiary of either one, any of
their principals and any guarantor of the
Facility, to any assignee or participant or
prospective assignee or prospective participant,
any Lender's affiliates (including NMS), any
regulatory body having jurisdiction over any
Lender and to any other parties as necessary or
appropriate in any Lender's reasonable judgment
with the approval of the Borrower with such
approval not unreasonably withheld.
INDEMNIFICATION: The Borrower, Guarantor and subsidiaries shall
indemnify the Lenders from and against all losses,
liabilities, claims, damages or expenses relating
to their loans, the Borrower's use of loan
proceeds or the commitments, including, but not
limited to, environmental indemnification,
reasonable attorneys' fees and settlement costs.
This indemnification shall survive and continue
for the benefit of the Lenders at all times after
the Borrower's acceptance of the Lenders'
commitment for the Facility, notwithstanding any
failure of the Facility to close.
REPORTING REQUIREMENTS: Borrower shall furnish to the Agent quarterly
compliance certificates, quarterly unaudited and
annual audited financial statements, quarterly
operating statements and other information as the
Agent may reasonably require, including specific
cash flow information, asset business plans, tax
returns, projections and capital expenditure
information (actual expenditures and budgets).
Quarterly unaudited and annual audited financial
statements of Wackenhut Corrections Corporation
and any other information as the Agent may
reasonably require. Agent agrees to maintain these
files as confidential.
GOVERNING LAW: State of Florida.
WAIVERS AND AMENDMENTS: Except as otherwise noted herein, amendments and
waiver of the provisions of the loan agreement and
other definitive credit documentation will require
the approval of Lenders (including the Agent)
holding loans and commitments representing the
greater of (i) more than 51% of the aggregate
amount of loans and commitments under the Credit
Facility or (ii) the Agents plus one additional
Lender, except that the consent of all the Lenders
affected shall be required with respect to (a)
increases in Facility
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
7
<PAGE> 12
- --------------------------------------------------------------------------------
SENIOR SECURED REVOLVING CREDIT FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- --------------------------------------------------------------------------------
Amount, (b) reductions of interest or fees, (c)
extensions of scheduled times for payment, (d)
release of a material obligor, and (e) extensions
of maturity and (f) release of all or
substantially all collateral..
EXPENSES: Borrower will pay all reasonable costs and
expenses associated with the preparation, due
diligence, administration, syndication and
enforcement of all documents executed in
connection with the Credit Facility, including
without limitation, travel expenses and the legal
fees of the Agent's and Lender's counsels
regardless of whether or not the Credit Facility
is closed.
CONFIDENTIALITY: This Summary of Terms and Conditions is delivered
to you with the understanding that neither this
term sheet nor any of its terms and substance
shall be disclosed, directly or indirectly, to any
other person except (i) to your employees, agents
and advisors who are directly involved in the
consideration of this matter, (ii) as disclosure
may be compelled in a judicial or administrative
proceeding or as otherwise required by law or the
Securities and Exchange Commission, or (iii)
unless approved by NationsBank.
- --------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
8
<PAGE> 1
Exhibit 4.3
NationsBank Tel 305 533-2418
Corporate Finance Fax 305 533-2437
100 Southeast 2nd Street
14th Floor, FL7-950-14-02
Miami, FL 33131
NATIONSBANK
April 1, 1998
Mr. Patrick Hogan
Chief Financial Officer
Correctional Properties Trust
4200 Wackenhut Drive
Palm Beach Gardens, Florida 33410
Re: $ 10 Million Revolving Credit Bridge Facility
Gentlemen:
NationsBank, N.A. ("NationsBank") is pleased to provide Correctional Properties
Trust with a commitment to underwrite a $10,000,000 Revolving Credit Bridge
Facility (the "Bridge") under terms and conditions substantially similar to the
terms and conditions outlined in the term sheet for the contemplated $100
million Senior Credit Facility agented and arranged by NationsBank and
NationsBanc Montgomery Securities LLC ("NMS").
The maturity of the Bridge will be the earlier of the closing of the Senior
Credit Facility or 120 days, and proceeds from the Senior Credit Facility will
be used to pay off the Bridge.
Very truly yours,
NATIONSBANK, N.A.,
By: /s/ Allison Freeland
-----------------------------
Title: Senior Vice President
Accepted and Agreed To:
CORRECTIONAL PROPERTIES TRUST
By: /s/ Patrick T. Hogan
-----------------------------
Title: Vice President and Chief Financial Officer
Member FDIC
<PAGE> 2
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
PURPOSE: To provide a senior secured revolving
credit line (the "Facility") to be used for
general corporate purposes including
acquisition financing of correctional and
detention facilities
BORROWER: CPT Operating Partnership, L.P. on full
recourse basis, including full
environmental indemnification.
GUARANTOR: Correctional Properties Trust, CPT Limited
Partner, Inc. and each subsidiary of the
Borrower or Guarantor currently existing or
that is created in the future.
LENDER: NationsBank, N.A.
FACILITY AMOUNT: $10,000,000 ("Facility Amount").
Availability under the Facility will be
subject to Pledge Pool availability.
INTEREST RATE: Principal shall bear interest, at the
Borrower's option, at either the Libor plus
a margin or Prime Rate plus a margin. In
each case the applicable interest spread
shall be based on the Borrower's Total
Indebtedness to Total Value ratio, as shown
below:
<TABLE>
<CAPTION>
more than 25- more than 35%- more than 40%-
less or less or less or less or
greater greater than greater greater
than 25% 35% than 40% than 50%
-------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Libor Margin 125 bps 150 bps 175 bps 200 bps
Prime Rate Margin 0 bps 0 bps 25 bps 50 bps
</TABLE>
Assuming the Borrower obtains a senior
unsecured debt rating from Standard &
Poor's or Moodys, pricing would convert to
the following grid:
<TABLE>
<CAPTION>
Rating LIBOR Prime
------ ----- -----
<S> <C> <C>
less or greater than BBB+/Baa1 1.125% 0.00%
less or greater than BBB/Baa2 1.250% 0.00%
less or greater than BBB-/Baa3 1.375% 0.125%
more than BBB-/Baa3 2.00% 0.500%
</TABLE>
The Borrower may select interest periods of
one, two, three, or six months. The credit
agreement will contain certain customary
Libor provisions, including, but not
limited to, increased costs, illegality,
changed circumstances, funding loss
indemnity, and minimum notices of
borrowing/conversion. The monthly per annum
interest rates (payable in arrears)
applicable to the Credit Facility will be
determined based upon the quarterly
calculation of Total
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
1
<PAGE> 3
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
Indebtedness to Total Value ratio as
defined in the Financial Covenants Section
hereinwith. Rates shall be effective as of
the Reporting Date (to be determined, but
possibly 45 to 60 days following the end of
each quarter.)
UNUSED FACILITY Calculated on the daily un-borrowed amount
FEE: of the Facility Amount, calculated and
payable quarterly in arrears.
UNUSED PORTION UNUSED FEE
-------------- ----------
less or greater than 50% 37.5 bps
more than 50% 25.0 bps
SWING LINE: Within the Swing Line Lender's portion of
the Facility Amount will be a $5,000,000
sublimit for Swing Line advances, made
available on a revolving basis. Swing Line
loans shall be made available for same day
borrowings in even dollar amounts with no
minimum advance amount. In no event shall
the Swing Line Lender be required to fund a
Swing Line Loan if it would increase the
total aggregate outstanding advances to an
amount in excess of the lesser of the
Facility Amount or the amount available
pursuant to the Financial Covenants. All
Swing Line advances shall bear interest on
a Prime rate basis or adjusted CD rate
basis. Interest shall be payable in arrears
on the first day of each month. For
purposes of calculating the Unused Fee,
outstandings under the Swing Line will not
be counted as outstandings. Upon request of
the Swing Line Lender, within one day (i.e.
the next day), each Lender irrevocably
agrees to purchase its pro-rata share of
any Swing Line advance made by the Swing
Line Lender regardless of whether the
conditions for disbursement are satisfied
at the time of such purchase, including the
existence of a default.
SWING LINE LENDER: NationsBank, in its capacity as a Lender.
TERM: 5 years.
COLLATERAL: Cross collateralized and cross-defaulted
first liens on all properties and
improvements in the Pledge Pool. An
assignment of leases associated with the
properties included in the Pledge Pool. An
assignment of the Guarantor's partnership
units in CPT Operating Partnership, L.P.
PLEDGE POOL: The Borrower will provide first liens on a
specific group of correctional and
detention properties (the "Pledged
Property"). Potential Pledged Properties
will be subject to customary individual
property due diligence and documentation.
Each Pledged Property must be (i) located
in either the 50 United States or United
States territories, (ii) wholly owned by
Borrower or Guarantor or its subsidiaries,
(iii) unencumbered, (iv) free of structural
and title defects and has passed a
structural inspection by an architect or
engineer engaged by the Agent, (v) free of
environmental concerns as evidenced by an
acceptable environmental site assessment
dated within six months of admittance and
addressed to Agent, (vi) fully operating
with a minimum occupancy level (to be
determined), and (vii) be in full
compliance with the terms contained in the
facility management agreement between the
lessee and the governmental entity
contracted, (viii) be in full compliance
with the terms
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
2
<PAGE> 4
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
contained in the lease or sublease (where
applicable) between the Borrower and Lessee
or subleasee (where applicable), and (ix)
otherwise acceptable to the greater of (i)
51% of the Lenders, including the Agents or
(ii) the Agents plus one additional Lender.
Additionally, the aggregate composition of
entities with whom Wackenhut Corrections
Corporation has entered into contracts with
in the Pledged Pool shall be comprised of
at least 80% investment grade entities.
Admittance criteria for Potential Pledged
Properties not leased or sub-leased by
Wackenhut Corrections Corporation will be
determined upon further due diligence.
Lenders (including Agent) retain the
unconditional right to accept or reject any
Pledged Property for inclusion in the
Pledge Pool. A time frame for acceptance or
rejection of a facility by Lenders will be
established prior to Facility closing.
Advances shall be made against the Pledged
Properties in the Pledge Pool. Availability
for each Pledged Property owned shall be
equal to the lesser of the following:
(i) 45% times the Lender historical cost
(including, without limitation, Borrower's
verifiable pre-acquisition due diligence
costs, purchase price, closing costs and
real estate commissions paid to third
parties) of each Pledged Property; or
(ii) 45% times the Agent approved appraised
value (the lesser of Leased Fee value or
Fee Simple value)of each Pledged Property
(Agent will not require appraisals to be
updated more frequently than annually).
REQUIREMENTS TO ADD When properties are proposed to be added to
PROPERTIES TO THE BORROWING the Pledge Pool, the Borrower shall provide
BASE: information including, but not limited to,
proforma compliance certificate which
includes an annualized calculation of
projected quarterly EBITDA , the Pledge
Pool, lease, sub-lease, management
contract, title information sufficient to
ensure no liens or other encumbrances,
historical and proforma operating
statements and occupancy reports, site
plan, a satisfactory engineering
report/structural engineer report, survey,
title policy, ESA, appraisal (agent
ordered, reviewed and approved by Agent),
insurance, and a general description of the
property's location, features, etc.
REMOVAL FROM PLEDGE POOL: Borrower may remove any property
from the Pledge Pool, provided such
property is being sold by the Borrower
(under an arms-length contract) and
provided at least one of the following
provisions is satisfied: (i) the Borrower
provides substitute correctional or
detention property acceptable to the
Lenders, or (ii) the outstanding principal
balance of the Facility is reduced to an
amount no greater than the reduced Pledge
Pool availability. In addition, in order to
remove the property, all covenants must
still be met as evidenced by a pro forma
compliance certificate.
OPTIONAL PREPAYMENTS: The Borrower may prepay the Facility, in
whole or in part, at any time without fees
or penalty, subject to reimbursement of the
Lenders' breakage and redeployment costs in
the case of prepayment of LIBOR borrowings.
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
3
<PAGE> 5
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
CONDITIONS PRECEDENT TO The closing of the Facility will be subject
CLOSING: to satisfaction of the conditions precedent
deemed appropriate by the Agent and the
Lenders for financings of this type
generally and for this transaction in
particular including, but not limited to,
the following:
(i) The completion of all due diligence
with respect to the Borrower and the
Pledged Properties in scope and
determination satisfactory to the Agent and
Lenders.
(ii) The negotiation, execution and
delivery of definitive documentation with
respect to the Facility satisfactory to the
Agent and the Lenders.
(iii) Assurance that there shall not have
occurred a material adverse change since
the date of the most recent pro-forma
financial statements, provided in the S-11,
in the business, assets, operations,
condition (financial or otherwise) or
prospects of the Borrower, Guarantor or
subsidiaries of either one, or in the facts
and information regarding such entities as
represented to date.
(iv) The absence of any action, suit,
investigation or proceeding, pending or
threatened, in any court or before any
arbitrator or governmental authority that
purports to affect the Borrower, Guarantor
or subsidiaries of either one or any
transaction contemplated hereby, or that
could have a material adverse effect on the
Borrower, Guarantor or subsidiaries of
either one or any transaction contemplated
hereby or on the ability of the Borrower,
Guarantor, or subsidiaries of either one to
perform its obligations under the documents
to be executed in connection with the
Facility.
(v) The Borrower, Guarantors and
subsidiaries of either one shall be in
compliance with all covenants as
demonstrated via a pro forma compliance
certificate that is acceptable to the Agent
and Lenders.
(vi) The Borrower successfully issue public
equity with net proceeds of at least $100
million.
REPRESENTATIONS AND Usual and customary for transactions of
WARRANTIES: this type, to include without limitation:
(i) no violation of law or contracts or
organizational documents; (ii) no material
litigation; (iii) correctness of specified
financial statements and no material
adverse change; (iv) no required
governmental or third party approvals; (v)
unencumbered title to Pledge Pool
Properties; and (vi) environmental
indemnities on Pledge Pool Properties.
COVENANTS: Usual and customary for transactions of
this type, to include, without limitation:
(i) delivery of financial statements and
other reports; (ii) delivery of quarterly
compliance certificates; (iii) notices of
default, material litigation and material
governmental and environmental proceedings;
(iv) compliance with laws; (v) payment of
taxes; (vi) maintenance of insurance; (vii)
maintenance of properties; and (viii)
obtaining an opinion of counsel opining on
the REIT status, power and
authority/enforceability of CPT; and (viii)
limitation on liens.
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
4
<PAGE> 6
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
COVENANTS ON CORRECTIONAL Usual and customary for structures of this
PROPERTIES TRUST: type, to include, without limitation: (i)
Correctional Properties Trust shall remain
the sole general partner of the Borrower;
(ii) Correctional Properties Trust shall
maintain a 99% limited partner interest in
the Borrower; (iii) CPT Limited Partner
Inc. shall be wholly owned by Correctional
Properties Trust; (iv) CPT Limited Partner,
Inc. shall maintain a 1% limited partner
interest in the Borrower; (iv) the Borrower
shall represent 100% of the combined book
value of Correctional Properties Trust and
CPT Limited Partner Inc.; and (v) the
revenues of the Borrower for any fiscal
year shall represent 100% of the total
revenues of Correctional Properties Trust
and CPT Limited Partner Inc. for such year.
FINANCIAL COVENANTS: All covenants and conditions outlined for
the Pledge Pool must be met at all times,
but will be only reported on a regular
quarterly basis and when properties are
added or removed from the Pledge Pool. All
covenants shall be measured on a
consolidated basis for the Borrower,
Guarantor and all subsidiaries. For
covenant calculation purposes, "Adjusted
EBITDA" is defined as EBITDA less actual
cash outlays by CPT for capital
expenditures. Adjusted EBITDA will be
comprised of actual rolling four quarter
historical EBITDA plus proforma annualized
EBITDA for those Properties not operational
for the entire period.
MINIMUM INTEREST At no time shall the ratio of Adjusted
COVERAGE: EBITDA to Interest Expense (accrued, paid,
capitalized or preferred stock dividends)
on all debt, including the Borrower,
Guarantors and their subsidiaries, to fall
below 3.00:1.00.
TOTAL INDEBTEDNESS At no time shall Total Indebtedness exceed
LIMITATION: the lesser of
(i) 4.0x the aggregate Adjusted EBITDA;
(ii) or 50% of the Cost in all correctional
and detention facilities. "Total
Indebtedness" shall include all
recourse, non-recourse, secured or
unsecured obligations of the Borrower,
Guarantor and their subsidiaries,
amounts payable under any interest
rate protection products, takeout
commitments or purchase contracts; the
face amount of any letters of credit;
the amount of any contingent or
guaranty obligations, and other
amounts considered debt by rating
agencies.
TOTAL INDEBTEDNESS TO At no time shall Total Indebtedness exceed
CAPITALIZATION LIMITATIONS: the lesser of (i) 50% of the sum of Total
Liabilities (as determined in accordance
with GAAP) and the Market Equity
Capitalization, or (ii) 50% of the sum of
Total Liabilities and Shareholder's Equity
(both as determined in accordance with
GAAP). Market Equity Capitalization means
the sum of the following: (i) the market
value of issued and outstanding common
stock of Correctional Properties Trust
based on the average closing price over the
last twenty trading days, (ii) the market
value
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
5
<PAGE> 7
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
of issued and outstanding preferred stock
of Correctional Properties Trust based on
the average closing price over the last
twenty days, and (iii) the value of the
limited partnership units of the Borrower
if each such unit were converted to a share
of common stock of Correctional Properties
Trust.
TOTAL INDEBTEDNESS TO TOTAL At no time shall Total Indebtedness exceed
VALUE: 50% of Total Value. Total Value shall be
equal to the sum of the lesser of (a) the
Historical Cost of the property or (b) the
Appraised Value of the property.
SECURED INDEBTEDNESS TO
TOTAL VALUE: At no time shall Secured Indebtedness
exceed 45% of Total Value.
LIMIT ON ADDITIONAL 1) At no time may Borrower, Guarantor and
INDEBTEDNESS: any subsidiary incur additional secured
indebtedness which is recourse.
2) At no time may Borrower, Guarantor and
any subsidiary in the aggregate incur
secured, but non-recourse, indebtedness
which exceeds 20% of Total Value.
MINIMUM NET WORTH: Guarantor shall at all times maintain
a minimum net worth equal to 90% of its
GAAP net worth projected subsequent to
its initial public offering on or about
April 30, 1998 plus 85% of the net cash
proceeds of any new equity (common or
preferred) offering.
OTHER COVENANTS: During any fiscal period, and provided no
default, event of default or potential
default has occurred, Guarantor may declare
and pay dividends on common or preferred
stock and similar distributions in an
amount not to exceed 100% of Funds
Available for Distribution or 95% of its
Funds from Operations (FFO), as defined by
NAREIT, attributable to such period, unless
a larger distribution is required in order
for the Guarantor to maintain its REIT
status. Not withstanding the above, the
Guarantor will not permit dividends in
excess of the lesser of (i) 95% of FFO in
any calendar year; or (ii) 100% of Funds
Available for distribution in any calendar
year.
Borrower, Guarantor and subsidiaries shall
be limited to making Non-conforming
Investments not to exceed 5% of its total
assets. Non-conforming Investments include
undeveloped land, non-income producing
properties, properties other than
correctional and detention facilities or
other investments not considered the
Borrower's/Guarantor's primary course of
business.
This facility will be cross defaulted to
any indebtedness of the Borrower, Guarantor
and subsidiaries.
Borrower, Guarantor or any subsidiaries of
either one have not and shall not grant any
other entity a negative pledge on any
assets.
EVENTS OF DEFAULT: Customary events of default in credit
agreements for transactions of this nature,
including, but not limited to:(i)
non-payment of principal, interest and
fees; (ii) breach of representations,
warranties and covenants; (iii) insolvency
and bankruptcy; (iv)
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
6
<PAGE> 8
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
condemnation or seizure of properties; (v)
judgments and attachments; (vi) ERISA;
(vii) environmental matters, and (viii) any
default on any other indebtedness of
Borrower, Guarantor or subsidiaries.
ASSIGNMENTS/PARTICIPATIONS: Each Lender will be permitted to make
assignments (in minimum amounts of
$10,000,000) to other permitted financial
institutions as approved by the Agent and
Borrower with approval not reasonably
withheld. Lenders will also be permitted to
sell participations with voting rights
limited to significant matters such as
changes in amount, rate, and maturity date.
A fee of $3,500 is payable by the Lender to
the Agent upon any such assignment
occurring (including but not limited to, an
assignment by a Lender to another Lender.
DISSEMINATION OF Each Lender shall be authorized to
INFORMATION: disseminate any information it obtains
pertaining to the Facility, including,
without limitation, any credit or other
information on the Borrower, Guarantor or
any subsidiary of either one, any of their
principals and any guarantor of the
Facility, to any assignee or participant or
prospective assignee or prospective
participant, any Lender's affiliates
(including NMS), any regulatory body having
jurisdiction over any Lender and to any
other parties as necessary or appropriate
in any Lender's reasonable judgment with
the approval of the Borrower with such
approval not unreasonably withheld.
INDEMNIFICATION: The Borrower, Guarantor and subsidiaries
shall indemnify the Lenders from and
against all losses, liabilities, claims,
damages or expenses relating to their
loans, the Borrower's use of loan proceeds
or the commitments, including, but not
limited to, environmental indemnification,
reasonable attorneys' fees and settlement
costs. This indemnification shall survive
and continue for the benefit of the Lenders
at all times after the Borrower's
acceptance of the Lenders' commitment for
the Facility, notwithstanding any failure
of the Facility to close.
REPORTING REQUIREMENTS: Borrower shall furnish to the Agent
quarterly compliance certificates,
quarterly unaudited and annual audited
financial statements, quarterly operating
statements and other information as the
Agent may reasonably require, including
specific cash flow information, asset
business plans, tax returns, projections
and capital expenditure information (actual
expenditures and budgets). Quarterly
unaudited and annual audited financial
statements of Wackenhut Corrections
Corporation and any other information as
the Agent may reasonably require. Agent
agrees to maintain these files as
confidential.
GOVERNING LAW: State of Florida.
WAIVERS AND AMENDMENTS: Except as otherwise noted herein,
amendments and waiver of the provisions of
the loan agreement and other definitive
credit documentation will require the
approval of Lenders (including the Agent)
holding loans and commitments representing
the greater of (i) more than 51% of the
aggregate amount of loans and commitments
under the Credit Facility or (ii) the
Agents plus one additional Lender, except
that the consent of all the Lenders
affected shall be required with respect to
(a) increases in Facility
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
7
<PAGE> 9
- -------------------------------------------------------------------------------
REVOLVING CREDIT BRIDGE FACILITY
CPT OPERATING PARTNERSHIP, L.P.
SUMMARY OF TERMS AND CONDITIONS
MARCH 30, 1998
- -------------------------------------------------------------------------------
Amount, (b) reductions of interest or fees,
(c) extensions of scheduled times for
payment, (d) release of a material obligor,
and (e) extensions of maturity and (f)
release of all or substantially all
collateral.
EXPENSES: Borrower will pay all reasonable costs and
expenses associated with the preparation,
due diligence, administration, syndication
and enforcement of all documents executed
in connection with the Credit Facility,
including without limitation, travel
expenses and the legal fees of the Agent's
and Lender's counsels regardless of whether
or not the Credit Facility is closed.
CONFIDENTIALITY: This Summary of Terms and Conditions is
delivered to you with the understanding
that neither this term sheet nor any of its
terms and substance shall be disclosed,
directly or indirectly, to any other person
except (i) to your employees, agents and
advisors who are directly involved in the
consideration of this matter, (ii) as
disclosure may be compelled in a judicial
or administrative proceeding or as
otherwise required by law or the Securities
and Exchange Commission, or (iii) unless
approved by NationsBank.
- -------------------------------------------------------------------------------
This Summary of Terms and Conditions is an outline only and does not purport to
summarize all the conditions, terms, covenants, representations, warranties and
other provisions which would be contained in definitive legal documentation.
8
<PAGE> 1
EXHIBIT 5.1
April 1, 1998
Correctional Properties Trust
4200 Wackenhut Drive -- Suite #100
Palm Beach Gardens, Florida 33410-4243
Re: CORRECTIONAL PROPERTIES TRUST
Ladies and Gentlemen:
We have acted as special Maryland counsel for Correctional
Properties Trust, a Maryland real estate investment trust (the "Trust"), in
connection with the issuance of the Trust's Common Shares, par value $.001 per
share (the "Shares").
As special Maryland counsel for the Trust, we are familiar with its
Declaration of Trust and Bylaws. We have examined the prospectus included in its
Registration Statement on Form S-11, File No. 333-46681 (the "Registration
Statement"), substantially in the form in which it is to become effective (the
"Prospectus"). We have further examined and relied upon a certificate of the
Maryland State Department of Assessments and Taxation to the effect that the
Trust is duly formed and existing under the laws of the State of Maryland and is
in good standing and duly authorized to transact business in the State of
Maryland.
We have also examined and relied upon such records of the Trust and
other documents and certificates with respect to factual matters as we have
deemed necessary to render the opinion expressed herein. We have assumed,
without independent verification, the genuineness of all signatures on documents
submitted to us, the authenticity of all documents submitted to us as originals,
and the conformity with originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that:
1. The Trust is duly formed and validly existing as a real estate
investment trust in good standing under the laws of the State
of Maryland.
<PAGE> 2
Correctional Properties Trust
April 1, 1998
Page 2
2. When the Board of Directors has determined the consideration to
be received by the Trust for the Shares to be offered for sale
pursuant to the Prospectus, the Shares will be duly authorized,
and, when thereafter sold, issued and paid for as contemplated
by the Prospectus, the Shares will have been validly and
legally issued and will be fully paid and nonassessable under
the laws of the State of Maryland.
This letter expresses our opinion with respect to the provisions of
Title 8 of the Corporations and Associations Article of the Annotated Code of
Maryland governing real estate investment trusts. It does not extend to the
securities or "blue sky" laws of Maryland, to federal securities laws or to
other laws.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us therein under the caption
"Legal Matters". We do not thereby admit that we are "experts" within the
meaning of the Securities Act of 1933 and the regulations thereunder. Except as
otherwise noted under the caption "Legal Matters," this opinion may not be
relied upon for any other purpose or by any other person without our prior
written consent.
Very truly yours,
Venable, Baetjer and Howard, LLP
<PAGE> 1
EXHIBIT 8.1
TAX OPINION TO BE PROVIDED
BY AKERMAN, SENTERFITT & EIDSON, P.A.
April 3, 1998
Correctional Properties Trust
4200 Wackenhut Drive
Palm Beach Gardens, Florida 33410-4243
RE: CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE
ORGANIZATION AND OPERATION OF CORRECTIONAL PROPERTIES TRUST AS
A REAL ESTATE INVESTMENT TRUST.
Gentlemen:
We have acted as counsel to Correctional Properties Trust, a Maryland
real estate investment trust (the "Company"), in connection with the preparation
of a registration statement including the prospectus contained as a part of such
registration statement filed with the Securities and Exchange Commission on
February 20, 1998 (No.46681), as amended through the date hereof, with respect
to the offering and sale (the "Offering") of up to 7,130,000 Common Shares of
beneficial interest, $.001 par value per share, of the Company. In connection
with that representation, we prepared the summaries under the sections titled
"PROSPECTUS SUMMARY - TAX CONSIDERATIONS AND TAX STATUS OF THE COMPANY" and
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" (the "Tax Summaries") which are
contained in the registration statement on Form S-11 with respect to the
Offering. This letter refers to the above registration statement, prospectus and
all Schedules, Annexes and Exhibits thereto and all amendments made thereto
through the date hereof collectively as the "Registration Statement."
Capitalized terms used herein have the meaning they have in the Registration
Statement.
In rendering the opinion below, we have examined such documents as we
have considered necessary or appropriate as a basis for such opinion, including
the following: (1) the Company's Declaration of Trust and Articles of Amendment
and Restatement of Declaration of Trust; (2) the Company's Bylaws and Amended
and Restated Bylaws; (3) the Registration Statement; (4) the Articles of
Incorporation of CPT Limited Partner, Inc., a Delaware corporation wholly owned
by the Company; (5) the Purchase Agreements; (6) the Certificate of Limited
Partnership of the Operating Partnership; (7) the Partnership Agreement of the
Operating Partnership among the Company as a general and limited partner and CPT
Limited Partner, Inc. as a limited partner; (8) the Master Lease; (9) the
Leases; (10) the Option Agreements; and (11) the Right to Purchase Agreement. In
our review, we have assumed, with your consent, that the documents that we
reviewed in proposed form will be executed in substantially the same form. We
have also assumed, with your consent, that all
<PAGE> 2
Correctional Properties Trust
April 3, 1998
Page 2
facts, representations and statements set forth in the above documents are true
and correct in all material respects, and that the transactions contemplated by
those documents and as described in the Registration Statement will be
consummated upon the closing of the Offering in accordance with their terms and
as so described. We have also assumed that all obligations imposed by any such
documents on the parties thereto have been, or will be, performed or satisfied
in accordance with their terms; that such documents have been, or will be,
properly executed; that original documents are authentic and accurate; and that
copies of documents conform to the originals thereof.
In connection with the opinions rendered below, we have also made the
following assumptions and have relied upon the factual representations of the
Company and the Operating Partnership relating to their properties and
operations:
(1) The Company will comply with all applicable filing, reporting and
administrative requirements relating to qualification as a real estate
investment trust ("REIT") such as, by way of example, making a timely election
under Section 856(c)(1) of the Internal Revenue Code of 1986, as amended (the
"Code") and maintaining the required records of actual ownership of its
outstanding stock and otherwise complying with Treasury Regulation Section
1.857-8;
(2) The Common Shares will be purchased by over 100 persons (as
determined under Section 856(a)(5)) and the Common Shares will thereafter
continue to be owned by over 100 persons;
(3) No shareholder will own shares of stock in the Company in excess of
the Ownership Limit as set forth in the Articles of Amendment and Restatement of
Declaration of Trust;
(4) The Operating Partnership will acquire the Initial Facilities upon
the closing of the Offering in accordance with the Purchase Agreements and
simultaneously enter into the Leases;
(5) The purchase price of the Facilities is equal to the fair market
value thereof and such price has been properly allocated among the purchased
assets;
(6) The Company and the Operating Partnership will operate in
accordance with their proposed method of operation as described in the
Registration Statement, and will not make any amendments to their organizational
documents, including the Partnership Agreement, that will have an adverse effect
on the Company's qualification as a REIT; (1)
(7) The economic useful lives of the Facilities extends substantially
beyond the terms of the Leases (including renewal options);
<PAGE> 3
Correctional Properties Trust
April 3, 1998
Page 3
(8) The Company will not acquire securities of any one issuer
constituting more than 5% of the fair market value of the total assets of the
Company or more than 10% of the outstanding voting securities of such issuer
unless the securities (a) constitute real estate assets under Section 856(c)(5)
of the Code; (b) represent stock in a qualified REIT subsidiary (as defined in
Section 856(i) of the Code) such as CPT LP; or (c) represent a partnership
interest in a business entity such as the Operating Partnership classified and
taxed as a partnership for federal income tax purposes;
(9) Proceeds from the Offering, if any, not used to purchase the
Facilities will be invested in cash and cash items, Government securities or
investments constituting real estate assets as defined in Section 856(c)(5) of
the Code;
(10) Additional properties other than the Facilities if acquired by the
Company or the Operating Partnership will qualify as real estate assets under
Section 856(c)(5) of the Code, and all other investments by the Company or the
Operating Partnership will be made in a manner to satisfy the 75/25% asset tests
in Section 865(c)(4) of the Code;
(11) Additional income from additional leases other than the Leases if
entered into or acquired by the Company or the Operating Partnership or from
other investments will not cause the Company to fail the 95/75% income tests in
Section 856(c)(2) and (3) of the Code; and
(12) The Company will make distributions satisfying the distribution
requirements of Section 857(a) of the Code.
Since the Company's qualification as a REIT is dependent upon its
actual, not just its proposed future conduct, it is possible that the Company's
future actions or inactions may cause the Company not to qualify or not to
continue to qualify as a REIT. We will not review on a continuing basis the
Company's compliance with the documents or assumptions set forth above, or the
representations set forth in the Representation Letter. Our opinion does not
relate to the actual future operation of the Company to the extent that it may
differ from the proposed and intended operation that has been represented to us.
No assurance can be given that the actual results of the Company's operations
for any given taxable year will satisfy the requirements for qualification and
taxation as a REIT.
We have not been asked to nor do we give any opinion regarding Maryland
law as it may or may not affect the tax status of the Company. We assume that
the Company has been duly and properly formed under Maryland law. We have
relied, with your consent, on the opinion of Venable,
<PAGE> 4
Correctional Properties Trust
April 3, 1998
Page 4
Baetjer and Howard, LLP regarding various aspects of Maryland law. We have not
been asked to nor do we give any opinion regarding any foreign, state or local
tax issues.
For purposes of our opinions, we have made no independent investigation
of the facts contained in the documents and assumptions set forth above or the
factual representations made by the Company. If any of the representations or
the assumptions set forth in this opinion are not accurate, the opinions and the
Tax Summaries may not be accurate and could change. No facts have come to our
attention, however, that would cause us to question the accuracy and
completeness of such facts or documents in a material way.
Based on and subject to the documents, assumptions, comments and
factual representations set forth above, we are of the opinion that:
(a) commencing with the Company's taxable year ending December
31, 1998, the Company will be organized in conformity with the requirements for
qualification as a REIT pursuant to sections 856 through 860 of the Code, and
the Company's proposed method of operation as described in the Registration
Statement, if followed, will enable it to meet the requirements for
qualification and taxation as a REIT under the Code;
(b) the descriptions of law and legal conclusions contained in
the Tax Summaries are correct in all material respects, and the discussion
contained therein fairly summarizes the federal income tax considerations that
are material to a holder of the Common Shares; and
(c) the Operating Partnership (and any Subsidiary Partnership)
will not be taxed as a corporation under the Code.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions as of the date hereof. The Internal Revenue Service has not
issued Regulations or administrative interpretations with respect to various
provisions of the Code relating to REIT qualification. No assurance can be given
that the law will not change in a way that will prevent the Company from
qualifying as a REIT, or cause the Operating Partnership (or any Subsidiary
Partnership) to be taxed as a corporation. In addition, an opinion of counsel is
not binding on the Internal Revenue Service or a court.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Akerman, Senterfitt
& Eidson, P.A., under the captions "PROSPECTUS SUMMARY - TAX CONSIDERATIONS AND
TAX STATUS OF THE
<PAGE> 5
Correctional Properties Trust
April 3, 1998
Page 5
COMPANY," "RISK FACTORS - TAX RISKS" and "MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS."
The foregoing opinions are limited to the federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any foreign
country, state or locality. As noted in the Tax Summaries, the Tax Summaries
neither deal with all aspects of federal income taxation that might be relevant
to particular holders of Common Shares in light of their personal circumstances
or status nor discuss, except in very general terms, federal income tax
consequences to certain holders subject to special treatment or rules under the
federal income tax laws, such as certain financial institutions, insurance
companies, dealers in securities, tax-exempt organizations, foreign corporations
and nonresident alien individuals. We undertake no obligation to update the
opinions expressed herein after the date of this letter.
Very truly yours,
AKERMAN, SENTERFITT & EIDSON, P.A.
<PAGE> 1
EXHIBIT 10.7
FORM OF
CORRECTIONAL PROPERTIES TRUST
1998 EMPLOYEE SHARE INCENTIVE PLAN
SECTION 1. PURPOSE.
The purpose of the Correctional Properties Trust 1998 Employee Share
Incentive Plan (the "Plan") is to advance the interests of Correctional
Properties Trust, a Maryland real estate investment trust, and its affiliates
and subsidiaries, if any (herein referred to collectively as the "Company"), by
enabling the Company to attract and retain executive officers and other key
employees of and consultants to the Company and to provide incentives to such
persons to maximize the Company's Funds from Operations. The Company believes
these purposes will be achieved under the Plan by offering such officers,
employees and consultants performance-based share incentives and/or other equity
interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash.
SECTION 2. DEFINITIONS.
For purposes of the Plan, the following terms shall have the meanings
set forth below:
(a) "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a participating employer under
the Plan, provided that the Company directly or indirectly owns at least 20% of
the combined voting power of all classes of stock of such entity or at least 20%
of the ownership interests in such entity.
(b) "Board" means the Board of Trustees of the Company.
(c) "Book Value" means, as of any given date, on a per share basis (i)
the shareholders' equity in the Company as of the end of the immediately
preceding fiscal year as reflected in the Company's consolidated balance sheet,
subject to such adjustments as the Committee shall specify at or after grant,
divided by (ii) the number of then outstanding Common Shares as of such year-end
date (as adjusted by the Committee for subsequent events).
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
<PAGE> 2
(e) "Committee" means the Committee referred to in Section 3 of the
Plan. If at any time no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
(f) "Common Shares" means the common shares of beneficial interest, par
value $.001 per share, of the Company.
(g) "Company" means Correctional Properties Trust, a Maryland real
estate investment trust, or any successor trust or corporation.
(h) "Deferral Period" means the period described in Section 9(a) below.
(i) "Deferred Shares" means an award made pursuant to Section 9 below
of the right to receive Common Shares at the end of a specified Deferral Period.
(j) "Disability" means a condition which the Committee determines,
based upon medical evidence, is due to injury or sickness and restricts an
individual from performing the material and substantive duties of his or her
regular occupation to an extent that prevents the individual from engaging in
such occupation.
(k) "Fair Market Value" means, as of any given date, unless otherwise
determined by the Committee in good faith, the reported closing price of the
Common Shares on the New York Stock Exchange or, if no such sale of Common
Shares is reported on the New York Stock Exchange on such date, the fair market
value of the Common Shares as determined by the Committee in good faith.
(l) "Funds from Operations" means, in accordance with the resolution
adopted by the Board of Governors of NAREIT, net income (loss) (computed in
accordance with generally accepted accounting principles), excluding significant
non-recurring items, gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures.
(m) "Immediate Family Member" means a person described in Section
6(b)(v) below.
(n) "Incentive Option" means any Share Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
(o) "Non-Qualified Option" means any Share Option that is not an
Incentive Option.
(p) "Normal Retirement" means retirement from active employment with
the Company and any Subsidiary or Affiliate on or after age 60.
(q) "Other Share-Based Award" means an award under Section 11 below
that is valued in whole or in part by reference to, or is otherwise based on,
Common Shares.
(r) "Plan" means this Correctional Properties Trust 1998 Employee Share
Incentive Plan, as hereinafter amended from time to time.
(s) "Restricted Shares" means an award of Common Shares that is subject
to restrictions under Section 8 below.
2
<PAGE> 3
(s) "Restriction Period" means the period described in Section 8(c)
below.
(t) "Retirement" means Normal Retirement.
(u) "Share Appreciation Right" means the right pursuant to an award
granted under Section 7 below to receive upon exercise an amount equal to the
excess of the Fair Market Value of one Common Share over the price per share
specified in the award agreement multiplied by the number of Common Shares in
respect of which a Share Appreciation Right has been exercised.
(v) "Share Option" or "Option" means any option to purchase Common
Shares (including Restricted Shares and Deferred Shares, if the Committee so
determines) granted pursuant to Section 6 below.
(w) "Subsidiary" means any corporation (or other entity) in an unbroken
chain of corporations and other entities beginning with the Company if each of
the corporations and other entities (other than the last corporation or other
entity in the unbroken chain) owns equity interests possessing more than 50% of
the total combined voting power of all classes of equity interests in one of the
other corporations or entities in the chain.
In addition, the terms "Change in Control," "Potential Change in
Control" and "Change in Control Price" shall have meanings set forth,
respectively, in Sections 11(b), (c) and (d) below.
SECTION 3. ADMINISTRATION.
The Plan shall be administered by a committee (the "Committee") to be
appointed by the Board of Trustees of the Company (the "Board"), consisting of
two or more independent outside directors (each of whom qualifies as an "outside
director" under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), and as a "non-employee director" under Rule 16b- 3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). In the event
a Committee of two or more qualifying directors cannot be formed, the Plan shall
be administered by the Board. No member of the Board or of the Committee shall
be liable for any action or determination made in good faith with respect to the
Plan or any option granted or option agreement entered into hereunder.
The Committee shall have full authority to grant, pursuant to the terms
of the Plan, to officers, employees and consultants eligible under Section 5:
(i) Share Options, (ii) Share Appreciation Rights, (iii) Restricted Shares, (iv)
Deferred Shares, and/or (v) Other Share-Based Awards.
In particular, the Committee shall have the authority:
3
<PAGE> 4
(i) to select the officers, employees and consultants of
the Company and its Subsidiaries and Affiliates to whom Share Options,
Share Appreciation Rights, Restricted Shares, Deferred Shares and/or
Other Share-Based Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Share Options,
Share Appreciation Rights, Restricted Shares, Deferred Shares and/or
Other Share-Based Awards, or any combination thereof, are to be granted
hereunder to one or more officers, employees and consultants of the
Company and its Subsidiaries and Affiliates;
(iii) to determine the number of shares to be covered by each
such award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including,
but not limited to, the share price, vesting schedule and any other
restriction or limitation, or any vesting acceleration or waiver of
forfeiture restrictions regarding any Share Option or other award
and/or the Common Shares relating thereto, based in each case on such
factors as the Committee shall determine, in its sole discretion);
(v) to determine whether and under what circumstances a
Share Option may be settled in cash, Restricted Shares and/or Deferred
Shares;
(vi) to determine whether, to what extent and under what
circumstances Option grants and/or other awards under the Plan and/or
other cash awards made by the Company are to be made, and operate, on a
tandem basis vis-a-vis other awards under the Plan and/or cash awards
made outside of the Plan, or on an additive basis; and
(vii) to determine whether, to what extent and under what
circumstances Common Shares and other amounts payable with respect to
an award under this Plan shall be deferred either automatically or at
the election of the participant (including providing for and
determining the amount (if any) of any deemed earnings on any deferred
amount during any deferral period).
The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan. All decisions made by the
Committee pursuant to the provisions of the Plan shall be made in the
Committee's sole discretion and shall be final and binding on all persons,
including the Company and Plan participants.
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SECTION 4. COMMON SHARES SUBJECT TO PLAN.
The total number of Common Shares reserved and available for
distribution under the Plan shall be 620,000 shares. Such Common Shares may
consist, in whole or in part, of authorized and unissued Common Shares. The
maximum number of Common Shares with respect to which share-based awards may be
granted during any calendar year to any one individual shall not exceed 150,000
shares.
Subject to Section 6 below, if any Common Shares that have been
optioned cease to be subject to a Share Option, or if any such Common Shares
that are subject to any Restricted Shares or Deferred Shares award or Other
Share-Based Award granted hereunder are forfeited or any such award otherwise
terminates without a payment being made to the participant in the form of Common
Shares, such Common Shares shall again be available for distribution in
connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, Common Share dividend, Common Share split or other change in
corporate structure affecting the Common Shares, an adjustment shall be made in
the aggregate number of Common Shares reserved for issuance under the Plan, in
the number and option price of Common Shares subject to outstanding Options
granted under the Plan, in the number and purchase price of Common Shares
subject to outstanding Share Purchase Rights under the Plan, and in the number
of Common Shares subject to other outstanding awards granted under the Plan as
may be determined to be appropriate by the Committee, in its sole discretion,
provided that the number of Common Shares subject to any award shall always be a
whole number. Such adjusted option price shall also be used to determine the
amount payable by the Company upon the exercise of any Share Appreciation Right
associated with any Share Option.
SECTION 5. ELIGIBILITY.
All officers, employees and consultants of the Company and its
Subsidiaries and Affiliates who are responsible for or contribute to the
management, growth and/or profitability of the business of the Company and/or
its Subsidiaries and Affiliates are eligible to be granted awards under the
Plan.
SECTION 6. SHARE OPTIONS.
(a) Grant and Exercise. Share options may be granted alone, in addition
to or in tandem with other awards granted under the Plan and/or cash awards made
outside of the Plan. Any Share Option granted under the Plan shall be in such
form as the Committee may from time to time approve. Share Options granted under
the Plan may be of two types: (i) Incentive Options and (ii) Non-Qualified
Options. The Committee shall have the authority to grant to any optionee
Incentive Options, Non-Qualified Options, or both types of Share Options (in
each case with or without Share Appreciation Rights); provided, however, that
Incentive Options may only be granted to employees.
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<PAGE> 6
(b) Terms and Conditions. Options granted under the Plan shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the
Committee shall deem desirable:
(i) Option Price. The option price per Common Share
purchasable under a Share Option shall be determined by the Committee
at the time of grant but shall be not less than 100% of the Fair Market
Value of the Common Shares at the time of grant.
(ii) Option Term. The term of each Share Option shall be
fixed by the Committee, but no Share Option shall be exercisable more
than ten years after the date the Option is granted.
(iii) Exercisability. Share Options shall be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant; provided, however, that,
except as provided in Section 6(b)(vi) and (b)(vii) and Section 11,
unless otherwise determined by the Committee at or after grant, Share
Options shall be exercisable as follows: 25% on the date of grant and
25% each on the first three anniversaries of the date of grant. If the
Committee provides, in its sole discretion, that any Share Option is
exercisable only in installments, the Committee may waive such
installment exercise provisions at any time at or after grant in whole
or in part, based on such factors as the Committee shall determine, in
its sole discretion.
(iv) Method of Exercise. Subject to whatever installment
exercise provisions apply under Section 6(b)(iii), Share Options may be
exercised in whole or in part at any time during the option period, by
giving written notice of exercise to the Company specifying the number
of shares to be purchased. Such notice shall be accompanied by payment
in full of the purchase price, either by check, note or such other
instrument as the Committee may accept. As determined by the Committee,
in its sole discretion, at or after grant, payment in full or in part
may also be made in the form of a Share Option or unrestricted Common
Shares already owned by the optionee or, in the case of the exercise of
a Non-Qualified Option, Restricted Shares or Deferred Shares subject to
an award hereunder (based, in each case, on the Fair Market Value of
the Share Option or the Common Shares on the date the option is
exercised, as determined by the Committee).
If payment of the option exercise price of a Non-Qualified
Option is made in whole or in part in the form of Restricted Shares or
Deferred Shares, such Restricted Shares or Deferred Shares (and any
replacement shares relating thereto) shall remain (or be) restricted or
deferred, as the case may be, in accordance with the original terms of
the Restricted Shares award or Deferred Shares award in question, and
any additional Common Shares received upon the exercise shall be
subject to the same forfeiture restrictions or deferral limitations,
unless otherwise determined by the Committee, in its sole discretion,
at or after grant.
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No Common Shares shall be issued until full payment therefor
has been made. An optionee shall generally have the rights to dividends
or other rights of a shareholder with respect to shares subject to the
Option when the optionee has given written notice of exercise, has paid
in full for such shares, and, if requested, has given the
representation described in Section 15(a).
(v) Transferability of Options. Incentive Options shall be
transferable by the optionee only by will or by the laws of descent and
shall be exercisable, during the optionee's lifetime, only by the
optionee. Non-Qualified Options shall be transferable by the optionee
by will or by the laws of descent or, with the consent of the
Committee, to (i) the spouse, children or grandchildren of the optionee
("Immediate Family Members"), (ii) a trust or trusts for the exclusive
benefit of such Immediate Family Members, (iii) a partnership in which
such Immediate Family Members are the only partners, or (iv) one or
more entities in which the optionee has a 10% or greater equity
interest, provided that (x) the share option agreement pursuant to
which such Non-Qualified Options are granted must be approved by the
Committee, and (y) subsequent transfers of transferred Non-Qualified
Options shall be prohibited except those in accordance with this
subparagraph (iv). Following transfer, any such Non-Qualified Options
shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that for purposes of
this Plan or the option agreement executed pursuant hereto, the term
"optionee" shall be deemed to refer to the transferee.
(vi) Termination by Death. Subject to Section 6(x), if an
optionee's employment by the Company and any Subsidiary or Affiliate
terminates by reason of death, all Share Options held by such optionee
shall vest immediately and may thereafter be exercised by the legal
representative of the estate or by the legatee of the optionee under
the will of the optionee, for a period of two years (or such other
period as the Committee may specify at grant) from the date of such
death or until the expiration of the stated term of such Share Option,
whichever period is the shorter.
(vii) Termination by Reason of Retirement. Subject to Section
6(x), if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates by reason of Retirement, any Share Option held by
such optionee shall vest immediately and may thereafter be exercised by
the optionee, from the date of such termination until the expiration of
the stated term of such Share Option. In the event of termination of
employment by reason of Retirement, if an Incentive Option is exercised
after the expiration of the exercise periods that apply for purposes of
Section 422 of the Code, the option will thereafter be treated as a
Non-Qualified Option.
(viii) Termination for Cause. Unless otherwise determined by
the Committee (or pursuant to procedures established by the Committee)
at or after grant, if an optionee's employment by the Company and any
Subsidiary or Affiliate terminates for cause, all Share
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<PAGE> 8
Options held by the optionee shall thereupon terminate. For purposes of
this paragraph, "cause" shall mean the following:
(a) Embezzlement, fraud or criminal misconduct;
(b) Gross negligence;
(c) Willful or continuing disregard for the
safety or soundness of the Company;
(d) Willful or continuing violation of the
published rules of the Company; or
(e) A request from a state or federal
governmental agency having regulatory
authority over the Company that the services
of the optionee be terminated.
(ix) Termination by Other than Death, Retirement or Cause.
Subject to Section 6(x), if an optionee's employment by the Company and
any Subsidiary or Affiliate terminates other than by death, Retirement
or cause, any vested Share Option held by such optionee may thereafter
be exercised by the optionee, to the extent it was exercisable at the
time of termination or on such accelerated basis as the Committee may
determine at or after grant (or as may be determined in accordance with
procedures established by the Committee), for a period of two years
from the date of such termination or until the expiration of the stated
term of such Share Option, whichever period is the shorter. In the
event of such termination of employment, if an Incentive Option is
exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Share Option will thereafter
be treated as a Non-Qualified Option.
(x) Incentive Options. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Options
shall be interpreted, amended or altered, nor shall any discretion or
authority granted under the Plan be so exercised, so as to disqualify
the Plan under Section 422 of the Code, or, without the consent of the
optionee(s) affected, to disqualify any Incentive Option under such
Section 422.
If an Incentive Option granted under this Plan is first
exercisable in any calendar year to obtain Common Shares having a fair
market value (determined at the time of grant) in excess of $100,000,
the option is treated as an Incentive Option for Common Shares having a
fair market value (determined at the time of grant) equal to $100,000
and as a NonQualified Option for the remaining Common Shares. In making
this determination, the rules specified in Section 422(d) of the Code
shall be determinative, including the aggregate of all Incentive
Options which are first exercisable in that calendar year under any
plan of the Company.
To the extent permitted under Section 422 of the Code or the
applicable regulations thereunder or any applicable Internal Revenue
Service pronouncement:
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(1) if (x) a participant's employment is terminated
by reason of death, Disability or Retirement and (y) the
portion of any Incentive Option that is otherwise exercisable
during the post-termination period specified under Section
6(f), (g) or (h), applied without regard to the $100,000
limitation contained in Section 422(b)(7) of the Code, is
greater than the portion of such option that is immediately
exercisable as an "Incentive Stock Option" during such
post-termination period under Section 422, such excess shall
be treated as a Non-Qualified Option; and
(2) if the exercise of an Incentive Option is
accelerated by reason of a Change in Control, any portion of
such option that is not exercisable as an Incentive Option by
reason of the $100,000 limitation contained in Section
422(b)(7) of the Code shall be treated as a Non-Qualified
Option.
An employee who owns Common Shares representing more
than ten percent (10%) of the total combined voting power of
all classes of shares of the Company shall not be eligible to
receive an Incentive Option.
(xi) Buyout Provisions. The Committee may at any time offer
to buy out for a payment in cash, Common Shares, Deferred Shares or
Restricted Shares an option previously granted, based on such terms and
conditions as the Committee shall establish and communicate to the
optionee at the time that such offer is made.
(xii) Settlement Provisions. If the option agreement so
provides at grant or is amended after grant and prior to exercise to so
provide (with the optionee's consent), the Committee may require that
all or part of the shares to be issued with respect to the spread value
of an exercised Option take the form of Deferred Shares or Restricted
Shares, which shall be valued on the date of exercise on the basis of
the Fair Market Value (as determined by the Committee) of such Deferred
Shares or Restricted Shares determined without regard to the deferral
limitations and/or forfeiture restrictions involved.
SECTION 7. SHARE APPRECIATION RIGHTS.
(a) Grant and Exercise. Share Appreciation Rights may be granted either
alone, in addition to or in conjunction with other awards granted under the
Plan. A Share Appreciation Right may be exercised by a right holder, subject to
Section 7(b), in accordance with the procedures established by the Committee for
such purpose. Upon such exercise, the right holder shall be entitled to receive
an amount determined in the manner prescribed in Section 7(b).
(b) Terms and Conditions. Share Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
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<PAGE> 10
(i) Exercisability. Share Appreciation Rights shall be
exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at or after grant;
provided, however, that, except as provided in Section 7(b)(iv) and (v)
and Section 11, unless otherwise determined by the Committee at or
after grant, Share Appreciation Rights shall be exercisable as follows:
25% on the date of grant and 25% each on the first three anniversaries
of the date of grant. The exercise of Share Appreciation Rights held by
right holders who are subject to Section 16(b) of the Exchange Act
shall comply with Rule 16b-3 thereunder, to the extent applicable.
(ii) Method of Exercise. Upon the exercise of a Share
Appreciation Right, a right holder shall be entitled to receive an
amount in cash (or, if expressly provided in the award agreement, an
amount in cash and/or Common Shares) equal in value to the excess of
the Fair Market Value of one Common Share over the price per share
specified in the award agreement multiplied by the number of Common
Shares in respect of which the Share Appreciation Right shall have been
exercised. The amount of cash and, if applicable, the number of Common
Shares to be paid shall be calculated on the basis of the Fair Market
Value of the Common Shares on the date of exercise.
(iii) Non-transferability of Share Appreciation Rights. Share
Appreciation Rights shall not be transferable by the right holder.
(iv) Termination by Death. Except as otherwise provided in
the award agreement, if a right holder's employment by the Company and
any Subsidiary or Affiliate terminates by reason of death, all Share
Appreciation Rights held by such right holder shall vest immediately
and may thereafter be exercised by the legal representative of the
estate or by the legatee of the right holder under the will of the
right holder, for a period of two years (or such other period as the
Committee may specify at grant) from the date of such death or until
the expiration of the stated term of such Share Appreciation Right,
whichever period is the shorter.
(v) Termination by Reason of Retirement. Except as otherwise
provided in the award agreement, if a right holder's employment by the
Company and any Subsidiary or Affiliate terminates by reason of
Retirement, any Share Appreciation Right held by such
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<PAGE> 11
right holder shall vest immediately and may thereafter be exercised by
the right holder, from the date of such termination until the
expiration of the stated term of such Share Appreciation Right.
(vi) Termination for Cause. Unless otherwise determined by
the Committee (or pursuant to procedures established by the Committee)
at or after gant, if the right holder's employment by the Company and
for cause, all Share Appreciation Rights held by the right holder shall
thereupon terminate. For purposes of this paragraph "cause" shall mean
the following:
(a) Embezzlement, fraud or criminal misconduct;
(b) Gross negligence;
(c) Willful or continuing disregard for the
safety or soundness of the Company;
(d) Willful or continuing violation of the
published rules of the Company; or
(e) A request from a state or federal
governmental agency having regulatory
authority over the Company that the services
of the right holder be terminated.
(vii) Termination by Other than Death, Retirement or Cause.
Except as otherwise provided in the award agreement, if a right
holder's employment by the Company and any Subsidiary of Affiliate
terminates other than by death, Retirement or cause, any vested Share
Appreciation Right held by such right holder may thereafter be
exercised by the right holder, to the extent it was exercisable at the
time of termination or on such accelerated basis as the Committee may
determine at or after grant (or as may be determined in accordance with
procedures established by the Committee), for a period of two years
from the date of such termination or until the expiration of the stated
term of such Share Appreciation Right, whichever period is shorter.
(viii) Limited Share Appreciation Rights. In its sole
discretion, the Committee may grant "Limited" Share Appreciation Rights
under this Section 7, i.e., Share Appreciation Rights that become
exercisable only in the event of a Change in Control and/or a Potential
Change in Control, subject to such terms and conditions as the
Committee may specify at grant. Such Limited Share Appreciation Rights
shall be settled solely in cash.
(ix) Settlement Provisions. The Committee, in its sole
discretion, may also provide that, in the event of a Change in Control
and/or a Potential Change in Control, the amount to be paid upon the
exercise of a Share Appreciation Right or Limited Share Appreciation
Right shall be based on the Change in Control Price, subject to such
terms and conditions as the Committee may specify at grant.
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SECTION 8. RESTRICTED SHARES.
(a) Administration. Shares of Restricted Shares may be issued either
alone, in addition to or in tandem with other awards granted under the Plan
and/or cash awards made outside the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which, grants of Restricted
Shares will be made, the number of shares to be awarded, the price (if any) to
be paid by the recipient of Restricted Shares (subject to Section 8(b)), the
time or times within which such awards may be subject to forfeiture, and all
other terms and conditions of the awards. The Committee may condition the grant
of Restricted Shares upon the attainment of specified performance goals or such
other factors as the Committee may determine, in its sole discretion. The
provisions of Restricted Shares awards need not be the same with respect to each
recipient.
(b) Awards and Certificates. The prospective recipient of a Restricted
Shares award shall not have any rights with respect to such award, unless and
until such recipient has executed an agreement evidencing the award and has
delivered a fully executed copy thereof to the Company, and has otherwise
complied with the applicable terms and conditions of such award.
(i) The purchase price for Restricted Shares shall be equal
to or less than their par value and may be zero.
(ii) Awards of Restricted Shares must be accepted within a
period of 60 days (or such shorter period as the Committee may specify
at grant) after the award date, by executing a Restricted Shares Award
Agreement and paying whatever price (if any) is required under Section
8(b)(i).
(iii) Each participant receiving a Restricted Shares award
shall be issued a share certificate in respect of such shares of
Restricted Shares. Such certificate shall be registered in the name of
such participant, and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such award.
(iv) The Committee shall require that the share certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Shares award, the participant shall have delivered a share
power, endorsed in blank, relating to the Common Shares covered by such
award.
(c) Restrictions and Conditions. The Restricted Shares awarded pursuant
to this Section 8 shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of this Plan and the award
agreement, during a period set by the Committee commencing with the
date of such award (the "Restriction Period"), the participant shall
not be permitted to sell, transfer, pledge or assign shares of
Restricted Shares awarded under the Plan. Within these limits, the
Committee, in its sole discretion, may provide for the lapse of such
restrictions in installments and may accelerate
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<PAGE> 13
or waive such restrictions in whole or in part, based on service,
performance and/or such other factors or criteria as the Committee may
determine, in its sole discretion.
(ii) Except as provided in this paragraph (ii) and Section
8(c)(i), the participant shall have, with respect to the Restricted
Shares, all of the rights of a shareholder of the Company, including
the right to vote the shares and the right to receive any cash
dividends. The Committee, in its sole discretion, as determined at the
time of award, may permit or require the payment of cash dividends to
be deferred and, if the Committee so determines, reinvested, subject to
Section 15(e), in additional Restricted Shares to the extent shares are
available under Section 4, or otherwise reinvested. Pursuant to Section
4 above, share dividends issued with respect to Restricted Shares shall
be treated as additional shares of Restricted Shares that are subject
to the same restrictions and other terms and conditions that apply to
the shares with respect to which such dividends are issued.
(iii) Subject to the applicable provisions of the award
agreement and this Section 8, upon termination of a participant's
employment with the Company and any Subsidiary or Affiliate for any
reason during the Restriction Period, all shares still subject to
restriction shall vest, or be forfeited, in accordance with the terms
and conditions established by the Committee at or after grant.
(iv) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Shares, certificates for an
appropriate number of unrestricted shares shall be promptly delivered
to the participant.
(d) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Common Shares to the recipient of a Restricted Shares award, subject
to such performance, future service, deferral and other terms and conditions as
may be specified by the Committee.
SECTION 9. DEFERRED SHARES.
(a) Administration. Deferred Shares may be awarded either alone, in
addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom and the time or times at which Deferred Common Shares shall be
awarded, the number of Deferred Shares to be awarded to any person, the duration
of the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Common Shares will be deferred, and the other terms and
conditions of the award in addition to those set forth in Section 9(b).
The Committee may condition the grant of Deferred Shares upon the
attainment of specified performance goals or such other factors or criteria as
the Committee shall determine, in its sole
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<PAGE> 14
discretion. The provisions of Deferred Shares awards need not be the same with
respect to each recipient.
(b) Terms and Conditions. The shares of Deferred Shares awarded
pursuant to this Section 9 shall be subject to the following terms and
conditions:
(i) Subject to the provisions of this Plan and the award
agreement referred to in Section 9(b)(vi) below, Deferred Shares awards
may not be sold, assigned, transferred, pledged or otherwise encumbered
during the Deferral Period. At the expiration of the Deferral Period
(or the Elective Deferral Period referred to in Section 9(b)(v), where
applicable), share certificates shall be delivered to the participant
or his legal representative, in a number equal to the shares covered by
the Deferred Shares award.
(ii) Unless otherwise determined by the Committee at grant,
amounts equal to any dividends declared during the Deferral Period with
respect to the number of shares covered by a Deferred Shares award will
be paid to the participant currently, or deferred and deemed to be
reinvested in additional Deferred Shares, or otherwise reinvested, all
as determined at or after the time of the award by the Committee, in
its sole discretion.
(iii) Subject to the provisions of the award agreement and
this Section 9, upon termination of a participant's employment with the
Company and any Subsidiary or Affiliate for any reason during the
Deferral Period for a given award, the Deferred Shares in question
shall vest, or be forfeited, in accordance with the terms and
conditions established by the Committee at or after grant.
(iv) Based on service, performance and/or such other factors
or criteria as the Committee may determine, the Committee may, at or
after grant, accelerate the vesting of all or any part of any Deferred
Shares award and/or waive the deferral limitations for all or any part
of such award.
(v) A participant may elect to further defer receipt of an
award (or an installment of an award) for a specified period or until a
specified event (the "Elective Deferral Period"), subject in each case
to the Committee's approval and to such terms as are determined by the
Committee, all in its sole discretion. Subject to any exceptions
adopted by the Committee, such election must generally be made at least
12 months prior to completion of the Deferral Period for such Deferred
Shares award (or such installment).
(vi) Each award shall be confirmed by, and subject to the
terms of, a Deferred Shares agreement executed by the Company and the
participant.
(c) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and the service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee
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<PAGE> 15
a minimum value, payable in cash or Common Shares to the recipient of a Deferred
Shares award, subject to such performance, future service, deferral and other
terms and conditions as may be specified by the Committee.
SECTION 10. OTHER SHARE-BASED AWARDS.
(a) Administration. Other awards of Common Shares and other awards that
are valued in whole or in part by reference to, or are otherwise based on,
Common Shares ("Other Share-Based Awards"), including, without limitation,
performance shares, convertible preferred stock, convertible debentures,
exchangeable securities and Common Share awards or options valued by reference
to Book Value or subsidiary performance, may be granted either alone or in
addition to or in tandem with Share Options, Share Appreciation Rights,
Restricted Shares or Deferred Shares granted under the Plan and/or cash awards
made outside of the Plan.
Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
awards shall be made, the number of Common Shares to be awarded pursuant to such
awards, and all other conditions of the awards. The Committee may also provide
for the grant of Common Shares upon the completion of a specified performance
period. The provisions of Other Share-Based Awards need not be the same with
respect to each recipient.
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(b) Terms and Conditions. Other Share-Based Awards made pursuant to
this Section 11 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the award
agreement referred to in Section 10(b)(v) below, shares subject to
awards made under this Section 10 may not be sold, assigned,
transferred, pledged or otherwise encumbered prior to the date on which
the shares are issued, or, if later, the date on which any applicable
restriction, performance or deferral period lapses.
(ii) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee at grant,
the recipient of an award under this Section 10 shall be entitled to
receive, currently or on a deferred basis, interest or dividends or
interest or dividend equivalents with respect to the number of shares
covered by the award, as determined at the time of the award by the
Committee, in its sole discretion, and the Committee may provide that
such amounts (if any) shall be deemed to have been reinvested in
additional Common Shares or otherwise reinvested.
(iii) Any award under this Section 10 and any Common Shares
covered by any such award shall vest or be forfeited to the extent so
provided in the award agreement, as determined by the Committee, in its
sole discretion.
(iv) In the event of the participant's Retirement, Disability
or death, or in cases of special circumstances, the Committee may, in
its sole discretion, waive in whole or in part any or all of the
remaining limitations imposed hereunder (if any) with respect to any or
all of an award under this Section 10.
(v) Each award under this Section 10 shall be confirmed by,
and subject to the terms of, an agreement or other instrument by the
Company and by the participant.
(vi) Common Shares (including securities convertible into
Common Shares) issued on a bonus basis under this Section 11 may be
issued for no cash consideration.
SECTION 11. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 11(b), or
(2) a "Potential Change in Control" as defined in section
11(c), but only if and to the extent so determined by the Committee or the Board
at or after grant (subject to any right of
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<PAGE> 17
approval expressly reserved by the Committee or the Board at the time of such
determination), the following acceleration and valuation provisions shall apply:
(i) Any Share Appreciation Rights (including, without
limitation, any Limited Share Appreciation Rights) outstanding for at
least six months and any Share Option awarded under the Plan not
previously exercisable and vested shall become fully exercisable and
vested.
(ii) The restrictions and deferral limitations applicable to
any Restricted Shares, Deferred Shares and Other Share-Based Awards, in
each case to the extent not already vested under the Plan, shall lapse
and such shares and awards shall be deemed fully vested.
(iii) The value of all outstanding Share Options, Share
Appreciation Rights, Restricted Shares, Deferred Shares and Other
Share-Based Awards, in each case to the extent vested, shall, unless
otherwise determined by the Committee in its sole discretion at or
after grant but prior to any Change in Control, be cashed out on the
basis of the "Change in Control Price" as defined in Section 11(d) as
of the date such Change in Control or such Potential Change in Control
is determined to have occurred or such other date as the Committee may
determine prior to the Change in Control.
(b) Definition of "Change in Control." For purposes of Section 11(a), a
"Change in Control" means the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Company or a
wholly-owned subsidiary thereof or any employee benefit plan of the
Company or any of its Subsidiaries, becomes the beneficial owner of the
Company's securities having 20% or more of the combined voting power of
the then outstanding securities of the Company that may be cast for the
election of trustees of the Company (other than as a result of an
issuance of securities initiated by the Company in the ordinary course
of business); or
(ii) as the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing transactions
less than a majority of the combined voting power of the then
outstanding securities of the Company or any successor corporation or
entity entitled to vote generally in the election of the trustees of
the Company or such other corporation or entity after such transaction
are held in the aggregate by the holders of the Company's securities
entitled to vote generally in the election of trustees of the Company
immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Board cease for
any reason to constitute at least a majority
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<PAGE> 18
thereof, unless the election, or the nomination for election by the
Company's shareholders, of each trustee of the Company first elected
during such period was approved by a vote of at least two-thirds of the
trustees of the Company then still in office who were trustees of the
Company at the beginning of any such period.
(c) Definition of "Potential Change in Control." For purposes of
Section 11(a), a "Potential Change in Control" means the happening of any one of
the following:
(i) The approval by shareholders of an agreement by the
Company, the consummation of which would result in a Change in Control
of the Company as defined in Section 11(b); or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or a
Subsidiary or any Company employee benefit plan (including any trustee
of such plan acting as such trustee)) of securities of the Company
representing 10% or more of the combined voting power of the Company's
outstanding securities and the adoption by the Board of a resolution to
the effect that a Potential Change in Control of the Company has
occurred for purposes of this Plan.
(d) Definition of "Change in Control Price." For purposes of this
Section 11, "Change in Control Price" means the highest price per share paid in
any transaction reported on the New York Stock Exchange or paid or offered in
any bona fide transaction related to a potential or actual Change in Control of
the Company at any time during the 60 day period immediately preceding the
occurrence of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the Committee
except that, in the case of Incentive Options and Share Appreciation Rights
relating to Incentive Options, such price shall be based only on transactions
reported for the date on which the optionee exercises such Share Appreciation
Rights (or Limited Share Appreciation Rights) or, where applicable, the date on
which a cashout occurs under Section 11(a)(2)(iii).
SECTION 12. OWNERSHIP LIMITATION.
All awards hereunder shall be subject to the ownership limitations set
forth in the Declaration of Trust of the Company as such may be amended from
time to time. Without limiting the generality of the foregoing, any award which
causes a recipient, or any constructive or beneficial owner of Shares (as
determined under Sections 318 and 544, respectively, of the Code), to own or be
deemed to own shares in excess of such ownership limitations shall be void.
No Share Options referred to herein shall be granted, awarded or
exercised, and no Deferred Shares or Restricted Shares shall be granted or
awarded hereunder, at any time prior to the consummation of the Company's
initial public offering. If no such offering is consummated, the Share Options
referred to herein shall not be granted or awarded or become exercisable, and no
Deferred Shares or Restricted Shares shall be granted or awarded.
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<PAGE> 19
SECTION 13. AMENDMENTS AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under a Share Option, Share Appreciation Right (or
Limited Share Appreciation Right), Restricted or Deferred Shares award, Share
Purchase Right or Other Share-Based Award theretofore granted, without the
optionee's or participant's consent, or which, without the approval of the
Company's shareholders, would: (a) except as expressly provided in this Plan,
increase the total number of shares reserved for the purpose of the Plan; or (b)
change the employees or class of employees eligible to participate in the Plan.
The Committee may amend the terms of any Share Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 4
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Share Options for
previously granted Share Options (on a one for one or other basis), including
previously granted Share Options having higher option exercise prices. Subject
to the above provisions, the Board shall have broad authority to amend the Plan
to take into account changes in applicable securities and tax laws and
accounting rules, as well as other developments.
SECTION 14. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Shares or payments in lieu of or with respect to
awards hereunder; provided, however, that, unless the Committee otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 15. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to
a Share Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
All certificates for Common Shares or other securities delivered under
the Plan shall be subject to such stock-transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any
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<PAGE> 20
stock exchange upon which the Common Shares are then listed, and any applicable
Federal or state securities law, and the Committee may cause a legend or legends
to be put on any such certificates to make appropriate reference to such
restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment with
the Company or a Subsidiary or Affiliate, as the case may be, nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
to terminate the employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includable in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations may be settled with Common Shares, including
Common Shares that are part of the award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements and the Company and its Subsidiaries or
Affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Shares (or in Deferred Shares or other
types of Plan awards) at the time of any dividend payment shall only be
permissible if sufficient Shares are available under Section 4 for such
reinvestment (taking into account then outstanding Share Options, Share Purchase
Rights and other Plan awards).
(f) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Maryland.
SECTION 16. EFFECTIVE DATE OF PLAN.
The Plan shall be effective as of February 19, 1998, the date of the
Plan's approval by the Board and the Company's sole shareholder.
SECTION 17. TERM OF PLAN.
No Share Option, Share Appreciation Right, Restricted Shares award,
Deferred Shares award or Other Share-Based Award shall be granted pursuant to
the Plan on or after
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<PAGE> 21
the tenth anniversary of the effective date as set forth in Section 17 above,
but awards granted prior to such tenth anniversary may extend beyond that date.
SECTION 18. RESTRICTIONS ON TRANSFER.
Awards of derivative securities (as defined in Rule 16a-1(c) under the
Exchange Act or any successor definition adopted by the Securities and Exchange
Commission) granted under the Plan shall not be transferable except (a) by will
or the laws of descent and distribution, or (b) as provided in Sections 6(e) and
7(b)(iii) of the Plan.
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<PAGE> 1
EXHIBIT 10.8
FORM OF
CORRECTIONAL PROPERTIES TRUST
1998 NON-EMPLOYEE TRUSTEES' SHARE OPTION PLAN
SECTION 1. PURPOSE.
The purpose of the Correctional Properties Trust Non-Employee Trustees'
Share Option Plan (the "Plan") is to advance the interests of Correctional
Properties Trust (the "Company") and its shareholders by linking the personal
interests of members of the Board of Trustees (the "Board") of the Company who
are not employees (a "Non-Employee Trustee") of the Company, or any subsidiary
of the Company, Wackenhut Corrections Corporation ("WCC"), or any subsidiary of
WCC, to those of the Company's shareholders and to attract and retain
Non-Employee Trustees of outstanding competence.
SECTION 2. ADMINISTRATION.
(a) The Plan shall be administered by a committee (the "Committee"), to
be appointed by the Board, consisting of two or more independent outside
directors (each of whom qualifies as a "non-employee director" under Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). The
Committee shall have all the powers vested in it by the terms of the Plan, which
shall include the authority (within the limitations described herein) to
prescribe the form of the agreements embodying awards of non-qualified options
(the "Options"). The Committee, subject to the provisions of the Plan, shall
grant Options under the Plan and shall have the power to construe the Plan, to
determine all questions arising hereunder and to adopt and amend such rules and
regulations for the administration of the Plan as it may deem desirable. Any
decision of the Committee in the administration of the Plan shall be final and
conclusive. The Committee may act only by a majority of its members in office,
except that the members of the Committee may authorize any one or more of their
members or the Secretary or any other officer of the Company to execute and
deliver documents on behalf of the Committee. In the event a Committee of two or
more qualifying directors cannot be formed, the Plan shall be administered by
the Board.
(b) Each person who is or shall have been a member of the Committee
shall be indemnified and held harmless by the Company against and from any and
all loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him in connection with or resulting from any claim, action, suit, or
proceeding to which he may be or become involved by reason of any action taken
or failure to act under the Plan and against and from any and all amounts paid
by him in settlement thereof (with the Company's written approval) or paid by
him in satisfaction of a judgment in any such action, suit, or proceeding,
except a judgment in favor of the Company based upon a finding of his lack of
good faith; subject, however, to the conditions that upon the institution of any
claim, action, suit, or proceeding against him, he shall in writing give the
Company an opportunity, at its expense, to handle and defend the same before he
undertakes to handle and defend
<PAGE> 2
it on such person's own behalf. The foregoing right of indemnification shall not
be exclusive of any other right to which such person may be entitled as a matter
of law or otherwise, or any power that the Company may have to indemnify him or
hold him harmless. Each member of the Committee and each officer and employee of
the Company shall be fully justified in relying or acting in good faith upon any
information furnished in connection with the administration of the Plan by an
appropriate person or persons other than himself. In no event shall any person
who is or shall have been a member of the Committee or an officer or employee of
the Company be held liable for any determination made or other action taken or
any omission to act in reliance upon any such information as referred to in the
preceding sentence, or for any action (including the furnishing of information)
taken or any omission to act, when such determination, action, or omission is
made in good faith.
SECTION 3. PARTICIPATION.
Each Non-Employee Trustee shall receive Options in accordance with
Section 5 below. As used herein, the term "subsidiary" means any corporation at
least 40% of the outstanding voting stock of which is owned, directly or
indirectly, by the Company.
SECTION 4. AWARDS UNDER THE PLAN.
(a) Type of Awards. Awards under the Plan shall include only Options,
which are rights to purchase the Company's common shares of beneficial interest,
par value of $.001 per share (the "Common Shares"). All Options are subject to
the terms, conditions, and restrictions specified in Paragraph 5 below.
(b) Maximum Number of Common Shares That May Be Issued. No more than
55,000 Common Shares, subject to adjustment as provided in Paragraph 6 below,
may be issued under the Plan pursuant to the exercise of Options.
(c) Rights with Respect to Common Shares. A Non-Employee Trustee to
whom an Option is granted (and any person succeeding to such a Non-Employee
Trustee's rights pursuant to the Plan) shall have no rights as a shareholder
with respect to any Common Shares issuable pursuant to any such Option until the
date of the issuance of a share certificate to him for such Common Shares.
Except as provided in Paragraph 6 below, no adjustment shall be made for
dividends, distributions, or other rights (whether ordinary or extraordinary,
and whether in cash, securities, or other property) for which the record date is
prior to the date such share certificate is issued.
2
<PAGE> 3
SECTION 5. NON-QUALIFIED OPTIONS.
All Options shall be options which are not "incentive stock options"
within the meaning of Section 422 of the Code. Each Option shall be evidenced by
an agreement in such form as the Board shall prescribe from time to time in
accordance with the Plan and shall be subject to the following terms and
conditions:
(a) The option price per Common Share shall be 100% of the fair market
value per Common Share at the date the Option is granted. The fair market value
per Common Share on any given date, unless otherwise determined by the Committee
in good faith, shall be the reported closing price of a Common Share on the New
York Stock Exchange or, if no such sale of Common Shares is reported on the New
York Stock Exchange on such date, the fair market value of the Common Share as
determined by the Board in good faith. The options granted to Founding Trustees
(as defined below) upon effectiveness of the Registration Statement (as defined
below) will have an exercise price equal to the Offering (as defined below)
price.
(b) Each Non-Employee Trustee as of the date of the consummation of the
Company's initial public offering of up to 7,130,000 Common Shares (the
"Offering") (each such trustee, a "Founding Trustee"), shall be granted an
Option to purchase 5,000 Common Shares on the date of consummation of the
Offering. Each Non-Employee Trustee who is not a Founding Trustee (a
"Non-Founding Trustee") shall be granted an Option to purchase 2,000 Common
Shares on the date the Non-Founding Trustee is first elected or appointed to the
Board. In addition to the foregoing, each Non-Employee Trustee shall be granted
an Option to purchase 2,000 Common Shares upon his reelection to serve on the
Board, subject to the limitation on the number of Common Shares subject to the
Plan.
(c) No Option referred to herein shall be granted, awarded or exercised
at any time prior to the consummation of the Offering. If the Offering is not
consummated, the Options referred to herein shall not be granted or awarded or
become exercisable.
(d) The term of each Option shall be fixed by the Committee, but no
Option shall be exercisable more than ten years after the date the Option is
granted.
(e) The Options to be granted to Founding Trustees will vest on the
date of grant. Options which are granted in the future will vest in four (4)
equal annual installments beginning on the date of grant, subject to the ability
of the Board to accelerate vesting in its discretion under appropriate
circumstances.
(f) Subject to whatever installment exercise provisions apply under
subparagraph (e), Options may be exercised in whole or in part at any time
during the option period, by giving written notice of exercise to the Company
specifying the number of Common Shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price either by check, note or
such
3
<PAGE> 4
other instrument as the Committee may accept. As determined by the Committee in
its sole discretion, at or after grant, payment in full or in part may also be
made in the form of a Common Share option or Common Shares already owned by the
Non-Employee Trustee (based, in each case, on the fair market value of the
Common Share option or the Common Shares on the date the Option is exercised, as
determined by the Committee in accordance with subparagraph (a)). No Common
Shares shall be issued until full payment therefor has been made. Upon purchase
of Common Shares, an optionee shall make such representations, warranties and
covenants as the Committee may request.
(g) The Committee may, in its discretion, authorize all or a portion of
the Options to be granted to a Non-Employee Trustee to be on terms which permit
transfer by such optionee to (i) the spouse, children or grandchildren of the
Non-Employee Trustee ("Immediate Family Members"), (ii) a trust or trusts for
the exclusive benefit of such Immediate Family Members, (iii) a partnership in
which such Immediate Family Members are the only partners, or (iv) certain
affiliates of the Non-Employee Trustee, as determined by the Committee, provided
that (x) there may be no consideration for any such transfer, (y) the option
agreement pursuant to which such Options are granted must be approved by the
Committee, and must expressly provide for transferability in a manner consistent
with this Section, and (z) subsequent transfers of transferred Options shall be
prohibited except those in accordance with this subparagraph (g). Following
transfer, any such Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of this Plan or the option agreement executed pursuant hereto, the term
"optionee" or "Non-Employee Trustee" shall be deemed to refer to the transferee.
(h) If an optionee ceases to be a member of the Board by reason of the
optionee's death, any unexercised Options held by such optionee may thereafter
be exercised in full (notwithstanding any vesting provisions to the contrary) by
the legal representative of the optionee's estate or by the legatee of the
optionee under the will of the optionee for a period of two years from the date
of death or until the expiration of the stated term of such Option, whichever
period is shorter.
(i) If an optionee ceases to be a member of the Board for any reason
other than death, any unexercised Options held by such optionee may thereafter
be exercised in full (notwithstanding any vesting provisions to the contrary) by
the optionee or his legal representative until the expiration of the stated term
of such Option.
(j) If an optionee ceases to be a member of the Board for any other
reason, the unexercised Options held by such optionee may thereafter be
exercised in full (but only to the extent vested on the termination date) by the
optionee.
SECTION 6. CAPITAL ADJUSTMENTS.
In the event of any merger, reorganization, consolidation,
recapitalization, share dividend, share split or other change in corporate
structure affecting the Common Shares, an adjustment shall be made in the
aggregate number of Common Shares reserved for issuance under the Plan and in
the
4
<PAGE> 5
number and price of Common Shares subject to outstanding Options granted under
the Plan, as may be determined to be appropriate by the Committee, in its sole
discretion, provided that the number of Common Shares subject to an Option shall
always be a whole number.
SECTION 7. AUTHORITY TO ISSUE COMMON SHARES.
The Company, during the term of the Options granted hereunder, will at
all times reserve and keep available, and will seek to obtain from any
regulatory body having jurisdiction, any requisite authority in order to issue
and sell such number of Common Shares as shall be sufficient to satisfy the
requirements of the Options granted under the Plan. If in the opinion of its
counsel the issuance or sale of any Common Shares hereunder shall not be lawful
for any reason, including the inability of the Company to obtain from any
regulatory body having jurisdiction, authority deemed by such counsel to be
necessary to such issuance or sale, the Company shall not be obligated to issue
or sell any such Common Shares.
SECTION 8. OWNERSHIP LIMITATION.
All Options shall be subject to the ownership limitations set forth in
the Declaration of Trust of the Company, as such may be amended from time to
time. Without limiting the generality of the foregoing, any Option which causes
a Non-Employee Trustee, or any constructive or beneficial owner of Common Shares
subject to such Option (as determined under Sections 318 and 544, respectively,
of the Code), to own or be deemed to own Common Shares in excess of such
ownership limitations shall be void.
SECTION 9. MISCELLANEOUS PROVISIONS.
(a) No Non-Employee Trustee or other person shall have any claim or
right to be granted an Option under the Plan. Neither the Plan nor any action
taken hereunder shall be construed as giving a Non-Employee Trustee any right to
be retained in the service of the Company.
(b) Except as provided in Section 5(g), an optionee's rights and
interests under the Plan may not be assigned or transferred in whole or in part
either directly or by operation of law or otherwise (except in the event of an
optionee's death, by will or the laws of descent and distribution), including,
but not by way of limitation, execution, levy, garnishment, attachment, pledge,
bankruptcy, or in any manner, and no such right or interest of any participant
in the Plan shall be subject to any obligation or liability of such participant.
(c) No Common Shares shall be issued hereunder unless counsel for the
Company shall be satisfied that such issuance will be in compliance with
applicable federal, state and other securities laws.
(d) The expenses of administration of the Plan shall be borne by the
Company.
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<PAGE> 6
(e) The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to ensure the issuance of Common Shares upon exercise of any Option under
the Plan and issuance of Common Shares upon exercise of Options shall be
subordinate to the claims of the Company's general creditors.
(f) By accepting any Option or other benefit under the Plan, each
optionee and each person claiming under or through an optionee shall be
conclusively deemed to have indicated his acceptance and ratification of, and
consent to, any action taken under the Plan by the Company or the Committee.
(g) The appropriate officers of the Company shall cause to be filed any
reports, returns, or other information regarding Options hereunder or any Common
Shares issued pursuant hereto as may be required by the Exchange Act, the
Securities Act of 1933, as amended, or any other applicable statute, rule, or
regulation (excluding reports pursuant to Section 16 of the Exchange Act, which
shall be the sole responsibility of a Non-Employee Trustee who is granted or
exercises an Option).
SECTION 10. AMENDMENT.
The Plan may be amended at any time and from time to time by the Board
as the Board shall deem advisable. No amendment of the Plan shall materially and
adversely affect any right of any optionee with respect to any Option
theretofore granted without such optionee's written consent.
SECTION 11. EFFECTIVE DATE.
This Plan shall be effective on February 19, 1998.
SECTION 12. TERMINATION.
This Plan shall terminate upon the earlier of the following dates or
events to occur:
(a) the adoption of a resolution of the Board terminating the
Plan; or
(b) December 31, 2008.
No termination of the Plan shall materially and adversely affect any of
the rights or obligations of any person, without his consent, under any Option
theretofore granted under the Plan.
6
<PAGE> 1
Exhibit 21
Correctional Properties Trust
Subsidiary State of Organization
---------- ---------------------
CPT Limited Partner Inc. Delaware
CPT Operating Partnership L.P. Delaware
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
use of our reports (and to all references to our Firm) included in or made a
part of this Registration Statement File No. 333-46681.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
April 7, 1998.
