<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1998
REGISTRATION NO. 333-50139
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
PRIME RETAIL, L.P. SKY MERGER CORP.
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
DELAWARE 6798 52-1844882 MARYLAND 6798 38-3405229
(State or other (Primary Standard (I.R.S. Employer (State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification jurisdiction of Industrial Identification
incorporation or Classification Code Number) incorporation or Classification Code Number)
organization) Number) organization) Number)
100 EAST PRATT STREET 5000 HAKES DRIVE
NINETEENTH FLOOR NORTON SHORES, MICHIGAN 49441
BALTIMORE, MARYLAND 21202 (616) 798-9100
(410) 234-0782
(Address, including ZIP code, and telephone number, including (Address, including ZIP code, and telephone number, including
area code, of registrant's principal executive offices) area code, of registrant's principal executive offices)
MICHAEL W. RESCHKE JAMES S. WASSEL
CHAIRMAN OF THE BOARD PRESIDENT
100 EAST PRATT STREET 5000 HAKES DRIVE
NINETEENTH FLOOR NORTON SHORES, MICHIGAN 49441
BALTIMORE, MARYLAND 21202 (616) 798-9100
(410) 234-0782
(Name, address, including ZIP Code, and telephone number, (Name, address, including ZIP Code, and telephone number,
including area code, of agent for service) including area code, of agent for service)
</TABLE>
------------------------------
COPIES TO:
WAYNE D. BOBERG, ESQ. ERROL R. HALPERIN, ESQ.
STEVEN J. GAVIN, ESQ. HAL M. BROWN, ESQ.
Winston & Strawn Rudnick & Wolfe
35 West Wacker Drive 203 North LaSalle Street
Chicago, Illinois 60601 Chicago, Illinois 60601
(312) 558-5600 (312) 368-4000
(312) 558-5700 (telecopier) (312) 236-7516 (telecopier)
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Units of Limited
Partnership of Prime
Retail, L.P............... 3,885,940(1)
}$14.59(2) }$61,672,863.76 }$18,193.50(2)(3)
- ---------------------------------------------
Common Stock, $0.01 par
value per share, of Sky
Merger Corp............... 5,885,910(3)
</TABLE>
(1) Represents the estimated maximum number of common units of limited
partnership of Prime Retail, L.P. to be issued in connectin with the
transactions described herein to the limited partners of Horizon/Glen Outlet
Centers Limited Partnership.
(2) Determined pursuant to Rule 457(f)(2). (Based on the book value of $14.59
per unit of limited partnership interest of Horizon/Glen Outlet Centers
Limited Partnership as of December 31, 1997). $18,193.50 previously paid by
the registrants.
(3) The common units of limited partnership of Prime Retail, L.P. are
exchangeable on a one-for-one basis for shares of common stock, $0.01 par
value per share, of Sky Merger Corp. Such shares also are being registered
herewith, as well as any such common shares issuable in respect
ofdistributions, share splits or recapitalization relating thereto. In
accordance with Rule 457(h)(3), no additional fee is payable in respect of
such registration.
------------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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.
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<PAGE>
REVISED PRELIMINARY COPY
PRIME RETAIL, L.P.
100 EAST PRATT STREET
NINETEENTH FLOOR
BALTIMORE, MARYLAND 21202
May , 1998
Dear Limited Partner:
As a limited partner in Prime Retail, L.P. ("Prime Partnership"), you are
being asked to consent to the merger of Horizon/Glen Outlet Centers Limited
Partnership ("Horizon Partnership") with and into Prime Partnership and the
other transactions contemplated by the agreement and plan of merger among Prime
Retail, Inc. ("Prime"), Prime Partnership, Horizon Group, Inc. ("Horizon"),
Horizon Partnership and certain wholly-owned subsidiaries of Horizon. The name
of the surviving partnership in the merger will be "Prime Retail, L.P."
In the merger, each limited partner of Horizon Partnership will receive
0.9193 of a common unit of limited partnership interest in Prime Partnership for
each unit of limited partnership interest in Horizon Partnership. Each
outstanding common and preferred unit of Prime Partnership will continue to
represent a unit of the same class and series of partnership interest in the
surviving partnership. In addition, each holder of Series C convertible
preferred units and common units of Prime Partnership prior to the merger will
receive a special cash distribution of $0.50 per unit and each holder of Series
B preferred units of Prime Partnership prior to the merger will receive a
special cash distribution of $0.60 per unit.
As a result of the merger and certain related transactions, Prime
Partnership will add 22 of Horizon Partnership's best performing factory outlet
centers to its portfolio and establish itself as the largest owner, operator and
developer of outlet centers in the United States with a total market
capitalization of over $2.2 billion. In addition, Prime Partnership's common and
Series C convertible preferred unitholders and Horizon Partnership's unitholders
will also receive, through a taxable distribution, common units of limited
partnership interest of Horizon Group Properties, L.P. ("HGP LP") that will own
and operate a portfolio consisting of Horizon's 13 remaining centers and two of
Prime's existing properties.
Details of the proposed merger and information regarding Prime Partnership,
Horizon Partnership and HGP LP are contained in the attached Joint Consent
Solicitation Statement/Prospectus/Information Statement, which you are
encouraged to read carefully.
The Board of Directors of Prime, as the sole general partner of Prime
Partnership, believes that the proposed merger will benefit Prime Partnership
and its limited partners by (i) enabling Prime Partnership to complement and
expand its existing portfolio of properties through the selective acquisition of
22 of Horizon Partnership's best performing outlet centers, (ii) positioning the
surviving partnership to meet competitive challenges by substantially increasing
its size and capitalization and thereby enabling it to achieve greater economies
of scale and to improve its access to capital and (iii) providing Prime
Partnership's common and Series C convertible preferred unitholders with the
opportunity to benefit from the continuing business and operations of HGP LP
through ownership of common units of limited partnership interest in such
entity.
<PAGE>
The Board of Directors of Prime, as the sole general partner of Prime
Partnership, has carefully reviewed and considered the terms and conditions of
the merger and the related transactions and has received and considered the
written opinion of Friedman, Billings, Ramsey & Co., Inc. dated February 1, 1998
to the effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the consideration to be paid by Prime
Partnership in connection with such transactions is fair to Prime Partnership
and its unitholders from a financial point of view. THE BOARD OF DIRECTORS OF
PRIME, AS THE SOLE GENERAL PARTNER OF PRIME PARTNERSHIP, HAS UNANIMOUSLY
APPROVED THE PROPOSED MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE
MERGER AGREEMENT AND BELIEVES THAT IT IS IN THE BEST INTERESTS OF PRIME
PARTNERSHIP AND ITS UNITHOLDERS AND RECOMMENDS THAT YOU CONSENT TO SUCH
TRANSACTIONS.
The proposed merger with Horizon Partnership and the other transactions
contemplated by the merger agreement require the consent of Prime Partnership
unitholders owning (i) a majority of the outstanding Prime Partnership common
units and (ii) two-thirds of the outstanding Prime Partnership Series C
preferred units. You may revoke your consent in the manner described in the
accompanying Joint Consent Solicitation Statement/Prospectus/Information
Statement. Your prompt cooperation will be greatly appreciated. This
solicitation is made on behalf of the Board of Directors of Prime, as the sole
general partner of Prime Partnership.
Sincerely,
Michael W. Reschke
CHAIRMAN OF THE BOARD
PRIME RETAIL, INC.
<PAGE>
REVISED PRELIMINARY COPY
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
May , 1998
Dear Limited Partner:
As a limited partner in Horizon/Glen Outlet Centers Limited Partnership
("Horizon Partnership"), you are being asked to consent to the merger of Horizon
Partnership with and into Prime Retail, L.P. ("Prime Partnership") and the other
transactions contemplated by a merger agreement between Horizon Partnership,
Horizon Group, Inc. ("Horizon"), Prime Retail, Inc., Prime Partnership and
certain wholly-owned subsidiaries of Horizon. As a result of the proposed
merger, each Horizon Partnership Unitholder will receive, for each unit of
limited partnership interest in Horizon Partnership, 0.9193 of a common unit of
limited partnership interest in Prime Partnership and approximately 0.04597 of a
common unit of limited partnership interest in a newly formed limited
partnership, Horizon Group Properties, L.P.
Generally, the receipt of Prime Partnership common units is not expected to
result in a taxable income or gain by any Horizon Partnership Unitholder.
However, the particular tax consequences of the partnership merger will depend
on certain factors related to the tax situation of each Horizon Partnership
Unitholder as discussed in the accompanying Joint Consent Solicitation
Statement/Prospectus/Information Statement.
In February of 1997, the Board of Directors of Horizon, the sole general
partner of Horizon Partnership, set in motion a series of events which led
Horizon to explore strategic alternatives, adopt a revised business plan, bring
in new senior management, refinance a large portion of the debt and eliminate
the burden of Horizon Partnership's Dole Cannery Project.
In November of 1997, the Board of Directors of Horizon approved entering
into a merger agreement with Horizon Partnership, Prime Retail, Inc., Prime
Partnership and certain wholly-owned subsidiaries of Horizon to form the largest
outlet center business in the United States.
The proposed merger will combine 22 of Horizon Partnership's best performing
outlet centers with 26 of Prime Partnership's best performing outlet centers,
resulting in a portfolio of outlet centers more than twice the size of its next
largest factory outlet industry competitor, based on gross leasable area as of
December 31, 1997. Horizon Partnership's lesser performing properties, together
with two of Prime Partnership's properties, will be combined into a separate
company, Horizon Group Properties, L.P., whose limited partnership interests
will be distributed to all holders of common or Series C convertible preferred
units of limited partnership interests in Prime Partnership following the
consummation of the merger.
The Board of Directors of Horizon, the sole general partner of Horizon, has
carefully reviewed and considered the terms and conditions of the merger
agreement and has received and considered the written opinion of Lehman Brothers
to the effect that as of the date of such opinion, and based upon and subject to
the assumptions made and matters considered, the proposed consideration to be
received by the limited partners of Horizon Partnership in the merger is fair
from a financial point of view. ACCORDINGLY, THE BOARD OF DIRECTORS OF HORIZON,
THE SOLE GENERAL PARTNER OF HORIZON PARTNERSHIP, HAS DETERMINED THAT THE MERGER
AND THE OTHER TRANSACTIONS CONTEMPLATED IN THE MERGER AGREEMENT ARE IN THE BEST
INTERESTS OF THE LIMITED PARTNERS OF HORIZON PARTNERSHIP AND UNANIMOUSLY
RECOMMENDS THAT YOU CONSENT TO SUCH TRANSACTIONS.
The merger agreement and merger requires the consent of limited partners
holding a majority of Horizon Partnership limited partnership interests. You may
revoke your consent in the manner described in the accompanying Joint Consent
Solicitation Statement/Prospectus/Information Statement. Your prompt cooperation
will be greatly appreciated. This solicitation is made on behalf of the Board of
Directors of Horizon, the sole general partner of Horizon Partnership.
Sincerely,
James S. Wassel, Chief Executive
Officer
HORIZON GROUP, INC.
<PAGE>
PRIME RETAIL, L.P.
AND
HORIZON/GLEN OUTLET CENTERS
LIMITED PARTNERSHIP
JOINT CONSENT
SOLICITATION STATEMENT
----------------
PRIME RETAIL, L.P.
PROSPECTUS
----------------
HORIZON GROUP PROPERTIES, L.P.
INFORMATION STATEMENT
This Joint Consent Solicitation Statement/Prospectus/Information Statement
is being furnished to the holders of units of limited partnership interest of
Prime Retail, L.P., a Delaware limited partnership ("Prime Partnership"), in
connection with the solicitation of consents by Prime Retail, Inc., a Maryland
corporation (together with its subsidiaries, "Prime"), as the sole general
partner of Prime Partnership, of the holders of (i) common units of limited
partnership interest of Prime Partnership ("Prime Partnership Common Units") and
(ii) Series C preferred units of Prime Partnership ("Prime Partnership Series C
Preferred Units"). Holders of Prime Partnership Common Units ("Prime Partnership
Common Unitholders") and Prime Partnership Series C Preferred Units ("Prime
Partnership Series C Preferred Unitholders" and together, with the Prime
Partnership Common Unitholders, the "Prime Partnership Consenting Unitholders")
will be asked to consent to the merger of Prime Partnership with Horizon/Glen
Outlet Centers Limited Partnership, a Delaware limited partnership ("Horizon
Partnership"), and the other transactions (collectively, the "Transactions")
contemplated by the Amended and Restated Agreement and Plan of Merger, dated as
of February 1, 1998 (the "Merger Agreement"), among Prime, Prime Partnership,
Horizon Group, Inc., a Michigan corporation, Sky Merger Corp., a Maryland
corporation ("Sky Merger") and the successor to Horizon pursuant to a
reincorporation merger contemplated by the Merger Agreement, Horizon Group
Properties, Inc., a Maryland corporation ("HGP"), Horizon Group Properties,
L.P., a Delaware limited partnership ("HGP LP"), and Horizon Partnership. A copy
of the Merger Agreement is attached hereto as Appendix A.
The Merger Agreement provides for the merger of Horizon Partnership with and
into Prime Partnership (the "Partnership Merger"), whereby Prime Partnership
shall be the surviving entity, and a merger of Prime with and into Sky Merger
(the "Corporate Merger"), whereby Sky Merger will be the surviving entity. The
name of the surviving company ("New Prime") in the Corporate Merger will be
"Prime Retail, Inc." At the effective time of the Mergers, (i) each unit of
limited partnership interest of Horizon Partnership (each, a "Horizon
Partnership Unit") will be converted into the right to receive 0.9193 of a Prime
Partnership Common Unit with cash in lieu of the issuance of any fractional
interests and (ii) each outstanding common and preferred unit of Prime
Partnership will continue to represent a unit of the same class and series of
partnership interest of the surviving partnership.
As a result of the Transactions, Prime Partnership will add 22 of Horizon
Partnership's best performing factory outlet centers to its portfolio
(collectively, the "Prime Acquired Properties") and establish itself as the
largest owner, operator and developer of outlet centers in the United States
with a total market capitalization of over $2.2 billion. Certain capitalized
terms used herein are defined in the Glossary beginning on page 295.
I-1
<PAGE>
This Joint Consent Solicitation Statement/Prospectus/Information Statement
also is being furnished to the holders of Horizon Partnership Units (the
"Horizon Partnership Unitholders") in connection with the solicitation of
consents by Horizon, as the sole general partner of Horizon Partnership. Horizon
Partnership Unitholders will be asked to consent to the Partnership Merger and
the other transactions contemplated by the Merger Agreement.
This Joint Consent Solicitation Statement/Prospectus/Information Statement
also is being furnished to the Prime Partnership Consenting Unitholders and
Horizon Partnership Unitholders to provide them with information regarding HGP
and HGP LP. Under the terms of the Merger Agreement, Prime Partnership Common
Unitholders, Prime Partnership Series C Unitholders and Horizon Partnership
Unitholders will receive all of the limited partnership interests of HGP LP. The
Transactions contemplate that HGP, through HGP LP, will own and operate a
portfolio of 12 factory outlet centers and a power center currently operated by
Horizon Partnership and two factory outlet centers currently operated by Prime
Partnership.
In considering whether to approve the Transactions, the Prime Partnership
Consenting Unitholders and Horizon Partnership Unitholders should consider, in
addition to the other information in this Joint Consent Solicitation
Statement/Prospectus/Information Statement, the matters discussed under "Prime
Partnership Risk Factors." Such matters include:
- The distribution declared on a Horizon Partnership Unit for each of the
first three quarters of 1997 was $0.35 and the distribution declared on
each Prime Partnership Common Unit Equivalent was $0.08 lower, or $0.27
for each such quarter. There can be no assurance that Prime Partnership
will make distributions equal to or in excess of those historically paid
to unitholders of Prime Partnership.
- In the event the Transactions are not consummated, Horizon Partnership
plans to reevaluate its distribution policy and may reduce or eliminate
the quarterly distribution payable to Horizon Partnership Unitholders.
- Possible fluctuations in the price of shares into which units are
exchangeable, including (a) a potential change in the relative market
prices of Prime Common Shares, and Horizon Common Shares prior to the
completion of the Transactions or (b) a possible reduction in the market
prices of New Prime Common Shares and New Prime Series B Preferred Shares
following the Transactions.
- There can be no assurance that costs or other factors associated with the
integration of Prime Partnership and Horizon Partnership would not
adversely affect future combined results of operations or the benefits of
expected cost savings.
- Conflicts of interest arising from benefits to certain directors and
officers of Horizon and to an affiliate of Horizon's financial advisor to
be received upon the consummation of the transactions described herein.
- Michael W. Reschke, who will serve as Chairman of the Board of Directors
of New Prime and as a director of HGP, is a principal owner of The Prime
Group, Inc. ("PGI"), which will have a substantial equity interest in
Prime Partnership. Because of this, PGI may be in a position to exercise
significant influence over the affairs of New Prime. In addition, PGI owns
substantial interests in income-producing properties unrelated to New
Prime's operations. Mr. Reschke's employment agreement with PGI permits
him to devote a considerable portion of his time to the management of such
interests.
- Although the receipt of Prime Partnership Common Units in the Partnership
Merger generally is not expected to result in the recognition of taxable
income or gain by any Prime Partnership Unitholder or Horizon Partnership
Unitholder, the federal income tax consequences of the
I-2
<PAGE>
Partnership Merger are highly complex and, with respect to each
unitholder, are dependent upon many variables, including the particular
circumstances of such unitholder. See "Federal Income Tax Consequences of
the Transactions--Tax Consequences of the Partnership Merger."
- Neither the Prime Partnership Consenting Unitholders nor the Horizon
Partnership Unitholders have appraisal rights in connection with the
Partnership Merger under Delaware law. See "Risk Factors--No Appraisal
Rights in Connection with the Partnership Merger."
- The surviving partnership will be subject to the risks normally associated
with debt or preferred equity financings, including the risk that the
surviving partnership's cash flow will be insufficient to meet required
payments of principal, interest and distributions.
The Prime Partnership Consenting Unitholders and Horizon Partnership
Unitholders should also consider the matters discussed under "HGP LP Risk
Factors". Such matters include:
- HGP LP does not have an operating history as a separate entity. The
historical and pro forma results for HGP LP contained elsewhere in this
Joint Consent Solicitation Statement/Prospectus/ Information Statement may
not be indicative of its results for future periods.
- The initial assets of HGP LP consist of properties formerly owned by
Horizon Partnership and Prime Partnership which have performed poorly
relative to other properties owned by Horizon Partnership and Prime
Partnership. As of December 31, 1997, the HGP Properties were 80.5% leased
while the properties in Prime Partnership's portfolio were 92.7% leased.
There can be no assurance that the performance of the HGP Properties will
not continue to deteriorate.
- HGP has obtained a commitment for a first mortgage loan that will be
secured by substantially all of the assets of HGP. HGP's indebtedness on a
pro forma basis as of December 31, 1997 represented approximately 75.8% of
HGP's total capitalization. The degree to which HGP will be leveraged
could have adverse consequences, including limiting HGP LP's ability to
obtain additional financing and that a substantial portion of HGP LP's
cash flow is expected to be required to be dedicated to debt service.
- Implementation of HGP LP's business plan will require substantial working
capital. HGP LP does not have any commitments for working capital
financing, and there is no assurance that HGP LP will have working capital
sufficient to execute its business plan.
- There can be no assurance as to the value, if any, of the HGP LP Common
Units to be distributed in connection with the Transactions. There is no
trading market for the securities of HGP LP, and HGP's management
currently has no plans to list such securities on any securities exchange.
- HGP LP does not plan to pay a distribution in the foreseeable future, and
there can be no assurance that HGP LP will ever declare a distribution
(except to the extent necessary to comply with its obligations as a real
estate investment trust ("REIT")).
- The Transactions represent the first attempt by a REIT in the factory
outlet center industry to separate its business into two publicly held
companies, one to continue to focus on the acquisition, development and
ownership of quality factory outlet centers and the other to implement a
repositioning strategy with respect to its retail properties. There is no
assurance that this strategy can be successfully implemented.
On May , 1998, the last reported sales price of a Prime Common Share on
the New York Stock Exchange ("NYSE") was $ . On May , 1998, the last
reported sales price of a Horizon Common Share on the NYSE was $ .
This Joint Consent Solicitation Statement/Prospectus/Information Statement
also constitutes a prospectus in respect of Prime Partnership Common Units to be
issued to Horizon Partnership Unitholders in the Partnership Merger. The Prime
Partnership Common Units offered hereby will be exchangeable for
I-3
<PAGE>
shares of common stock, $0.01 par value per share, of New Prime ("New Prime
Common Shares") on a one for one basis, or, at New Prime's option, cash equal to
the fair market value of such New Prime Common Shares. This Joint Consent
Solicitation Statement/Prospectus/Information Statement also constitutes a
prospectus with respect to such New Prime Common Shares. Following consummation
of the Transactions, the outstanding New Prime Common Shares will be listed on
the NYSE under the trading symbol "PRT."
This Joint Consent Solicitation Statement/Prospectus/Information Statement
and the forms of consents are first being mailed to unitholders of Prime
Partnership and Horizon Partnership on or about May , 1998.
SEE "PRIME PARTNERSHIP RISK FACTORS" BEGINNING ON PAGE 31 AND "HGP LP RISK
FACTORS" BEGINNING ON PAGE 47 FOR A DISCUSSION OF MATERIAL FACTORS WHICH SHOULD
BE CONSIDERED BY UNITHOLDERS OF PRIME PARTNERSHIP AND HORIZON PARTNERSHIP.
---------------------
THE SECURITIES TO WHICH THIS JOINT CONSENT SOLICITATION
STATEMENT/PROSPECTUS/INFORMATION STATEMENT RELATE HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT CONSENT SOLICITATION
STATEMENT/PROSPECTUS/INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Joint Consent Solicitation
Statement/Prospectus/Information Statement is May , 1998.
I-4
<PAGE>
AVAILABLE INFORMATION
Prime Partnership and Sky Merger Corp. have filed a registration statement
on Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the Prime Partnership Common Units to be issued in
connection with the Partnership Merger. Prime Partnership will become subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, will file reports
and other information with the Commission. As permitted by the rules and
regulations of the Commission, this Joint Consent Solicitation
Statement/Prospectus/ Information Statement omits certain information, exhibits
and undertakings contained in the Registration Statement. For further
information pertaining to the securities offered hereby, reference is made to
the Registration Statement, including the exhibits filed as a part thereof.
Prime and Horizon are subject to the informational requirements of the
Exchange Act, and, in accordance therewith, file reports, proxy statements and
other information with the Commission. HGP has filed a registration statement on
Form 10 and, as of the date of the effectiveness of such registration statement.
HGP will also be subject to the informational requirements of the Exchange Act.
HGP LP will not file a registration statement with the Commission and does not
anticipate becoming subject to the informational requirements of the Exchange
Act. Reports, proxy statements and other information filed by Prime, Horizon and
HGP can be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its
Regional Offices located at Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661; and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is:
http://www.sec.gov. The Prime Common Shares, the Prime Series A Preferred
Shares, the Prime Series B Preferred Shares and the Horizon Common Shares are
currently listed on the NYSE and such reports, proxy statements and other
information concerning Prime and Horizon can be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005. HGP intends to apply for
inclusion of its common stock, $0.01 par value per share (the "HGP Common
Shares"), in the Nasdaq National Market ("Nasdaq").
All information contained in this Joint Consent Solicitation
Statement/Prospectus/Information Statement with respect to Horizon and Horizon
Partnership has been supplied by Horizon, all information with respect to Prime
and Prime Partnership has been supplied by Prime and all information with
respect to HGP and HGP LP has been supplied by HGP.
No person is authorized to give any information or to make any
representation not contained in this Joint Consent Solicitation
Statement/Prospectus/Information Statement, or incorporated in it by reference,
and, if given or made, such information or representation should not be relied
upon as having been authorized. This Joint Consent Solicitation
Statement/Prospectus/Information Statement does not constitute an offer to sell,
or a solicitation of an offer to purchase, the securities offered by this Joint
Consent Solicitation Statement/Prospectus/Information Statement, or the
solicitation of a consent, in any jurisdiction where or from any person to whom
it is unlawful to make such offer, or solicitation of an offer, or consent
solicitation. Neither the delivery of this Joint Consent Solicitation
Statement/Prospectus/Information Statement nor any distribution of the
securities offered pursuant to this Joint Consent Solicitation
Statement/Prospectus/Information Statement shall, under any circumstances,
create an implication that there has been no change in the affairs of Prime,
Prime Partnership, Horizon, Horizon Partnership, HGP or HGP LP since the date of
this Joint Consent Solicitation Statement/Prospectus/Information Statement.
All documents that are incorporated by reference in this Joint Consent
Solicitation Statement/ Prospectus/Information Statement but which are not
delivered herewith are available without charge (other than exhibits to such
documents which are not specifically incorporated by reference therein) upon
request from, in the case of documents relating to Prime, 100 East Pratt Street,
19th Floor, Baltimore, Maryland 21202, Attention: C. Alan Schroeder, telephone
(410) 234-0782, and, in the case of documents relating to Horizon, 5000 Hakes
Drive, Norton Shores, Michigan 49441, Attention: Robin Westra, telephone (616)
798-9100. In order to insure timely delivery of the documents, any request
should be made by May , 1998.
I-5
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
IN THIS JOINT CONSENT SOLICITATION
STATEMENT/PROSPECTUS/INFORMATION STATEMENT
The following documents filed with the Commission by Prime or by Horizon
pursuant to the Exchange Act are hereby incorporated in this Joint Consent
Solicitation Statement/Prospectus/Information Statement by reference:
1. Prime's annual report on Form 10-K for the year ended December 31, 1997.*
2. Prime's current report on Form 8-K dated February 1, 1998.*
3. The information prescribed by Items 12, 13, 14, 15 and 16 of Form S-11
contained in Prime's Registration Statement on Form S-11 dated June 28,
1996, as amended (Registration No. 333-01666).
4. Horizon's annual report on Form 10-K for the year ended December 31, 1997.**
5. Horizon's current report on Form 8-K dated February 1, 1998.**
6. Horizon's current report on Form 8-K dated April 1, 1998.**
7. All documents subsequently filed by Prime or Horizon pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the date of the
meetings of shareholders.
Any statement contained herein or in a document incorporated by reference or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Joint Consent Solicitation
Statement/Prospectus/Information Statement to the extent that a statement
contained in this Joint Consent Solicitation Statement/Prospectus/Information
Statement or in any other subsequently filed document that also is or is deemed
to be incorporated by reference in this Joint Consent Solicitation
Statement/Prospectus/Information Statement modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Consent
Solicitation Statement/Prospectus/Information Statement.
* File No. 0-23616
** File No. 1-12424
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JOINT CONSENT SOLICITATION STATEMENT/
PROSPECTUS/INFORMATION STATEMENT
TABLE OF CONTENTS
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SUMMARY................................................................................................... 1
Parties to the Transactions............................................................................. 1
The Transactions........................................................................................ 3
Prime Partnership Risk Factors.......................................................................... 8
HGP LP Risk Factors..................................................................................... 9
Merger Consideration and Distributions Payable Pursuant to the Transactions............................. 9
Advantages and Disadvantages of the Transactions; Recommendation of the Prime Board of Directors........ 11
Advantages and Disadvantages of the Transactions; Recommendation of the Horizon Board of Directors...... 12
Opinions of Financial Advisors.......................................................................... 13
Conflicts of Interest Arising from Benefits to Certain Directors and Officers of Horizon................ 14
Effective Time of the Partnership Merger and Closing Date............................................... 14
Conditions to the Mergers; Waiver and Amendment......................................................... 14
Appraisal Rights........................................................................................ 15
Federal Income Tax Consequences of the Partnership Merger............................................... 15
Resales of Prime Partnership Common Units, New Prime Common Shares and New Prime Series B Preferred
Shares................................................................................................ 15
Termination............................................................................................. 16
Break-up Fee and Expenses............................................................................... 16
Anticipated Accounting Treatment........................................................................ 16
Conduct of Business Pending the Mergers................................................................. 16
No Solicitation of Other Transactions................................................................... 16
Exchange of Units....................................................................................... 16
Comparison of Rights of Unitholders..................................................................... 17
Management and Operation of New Prime after the Transactions............................................ 18
Consent Solicitation Information of Unitholders; Record Dates; Consents Required........................ 19
Prime Partnership and HGP LP Summary Unaudited Pro Forma Financial Data................................. 20
Prime Partnership Summary Historical Financial Data..................................................... 22
Horizon Partnership Summary Historical Financial Data................................................... 26
Comparative Per Unit Data............................................................................... 27
Comparative Share Prices................................................................................ 28
PRIME PARTNERSHIP RISK FACTORS............................................................................ 31
Risks to Horizon Partnership Unitholders................................................................ 31
Potential Change in Relative Unit Values; Share Price Fluctuations after the Transactions............... 31
Adverse Effects of Combining the Partnerships........................................................... 32
Possibility That the Expected Benefits of the Transactions Will Not Be Realized......................... 32
Conflicts of Interest Arising from Benefits to Certain Directors and Officers of Horizon................ 32
Conflict of Interest Relating to Lehman Brothers........................................................ 34
Influence of PGI and Mr. Reschke........................................................................ 34
Federal Income Tax Consequences of the Partnership Merger............................................... 34
No Appraisal Rights in Connection with the Partnership Merger........................................... 35
Adverse Consequences of Debt Financing.................................................................. 35
Guarantee of HGP Credit Facility; Modification of HGP Credit Facility................................... 35
Risks of Ownership of Prime Partnership Common Units.................................................... 36
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Limited Control Over Business of Prime Partnership...................................................... 36
Risks Concerning Prime's Ownership of Majority of Prime Partnership Common Units........................ 37
Adverse Impact of New Prime's Failure to Continue to Qualify as a REIT.................................. 37
Effect of REIT Distribution Requirements................................................................ 37
Penalty Tax on Prohibited Transactions.................................................................. 38
Ownership Limit Necessary to Maintain REIT Qualification................................................ 38
Restrictions upon Transfer to Avoid Publicly Traded Partnership Status.................................. 39
The Brief History of the Outlet Center Industry; Decline in Development of New Centers; Competition
within the Industry................................................................................... 40
Shareholder Litigation.................................................................................. 41
Risks of Acquisition Activities......................................................................... 42
Adverse Effect of Inability to Pursue Development Activities; Developments May Not Be Profitable........ 42
No Limitation in Organizational Documents on Incurrence of Debt......................................... 42
General Real Estate Investment Risks.................................................................... 42
Limits on Changes in Control............................................................................ 43
Possible Liability Relating to Environmental Matters.................................................... 44
Tax Termination of Prime Partnership.................................................................... 45
Issuance of Preferred Units............................................................................. 46
HGP LP RISK FACTORS....................................................................................... 47
Lack of Operating History as Separate Entity; Limited Relevance of Historical Financial Information..... 47
Declining Operating Results of HGP Properties........................................................... 47
Adverse Consequences of Debt Financing.................................................................. 47
Lack of Working Capital................................................................................. 48
No Prior Public Market; No Assurance of Value........................................................... 49
Absence of Distributions................................................................................ 49
Novelty of Transaction Structure to the Factory Outlet Industry......................................... 49
Change in Business Strategy............................................................................. 49
Financings May Not Be Successful........................................................................ 50
Limited Experience of HGP's Management in Factory Outlet Center Industry................................ 50
Conflicts of Interest of Common Directors............................................................... 50
Dependence on Rental Income from Real Property.......................................................... 50
Adverse Impact of the Failure to Continue to Qualify as a REIT.......................................... 50
Effect of REIT Distribution Requirements................................................................ 51
Penalty Tax on Prohibited Transactions.................................................................. 51
Ownership Limit Necessary to Maintain REIT Qualification................................................ 52
Restrictions upon Transfer to Avoid Publicly Traded Partnership Status.................................. 52
Nasdaq Maintenance Requirements; Possible Failure to List or Delisting of HGP Common Shares from
Nasdaq................................................................................................ 53
SEC Penny Stock Regulations............................................................................. 53
Federal Income Tax Consequences of the HGP LP Common Unit Distribution.................................. 54
Limits on Changes in Control............................................................................ 55
Changes in Policies without Unitholder Approval......................................................... 56
General Real Estate Risks............................................................................... 56
Operating Risks......................................................................................... 56
Uninsured Loss.......................................................................................... 56
Potential Environmental Liability Related to the HGP Properties......................................... 57
Costs of Compliance with the Americans with Disabilities Act and Similar Laws........................... 57
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Other Laws.............................................................................................. 58
PRIME PARTNERSHIP CONSENT SOLICITATION INFORMATION........................................................ 59
Purpose................................................................................................. 59
Record Date; Consents Required.......................................................................... 59
Solicitation of Consents................................................................................ 59
Revocation of Consents.................................................................................. 59
HORIZON PARTNERSHIP CONSENT SOLICITATION INFORMATION...................................................... 60
Purpose................................................................................................. 60
Record Date; Consents Required.......................................................................... 60
Solicitation of Consents................................................................................ 60
Revocation of Consents.................................................................................. 60
THE TRANSACTIONS.......................................................................................... 61
Parties to the Transactions............................................................................. 61
Summary of the Transactions............................................................................. 63
THE CONTRIBUTION AGREEMENT................................................................................ 73
Background.............................................................................................. 73
Contributed Assets...................................................................................... 73
Retained Assets......................................................................................... 73
Assumed and Retained Liabilities........................................................................ 74
Indemnification......................................................................................... 74
THE PARTNERSHIP MERGER.................................................................................... 75
Consent Solicitation; Consent Required.................................................................. 75
Partnership Merger Consideration........................................................................ 75
Partnership Merger Effective Time....................................................................... 75
Appointment of Exchange Agent........................................................................... 75
Exchange of Units....................................................................................... 75
Units Available for Resale.............................................................................. 76
Federal Income Tax Consequences of the Partnership Merger............................................... 76
THE REINCORPORATION MERGER................................................................................ 77
Terms of the Reincorporation Merger..................................................................... 77
Reincorporation Merger Consideration; Treatment of Stock Options........................................ 77
THE CORPORATE MERGER...................................................................................... 78
Terms of the Corporate Merger........................................................................... 78
Background of the Transactions.......................................................................... 78
Advantages and Disadvantages of the Transactions; Recommendation of the Prime Board of Directors........ 85
Advantages and Disadvantages of the Transactions; Recommendation of the Horizon Board of Directors...... 88
Opinion of Financial Advisor--Prime..................................................................... 90
Opinion of Financial Advisor--Horizon................................................................... 94
Effective Time of the Corporate Merger.................................................................. 99
Representations and Warranties; Conditions to the Mergers............................................... 99
Regulatory Matters...................................................................................... 100
Termination Provisions.................................................................................. 101
Break-up Fee and Expenses............................................................................... 101
No Solicitation of Other Transactions................................................................... 103
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Conversion of Shares.................................................................................... 104
Appointment of Exchange Agent........................................................................... 104
Exchange of Certificates................................................................................ 104
Conduct of Business Pending the Mergers................................................................. 105
Dividends and Distributions............................................................................. 109
Waiver and Amendment.................................................................................... 109
Stock Exchange Listing.................................................................................. 110
Anticipated Accounting Treatment........................................................................ 110
Shares Available for Resale............................................................................. 110
Registration Rights Agreement........................................................................... 110
Stock Purchase Agreement................................................................................ 111
Shareholder Litigation.................................................................................. 111
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS.......................................................... 111
Benefits to Certain Directors and Officers.............................................................. 111
Amendments to Agreements with Certain Shareholders...................................................... 113
Agreements with Certain Officers and Key Employees...................................................... 113
Agreements Relating to Finger Lakes..................................................................... 113
Retention Program....................................................................................... 113
Indemnification of Directors and Officers............................................................... 113
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS....................................................... 114
Tax Consequences of the Horizon Partnership Contribution................................................ 114
Tax Consequences of the Partnership Merger.............................................................. 115
Tax Consequences of Tax Termination of Prime Partnership................................................ 119
Tax Consequences of the Nebraska/Indiana Property Transfers............................................. 120
Tax Consequences of the Prime Partnership Special Distribution.......................................... 121
Tax Consequences of the HGP LP Common Unit Distribution................................................. 122
Entity Classification................................................................................... 124
Allocations of Partnership Items........................................................................ 126
Prime Partnership Distributions......................................................................... 127
Dispositions and Exchanges/Redemptions of Prime Partnership Units....................................... 127
Tax Returns and Other Tax Matters Affecting Holders of Prime Partnership Units.......................... 128
Limitations on Deductibility of Losses.................................................................. 128
State and Local Taxes................................................................................... 129
Alternative Minimum Tax................................................................................. 129
Qualification of New Prime as a REIT.................................................................... 130
PRIME PARTNERSHIP AND HGP LP
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA............................................................. 134
PRIME PARTNERSHIP
SELECTED HISTORICAL FINANCIAL DATA...................................................................... 136
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PRIME
PARTNERSHIP............................................................................................. 140
Introduction............................................................................................ 140
Cautionary Statements................................................................................... 140
Portfolio Growth........................................................................................ 140
Results of Operations................................................................................... 141
Comparison of the year ended December 31, 1997 to the year ended December 31, 1996...................... 144
Comparison of the year ended December 31, 1996 to the year ended December 31, 1995...................... 148
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Liquidity and Capital Resources......................................................................... 150
Economic Conditions..................................................................................... 154
Year 2000............................................................................................... 155
Funds from Operations................................................................................... 155
BUSINESS OF PRIME PARTNERSHIP............................................................................. 157
General................................................................................................. 157
Business................................................................................................ 157
Strategies for Growth................................................................................... 158
Competition............................................................................................. 159
Relationship with Municipalities........................................................................ 160
Mortgage and Other Debt Financing of Prime Partnership.................................................. 160
Joint Venture Financing................................................................................. 162
Certain Tax Information................................................................................. 163
Legal Proceedings....................................................................................... 163
Environmental Matters................................................................................... 163
Insurance............................................................................................... 164
Employees............................................................................................... 164
Executive Officers...................................................................................... 164
Biographies of Executive Officers....................................................................... 164
THE PRIME PARTNERSHIP PROPERTIES.......................................................................... 165
General................................................................................................. 165
Prime Partnership's Outlet Centers...................................................................... 167
Tenants................................................................................................. 170
Lease Terms for Outlet Centers.......................................................................... 170
Community Shopping Centers.............................................................................. 171
Lease Expirations for Prime Partnership's Entire Portfolio of Prime Properties.......................... 172
HORIZON PARTNERSHIP
SELECTED HISTORICAL FINANCIAL DATA...................................................................... 173
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF HORIZON
PARTNERSHIP............................................................................................. 175
General Overview........................................................................................ 175
Consolidated Results of Operations...................................................................... 175
Liquidity and Capital Resources......................................................................... 178
Year 2000............................................................................................... 179
Funds From Operations................................................................................... 179
Inflation............................................................................................... 180
BUSINESS OF HORIZON PARTNERSHIP........................................................................... 181
General................................................................................................. 181
Business Developments................................................................................... 181
Business Strategy....................................................................................... 181
Competition............................................................................................. 182
Policies with Respect to Certain Activities............................................................. 183
Policies with Respect to Certain Other Activities....................................................... 183
Environmental Matters................................................................................... 183
Insurance............................................................................................... 184
Employees............................................................................................... 184
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Management.............................................................................................. 184
THE HORIZON PARTNERSHIP PROPERTIES........................................................................ 186
Properties.............................................................................................. 186
Executive Offices....................................................................................... 193
State Information....................................................................................... 193
Undeveloped Parcels..................................................................................... 193
Tenants................................................................................................. 194
Mortgage Debt........................................................................................... 195
Taxes................................................................................................... 196
POLICIES OF NEW PRIME WITH RESPECT TO CERTAIN ACTIVITIES.................................................. 197
Investment Objectives and Policies...................................................................... 197
Distribution and Dividend Policy........................................................................ 197
Financing Policies...................................................................................... 198
Conflict of Interest Policies........................................................................... 198
Working Capital Reserves................................................................................ 199
New Prime's Relationship with HGP....................................................................... 199
Policies with Respect to Other Activities............................................................... 200
LIQUIDITY AND CAPITAL RESOURCES OF NEW PRIME FOLLOWING THE TRANSACTIONS................................... 200
Planned Development..................................................................................... 200
Nomura Loan Facilities.................................................................................. 201
Debt Repayments and Preferred Stock Dividends........................................................... 201
Short-Term and Long-Term Liquidity Requirements......................................................... 202
Year 2000............................................................................................... 202
MANAGEMENT AND OPERATION OF NEW PRIME AFTER THE TRANSACTIONS.............................................. 203
General................................................................................................. 203
Directors and Executive Officers........................................................................ 203
Committees of the New Prime Board of Directors.......................................................... 208
Compensation of Directors............................................................................... 209
Headquarters............................................................................................ 209
DESCRIPTION OF THE CAPITAL STOCK OF NEW PRIME............................................................. 210
Authorized Shares....................................................................................... 210
New Prime Series A Preferred Shares..................................................................... 210
New Prime Series B Preferred Shares..................................................................... 214
New Prime Series C Preferred Shares..................................................................... 220
New Prime Common Shares................................................................................. 226
Restrictions on Ownership and Transfer.................................................................. 227
COMPARISON OF RIGHTS OF SHAREHOLDERS...................................................................... 231
Prime Shareholders and New Prime Shareholders........................................................... 231
Authorized and Issued Shares............................................................................ 231
Amendment to Articles and Bylaws........................................................................ 231
Voting Rights........................................................................................... 232
Special Meetings........................................................................................ 234
Boards of Directors..................................................................................... 234
General................................................................................................. 235
Shareholder Inspection Rights........................................................................... 235
Mergers, Consolidations, Dissolution and Sale of Substantially All Assets............................... 235
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Restrictions on the Ownership Transfer or the Issuance of Shares........................................ 236
Appraisal or Dissenter's Rights......................................................................... 240
Advance Notice Provision for Shareholder Nomination and Shareholder Proposals........................... 240
Transactions With Directors and Officers................................................................ 240
CERTAIN PROVISIONS OF MARYLAND LAW AND THE NEW PRIME CHARTER AND BYLAWS................................... 242
Classification of the New Prime Board of Directors...................................................... 242
Removal of Directors.................................................................................... 242
Business Combinations................................................................................... 242
Control Share Acquisitions.............................................................................. 243
Amendment to the New Prime Charter...................................................................... 244
Advance Notice of Director Nominations and New Business................................................. 244
PRIME PARTNERSHIP AGREEMENT............................................................................... 245
Formation............................................................................................... 245
Capitalization.......................................................................................... 245
Management.............................................................................................. 245
Transferability of Interests............................................................................ 245
Additional Funds........................................................................................ 245
Registration Rights..................................................................................... 246
Tax Matters............................................................................................. 246
Operations.............................................................................................. 246
Distributions........................................................................................... 246
Prime Partnership Limited Partner Exchange and Redemption Rights........................................ 247
Conversion.............................................................................................. 247
Redemption.............................................................................................. 247
Indemnification......................................................................................... 248
Duties and Conflicts.................................................................................... 248
Term.................................................................................................... 248
Voting.................................................................................................. 248
Amendment............................................................................................... 249
Books and Reports....................................................................................... 249
Power of Attorney....................................................................................... 249
COMPARISON OF RIGHTS OF THE UNITHOLDERS................................................................... 250
Issuance of Other Units................................................................................. 250
Unit Option Plan........................................................................................ 250
Indemnification......................................................................................... 251
Financial Statements and Reports........................................................................ 251
Mergers................................................................................................. 251
Transfer or Pledge of Units............................................................................. 252
Redemption/Exchange of Units............................................................................ 252
Amendments.............................................................................................. 253
HORIZON GROUP PROPERTIES, L.P............................................................................. 255
General................................................................................................. 255
Business Strategy....................................................................................... 255
HGP LP Distribution Policy.............................................................................. 256
HGP LP Capitalization................................................................................... 257
Horizon Group Properties, L.P. Selected Financial Data.................................................. 257
Management's Discussion and Analysis of Results of Operations and Financial Condition................... 259
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Year 2000............................................................................................... 263
Funds From Operations................................................................................... 263
Inflation............................................................................................... 263
Properties.............................................................................................. 264
Lease Information....................................................................................... 266
Tenant Information...................................................................................... 267
Competition............................................................................................. 267
Legal Proceedings....................................................................................... 268
Policies with Respect to Certain Activities............................................................. 268
Management.............................................................................................. 269
Committees of the HGP Board of Directors................................................................
Compensation of Directors............................................................................... 270
Indemnification of Directors and Officers............................................................... 271
Principal Unitholders of HGP LP......................................................................... 271
Description of Capital Stock of HGP..................................................................... 272
Executive Compensation of HGP Management................................................................ 274
Employment Agreements................................................................................... 275
Certain Provisions of Maryland Law and of the HGP Charter and the HGP Bylaws............................ 275
Federal Income Tax Consequences......................................................................... 279
Description of the HGP LP Agreement..................................................................... 285
Federal Income Tax Consequences of Continuing Ownership of HGP LP Common Units.......................... 288
Entity Classification................................................................................... 289
Allocations of Partnership Items........................................................................ 291
HGP LP Distributions.................................................................................... 292
Dispositions and Exchanges/Redemptions of HGP LP Common Units........................................... 292
Tax Returns and Other Tax Matters Affecting Holders of HGP LP Common Units.............................. 293
Limitations on Deductibility of Losses.................................................................. 293
State and Local Taxes................................................................................... 294
Alternative Minimum Tax................................................................................. 294
LEGAL MATTERS............................................................................................. 295
EXPERTS................................................................................................... 295
GLOSSARY.................................................................................................. 296
INDEX TO FINANCIAL STATEMENTS............................................................................. F-1
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APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER......................... Appendix A-1
APPENDIX B
DELAWARE CERTIFICATE OF MERGER............................................ Appendix B-1
APPENDIX C
CONTRIBUTION AGREEMENT.................................................... Appendix C-1
APPENDIX D
OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO., INC.......................... Appendix D-1
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APPENDIX E
Appendix
OPINION OF LEHMAN BROTHERS.............................................................................. E-1
APPENDIX F
Appendix
SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF PRIME RETAIL, L.P....................... F-1
APPENDIX G
Appendix
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HORIZON GROUP PROPERTIES, L.P.................. G-1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THE SUMMARY AND UNDER CAPTIONS "PRIME PARTNERSHIP RISK
FACTORS," "HGP LP RISK FACTORS," "THE CORPORATE MERGER--REASONS FOR THE
TRANSACTIONS; RECOMMENDATION OF THE PRIME BOARD OF DIRECTORS" "--REASONS FOR THE
TRANSACTIONS; RECOMMENDATION OF THE HORIZON BOARD OF DIRECTORS," "--OPINION OF
FINANCIAL ADVISOR--PRIME" AND "--OPINION OF FINANCIAL ADVISOR--HORIZON" AND
ELSEWHERE IN THIS JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION
STATEMENT CONSTITUTE FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF PRIME PARTNERSHIP, HORIZON
PARTNERSHIP OR HGP LP OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
GENERAL ECONOMIC AND BUSINESS CONDITIONS, WHICH WILL, AMONG OTHER THINGS, AFFECT
DEMAND FOR OUTLET CENTER PROPERTIES, AVAILABILITY AND CREDITWORTHINESS OF
PROSPECTIVE TENANTS, LEASE RENTS AND THE AVAILABILITY OF FINANCING; ADVERSE
CHANGES IN THE REAL ESTATE MARKETS INCLUDING, AMONG OTHER THINGS, COMPETITION
WITH OTHER COMPANIES, RISKS OF REAL ESTATE ACQUISITION AND DEVELOPMENT;
GOVERNMENTAL ACTIONS AND INITIATIVES; ENVIRONMENTAL REQUIREMENTS; ABILITY TO
ACHIEVE ANTICIPATED COST SAVINGS AND OPERATING EFFICIENCIES FROM THE
TRANSACTIONS; AND OTHER CHANGES AND FACTORS REFERENCED IN THIS JOINT CONSENT
SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. SEE "PRIME PARTNERSHIP RISK FACTORS." AS TO
PRIME RETAIL, INC. AND HORIZON GROUP, INC., SUCH FORWARD-LOOKING STATEMENTS MAY
ALSO BE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT.
REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED IN THIS JOINT CONSENT
SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT, THE APPENDICES HERETO
AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN.
CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS
JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT. AS USED
IN THIS JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/ INFORMATION STATEMENT,
EXCEPT WHERE THE CONTEXT REQUIRES OTHERWISE, "PRIME" MEANS PRIME RETAIL, INC., A
MARYLAND CORPORATION, AND ITS SUBSIDIARIES; "PRIME PARTNERSHIP" MEANS PRIME
RETAIL, L.P., A DELAWARE LIMITED PARTNERSHIP OF WHICH PRIME IS THE SOLE GENERAL
PARTNER, AND ITS SUBSIDIARIES; "HORIZON" MEANS HORIZON GROUP, INC., A MICHIGAN
CORPORATION AND ITS SUBSIDIARIES AND AFTER THE REINCORPORATION MERGER EFFECTIVE
TIME, SKY MERGER AS THE SUCCESSOR TO HORIZON; "HORIZON PARTNERSHIP" MEANS
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP, A DELAWARE LIMITED PARTNERSHIP
OF WHICH HORIZON IS THE SOLE GENERAL PARTNER, AND ITS SUBSIDIARIES; "SKY MERGER"
MEANS SKY MERGER CORP., A MARYLAND CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF
HORIZON; "HGP" MEANS HORIZON GROUP PROPERTIES, INC., A MARYLAND CORPORATION
WHICH IS A SUBSIDIARY OF HORIZON, AND ITS SUBSIDIARIES; "HGP LP" MEANS HORIZON
GROUP PROPERTIES, L.P., A DELAWARE LIMITED PARTNERSHIP OF WHICH HGP IS THE
GENERAL PARTNER AND HORIZON PARTNERSHIP IS THE LIMITED PARTNER; AND
"TRANSACTIONS" MEANS THE HORIZON PARTNERSHIP CONTRIBUTION, THE NEW PRIME
CONTRIBUTION, THE PRIME PARTNERSHIP SPECIAL DISTRIBUTION, THE PRIME SPECIAL
DISTRIBUTION, THE HGP LP COMMON UNIT DISTRIBUTION, THE HGP COMMON SHARE
DISTRIBUTION, THE NEBRASKA/INDIANA PROPERTY TRANSFERS AND THE MERGERS.
AS USED IN THIS JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION
STATEMENT, "NEW PRIME" MEANS THE SURVIVING MARYLAND CORPORATION IN THE CORPORATE
MERGER. THE NAME OF NEW PRIME WILL BE PRIME RETAIL, INC.
PARTIES TO THE TRANSACTIONS
PRIME AND PRIME PARTNERSHIP. Prime is a self-administered and self-managed
REIT engaged in the ownership, development, and management of factory outlet
centers in the United States. Prime believes it is one of the largest owners and
operators of factory outlet centers in the United States based on aggregate
gross leasable area ("GLA") and total revenue. As of December 31, 1997, Prime's
portfolio consisted of 28
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factory outlet centers in 20 states which totaled approximately 7,217,000 square
feet of GLA. As a fully-integrated real estate firm, Prime provides development,
construction, finance, leasing, marketing and management services for all of its
properties (the "Prime Properties"). The Prime Properties are held and all of
Prime's business and operations are conducted through Prime Partnership. Prime
controls Prime Partnership as its sole general partner and is dependent upon the
distributions or other payments from Prime Partnership in order to meet its
financial obligations. Prime is a Maryland corporation that was incorporated in
July 1993 and commenced operations as a publicly traded company on March 22,
1994 upon the completion of its initial public offering (the "Prime IPO"). Prime
and Prime Partnership's executive offices are located at 100 East Pratt Street,
Nineteenth Floor, Baltimore, Maryland 21202, and their telephone number is (410)
234-0782.
HORIZON AND HORIZON PARTNERSHIP. Horizon is a self-administered and
self-managed REIT engaged in the ownership, development and management of
factory outlet centers in the United States. Horizon believes it is one of the
largest owners and operators of factory outlet centers in the United States
based on aggregate GLA and total revenue. As of December 31, 1997, Horizon's
portfolio consisted of 37 factory outlet centers (including one power center) in
21 states which totaled approximately 9,907,000 square feet of GLA. On April 1,
1998, Horizon and Horizon Partnership consummated the C&C Contribution Agreement
which provided for the contribution of Horizon's interests in Dole Cannery
Center and Lake Elsinore Center to Castle & Cooke Outlet Centers, LLC, a
California limited liability company and an affiliate of Castle & Cooke, Inc., a
Hawaii corporation ("Castle & Cooke"). See "The Transactions-- Parties to the
Transactions." As a result, Horizon's portfolio consists of 35 factory outlet
centers in 20 states which totals approximately 9,283,000 square feet of GLA. As
a fully integrated real estate firm, Horizon provides development, construction,
finance, leasing, marketing and management services for all of its properties
(the "Horizon Properties"). The Horizon Properties are held and all of Horizon's
business and operations are conducted through Horizon Partnership. Horizon
controls Horizon Partnership as its sole general partner and is dependent on the
distributions or other payments from Horizon Partnership in order to meet its
financial obligations. Horizon is a Michigan corporation that was incorporated
in October, 1984 and commenced operations as a publicly traded company on
November 8, 1993 upon the completion of its initial public offering (the
"Horizon IPO"). Horizon and Horizon Partnership's executive offices are located
at 5000 Hakes Drive, Norton Shores, Michigan 49441, and their telephone number
is (616) 798-9100.
NEW PRIME. Upon consummation of the Transactions, New Prime will be a
self-administered and self-managed REIT engaged in the ownership, development,
and management of factory outlet centers in the United States. New Prime
believes that, immediately following the consummation of the Transactions, it
will be the largest owner and operator of factory outlet centers in the United
States. Upon consummation of the Transactions, New Prime's portfolio will
consist of 48 factory outlet centers in 26 states totaling approximately
13,400,000 square feet of GLA. As a fully-integrated real estate firm, New Prime
will provide development, construction, finance, leasing, marketing and
management services for all of its properties (the "New Prime Properties"). The
New Prime Properties will be held and all of New Prime's business and operations
will be conducted through Prime Partnership. New Prime will control Prime
Partnership as its sole general partner and will be dependent upon the
distributions or other payments from Prime Partnership in order to meet its
financial obligations. New Prime is a Maryland corporation that was incorporated
on November 12, 1997, and will commence operations as a publicly traded company
under the name "Prime Retail, Inc." New Prime and Prime Partnership's executive
offices will be located at 100 East Pratt Street, Nineteenth Floor, Baltimore,
Maryland 21202, and their telephone number will be (410) 234-0782.
HGP AND HGP LP. Upon consummation of the Transactions, HGP intends to be a
self-administered and self-managed REIT. HGP's portfolio (the "HGP Properties")
initially will consist of 14 factory outlet centers and one power center in 12
states totaling approximately 3,092,000 square feet of GLA. The HGP Properties
will be held and all of HGP's business and operations will be conducted through
HGP LP. HGP will control HGP LP as its sole general partner and will be
dependent upon the distributions or other
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payments from HGP LP in order to meet its financial obligations. HGP is a
Maryland corporation that was incorporated on January 21, 1998, and HGP LP is a
Delaware limited partnership that was formed on November 12, 1997. Each will
commence operations on the Closing Date upon consummation of the Transactions.
HGP and HGP LP's executive offices will be located at 5000 Hakes Drive, Norton
Shores, Michigan 49441, and their telephone number will be (616) 798-9100.
HGP and HGP LP's management plans to create and maximize securityholder
value over time through repositioning properties and concentrating on
remerchandising and leasing existing centers, enhancing operating performance at
existing centers through intensive tenant and property management and
selectively expanding centers in response to tenant demand. HGP will also
explore strategic alternatives, including selective acquisitions of
underperforming properties and asset sales.
HGP intends to qualify as a REIT under the Code. HGP's management does not
believe that the obligations inherent in the REIT structure (including the
distribution each year of at least 95% of net taxable income, excluding capital
gains) will be an impediment to the successful execution of its business plan.
Given that HGP's principal source of liquidity is retained earnings and that a
substantial portion of HGP's cash flow from operations is expected to be used to
make required payments under HGP's debt instruments, there can be no assurance
that HGP will be able to make any distributions necessary to maintain its status
as a REIT or that such distribution requirements will not impede the successful
execution of HGP's business plan.
THE TRANSACTIONS
OVERVIEW
The purpose of the Transactions is to allow Prime and Horizon to merge and
to execute a new business strategy with respect to their factory outlet centers.
The Transactions are designed to enable Prime to acquire 22 of Horizon's best
performing factory outlet centers and to spin off 15 underperforming properties
of Horizon and Prime to a separate public company owned by the shareholders of
New Prime.
The Transactions are intended to maximize long-term value for shareholders
by concentrating Prime's and Horizon's higher quality, more upscale factory
outlet centers in one company and transferring their underperforming assets, in
this case the HGP Properties, to a newly created company with a management team
dedicated to the development and implementation of a business strategy tailored
to address the specific issues posed by such assets. The Transactions are
designed to benefit New Prime by establishing it as the largest outlet center
owner/operator in the United States and enabling it, through its increased size
and market capitalization, to achieve greater economies of scale and improved
access to capital. Prime and Horizon believe that the HGP Properties, which have
performed poorly relative to the New Prime Properties in recent periods, present
challenges that are different from those involved in the management of outlet
centers with strong operating histories and established positions in their local
markets. These challenges include exploring the remerchandising of properties
with non-outlet center tenants. In Prime's and Horizon's view, the HGP
Properties also involve fundamentally different growth opportunities, investment
returns, and financing requirements than the New Prime Properties. Accordingly,
Prime and Horizon have concluded that their long term interests are best served
through the creation of an independent, more narrowly focused corporation to
manage, lease and operate the HGP Properties.
The Transactions consist of the following steps:
- Horizon will contribute 13 of its 35 centers from Horizon Partnership to
HGP LP, a newly-formed limited partnership of which HGP is the sole
general partner.
- HGP will purchase two factory outlet centers from Prime Partnership
(collectively, the "Prime Transferred Properties").
- Prime will make a special cash distribution of $0.60 per share to the
Prime Series B Preferred Shareholders and $0.50 per share/unit to the
holders of Prime Common Shares, Prime Common Units, Prime Partnership
Series C Preferred Units and Prime Series C Preferred Shares (neither
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Horizon Common Shareholders nor Horizon Partnership Unitholders will
participate in such distribution).
- Horizon Partnership will merge into Prime Partnership and Horizon
Partnership Unitholders will receive Prime Partnership Common Units.
- Horizon will reincorporate in Maryland by merging into Sky Merger.
- Prime will merge into Sky Merger, and Sky Merger will change its name to
"Prime Retail, Inc." In this merger, each Horizon Common Shareholder will
receive New Prime Common Shares, and New Prime Series B Preferred Shares
and outstanding shares of Prime will become shares of New Prime having
substantially identical rights and preferences.
- HGP Common Shares will be distributed to the holders of New Prime Series C
Preferred Shares, New Prime Series B Preferred Shares and New Prime Common
Shares. Limited partnership interests in HGP LP will be distributed to the
limited partners of Horizon Partnership and Prime Partnership.
THE PARTNERSHIP MERGER
Prime Partnership and Horizon Partnership shall file a Certificate of Merger
(the "Delaware Certificate of Merger"), a copy of which is attached hereto as
Appendix B, with the Secretary of State of the State of Delaware (the "Delaware
Secretary") to effectuate the Partnership Merger pursuant to which Prime
Partnership shall survive. Following consummation of the Partnership Merger,
each of the issued and outstanding Horizon Partnership Units (other than units
held by Horizon or any Horizon Subsidiary) will be converted into the right to
receive 0.9193 of a Prime Partnership Common Unit (the "Partnership Merger
Consideration"). Each outstanding common and preferred unit of Prime Partnership
will continue to represent a unit of the same class and series of partnership
interest in the surviving partnership.
By this Joint Consent Solicitation Statement/Prospectus/Information
Statement, the Prime Board of Directors, on behalf of Prime as the sole general
partner of Prime Partnership, is soliciting consents from the Prime Partnership
Consenting Unitholders (other than Prime). In addition, the Horizon Board of
Directors, on behalf of Horizon as the sole general partner of Horizon
Partnership, is soliciting consents from the limited partners of Horizon
Partnership (the "Horizon Partnership Limited Partners"). The Prime Partnership
Consenting Unitholders and Horizon Partnership Unitholders are being asked to
consider and consent to the Transactions. The Transactions must receive the
affirmative consent of the holders of (i) a majority of the outstanding Prime
Partnership Common Units (other than those held by Prime), (ii) two-thirds of
the outstanding Prime Partnership Series C Preferred Units and (iii) the Horizon
Partnership Limited Partners who own more than 50% of the Horizon Partnership
Units owned by all of the Horizon Limited Partners. As of December 31, 1997,
Prime owned approximately 76.2% of the Prime Partnership Common Units. Prime
intends to consent to the Transactions in its capacity as the holder of such
interests. The Partnership Merger will not be consummated if the Transactions do
not receive the required consents of the Prime Partnership Consenting
Unitholders and Horizon Partnership Limited Partners.
THE REINCORPORATION MERGER
Following consummation of the Partnership Merger, Horizon and Sky Merger
will file (i) articles of merger (the "Reincorporation Articles of Merger") with
the State Department of Assessments and Taxation of the State of Maryland (the
"Maryland Department") and (ii) a certificate of merger (the "Reincorporation
Certificate of Merger") with the Department of Commerce of the State of Michigan
(the "Michigan Department"), in each case to effectuate the Reincorporation
Merger pursuant to which Sky Merger shall survive as a Maryland corporation (the
"Reincorporation Merger"). In the Reincorporation Merger, each outstanding share
of common stock of Sky Merger held by Horizon shall be canceled, and each issued
and outstanding Horizon Common Share (other than Horizon Common Shares owned by
Horizon or any subsidiary of Horizon, which shall automatically be canceled and
retired and all rights with
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respect thereto shall cease to exist), shall be automatically converted into one
share of common stock, $0.01 par value per share, of Sky Merger (each, a "Sky
Merger Common Share"). The purpose of the Reincorporation Merger is to enable
New Prime to continue as a Maryland corporation. See "The Reincorporation
Merger."
THE CORPORATE MERGER
Following consummation of the Reincorporation Merger, Prime and Sky Merger
will file articles of merger (the "Corporate Articles of Merger") with the
Maryland Department in order to effectuate the Corporate Merger, pursuant to
which Sky Merger shall survive as New Prime. The name of New Prime will be Prime
Retail, Inc. In the Corporate Merger, each outstanding Horizon Common Share
(other than shares held by Horizon or any subsidiary of Horizon) will be
converted into 0.20 of a New Prime Series B Preferred Share and 0.597 of a New
Prime Common Share (the "Horizon Corporate Merger Consideration"). Each
outstanding Prime Common Share will be converted into one New Prime Common Share
and each outstanding share of 10.5% Series A Senior Cumulative Preferred Stock,
$0.01 par value per share, of Prime (each, a "Prime Series A Preferred Share")
and each Prime Series B Preferred Share and Prime Series C Preferred Share shall
be converted into one Series A Preferred Share, $0.01 par value per share, of
New Prime (each, a "New Prime Series A Preferred Share"), one New Prime Series B
Preferred Share, and one Series C Preferred Share, $0.01 par value per share, of
New Prime (each, a "New Prime Series C Preferred Share"), respectively (the
"Prime Corporate Merger Consideration" and, together with the Horizon Corporate
Merger Consideration, the "Corporate Merger Consideration"). Each such series of
preferred stock of New Prime will have rights and preferences that are
substantially identical to those of the corresponding series of Prime stock. See
"The Corporate Merger."
By separate Joint Proxy Statement/Prospectus/Information Statement, the
Prime Board of Directors is soliciting approvals from the holders of Prime
Common Shares and Prime Series C Preferred Shares. In addition, the Horizon
Board of Directors is soliciting approvals from the holders of Horizon Common
Shares. The holders of the Prime Common Shares, Prime Series C Preferred Shares
and Horizon Common Shares are being asked to consider and approve the
Transactions. The Transactions must receive the affirmative vote of the holders
of (i) two-thirds of the outstanding Prime Common Shares, (ii) two-thirds of the
outstanding Prime Series C Preferred Shares and (iii) two-thirds of the
outstanding Horizon Common Shares. The Transactions (including the Partnership
Merger) will not be consummated if the Transactions do not receive the required
approvals of the holders of the Prime Common Shares, Prime Series C Preferred
Shares and Horizon Common Shares.
DISTRIBUTION OF INTERESTS IN HGP AND HGP LP
Following consummation of the Mergers, New Prime will make a distribution of
the HGP Common Shares to the shareholders of record of New Prime Common Shares,
New Prime Series B Preferred Shares and New Prime Series C Preferred Shares.
Such distribution will be made at a rate of one HGP Common Share for every 20
New Prime Common Shares and New Prime Series C Preferred Shares, respectively,
and 1.19617 HGP Common Shares for every 20 New Prime Series B Preferred Shares.
Following consummation of the Mergers, Prime Partnership will make a
distribution of HGP LP Common Units at a rate of one HGP LP Common Unit for
every 20 HGP LP Common Units. Each HGP LP Common Unit will be exchangeable for
an HGP Common Share on a one-for-one basis or, at the option of HGP, cash in an
amount equal to the fair market value of such a share.
STRUCTURE OF PRIME, HORIZON, NEW PRIME AND HGP
The following diagrams set forth the organizational structure and ownership
interests of Prime and Horizon prior to the consummation of the Transactions and
of New Prime and HGP after consummation of the Transactions. The Transactions
are described in greater detail in "The Transactions," "The Contribution
Agreement," "The Partnership Merger," "The Reincorporation Merger" and "The
Corporate Merger."
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PRE-TRANSACTIONS STRUCTURE
THE DIAGRAM BELOW SETS FORTH THE ORGANIZATIONAL STRUCTURES OF PRIME AND
HORIZON PRIOR TO THE CONSUMMATION OF THE TRANSACTIONS AS WELL AS THEIR
PERCENTAGE OWNERSHIP INTERESTS OF THEIR RESPECTIVE SHAREHOLDERS AND PARTNERS.
[DIAGRAM]
Notes:
(1) Before the conversion of Prime Partnership Common Units, Prime Partnership
Series C Preferred Units, Prime Series B Preferred Shares and Prime Series C
Preferred Shares to Prime Common Shares.
(2) After the conversion of Prime Partnership Common Units, Prime Partnership
Series C Preferred Units, Prime Series B Preferred Shares and Prime Series C
Preferred Shares to Prime Common Shares.
(3) Before the conversion of Horizon Partnership Units to Horizon Common Shares.
(4) After the conversion of Horizon Partnership Units to Horizon Common Shares.
(5) Before the conversion of Prime Partnership Common Units to Prime Common
Shares.
(6) After the conversion of Prime Partnership Common Units and Prime Series C
Preferred Units to Prime Common Shares.
(7) Before the conversion of Horizon Partnership Units to Horizon Common Shares.
(8) After the conversion of Horizon Partnership Units to Horizon Common Shares.
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<PAGE>
POST-TRANSACTIONS STRUCTURE
THE DIAGRAM BELOW SETS FORTH THE ORGANIZATIONAL STRUCTURE OF NEW PRIME AND
HGP IMMEDIATELY FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS AS WELL AS THE
PERCENTAGE OWNERSHIP INTERESTS OF THEIR RESPECTIVE SHAREHOLDERS AND PARTNERS.
[DIAGRAM]
Notes:
(1) Before the conversion of Prime Partnership Common Units, New Prime Series B
Preferred Shares and New Prime Series C Preferred Securities to New Prime
Common Shares.
(2) After the conversion of Prime Partnership Common Units, New Prime Series B
Preferred Shares (including New Prime Series B Preferred Shares issued to
Horizon Common Sharheolders pursuant to the Corporater Merger) and New Prime
Series C Preferred Securities to New Prime Common Shares.
(3) Before the conversion of HGP LP Common Units to HGP Common Shares.
(4) After the conversion of HGP LP Common Units to HGP Common Shares.
(5) Before the conversion of Prime Partnership Common Units to New Prime Common
Shares.
(6) After the conversion of Prime Partnership Common Units and Prime Partnership
Series C Preferred Units to New Prime Common Shares.
(7) Before the conversion of HGP LP Common Units to HGP Common Shares.
(8) After the conversion of HGP LP Common Units to HGP Common Shares.
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<PAGE>
PRIME PARTNERSHIP RISK FACTORS
In considering whether to approve the Transactions, the unitholders of Prime
Partnership and Horizon Partnership voting thereon should consider, in addition
to the other information in this Joint Consent Solicitation
Statement/Prospectus/Information Statement, the matters discussed under "Prime
Partnership Risk Factors." Such matters include:
- The distribution declared on a Horizon Partnership Unit for each of the
first three quarters of 1997 was $0.35 and the distribution declared on
each Prime Partnership Common Unit Equivalent was $0.08 lower, or $0.27
for each such quarter. There can be no assurance that Prime Partnership
will make distributions equal to or in excess of those historically paid
to unitholders of Prime Partnership.
- In the event the Transactions are not consummated, Horizon Partnership
plans to reevaluate its distribution policy and may reduce or eliminate
the quarterly distribution payable to Horizon Partnership Unitholders.
- Possible fluctuations in the price of shares into which units are
exchangeable, including (a) a potential change in the relative market
prices of Prime Common Shares and Horizon Common Shares prior to the
completion of the Transactions or (b) a possible reduction in the market
prices of New Prime Common Shares and New Prime Series B Preferred Shares
following the Transactions.
- There can be no assurance that costs or other factors associated with the
integration of Prime Partnership and Horizon Partnership would not
adversely affect future combined results of operations or the benefits of
expected cost savings.
- Conflicts of interest arising from benefits to certain directors and
officers of Horizon and to an affiliate of Horizon's financial advisor to
be received upon the consummation of the Transactions described herein.
- Michael W. Reschke, who will serve as Chairman of the Board of Directors
of New Prime and as a director of HGP, is a principal owner of The Prime
Group, Inc. ("PGI"), which will have a substantial equity interest in
Prime Partnership. Because of this, PGI may be in a position to exercise
significant influence over the affairs of New Prime. In addition, PGI owns
substantial interest in income producing properties unrelated to New
Prime's operations. Mr. Reschke's employment agreement with PGI permits
him to devote a considerable portion of his time to the management of such
interests.
- Although the receipt of Prime Partnership Common Units in the Partnership
Merger generally is not expected to result in the recognition of taxable
income or gain by any Prime Partnership Unitholder or Horizon Partnership
Unitholder, the federal income tax consequences of the Partnership Merger
are highly complex and, with respect to each unitholder, are dependent
upon many variables, including the particular circumstances of such
unitholder. See "Federal Income Tax Consequences of the Transactions--The
Partnership Merger."
- Neither the Prime Partnership Consenting Unitholders nor the Horizon
Partnership Unitholders have appraisal rights in connection with the
Partnership Merger under Delaware law. See "Risk Factors--No Appraisal
Rights in Connection with the Partnership Merger."
- The surviving partnership will be subject to the risks normally associated
with debt or preferred equity financings, including the risk that the
surviving partnership's cash flow will be insufficient to meet required
payments of principal, interest and distributions.
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HGP LP RISK FACTORS
In addition to the general investment and real estate risks and those
factors set forth elsewhere in this Joint Consent Solicitation
Statement/Prospectus/Information Statement under "HGP LP Risk Factors" in
connection with HGP and HGP LP's business activities, Horizon Partnership
Unitholders and Prime Partnership Consenting Unitholders should be aware of,
among other things, the following factors:
- HGP LP does not have an operating history as a separate entity. The
historical and pro forma results for HGP LP contained elsewhere in this
Joint Consent Solicitation Statement/Prospectus/ Information Statement may
not be indicative of its results for future periods.
- The initial assets of HGP LP consist of properties formerly owned by
Horizon Partnership and Prime Partnership which have performed poorly
relative to other properties owned by Horizon Partnership and Prime
Partnership. As of December 31, 1997, the HGP Properties were 80.5% leased
while the properties in New Prime's portfolio were 92.7% leased. There can
be no assurance that the performance of the HGP Properties will not
continue to deteriorate.
- HGP has obtained a commitment for a first mortgage loan that will be
secured by substantially all of the assets of HGP. HGP's indebtedness on a
pro forma basis as of December 31, 1997 represented approximately 75.8% of
HGP's total capitalization. The degree to which HGP LP will be leveraged
could have adverse consequences, including limiting HGP LP's ability to
obtain additional financing and that a substantial portion of HGP LP's
cash flow is expected to be required to be dedicated to debt service.
- Implementation of HGP LP's business plan will require substantial working
capital. HGP LP does not have any commitments for working capital
financing, and there is no assurance that HGP LP will have working capital
sufficient to execute its business plan.
- There can be no assurance as to the value, if any, of the HGP LP Common
Units to be distributed in connection with the Transactions. There is no
trading market for the securities of HGP LP, and HGP's management
currently has no plans to list such securities on any securities exchange.
- HGP LP does not plan to pay a distribution in the foreseeable future, and
there can be no assurance that HGP LP will ever declare a distribution
(except to the extent necessary to comply with its obligations as a REIT).
- The Transactions represent the first attempt by a REIT in the factory
outlet center industry to separate its business into two publicly held
companies, one to continue to focus on the acquisition, development and
ownership of quality factory outlet centers and the other to implement a
repositioning strategy with respect to its retail properties. There is no
assurance that this strategy can be successfully implemented.
- The business plan of HGP LP is to seek to expand the occupancy of its real
estate assets to include non-factory outlet center tenants, which would
require HGP LP to compete in new markets. There is no assurance that HGP
LP will be able to compete effectively in new markets.
MERGER CONSIDERATION AND DISTRIBUTIONS PAYABLE PURSUANT TO THE TRANSACTIONS
The consideration and distributions payable pursuant to the Transactions
were determined through arm's length negotiations between Prime and Horizon. For
a detailed discussion of the background concerning these negotiations see "The
Corporate Merger--Background of the Transactions." Independent appraisals of the
market value of the properties and assets involved in the Transactions were not
obtained by Prime or Horizon. The consideration of 0.9193 of a Prime Partnership
Common Unit payable in respect of each Horizon Partnership Unit reflects Prime's
valuation of the properties, business and assets of Horizon as a whole based
primarily upon Horizon's historical cash available for distribution and
operating income rather than a property by property valuation based on current
market value. Each Prime
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<PAGE>
Partnership Unitholder will continue to hold such units of Prime Partnership
upon consummation of the Partnership Merger.
The distribution ratio of one HGP LP Common Unit for every 20 Prime
Partnership Common Units was determined by Prime Partnership based on HGP LP's
pro forma capitalization and partners' capital as of December 31, 1997. This
ratio is expected to result in the issuance of approximately 3,389,000 HGP LP
Common Units pursuant to the HGP LP Common Unit Distribution, 2,770,000, or
81.7%, of which will be issued to New Prime.
The aggregate amount of the Prime Partnership Special Distribution was
negotiated in connection with the Merger Agreement. The amount of cash
distributed in respect of each unit of Prime Partnership is based on the
provisions of the Prime Partnership Agreement that enable holders of Prime
Partnership Series C Preferred Units to participate in special cash
distributions made in respect of the Prime Partnership Common Units on an as
converted basis.
The following table sets forth the per share/unit consideration and
distributions to be received by the shareholders and unitholders of Prime and
Horizon upon consummation of the Transactions.
<TABLE>
<CAPTION>
SECURITY PER SHARE/UNIT CONSIDERATION AND DISTRIBUTIONS
- -------------------------------------- --------------------------------------------------------------
<S> <C>
PRIME PARTNERSHIP
Series A Preferred Unit............. 1.0 Prime Partnership Series A Preferred Unit
Series B Preferred Unit............. 1.0 Prime Partnership Series B Preferred Unit
Cash distribution of $0.60
0.0598 of an HGP LP Common Unit (1)
Series C Preferred Unit............. 1.0 Prime Partnership Series C Common Unit
Cash distribution of $0.50
0.05 of an HGP LP Common Unit (3)
Common Unit......................... 1.0 Prime Partnership Common Unit
Cash distribution of $0.50
0.05 of an HGP LP Common Unit (3)
PRIME
Series A Preferred Share............ 1.0 New Prime Series A Preferred Share
Series B Preferred Share............ 1.0 New Prime Series B Preferred Share
Cash distribution of $0.60
0.0598 of an HGP Common Share (1)
Series C Preferred Share............ 1.0 New Prime Series C Preferred Share
Cash distribution of $0.50
0.05 of an HGP Common Share (2)
Common Share........................ 1.0 New Prime Common Share
Cash distribution of $0.50
0.05 of an HGP Common Share (2)
HORIZON PARTNERSHIP
Common Unit......................... 0.9193 of a Prime Partnership Common Unit
0.04597 of an HGP LP Common Unit (3)
HORIZON
Common Share........................ 0.597 of a New Prime Common Share
0.20 of a New Prime Series B Preferred Share
0.04181 of an HGP Common Share (4)
</TABLE>
- ------------------------
(1) Reflects the distribution ratio of 1.19617 HGP Common Shares and HGP LP
Common Units for every 20 New Prime Series B Preferred Shares and Prime
Partnership Series B Preferred Units, respectively.
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(2) Reflects the distribution ratio of one HGP Common Share for every 20 New
Prime Common Shares and New Prime Series C Preferred Shares, respectively.
(3) Reflects the distribution ratio of one HGP LP Common Unit for every 20 Prime
Partnership Common Units and Prime Partnership Series C Preferred Units,
respectively.
(4) Reflects the sum of (a) the 0.02985 of an HGP Common Share distributable in
respect of the 0.597 of a New Prime Common Share based on the distribution
ratio of one HGP Common Share for every 20 New Prime Common Shares and (b)
the 0.01196 of an HGP Common Share distributable in respect of the 0.20 of a
New Prime Series B Preferred Share based on the distribution ratio of
1.19617 HGP Common Shares for every 20 New Prime Series B Preferred Shares.
Following the consummation of the Transactions, (i) each Prime Partnership
Common Unit will be exchangeable for one New Prime Common Share or, at New
Prime's option, the cash equivalent thereof and (ii) each HGP LP Common Unit
will be exchangeable for one HGP Common Share or, at HGP's option, the cash
equivalent thereof.
ADVANTAGES AND DISADVANTAGES OF THE TRANSACTIONS; RECOMMENDATION OF THE PRIME
BOARD OF DIRECTORS
The Prime Board of Directors believes that the Transactions, including the
consideration to be paid by Prime, are fair to and in the best interests of
Prime, Prime Partnership and their respective security holders. THE PRIME BOARD
OF DIRECTORS, ON BEHALF OF PRIME, IN ITS CAPACITY AS SOLE GENERAL PARTNER OF
PRIME PARTNERSHIP, UNANIMOUSLY APPROVED THE PARTNERSHIP MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND THE PRIME BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF PRIME PARTNERSHIP COMMON
UNITS AND PRIME PARTNERSHIP SERIES C PREFERRED UNITS CONSENT TO THE PARTNERSHIP
MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT. In
reaching this determination, the Prime Board of Directors consulted with Prime's
management as well as its financial advisor and legal counsel and considered the
short-term and long-term interests of Prime Partnership and its unitholders.
ADVANTAGES. The material factors that the Prime Board of Directors
considered in approving the Transactions and unanimously recommending approval
of the Transactions are that: (i) the Transactions would establish Prime
Partnership as the largest owner/operator of factory outlet centers in the
United States which, in the view of the Prime Board of Directors, should improve
access to the capital markets and better position the company to attract and
retain tenants; (ii) the Transactions would result in an increased market
capitalization which likely would result in higher trading volumes for New Prime
Common Shares and New Prime Series B Preferred Shares and increased liquidity
for the holders of such shares , including Prime Partnership Common Unitholders
who receive New Prime Common Shares upon exchange of their units; (iii) the
Transactions likely would provide significant cost savings and operating
efficiencies for Prime Partnership; (iv) the impact of the Transactions on Prime
Partnership's operating results on a pro forma basis are accretive; (v) the
Mergers could be effectuated through the issuance of equity rather than the use
of available cash or cash raised from debt or equity offerings; (vi) Prime's
management and its financial advisor, Friedman, Billings, Ramsey & Co., Inc.
("FBR"), concluded that the Transactions were fair, from a financial point of
view; (vii) after review of the terms of the Merger Agreement with Prime's
management, legal counsel and financial advisors, the Prime Board of Directors,
on behalf of Prime, in its capacity as sole general partner of Prime
Partnership, believes the terms of the Merger Agreement were fair; (viii) the
Partnership Merger will be tax-free for Prime Partnership for federal income tax
purposes; (ix) the HGP LP Common Units to be distributed as a dividend and would
enable common and convertible unitholders to benefit from the continuing
operations of HGP LP; and (x) the holders of common and convertible preferred
shares/units of Prime and Prime Partnership would receive special cash
distributions.
DISADVANTAGES. The Prime Board of Directors also considered the following
potentially negative factors which could arise from the Partnership Merger: (i)
the significant costs involved in connection with consummating the Transactions;
(ii) the substantial management time and effort required to effectuate the
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Transactions and integrate the Prime Acquired Properties; (iii) the increase in
Prime Partnership's ratio of debt to total market capitalization and the related
risks associated with such increased leverage; (iv) the possible adverse effects
upon the markets for Prime Common Shares and Prime Series B Preferred Shares and
upon Prime's ability to raise capital and issue equity if the Transactions were
not consummated; and (v) the risk that the anticipated benefits of the
Transactions might not be fully realized. Overall, the Prime Board of Directors
concluded that such negative factors were not sufficient, either individually or
collectively, to outweigh the positive factors considered by it in its
deliberations relating to the Transactions. See "The Corporate Merger--Reasons
for the Transactions; Recommendation of the Prime Board of Directors" and
"Opinion of Financial Advisor--Prime."
ADVANTAGES AND DISADVANTAGES OF THE TRANSACTIONS; RECOMMENDATION OF THE HORIZON
BOARD OF DIRECTORS
The Horizon Board of Directors believes that the Transactions, including the
consideration, are fair and in the best interests of Horizon, Horizon
Partnership and their respective securityholders. ACCORDINGLY, HORIZON'S BOARD
OF DIRECTORS, ON BEHALF OF HORIZON, IN ITS CAPACITY AS SOLE GENERAL PARTNER OF
HORIZON PARTNERSHIP, UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE PARTNERSHIP MERGER, THE
TRANSFER OF HORIZON PARTNERSHIP UNITS BY HORIZON AND ITS WITHDRAWAL AS GENERAL
PARTNER OF HORIZON PARTNERSHIP, AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
HORIZON PARTNERSHIP UNITS CONSENT TO THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE PARTNERSHIP MERGER. In reaching its
determination, the Horizon Board of Directors consulted with Horizon
Partnership's management, as well as financial advisors, legal counsel and
accountants, and considered a number of factors.
ADVANTAGES. The material factors that the Horizon Board of Directors
considered in approving the Transactions and unanimously recommending approval
of the Transactions are that: (i) as a result of the Transactions, Prime
Partnership would be better positioned to compete in the outlet shopping center
industry; (ii) the Transactions would enhance Prime Partnership's ability to
meet its continuing need for liquidity; (iii) the Transactions would provide
greater access to the public equity and debt markets and would increase Prime
Partnership's ability to raise capital at reasonable rates; (iv) the
Transactions would provide Horizon Partnership with a partner that has a
stronger capital base; (v) after reviewing Horizon Partnership's strategic
alternatives which included maintaining the status quo, raising capital through
a debt or equity offering, liquidating the company's assets, acquiring a
competitor and merging with another company, the Horizon Board of Directors
determined that the Transactions were the best alternative reasonably available
to Horizon Partnership Unitholders to maximize unitholder value; (vi) the
Horizon Board of Directors believed that, after management's discussions with
its investment bankers and after discussions with other REITs which requested
and received information about Horizon Partnership, no other prospective
purchasers were reasonably expected to make a proposal superior to that made by
Prime Partnership in the Transactions; (vii) based upon management's analysis of
Horizon Partnership's performance during 1997 and liquidity issues, the Horizon
Board of Directors had determined to reevaluate its distribution policy and
consider the possible reduction or elimination of future distributions; and
(viii) the Partnership Merger will be tax-free for federal income tax purposes
with respect to the Horizon Partnership Unitholders, which the Horizon Board of
Directors viewed as favorable because no gain or loss would be recognized by a
unitholder of Horizon Partnership. In reaching its determination, the Horizon
Board of Directors considered the investigation performed by Horizon Partnership
and its advisors as to the financial conditions and business of Prime
Partnership, as well as the opinion, analyses and presentations of Lehman
Brothers with respect to the strategic alternatives available to Horizon
Partnership, including the opinion that, subject to certain factors, the
consideration to be received in the Transactions by Horizon's shareholders and
unitholders is fair from a financial point of view to such shareholders and
unitholders.
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<PAGE>
DISADVANTAGES. The Horizon Board of Directors also considered the following
potentially negative factors which could arise from the Transactions: (i) the
risk that the anticipated benefits from the Transactions might not be fully
realized; (ii) that for each of the first three quarters of 1997, the
distribution declared on a Horizon Partnership Unit was $0.35 and the
distribution declared on 0.9193 of a Prime Partnership Common Unit into which
one Horizon Partnership Unit is exchangeable pursuant to the terms of the
Partnership Merger (the "Prime Partnership Common Unit Equivalent") was $0.07
lower, or $0.28; (iii) the possibility that the market price of Prime Common
Shares, and thus the consideration to be paid Horizon securityholders and
unitholders, may decrease in value prior to the Corporate Merger Effective Time;
(iv) the significant costs involved in connection with consummating the
Transactions; (v) the substantial management time and effort required to
effectuate the Transactions; and (vi) the possibility that Horizon may be
required, if the Merger Agreement is terminated under certain circumstances, to
pay Prime a Break-up Fee of $20,000,000 and to reimburse Prime for Break-up
Expenses of up to $4,500,000. See "The Corporate Merger--Reasons for the
Transactions; Recommendation of the Prime Board of Directors" and "Opinion of
Financial Advisor--Prime."
OPINIONS OF FINANCIAL ADVISORS
PRIME. Prime received the oral opinion of FBR at the meeting of the Prime
Board of Directors on January 30, 1998, which was confirmed in writing on
February 1, 1998, to the effect that, as of the respective dates of such
opinion, the consideration to be paid in connection with the Transactions is
fair from a financial point of view to Prime and Prime Partnership.
FBR is a nationally recognized investment banking and financial advisory
firm and is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. Prime selected FBR to serve as its financial
advisor with respect to the Transactions on the basis of such experience and
FBR's familiarity with Prime and its operations.
Prime has agreed to pay FBR a fee of $3,000,000 for the delivery of its
opinion and related advisory work, and to indemnify FBR against certain
liabilities, including liabilities under the federal securities laws. For
additional information concerning FBR and its written opinion, see "The
Corporate Merger--Opinion of Financial Advisor--Prime" and FBR's written
opinion, dated as of February 1, 1998, attached hereto as Appendix D. The
written opinion of FBR should be read in its entirety with respect to the
assumptions made, matters considered and limits of the reviews undertaken by FBR
in rendering such an opinion.
HORIZON. Horizon received the oral opinion of Lehman Brothers at the
meeting of the Horizon Board of Directors on January 29, 1998, which opinion was
subsequently confirmed in writing on January 29, 1998 that as of such date, and
subject to assumptions, factors and limitations as described in that opinion,
the consideration to be received by the Horizon shareholders and Horizon
Partnership limited partners was fair, from a financial point of view.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Horizon Board of Directors
selected Lehman Brothers because of its expertise, reputation, familiarity with
the real estate industry and knowledge of Horizon gained in connection with a
loan (the "Lehman Loan") made by Lehman Brothers Holdings Inc., an affiliate of
Lehman Brothers, to Horizon which had a balance outstanding as of March 31, 1998
of approximately $254,000,000. Such loan is due in full by its terms upon
consummation of the Transactions.
As compensation for its services in connection with the Transactions,
Horizon has agreed to pay Lehman Brothers a fee upon consummation of the
Transactions of $6,000,000, as well as to reimburse
13
<PAGE>
Lehman Brothers for reasonable expenses. In addition, Horizon has agreed to
indemnify Lehman Brothers for certain liabilities that may arise out of its
engagement by Horizon and the rendering of its opinion. For additional
information concerning Lehman Brothers and its written opinion, see "The
Corporate Merger--Opinion of Financial Advisor--Horizon" and Lehman Brothers'
written opinion, dated as of February 1, 1998, attached hereto as Appendix E.
The written opinion of Lehman Brothers should be read in its entirety with
respect to the assumptions made, matters considered and limits of the reviews
undertaken by Lehman Brothers in rendering such an opinion.
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN DIRECTORS AND OFFICERS OF
HORIZON
Certain executive officers, directors and key employees of Horizon have been
granted stock options and/or have entered into certain agreements providing them
with cash payments and/or rights upon the occurrence of a merger or
consolidation between Horizon and another person, the corporate reorganization
of Horizon or the acquisition of a majority or more of the assets of Horizon by
another person (each a "Specified Event"). The Transactions are such a Specified
Event within the meaning of the aforementioned agreements. These executive
officers, directors and key employees will receive material benefits from the
Transactions that will not generally be received by the other participants in
the Transactions and therefore a conflict between the interests of such
directors, executive officers and key employees, as individuals, and the
interests of the shareholders of Horizon, could exist. For example, under
existing agreements with and compensation awards from Horizon, all of which were
approved by the Horizon Board of Directors, James S. Wassel, President and Chief
Executive Officer of Horizon, will receive the following upon the consummation
of the Transactions pursuant to the terms of the Employment Agreement dated as
of April 24, 1997, as amended by that certain Amendment No. 1 to Employment
Agreement dated as of November 12, 1997: (i) the greater of (a) his base salary
plus the maximum bonus he is entitled to receive under the terms of the
Employment Agreement and (b) the amount of base salary and bonus actually paid
to Mr. Wassel for the most recently completed twenty-four month period, (ii) a
payment in the amount required to cover any additional tax liability incurred
because any income or compensation paid to Mr. Wassel is treated as an "excess
parachute payment" under the Code, (iii) the remaining 35,000 restricted Horizon
Common Shares to which Mr. Wassel is entitled under the terms of his Employment
Agreement and (iv) full vesting of the options under which Mr. Wassel has the
right to purchase 200,000 Horizon Common Shares. For a detailed description of
the cash payments and other benefits which will be provided to executive
officers, directors and key employees of Horizon in connection with the
consummation of the Transactions, see "Conflicts of Interest Arising from
Benefits to Certain Directors and Officers of Horizon."
EFFECTIVE TIME OF THE PARTNERSHIP MERGER AND CLOSING DATE
The closing ("Closing") of the Partnership Merger will take place at 10:00
a.m. on the date to be specified by Prime Partnership and Horizon Partnership,
which will be no later than the third business day after satisfaction or waiver
of the conditions set forth in the Merger Agreement (the "Closing Date"), at the
offices of Winston & Strawn, 35 West Wacker Drive, Chicago, Illinois 60601,
unless another date or place is agreed to in writing by the parties. The
Partnership Merger will become effective (the "Partnership Merger Effective
Time") immediately after the Prime Partnership Special Distribution, or at such
time as Prime Partnership and Horizon Partnership will agree should be specified
in the Merger Agreement. It is currently anticipated that the Partnership Merger
Effective Time will be on or about June , 1998.
CONDITIONS TO THE MERGERS; WAIVER AND AMENDMENT
The consummation of the Mergers are subject to satisfaction of certain
conditions, all of which may be waived unless otherwise required by law,
including, among other things, obtaining the requisite approval of the limited
partners and shareholders, as the case may be, of Horizon Partnership, Prime
Partnership, Horizon and Prime, and receipt by Prime and Horizon of opinions of
their respective counsel to the effect
14
<PAGE>
described in "The Partnership Merger--Federal Income Tax Consequences." If Prime
or Horizon waives a material condition to the consummation of the Mergers, such
company will resolicit the approval of its limited partners and shareholders.
See "The Corporate Merger--Representations and Warranties; Conditions to the
Mergers" and "The Corporate Merger--Waiver and Amendment."
APPRAISAL RIGHTS
The Horizon Partnership Unitholders and Prime Partnership Common Unitholders
are not entitled to a statutory right of appraisal.
FEDERAL INCOME TAX CONSEQUENCES OF THE PARTNERSHIP MERGER
The receipt of Prime Partnership Common Units in the Partnership Merger
generally is not expected to result in the recognition of taxable income or gain
by any Prime Partnership Unitholder or Horizon Partnership Unitholder at the
time of the Partnership Merger. However, the particular tax consequences of the
Partnership Merger for each Horizon Partnership Unitholder or Prime Partnership
Unitholder will depend on a number of factors related to the tax situation of
the individual unitholder, including such unitholder's adjusted tax basis in its
Horizon Partnership Units or Prime Partnership Units at the time of the
Partnership Merger, the assets that the Horizon Partnership Unitholder or Prime
Partnership Unitholder originally contributed to Horizon Partnership or Prime
Partnership in exchange for his or her units, such unitholder's share of the
"unrealized gain" with respect to Horizon Partnership's assets or Prime
Partnership's assets at the time of the Partnership Merger, the extent to which
a unitholder's share of the liabilities of Prime Partnership which the
unitholder includes in its basis for its Horizon Partnership Units or Prime
Partnership Units after the Partnership Merger is less than such unitholder's
share of the liabilities of Horizon Partnership or Prime Partnership before the
Partnership Merger. Although the gain that the unitholders of Prime Partnership
and Horizon Partnership may recognize as a result of the Partnership Merger is
most likely to be less than the gain that they otherwise would recognize in a
fully taxable transaction, each unitholder is strongly urged to consult with his
or her own tax advisor in order to determine the anticipated tax consequences of
the Partnership Merger for such unitholder in light of his or her specific
circumstances. See "The Federal Income Tax Consequences of the Transactions--Tax
Consequences of the Partnership Merger."
RESALES OF PRIME PARTNERSHIP COMMON UNITS, NEW PRIME COMMON SHARES AND NEW PRIME
SERIES B PREFERRED SHARES
The Prime Partnership Common Units to be issued to the holders of Horizon
Partnership Units in the Partnership Merger will be transferable subject to the
restrictions contained in the Prime Partnership Agreement as described under
"Prime Partnership Agreement--Transferability of Interests." New Prime Common
Shares and New Prime Series B Preferred Shares to be issued to holders of the
Horizon Common Shares upon consummation of the Corporate Merger, and New Prime
Common Shares reserved for issuance upon exchange of Prime Partnership Common
Units to be issued to holders of Horizon Partnership Units upon consummation of
the Partnership Merger, will be registered under the Securities Act. Such
securities may be traded freely and without restriction by those shareholders
and unitholders who are not deemed to be "affiliates" of Horizon and Prime as
that term is defined in the rules and regulations promulgated pursuant to the
Securities Act. "Affiliates" are generally defined as persons who control, are
controlled by or are under common control with an issuer. This Joint Consent
Solicitation Statement/Prospectus/Information Statement does not cover any
resales of New Prime Common Shares and New Prime Series B Preferred Shares
received by affiliates of Horizon or Prime. Under a registration rights
agreement to be entered into by New Prime, New Prime is obligated to keep in
effect a shelf registration statement under which affiliates of Horizon or Prime
may sell their New Prime Common Shares and New Prime Series B Preferred Shares.
See "The Corporate Merger--Registration Rights Agreement."
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<PAGE>
TERMINATION
The Merger Agreement provides that it may be terminated in a number of
circumstances at any time prior to the Partnership Merger Effective Time,
whether before or after the approval of the Partnership Merger and the other
transactions contemplated by the Merger Agreement by the unitholders of Prime
Partnership and Horizon Partnership. See "The Corporate Merger--Termination
Provisions."
BREAK-UP FEE AND EXPENSES
Depending on the reason for the Merger Agreement's termination, Horizon may
be required to pay Prime the Break-up Expenses, the Break-up Fee or the Break-up
Fee plus the Break-up Expenses, or Prime may be required to pay Horizon the
Break-up Expenses. See "The Corporate Merger--Break-up Fee and Expenses."
ANTICIPATED ACCOUNTING TREATMENT
The Mergers will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. See "The Corporate Merger--Anticipated
Accounting Treatment."
CONDUCT OF BUSINESS PENDING THE MERGERS
Each of Horizon and Horizon Partnership has agreed that, prior to the
Corporate Merger Effective Time, it will, and will cause each of its respective
subsidiaries which it controls to, conduct its business in the ordinary course,
except in certain circumstances. In addition, each of Prime and Prime
Partnership has agreed that, prior to the Corporate Merger Effective Time, it
will, and will cause each of its respective subsidiaries which it controls to,
conduct its business in the ordinary course, except in certain circumstances.
See "The Corporate Merger--Conduct of Business Pending the Mergers."
NO SOLICITATION OF OTHER TRANSACTIONS
Horizon has agreed that it will not, and will not permit its officers,
trustees, employees, agents or financial advisors to, initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its shareholders) with respect to a merger, acquisition, tender offer,
exchange offer, consolidation, sale of assets or similar transactions involving
all or any significant portion of the assets or any equity securities of, it or
any of its subsidiaries, other than the transactions contemplated by the Merger
Agreement. The Merger Agreement does not, however, prohibit Horizon from
entering into discussions with respect to an unsolicited Acquisition Proposal if
the Horizon Board of Directors determines that such action is required by its
duties to its shareholders imposed by law. See "The Corporate Merger--No
Solicitation of Other Transactions."
EXCHANGE OF UNITS
Contemporaneous with or as soon as practicable after the Partnership Merger
Effective Time, Prime Partnership shall mail or otherwise make available to each
holder of record of Horizon Partnership Units whose interest in Horizon
Partnership was converted into the right to receive the Partnership Merger
Consideration, a letter of transmittal. Such letter of transmittal shall contain
instructions for execution and delivery of the Prime Partnership Agreement which
shall specify that delivery of the Partnership Merger Consideration shall be
effected only upon execution and delivery of the Prime Partnership Agreement and
such other documentation as Prime Partnership may reasonably specify as
necessary in connection with the consummation of the Transactions. Upon
execution and delivery of the Prime Partnership Agreement and such other
documentation as specified, each holder of Horizon Partnership Units shall be
entitled to receive from Prime Partnership a copy of the Prime Partnership
Agreement, duly amended to reflect the Partnership Merger Consideration to be
received by such holder as well as any dividends or distributions to
16
<PAGE>
which such holder is entitled. Only holders of record on the books and records
of Horizon Partnership shall be entitled to the Partnership Merger Consideration
and to become a limited partner in Prime Partnership. Until the execution and
delivery of the Prime Partnership Agreement by a holder of Horizon Partnership
Units and such other documentation as specified, such Horizon Partnership Units
shall be deemed at any time after the Partnership Merger Effective Time to
represent only the rights to receive the Partnership Merger Consideration into
which such Horizon Partnership Units shall have been converted, without
interest, and any dividends or other distributions to which such holder is
entitled, without interest. As part of the mailing of this Joint Consent
Solicitation Statement/Prospectus/Information Statement Horizon Partnership will
provide each Horizon Partnership Unitholder with a letter of transmittal and
signature pages to permit each Horizon Partnership Unitholder to become a
limited partner of Prime Partnership and HGP, L.P. at the Effective Time.
COMPARISON OF RIGHTS OF UNITHOLDERS
The following discussion summarizes certain significant differences between
the rights of holders of limited partnership interests of Horizon Partnership
and Prime Partnership as a result of the Transactions. The rights of the Horizon
Partnership Unitholders and Prime Partnership Unitholders are presently governed
by the Delaware Revised Uniform Limited Partnership Act ("DRULPA"), the Horizon
Partnership Agreement and Prime Partnership Agreement, respectively. This
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to the Horizon Partnership Agreement and the Prime
Partnership Agreement.
ISSUANCE OF OTHER UNITS
Both the Horizon Partnership Agreement and the Prime Partnership Agreement
authorize the general partner to cause the partnership to issue additional
partner interests in the form of partnership units for any purpose.
UNIT OPTION PLAN
Under the Prime Partnership Agreement, if any incentive options granted in
connection with the Prime Stock Incentive Plan are exercised, Prime shall
contribute to the capital of Prime Partnership an amount equal to the exercise
price paid to Prime, and Prime shall receive common units corresponding to the
number of Prime Common Shares delivered by Prime to the exercising party
multiplied by the exchange factor.
The Horizon Partnership Agreement provides that Horizon as general partner
may cause Horizon Partnership to adopt one or more Horizon Partnership Unit
option or incentive plans pursuant to which officers, directors and/or employees
of Prime Partnership or Prime may acquire Prime Partnership Units.
INDEMNIFICATION
Pursuant to the Prime Partnership Agreement, Prime Partnership shall
generally indemnify and hold harmless Prime from any loss, damage, claim or
liability, including, but not limited to, reasonable attorneys' fees and
expenses incurred by Prime.
Pursuant to the Horizon Partnership Agreement, Horizon Partnership shall
generally indemnify Horizon, any director, officer or employer of Horizon or
Horizon Partnership or any person (including any affiliate) designated as an
agent by Horizon in its reasonable discretion from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable
attorneys' fees).
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FINANCIAL STATEMENTS AND REPORTS
The Prime Partnership Agreement provides that Prime shall cause to be
submitted to the limited partners promptly upon receipt of the same from the
accountants and in no event later than April 1 of each year, copies of audited
financial statements prepared on a consolidated basis for Prime Partnership.
The Horizon Partnership Agreement provides that Horizon shall maintain at
the office of Horizon Partnership full and accurate books of Horizon Partnership
showing all transactions, assets and liabilities, financial condition, names and
current addresses of partners and all other records necessary for recording
Horizon Partnership's business and affairs.
MERGERS
DRULPA provides that limited partnerships may enter into mergers,
consolidations or similar transactions with other limited partnerships or
business entities.
TRANSFER OR PLEDGE OF UNITS
Pursuant to the Prime Partnership Agreement, limited partners of Prime
Partnership shall have the right to transfer all or any portion of its common
units to any person or entity as long as such person or entity does not lack the
legal right, power or capacity to own a partnership interest.
Pursuant to the Horizon Partnership Agreement, limited partners of Horizon
Partnership may not, generally, without the consent of Horizon, as general
partner, transfer all or any portion of its partnership interests.
REDEMPTION/EXCHANGE OF UNITS
Under the Prime Partnership Agreement, if at any time Prime's preferred
shares are to be redeemed pursuant to the Prime Charter purchased by Prime,
Prime Partnership shall redeem an equal number of preferred units by payment to
Prime of the preferred unit redemption amount or purchase price to be paid by
Prime immediately prior to or concurrently with such redemption or purchase.
The Horizon Partnership Agreement provides that any limited partner holding
100,000 or more registrable securities or equivalent securities shall be
entitled to redeem the partnership units held by such limited partner only
during the 30-day period immediately following the filing with the commission by
Horizon of its annual report on Form 10-K and quarterly reports on Form 10-Q, or
during such other periods as Horizon Partnership may otherwise permit.
AMENDMENTS
The Prime Partnership Agreement may not be amended, except by a written
instrument signed by Prime (and approved on behalf of Prime by at least a
majority of its directors who are not affiliates of any of the limited partners)
and by a majority-in-interest of the partners.
The Horizon Partnership Agreement provides that such agreement, except for
certain restrictions, may be amended by Horizon, without the consent of any
limited partner.
MANAGEMENT AND OPERATION OF NEW PRIME AFTER THE TRANSACTIONS
After the Transactions, management and control of Prime Partnership will be
vested in New Prime, which will serve as its sole general partner. Senior
management of New Prime will be drawn from the present management of Prime. See
"Interests of Certain Persons in the Transactions."
The Board of Directors of New Prime (the "New Prime Board of Directors")
will consist of the following persons: Michael W. Reschke, Abraham Rosenthal,
William H. Carpenter, Jr., Glenn D.
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Reschke, Terence C. Golden, Kenneth A. Randall, James R. Thompson, Marvin S.
Traub, Sharon Sharp, Norman Perlmutter, Robert D. Perlmutter and William P.
Dickey. The New Prime Board of Directors will be divided into three equally
numbered classes serving staggered three-year terms. One class will serve as
directors until the 1999 annual meeting of shareholders, one class will serve as
directors until the 2000 annual meeting of shareholders, and one class will
serve as directors until the 2001 annual meeting of shareholders.
The Merger Agreement also contains provisions relating to, among other
things, employee benefits and indemnification and liability coverage of former
directors and officers of Horizon after the Transactions. See "Interests of
Certain Persons in the Transactions."
CONSENT SOLICITATION INFORMATION OF UNITHOLDERS; RECORD DATES; CONSENTS REQUIRED
PRIME. Prime Partnership Consenting Unitholders are being asked by Prime,
in its capacity as sole general partner of Prime Partnership, to consent to the
Transactions. Consent to the Transactions by the Prime Partnership Consenting
Unitholders is required for consummation of the Transactions. Neither the Prime
Partnership Agreement nor Delaware law requires the setting of a record date for
Prime Partnership Consenting Unitholders entitled to consent to the
Transactions. However, only Prime Partnership Consenting Unitholders of record
may consent to the Transactions. Approval of the Transactions requires the
affirmative consent of the holders of a majority of Prime Partnership Common
Units and holders of a majority of Prime Partnership Series C Preferred Units.
As of April 24, 1998, Prime Partnership had issued and outstanding 35,800,423
Prime Partnership Common Units and 727,273 Prime Partnership Series C Preferred
Units.
Consents will be solicited by mail, telephone and in person. Solicitations
may be made by certain employees of Prime Partnership, none of whom will receive
additional compensation for such solicitations. Prime Partnership will bear its
own expenses in connection with the consent solicitation. Consents must be
received prior to the execution and delivery of the Delaware Certificate of
Merger with the Delaware Secretary (the "Prime Consent Period"). Prime
Partnership Consenting Unitholders may revoke consents until the expiration of
the Prime Consent Period by dating, signing and delivering a written notice,
which clearly expresses the revocation of consent, to Prime Partnership, or by
delivering a properly executed, subsequently dated consent card withholding a
previously granted consent.
HORIZON. Horizon Partnership Limited Partners are being asked by Horizon,
in its capacity as sole general partner of Horizon Partnership, to consent to
the Transactions. Consent to the Transactions by the Horizon Partnership Limited
Partners is required for consummation of the Transactions. Neither the Horizon
Partnership Agreement nor Delaware law requires the setting of a record date for
Horizon Partnership Unitholders entitled to consent to the Transactions.
However, only Horizon Partnership Limited Partners of record may consent to the
Transactions. Approval of the Transactions requires the affirmative consent of
the Horizon Partnership Limited Partners who own more than 50% of the Horizon
Partnership Units. Pursuant to the terms of the Horizon Partnership Agreement
and Delaware law, the assignees of Horizon Partnership Units ("Horizon
Partnership Assignees") do not have the right to consent to the Transactions.
Each Horizon Partnership Assignee may become a Horizon Partnership Limited
Partner by executing and delivering a signature page to the Horizon Partnership
Agreement prior to the completion of the Horizon Consent Period. Each Horizon
Partnership Assignee that elects to become a Horizon Partnership Limited Partner
prior to the completion of the Horizon Consent Period will have a right to
execute a Consent with respect to the Transactions. As of April 24, 1998,
Horizon Partnership had issued and outstanding 4,116,193 Horizon Partnership
Units. As of April 24, 1998 4,039,870 of the outstanding Horizon Partnership
Units were held by Horizon Partnership Limited Partners and 76,323 outstanding
Horizon Partnership Units were held by Horizon Partnership Assignees. Pursuant
to the terms of the Horizon Partnership Agreement, Horizon Partnership Units
held by Horizon Partnership Assignees shall be deemed to have been voted in the
same proportion that all Horizon Partnership Units held by Horizon Limited
Partners have been voted.
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Consents will be solicited by mail, telephone and in person. Solicitations
may be made by certain employees of Horizon Partnership, none of whom will
receive additional compensation for such solicitations. Horizon Partnership will
bear its own expenses in connection with the consent solicitation. Consents must
be received prior to the execution and delivery of the Delaware Certificate of
Merger with the Delaware Secretary (the "Horizon Consent Period"). Horizon has
retained MacKenzie Partners to assist in the solicitation of consents. The fee
of such firm for the corporate proxy solicitation is estimated to be $7,500,
plus reimbursement for out-of-pocket costs and expenses and will also cover the
solicitation of partnership consents. Horizon Partnership Limited Partners may
revoke consents until the expiration of the Horizon Consent Period by dating,
signing and delivering a written notice, which clearly expresses the revocation
of consent, to Horizon Partnership, or by delivering a properly executed,
subsequently dated consent card withholding a previously granted consent.
PRIME PARTNERSHIP AND HGP LP SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following tables set forth the summary unaudited pro forma financial
data for Prime Partnership and HGP LP after their giving effect to the
Transactions as if they had occurred on the dates indicated herein and the other
pro forma adjustments described in the notes to the unaudited pro forma
financial statements included elsewhere in this Joint Consent Solicitation
Statement/Prospectus/Information Statement.
The summary unaudited pro forma operating data are presented as if the
Transactions had been consummated at the beginning of the earliest period
presented.
The summary unaudited pro forma balance sheet data is presented as if the
Transactions had occurred on December 31, 1997. The Mergers have been accounted
for under the purchase method of accounting in accordance with the Accounting
Principles Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the Transactions have been made.
The summary pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the unaudited pro forma financial
statements and notes thereto included elsewhere in this Joint Consent
Solicitation Statement/Prospectus/Information Statement.
The summary unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of Prime Partnership and Horizon Partnership or
HGP LP would have been for the period and dates presented nor does such data
purport to represent the results of future periods.
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PRIME PARTNERSHIP AND HGP LP
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
YEAR ENDED DECEMBER 31,
1997
-------------------------
PRIME
PARTNERSHIP HGP LP
------------- ----------
(IN THOUSANDS, EXCEPT PER
UNIT INFORMATION)
<S> <C> <C>
OPERATING DATA:
REVENUES
Base rents............................................................................. $ 175,548 $ 27,416
Percentage rents....................................................................... 8,140 151
Tenant reimbursements.................................................................. 66,732 9,341
Income from investment partnerships.................................................... 243 --
Interest and other..................................................................... 15,593 2,638
------------- ----------
Total revenues..................................................................... 266,256 39,546
EXPENSES
Property operating..................................................................... 51,261 7,862
Real estate taxes...................................................................... 19,655 3,782
Depreciation and amortization.......................................................... 61,670 4,489
General and administrative............................................................. 8,233 3,500
Interest............................................................................... 81,210 10,034
Impairment and severance............................................................... -- 6,949
Other charges.......................................................................... 6,988 2,696
------------- ----------
Total expenses..................................................................... 229,017 39,312
------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM..... 37,239 234
Loss allocated to minority interests................................................... 76 --
------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM............................ 37,315 234
Income allocated to preferred unitholders.............................................. 23,245 --
------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM APPLICABLE TO COMMON
UNITS................................................................................. $ 14,070 $ 234
------------- ----------
------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM PER COMMON UNIT:
General partner...................................................................... $ 0.31 $ 0.07
------------- ----------
------------- ----------
Limited partners..................................................................... $ 0.31 $ 0.07
------------- ----------
------------- ----------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
General partner...................................................................... 33,587 2,770
Limited partners..................................................................... 12,391 619
------------- ----------
45,978 3,389
------------- ----------
------------- ----------
<CAPTION>
BALANCE SHEET DATA
(at end of period) DECEMBER 31, 1997
- --------------------------------------------------------------------------------------- -------------------------
<S> <C> <C>
Investment in rental property, net..................................................... $ 1,751,257 $ 157,099
Total assets........................................................................... 1,867,030 176,749
Total debt............................................................................. 1,095,841 127,387
Minority interests..................................................................... 3,666 --
Partners' capital...................................................................... 714,062 40,565
</TABLE>
21
<PAGE>
PRIME PARTNERSHIP SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical financial data for the three years ended
December 31, 1997, 1996 and 1995, the periods from January 1, 1994 to March 21,
1994 and March 22, 1994 to December 31, 1994 and the two years ended December
31, 1993 and 1992 are derived from the consolidated financial statements of
Prime and the combined financial statements of Prime Retail Properties (the
"Prime Partnership Predecessor"). Combined financial statements for the two
years ended December 31, 1993 and the period January 1, 1994 to March 21, 1994
are included for the Prime Partnership Predecessor. The combined financial
statements for the Prime Partnership Predecessor combine the balance sheet data
and results of operations of eleven predecessor partnerships, the 40% equity
interest in two predecessor partnerships that previously owned properties, and
the management and development operations acquired by Prime from PGI in
connection with the Prime IPO. Because of the Prime IPO and the related
transactions pertaining to the formation of Prime, results of operations for
Prime after March 21, 1994 are not comparable to results for prior periods. The
following financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements, notes thereto and other financial information included
elsewhere in this Joint Consent Solicitation Statement/Prospectus/Information
Statement.
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PRIME PARTNERSHIP PREDECESSOR (COMBINED)
-------------------------------------------------- -------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED MARCH 22 JANUARY 1
DECEMBER 31, TO TO YEAR ENDED
------------------------------------ DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
----------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL REVENUES........................... $ 129,092 $ 89,040 $ 77,398 $ 45,365 $ 6,330 $ 21,800
Operating expense........................ 38,909 25,709 22,366 12,414 2,424 6,604
----------- ----------- ---------- ------------ ----------- ------------
Operating income......................... 90,183 63,331 55,032 32,951 3,906 15,196
Other expenses(1)........................ 70,168 55,461 41,176 22,819 6,314 19,069
----------- ----------- ---------- ------------ ----------- ------------
Income (loss) before minority
interests.............................. 20,015 7,870 13,856 10,132 (2,408) (3,873)
Income allocated to minority interests... (189) (140) (167) (46) -- --
----------- ----------- ---------- ------------ ----------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM................................... 19,826 7,730 13,869 10,086 (2,408) (3,873)
Extraordinary item....................... (2,061) (4,280) -- -- -- --
----------- ----------- ---------- ------------ ----------- ------------
NET INCOME (LOSS)........................ 17,765 3,450 13,869 10,086 (2,408) (3,873)
Income allocated to preferred units...... 12,995 14,236 20,944 16,290 -- --
----------- ----------- ---------- ------------ ----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
UNITS.................................. $ 4,770 $ (10,786) $ (7,255) $ (6,204) $ (2,408) $ (3,873)
----------- ----------- ---------- ------------ ----------- ------------
----------- ----------- ---------- ------------ ----------- ------------
NET INCOME (LOSS) APPLICABLE TO COMMON
UNITS:
General partner........................ $ 3,305 $ (5,193) $ (1,724) $ (1,465)
Limited partner........................ 1,465 (5,593) (5,531) (4,739)
----------- ----------- ---------- ------------
Total.................................... $ 4,770 $ (10,786) $ (7,255) $ (6,204)
----------- ----------- ---------- ------------
----------- ----------- ---------- ------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PRIME PARTNERSHIP PREDECESSOR (COMBINED)
-------------------------------------------------- -------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED MARCH 22 JANUARY 1
DECEMBER 31, TO TO YEAR ENDED
------------------------------------ DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
----------- ----------- ---------- ------------ ----------- ------------
EARNINGS (LOSS) PER COMMON UNIT(2):
<S> <C> <C> <C> <C> <C> <C>
General partner (including $0.07 and
$0.25 net loss per unit from
extraordinary item in 1997 and 1996,
respectively)........................ $ 0.17 $ (0.63) $ (0.60) $ (0.51)
----------- ----------- ---------- ------------
----------- ----------- ---------- ------------
Limited partner (including $0.07 and
$0.25 net loss per unit from
extraordinary item in 1997 and 1996,
respectively)........................ $ 0.17 $ (0.63) $ (0.60) $ (0.51)
----------- ----------- ---------- ------------
----------- ----------- ---------- ------------
WEIGHTED AVERAGE COMMON UNITS
OUTSTANDING:
General partner........................ 19,189 8,221 2,875 2,850
Limited partner........................ 8,505 8,855 9,221 9,221
----------- ----------- ---------- ------------
Total.................................... 27,694 17,076 12,096 12,071
----------- ----------- ---------- ------------
----------- ----------- ---------- ------------
BALANCE SHEET DATA:
Rental property (before accumulated
depreciation).......................... $ 904,518 $ 640,751 $ 454,471 $ 376,181 $ 180,170 $ 185,394
Total assets............................. 911,834 670,347 462,758 386,198 186,034 190,685
Total liabilities........................ 548,542 526,584 326,094 232,917 198,244 197,400
Total partners' capital (deficit)........ 359,381 139,777 132,257 (11,217) (12,210) (6,715)
SUPPLEMENTAL DATA:
Funds from operations(3)................. $ 48,187 $ 34,652 $ 29,046 $ 22,154 $ 139 $ 4,351
Ratio of earnings to combined fixed
charges and preferred unit
distributions.......................... 1.06x -- -- -- -- --
Excess of combined fixed charges and
preferred unit dividends over
earnings(4)............................ $ -- $ (9,745) $ (10,262) $ (7,507) $ (2,366) $ (4,423)
Net cash provided by (used in) operating
activities............................. $ 46,695 $ 42,245 $ 37,272 $ 17,573 $ (1,873) $ 14,450
Net cash used in investing activities.... $ (229,702) $ (232,291) $ (81,967) $ (149,435) $ (1,239) $ (54,210)
Net cash provided by financing
activities............................. $ 185,366 $ 179,042 $ 56,634 $ 134,845 $ 4,087 $ 39,907
Factory outlet GLA (square feet)......... 7,217 5,780 4,331 3,382 1,839 1,839
</TABLE>
- ------------------------
Notes:
(1) Other expenses includes depreciation and amortization expenses, general and
administrative expense, interest expense, and other charges.
(2) Net loss per common unit outstanding is net of applicable preferred
distributions.
(3) Prime Partnership's management believes that in order to facilitate a clear
understanding of the consolidated historical operating results of Prime
Partnership, Funds from Operations ("FFO") should be considered in
conjunction with net income (loss) as presented in the financial statements
included in this Joint Consent Solicitation Statement/Prospectus/Information
Statement. Management
23
<PAGE>
believes that FFO is an important and widely used measure of the operating
performance of REITs which provides a relevant basis for comparison to other
REITs. Therefore, FFO is presented to assist investors in analyzing the
performance of Prime Partnership. FFO represents net income (loss) (computed
in accordance with generally accepted accounting principles ("GAAP")),
excluding gains or losses from debt restructuring and sales of property,
plus depreciation and amortization and after adjustments for unconsolidated
investment partnerships and joint ventures. In March 1995, the National
Association of Real Estate Investment Trusts ("NAREIT") issued a
clarification of its definition of FFO. Although Prime Partnership has
adopted the NAREIT definition of FFO, Prime Partnership cautions that the
calculation of FFO may vary from entity to entity and as such the
presentation of FFO by Prime Partnership may not be comparable to other
similarly titled measures of other reporting companies. FFO does not
represent cash flow from operating activities in accordance with GAAP and is
not indicative of cash available to fund all of Prime Partnership's cash
needs. FFO should not be considered as an alternative to net income or any
other GAAP measure as an indicator of performance and should not be
considered as an alternative to cash flow as a measure of liquidity or the
ability to service debt or to pay dividends. A reconciliation of income
(loss) before allocation to minority interests and preferred shareholders to
FFO is as follows:
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PRIME PARTNERSHIP PREDECESSOR (COMBINED)
-------------------------------------------- -------------------------
PERIOD PERIOD
YEAR ENDED MARCH 22 JAN. 1
DECEMBER 31, TO TO YEAR ENDED
------------------------------- DEC. 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
--------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before allocations to minority
interests and preferred unitholders............. $ 20,015 $ 14,001(i) $ 13,856 $ 10,132 $ (2,408) $ (3,873)
FFO ADJUSTMENTS
Depreciation and amortization..................... 26,414 18,703 14,884 9,508 2,173 7,504
Unconsolidated joint venture adjustments (ii)..... 1,758 1,948 306 2,514 374 720
--------- --------- --------- ----------- ----------- ------------
FFO before allocation to minority interests and
preferred unitholders........................... $ 48,187 $ 34,652 $ 29,046 $ 22,154 $ 139 $ 4,351
--------- --------- --------- ----------- ----------- ------------
--------- --------- --------- ----------- ----------- ------------
</TABLE>
- ------------------------
NOTES:
(i) Excludes a nonrecurring charge of $6,131 related to the prepayment of
long-term debt during 1996.
(ii) Amounts include net preferential partner distributions from a joint
venture partnership of $400, $162 and $2,538 for the years ended December
31, 1996 and 1995 and the period from March 22, 1994 to December 31,
1994, respectively.
(4) For purposes of these computations, earnings consist of income (loss) less
income from unconsolidated investment partnerships, plus fixed charges
(excluding capitalized interest). Combined fixed charges and preferred unit
dividends consist of interest costs whether expensed or capitalized and
amortization of debt issuance costs and preferred unit dividends. For the
years ended December 31, 1996, 1995, 1994 and 1993, Prime's earnings were
inadequate to cover fixed charges and preferred unit distributions. A
reconciliation of income (loss) before minority interests to excess of
combined fixed charges and preferred unit distributions and dividends over
earnings is as follows:
24
<PAGE>
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PRIME RETAIL, L.P. PREDECESSOR
---------------------------------------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 22 TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
minority interests...... $ 20,015 $ 7,870 $ 13,856 $ 10,132 $ (2,408) $ (3,873)
Interest incurred......... 39,078 26,853 22,394 8,491 2,585 9,277
Amortization of
capitalized interest.... 343 284 222 152 42 161
Amortization of debt
issuance costs.......... 2,330 2,407 3,309 2,160 695 362
Amortization of interest
rate protection
contracts............... 1,390 1,383 1,276 797 -- --
Less interest earned on
interest rate protection
contracts............... (115) (201) (721) (224) -- --
Less capitalized
interest................ (3,818) (3,462) (2,675) (1,277) -- (711)
------------- ------------- ------------- ------------- ------------- -------------
Earnings................ 59,223 35,134 37,661 20,231 914 5,216
------------- ------------- ------------- ------------- ------------- -------------
Interest incurred......... 39,078 26,853 22,394 8,491 2,585 9,277
Amortization of debt
issuance costs.......... 2,330 2,407 3,309 2,160 695 362
Amortization of interest
rate protection
contracts............... 1,390 1,383 1,276 797 -- --
Preferred unit
distributions........... 12,995 14,236 20,944 16,290 -- --
------------- ------------- ------------- ------------- ------------- -------------
Combined Fixed Charges
and Preferred Unit
Distributions......... 55,793 44,879 47,923 27,738 3,280 9,639
------------- ------------- ------------- ------------- ------------- -------------
Excess of Combined Fixed
Charges and Preferred
Unit Distributions over
Earnings................ $ -- $ (9,745) $ (10,262) $ (7,507) $ (2,366) $ (4,423)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Ratio of Earnings to
Combined Fixed Charges
and Preferred Unit
Distributions........... 1.06x -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
25
<PAGE>
HORIZON PARTNERSHIP SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data for Horizon
Partnership, which includes the results of operations of McArthur/Glen Outlet
Centers Limited Partnership ("McArthur/ Glen") from July 14, 1995, the date of
the consolidation. The summary historical financial data as of December 31, 1997
and 1996 and for each of the years ended December 31, 1997, 1996 and 1995 is
derived from the audited financial statements of Horizon Partnership included
herein. Summary historical financial data as of December 31, 1995, 1994 and 1993
and for each of the years ended December 31, 1994 and 1993 is derived from the
audited financial statements of Horizon Partnership not included herein. The
following information should be read in conjunction with, and is qualified in
its entirety by, the financial statements and notes thereto of Horizon
Partnership and "Management's Discussion and Analysis of Results of Operations
and Financial Condition" contained elsewhere in this Form S-4.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- ---------
<CAPTION>
(THOUSANDS, EXCEPT PER UNIT AMOUNTS AND
NUMBER OF PROPERTIES)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue.......................................................... $ 162,463 $ 154,499 $ 93,929 $ 43,267 $ 22,247
Expenses......................................................... 156,481 124,277 66,558 26,073 19,274
Impairment and severance......................................... 7,798 65,355 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before gain on sale of real estate, minority
interests and extraordinary charge............................. (1,816) (35,133) 27,371 17,194 2,973
Gain on sale of real estate...................................... 8 563 776 287 272
--------- --------- --------- --------- ---------
Income (loss) before minority interests and extraordinary
charge......................................................... (1,808) (34,570) 28,147 17,481 3,245
Minority interests............................................... (3,211) (331) -- -- --
Extraordinary charge............................................. (3,927) (419) -- -- --
--------- --------- --------- --------- ---------
Net income (loss)................................................ $ (8,946) $ (35,320) $ 28,147 $ 17,481 $ 3,245
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per unit before extraordinary charge and gain on
sale of real estate (2)........................................ $ (0.18) $ (1.34) $ 1.47 $ 1.39 $ 0.03
Net income (loss) per unit (2)................................... $ (0.32) $ (1.34) $ 1.52 $ 1.42 $ 0.06
Distributions declared per unit (3).............................. $ 1.05 $ 2.095 $ 2.131 $ 1.755 $ 0.247
BALANCE SHEET DATA:
Real estate, net of accumulated depreciation..................... $1,051,321 $1,008,000 $1,023,745 $ 287,833 $ 176,512
Total assets..................................................... 1,115,531 1,095,221 1,059,090 300,043 218,146
Total mortgages and other debt................................... 626,097 557,672 503,246 96,929 24,888
Total partners' capital.......................................... 412,924 445,639 491,593 178,463 182,478
OTHER DATA:
Funds from operations (4) (5).................................... $ 44,926 $ 66,410 $ 47,549 $ 25,656 $ 6,860
Cash flows provided by (used in):
Operating activities........................................... 49,778 32,442 35,719 26,713 9,557
Investing activities (5)....................................... (81,282) (96,854) (150,916) (114,330) (93,663)
Financing activities........................................... 28,197 74,054 117,592 56,105 118,965
Total GLA (square feet).......................................... 9,907 9,369 8,464 3,124 2,215
Number of properties............................................. 37 37 35 13 12
</TABLE>
- ------------------------------
NOTES:
(1) The selected financial data includes: for the period up to and including
November 7, 1993, the combined financial statements of Horizon Partnership
and certain affiliated partnerships, the impact of the Horizon IPO and
related transactions as of November 8, 1993 and for the period subsequent to
November 8, 1993, the consolidated financial statements of Horizon
Partnership.
(2) The earnings per unit amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128. See the
accompanying notes to consolidated financial statements of Horizon
Partnership. There is no difference between basic and diluted earnings per
unit.
26
<PAGE>
(3) Included in 1995 is a special one-time distribution of $0.111 per unit,
declared in connection with the consolidation with McArthur/Glen, a Delaware
limited partnership and a predecessor to Horizon Partnership.
(4) Horizon Partnership's management believes that in order to facilitate a
clear understanding of the consolidated historical operating results of
Horizon Partnership, FFO should be considered in conjunction with net income
(loss) as presented in the financial statements included in this Joint
Consent Solicitation Statement/Prospectus/Information Statement. Management
believes that FFO is an important and widely used measure of the operating
performance of REITs which provides a relevant basis for comparison to other
REITs. Therefore, FFO is presented to assist investors in analyzing the
performance of Horizon Partnership. In March 1995, NAREIT issued a
clarification of its definition of FFO. Although Horizon Partnership has
adopted the NAREIT definition of FFO, Horizon Partnership cautions that the
calculation of FFO may vary from entity to entity and as such the
presentation of FFO by Horizon Partnership may not be comparable to other
similarly titled measures of other reporting companies. FFO does not
represent cash flow from operating activities in accordance with GAAP and is
not indicative of cash available to fund all of Horizon Partnership's cash
needs. FFO should not be considered as an alternative to net income or any
other GAAP measure as an indicator of performance and should not be
considered as an alternative to cash flow as a measure of liquidity or the
ability to service debt or to pay distributions. A reconciliation of income
(loss) before extraordinary charge to FFO is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income (loss) before extraordinary charge....................................... $ (5,019) $ (34,901) $ 28,147 $ 17,481
FFO Adjustments:
Depreciation and amortization................................................. 41,154 36,519 20,178 8,462
Loss on asset impairment...................................................... 7,798 65,355 -- --
Merger expenses............................................................... 1,001 -- -- --
Gain on sale of assets........................................................ (8) (563) (776) (287)
--------- --------- --------- ---------
Total FFO adjustments....................................................... 49,945 101,311 19,402 8,175
--------- --------- --------- ---------
FFO............................................................................. $ 44,926 $ 66,410 $ 47,549 $ 25,656
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1993
---------
<S> <C>
Income (loss) before extraordinary charge....................................... $ 3,245
FFO Adjustments:
Depreciation and amortization................................................. 3,887
Loss on asset impairment...................................................... --
Merger expenses............................................................... --
Gain on sale of assets........................................................ (272)
---------
Total FFO adjustments....................................................... 3,615
---------
FFO............................................................................. $ 6,860
---------
---------
</TABLE>
(5) Certain reclassifications have been made to previously reported balances in
order to provide comparability to the current year amounts. These
reclassifications have not changed previously reported results or partners'
capital.
COMPARATIVE PER UNIT DATA
The following summary presents selected comparative unaudited per unit
information for Prime Partnership and Horizon Partnership on an historical basis
and Prime Partnership and HGP LP on a pro forma basis assuming the Transactions
had been effective throughout the periods presented. Horizon Partnership pro
forma equivalent per unit amounts are presented with respect to such pro forma
information. Such per unit amounts allow comparison of historical information
with respect to one Horizon Partnership Unit to the corresponding information
for the Partnership Merger Consideration payable in respect of each such unit
pursuant to the Partnership Merger.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON UNIT (1)
Prime Partnership................................................................................... $ 0.24
Horizon Partnership................................................................................. (0.18)
HGP LP (pro forma) (2).............................................................................. 0.07
Prime Partnership (pro forma) (3)................................................................... 0.31
Horizon Partnership pro forma equivalent (4)........................................................ 0.28
CASH DISTRIBUTIONS DECLARED PER COMMON UNIT
Prime Partnership Common Unit (5)................................................................... $ 1.180
Horizon Partnership Common Unit (6)................................................................. 1.050
HGP LP Common Unit (pro forma)...................................................................... --
Prime Partnership (pro forma) (3)................................................................... 1.180
Horizon Partnership pro forma equivalent (4)........................................................ 1.085
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
PARTNERS' CAPITAL PER COMMON UNIT
Prime Partnership................................................................................... $ 4.67
Horizon Partnership................................................................................. 14.59
HGP LP (pro forma) (2).............................................................................. 11.97
Prime Partnership (pro forma) (3)................................................................... 7.42
Horizon Partnership pro forma equivalent (4)........................................................ 6.82
</TABLE>
- ------------------------
NOTES:
(1) Amounts were computed based on net income (loss) per unit from continuing
operations and accordingly, such amounts exclude historical losses from
extraordinary items.
(2) The pro forma Net Income Per Common Unit for HGP LP has been prepared
assuming that in the HGP LP Common Unit Distribution one unit of HGP LP
Common Units will be distributed for every 20 Prime Partnership Common Units
and that approximately 1.196 HGP LP Common Units will be distributed for
every 20 Prime Partnership Series B Preferred Units, resulting in a total
weighted average outstanding HGP LP Common Units of 3,389,000 for the year
ended December 31, 1997. For the Partners' Capital per Common Unit data,
total outstanding HGP LP Common Units was 3,389,000 as of December 31, 1997.
(3) The pro forma Net Income (Loss) Per Common Unit and Cash Distributions
Declared data for Prime Partnership has been prepared assuming that in the
Partnership Merger each Horizon Partnership Common Unit is converted into
0.9193 of a Prime Partnership Common Unit, resulting in total weighted
average outstanding Prime Partnership Common Units of 45,978,000 for the
year ended December 31, 1997. For the Partners' Capital Per Common Unit data
total outstanding Prime Partnership Common Units was 54,083,994 as of
December 31, 1997.
(4) The Horizon Partnership pro forma equivalent is determined by multiplying
0.9193 by the Prime Partnership pro forma per common unit amounts.
(5) The 1996 amount excludes a special cash distribution of $0.145 per common
unit paid by Prime Partnership in July 1996.
(6) Pursuant to the Merger Agreement, Horizon Partnership agreed to forego the
payment of its 1997 fourth quarter distribution which would customarily have
been paid in January 1998.
COMPARATIVE SHARE PRICES
The Prime Partnership Common Units and the Horizon Partnership Units are not
listed on any national securities exchange or quoted in the over the counter
market, and there is no established public trading market for either of the
Prime Partnership Common Units or the Horizon Partnership Units. However, each
Prime Partnership Common Unit to be received by Horizon Partnership Unitholders
in the Partnership Merger may be exchanged for one New Prime Common Share or, at
New Prime's option, the cash equivalent thereof. The Horizon Partnership Units
currently may be exchanged for Horizon Common Shares or, at the option of
Horizon, the cash equivalent thereof. The following tables set forth certain
information related to comparative share prices of Prime and Horizon.
PRIME.
The Prime Common Shares commenced trading on the NYSE on August 27, 1997
under the symbol "PRT". From March 15, 1994 through August 26, 1997, the Prime
Common Shares were quoted in the Nasdaq National Market under the trading
symbols "PRME".
28
<PAGE>
The following table sets forth the quarterly high and low sales prices per
Prime Common Share reported on the NYSE and in the Nasdaq National Market, as
the case may be, as well as the cash distributions paid during the periods
indicated:
<TABLE>
<CAPTION>
SALES PRICE PER
SHARE CASH
-------------------- DISTRIBUTIONS
HIGH LOW PAID (1)
--------- --------- -------------
<S> <C> <C> <C>
1996
First Quarter................................................................... $ 12.50 $ 11.00 $ 0.295
Second Quarter.................................................................. 12.00 10.88 0.295
Third Quarter................................................................... 12.25 11.00 0.440(2)
Fourth Quarter.................................................................. 12.75 11.38 0.295
1997
First Quarter................................................................... 13.38 12.00 0.295
Second Quarter.................................................................. 13.63 11.88 0.295
Third Quarter................................................................... 15.63 13.13 0.295
Fourth Quarter.................................................................. 16.50 13.31 0.295
1998
First Quarter................................................................... 15.50 13.75 0.295
Second Quarter (through April 27, 1998)......................................... 15.00 13.50 --(3)
</TABLE>
- ------------------------
NOTES:
(1) Distributions were paid to Prime Common Shareholders and Prime Partnership
Common Unitholders.
(2) Includes a special cash distribution of $0.145 per Prime Common Share paid
by Prime in July 1996.
(3) On March 18, 1998, the Prime Board of Directors declared a distribution of
$0.295 per share payable on May 15, 1998 to holders of record of Prime
Common Shares on April 15, 1998.
On January 30, 1998, the last full trading day prior to the public
announcement of the Transactions, the last reported sale price of a Prime Common
Share on the NYSE was $14.81 per share. On November 12, 1997, the last full
trading day prior to the public announcement of the Merger Agreement dated
November 12, 1997 between Prime, Horizon and the other parties signatory thereto
(the "Original Merger Agreement"), the last reported sale price of a Prime
Common Share on the NYSE was $13.31. As of March 13, 1998, there were 18 record
holders of Prime Partnership Common Units, and Prime's transfer agent reported
226 record holders of Prime Common Shares.
29
<PAGE>
HORIZON.
The Horizon Common Shares have been traded on the NYSE under the symbol
"HGI" since November 1, 1993. The following table sets forth the quarterly high
and low sales prices per Horizon Common Share reported on the NYSE as well as
the cash distributions paid during the periods indicated:
<TABLE>
<CAPTION>
SALES PRICE PER
SHARE CASH
-------------------- DISTRIBUTIONS
HIGH LOW PAID(1)
--------- --------- -------------
<S> <C> <C> <C>
1996
First Quarter................................................................... $ 23.25 $ 20.75 $ 0.505
Second Quarter.................................................................. 21.75 19.50 0.505
Third Quarter................................................................... 21.38 19.75 0.530
Fourth Quarter.................................................................. 21.75 19.00 0.530
1997
First Quarter................................................................... 19.50 12.75 0.530
Second Quarter.................................................................. 14.00 10.00 0.350
Third Quarter................................................................... 13.81 11.06 0.350
Fourth Quarter.................................................................. 14.94 10.38 0.350
1998
First Quarter................................................................... 12.50 11.13 0.105(2)
Second Quarter (through April 27, 1998)......................................... 12.69 11.38 --(3)
</TABLE>
- ------------------------
NOTE:
(1) Distributions were paid to Horizon Common Shareholders and Horizon
Partnership Unitholders.
(2) Pursuant to the Merger Agreement, Horizon agreed to forego the declaration
of the 1997 fourth quarter distribution which would customarily have been
paid in January 1998. As permitted under the Merger Agreement, on February
17, 1998, the Horizon Board of Directors declared a distribution of $0.105
per Horizon Common Share.
(3) As permitted under the Merger Agreement, on March 23, 1998, the Horizon
Board of Directors declared a distribution of $0.24 per Horizon Common Share
payable on May 15, 1998 to holders of record of Horizon Common Shares on
April 15, 1998.
On January 30, 1998, the last full trading day prior to the public
announcement of the Transactions, the last reported sale price of Horizon Common
Shares on the NYSE was $12.13 per share. On November 12, 1997, the last full
trading day prior to the public announcement of the Original Merger Agreement,
the last reported sale price of Horizon Common Shares on the NYSE was $12.56 per
share. As of March 13, 1998, there were 143 record holders of Horizon
Partnership Units, and Horizon's transfer agent reported 745 record holders of
Horizon Common Shares.
BECAUSE THE PARTNERSHIP MERGER CONSIDERATION IS FIXED AND THE MARKET PRICE
OF A PRIME COMMON SHARE IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF NEW PRIME
COMMON SHARES INTO WHICH PRIME PARTNERSHIP COMMON UNITS ARE EXCHANGEABLE MAY
INCREASE OR DECREASE PRIOR TO AND FOLLOWING THE PARTNERSHIP MERGER AND
THEREFORE, THE VALUE OF PRIME PARTNERSHIP COMMON UNITS MAY LIKEWISE FLUCTUATE.
UNITHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR PRIME COMMON
SHARES AND HORIZON COMMON SHARES.
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PRIME PARTNERSHIP RISK FACTORS
In considering whether to approve the Transactions, the unitholders of Prime
Partnership and Horizon Partnership should consider, in addition to the other
information in this Joint Consent Solicitation Statement/Prospectus/Information
Statement, the matters described in this section.
RISKS TO HORIZON PARTNERSHIP UNITHOLDERS
HORIZON DISTRIBUTIONS. The distribution declared on a Horizon Partnership
Unit for each of the first three quarters of 1997 was $0.35 and the distribution
declared on a Prime Partnership Common Unit Equivalent was $0.07 lower, or $0.28
for each such quarter. There can be no assurance that Prime Partnership will
make distributions or, if distributions are made, that they will be equal to or
in excess of those historically paid to unitholders of Prime Partnership.
REDUCTION OR ELIMINATION OF DISTRIBUTION IF THE TRANSACTIONS FAIL TO
OCCUR. Due to the decline in Horizon Partnership's operating results and its
continuing liquidity needs, in the event that the Transactions are not
consummated, Horizon Partnership plans to reevaluate its distribution policy and
may reduce or eliminate its quarterly distribution paid to Horizon Partnership
Unitholders.
TERMINATION PAYMENTS IF THE TRANSACTIONS FAIL TO OCCUR. No assurance can be
given that the Transactions will be consummated. The Merger Agreement provides
for a Break-up Fee payable by Horizon of $20,000,000 plus Break-up Expenses of
up to $4,500,000 if the Merger Agreement is terminated by either Prime or
Horizon under certain circumstances and within one year after such termination,
Horizon enters into an agreement regarding an "Acquisition Proposal" which is
consummated. In addition, if the Merger Agreement is terminated for certain
other reasons, Prime or Horizon will be required to pay the other party's
Break-Up Expenses of up to $4,500,000. See "The Corporate Merger-Break-up Fee
and Expenses."
The obligation to pay the Break-up Fee and/or Break-up Expenses may
adversely affect the ability of Horizon to engage in another transaction in the
event the Transactions are not consummated.
REDUCTION IN OWNERSHIP AND VOTING. Upon consummation of the Transactions,
Horizon Partnership Unitholders will own approximately 7.19% of the Prime
Partnership Common Units and will not have separate approval rights with respect
to any actions or decisions of Prime Partnership.
POTENTIAL CHANGE IN RELATIVE UNIT VALUES; SHARE PRICE FLUCTUATIONS AFTER THE
TRANSACTIONS
In considering whether to approve the Transactions, unitholders of Horizon
Partnership and Prime Partnership should consider the risks associated with (a)
a potential change in the relative stock prices of Prime Common Shares and
Horizon Common Shares prior to the Corporate Merger Effective Time, which would
increase or decrease the value of the consideration being received by the
various parties and (b) a possible reduction in the market price of New Prime
Common Shares following the Transactions, due to future sales of New Prime
Common Shares or the availability of such shares for future sales, government
regulatory action, tax laws, interest rates, general market conditions and other
factors outside the control of New Prime. The market price of a Prime Common
Share on the NYSE ranged from $11.88 to $16.50 during 1997. The market price of
a Horizon Common Share on the NYSE ranged from $10.00 to $19.50 during 1997.
The value of the consideration and the distributions payable in respect of a
Horizon Common Share and a Horizon Partnership Unit in connection with the
Transactions may not be identical. The value of the consideration payable to the
Horizon Common Shareholders pursuant to the Corporate Merger will be dependent
on the market price of the Prime Series B Preferred Shares and the Prime Common
Shares. The value of the consideration payable to holders of Horizon Partnership
Units pursuant to the Partnership Merger will depend solely on the market price
of the Prime Common Shares into which Prime Partnership Common Units issuable to
such holders may be exchanged. Depending on the prevailing
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market price of such securities, the value of the merger consideration payable
in respect of a Horizon Common Share may be more or less than that payable in
respect of a Horizon Partnership Unit.
ADVERSE EFFECTS OF COMBINING THE PARTNERSHIPS
Prime Partnership and Horizon Partnership are large enterprises with
operations in a number of different states. The Mergers involve the addition of
22 Horizon Properties to the 26 properties Prime Partnership is retaining in the
Transactions, thereby increasing the GLA under Prime Partnership's management
from 7.2 million square feet to 13.4 million square feet. If Prime Partnership
is unable to control and manage the integration of these two portfolios
effectively, the Mergers could have a material adverse effect on Prime
Partnership. There can be no assurance that costs or other factors associated
with the integration of the two companies would not adversely affect future
combined results of operations or the benefits of expected cost savings.
POSSIBILITY THAT THE EXPECTED BENEFITS OF THE TRANSACTIONS WILL NOT BE REALIZED
Based on anticipated savings in overhead expenses and other factors, the
Transactions have an accretive (rather than a dilutive) effect on the surviving
partnership's results of operations on a pro forma basis for the year ended
December 31, 1997. Earnings per unit on a pro forma basis for the year ended
December 31, 1997, after giving effect to the Transactions, was $0.32 per unit
as opposed to $0.24 per unit for the same period on an historical basis.
However, no assurance can be given that these anticipated savings will be
realized or that the Transactions will not have a dilutive effect on the
surviving partnership's earnings per share. If anticipated savings are not
realized or if the Transactions have a dilutive effect, Prime Partnership might
be unable to pay expected distributions to unitholders.
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN DIRECTORS AND OFFICERS OF
HORIZON
In considering whether to approve the Transactions, unitholders should be
aware that certain members of the management of Horizon and the Horizon Board of
Directors have certain interests that arise in connection with the Transactions
that are in addition to the interests of shareholders of Horizon and unitholders
of Horizon Partnership generally and therefore a conflict between the interests
of such directors, executive officers and key employees, as individuals, and the
interests of shareholders of Horizon and unitholders of Horizon Partnership
could exist. These interests arise under existing agreements with, and
compensation awards from, Horizon, all of which were approved by the Horizon
Board of Directors, including the Employment Agreement of James S. Wassel,
President and Chief Executive Officer of Horizon dated as of April 24, 1997, as
amended by that certain Amendment No. 1 to Employment Agreement dated as of
November 12, 1997, which provides, among other things, that upon the
consummation of the Transactions, Mr. Wassel shall receive (a) the greater of
(x) his base salary plus the maximum bonus he is entitled to under the terms of
the agreement and (y) the amount of base salary and bonus actually paid to Mr.
Wassel for the most recently completed twenty-four month period, (b) a payment
of the amount required to cover any additional tax liability incurred because
any income or compensation paid to Mr. Wassel is treated as an "excess parachute
payment" for purposes of the Code, (c) the remaining 35,000 restricted Horizon
Common Shares to which Mr. Wassel is entitled under the terms of his Employment
Agreement and (d) full vesting of the options under which Mr. Wassel has the
right to purchase 200,000 Horizon Common Shares.
Upon the consummation of the Transactions, Norman Perlmutter, Chairman of
the Horizon Board of Directors, will receive the following benefits that are in
addition to the interests of Horizon shareholders generally all of which were
approved by the Horizon Board of Directors: (i) Norman Perlmutter will resign as
Chairman of the Horizon Board of Directors, but will become a member of the New
Prime Board of Directors and (ii) pursuant to an Agreement dated as of October
23, 1997 between Norman Perlmutter and Horizon, Norman Perlmutter has agreed,
commencing January 1, 1998, to serve as the Chairman of the Horizon Board of
Directors, if so elected, for a period equal to the shorter of (a) three years
and
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(b) the date on which the failure of Norman Perlmutter to serve as the Chairman
of the Board of Horizon shall not cause a default under that certain loan
agreement by and among Third Horizon Group Limited Partnership, a Delaware
limited partnership, HGL Outlet Associates, a Delaware general partnership, and
Lehman Brothers Realty Corporation, a Delaware corporation and an affiliate of
Lehman Brothers, Horizon's financial advisor in connection with the
Transactions, dated as of June 30, 1997 (the "Lehman Loan") in consideration for
a fee paid in three equal annual installments of $333,333 commencing January 1,
1998, which installments shall be accelerated upon the effectiveness of the
Transactions.
Additional conflicts of interest between certain Directors of the Horizon
Board or members of management of Horizon, as individuals, and the shareholders
of Horizon and unitholders of Horizon Partnership could arise as a result of the
following existing agreements with and compensation awards from Horizon, all of
which were approved by the Horizon Board of Directors: (i) Robert D. Perlmutter
and William P. Dickey, current directors of Horizon, will become members of the
New Prime Board of Directors upon consummation of the Transactions; (ii) upon
the effectiveness of the Mergers, options to purchase an aggregate of 1,798,266
Horizon Common Shares will be converted into options to acquire the number of
New Prime Common Shares equal to 0.9193 times the number of Horizon Common
Shares subject to such options at an aggregate exercise price per share equal to
the exercise price per share set forth in each such option including: (a) the
options to purchase 656,432 Horizon Common Shares under the Horizon Long Term
Incentive Plan, (b) the options to purchase 441,834 Horizon Common Shares under
the Horizon 1993 Stock Option Plan, (c) the options to purchase 55,000 Horizon
Common Shares under the Horizon Director/Stock Option Plan, including the option
to purchase 5,000 Horizon Common Shares held by Norman Perlmutter and (d) the
options to purchase an aggregate of 645,000 Horizon Common Shares under the
Horizon 1997 Stock Option Plan, including the options held by Mr. Wassel to
purchase 400,000 shares and Norman Perlmutter to purchase 125,000 shares and
options held by or to be issued to Paul Comarato, Vice President of Operations
of Horizon, to purchase 35,000 shares and Stephen J. Moore, Senior Vice
President of Marketing and Communication of Horizon, to purchase 80,000 shares
(each option shall continue to be exercisable until its expiration date
notwithstanding the termination of employment, death or disability of the
optionee); (iii) the award by the Horizon Compensation Committee to Ronald
Piasecki, Vice Chairman of Horizon, of a bonus in the amount of $150,000 in
consideration for his services rendered as Interim Chief Executive Officer and
the Chairman of the Executive Committee of Horizon, with such amount to be paid
in twelve equal monthly installments commencing in January 1998, with any
remaining outstanding payments becoming immediately due and payable to Mr.
Piasecki upon the effectiveness of the Transactions; (iv) the agreement by Mr.
Piasecki to sell all his shares of First HGI, Inc., HGI Perryville, Inc., MG
Third Party Services Corp., HGI Management Corp. and Second HGI, Inc. to Prime
for fair market value, but in an aggregate amount not to exceed $50,000; (v) the
Second Amendment to the Consulting and Non-Competition Agreement dated as of
November 12, 1997 by and among Cheryl McArthur (the former chief executive
officer and founder of McArthur/Glen and the wife of Norman Perlmutter) and
Horizon and Horizon Partnership which provides that upon the effectiveness of
the Transactions, Ms. McArthur's obligation to perform consulting duties
thereunder shall be terminated; (vi) the separate agreements each dated as of
November 12, 1997 entered into by Horizon and Horizon Partnership with Alan Glen
(a former director of Horizon) and Ms. McArthur pursuant to which the parties
have agreed to terminate certain prior agreements regarding, among other things,
certain outlots owned by Mr. Glen and Ms. McArthur upon the effectiveness of the
Transactions; (vii) the separate agreements entered into by Horizon and Horizon
Partnership with Mr. Comarato and Mr. Moore, pursuant to which Mr. Comarato
shall receive a bonus in the amount of $196,875 plus an option to purchase
15,000 Horizon Common Shares and Mr. Moore shall receive a bonus in the amount
of $236,250 plus an option to purchase 50,000 Horizon Common Shares in
consideration for each officer's agreement to continue his employment with
Horizon until the effectiveness of the Transactions; and (viii) the agreement of
New Prime to purchase the interest of a pension fund which is advised by Heitman
Capital Management Corporation, an affiliate of Heitman Financial Ltd., of which
Norman
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Perlmutter is Chairman of the Board and Chief Executive Officer, in Horizon's
Finger Lakes Outlet Center. See "Interests of Certain Persons in the
Transactions."
CONFLICT OF INTEREST RELATING TO LEHMAN BROTHERS
Unitholders should be aware that the Lehman Loan, which had a balance of
approximately $254,000,000 outstanding as of March 31, 1998, will become due in
full upon the closing of the Transactions.
The Horizon Board of Directors recognized that a conflict of interest
existed as a result of Horizon's relationships with Lehman Brothers as Horizon's
investment advisor and an affiliate of Lehman Brothers as a major lender to
Horizon. After evaluating the situation, the Horizon Board of Directors
determined that the benefit derived from Lehman Brothers' knowledge of Horizon
gained during the loan process outweighed the potential risks due to such a
conflict of interest.
INFLUENCE OF PGI AND MR. RESCHKE
Upon consummation of the Transactions, PGI will own a 14.7% common equity
interest in New Prime assuming PGI's units are converted to common shares.
Because of this ownership interest and the fact that Michael W. Reschke, who
will serve as Chairman of the Board of New Prime, is a principal owner of PGI,
PGI may be in a position to exercise significant influence over the affairs of
Prime Partnership. PGI owns substantial interests in income producing properties
unrelated to Prime Partnership's operations. Under the terms of his employment
agreement with New Prime, Michael W. Reschke is permitted to devote a
considerable portion of his time to the management of such interests provided he
is able to perform duties customary to his position as Chairman of the Board of
Prime, including overseeing the affairs and proceedings of such board. Michael
W. Reschke and PGI have agreed that, so long as PGI and/or its affiliates own a
5% or greater economic interest in Prime or Michael W. Reschke is Chairman of
the Board of Prime, neither Michael W. Reschke nor PGI will develop or acquire
any interest in any retail property that is within the primary business of Prime
as determined from time to time by a majority vote of the independent directors
of Prime. Excluded from the foregoing restrictions are all properties in which
PGI had an interest prior to the Prime IPO, any retail projects developed or
acquired by PGI in Spain, and PGI's or Michael W. Reschke's ownership of less
than 5% of any class of securities listed on a national securities exchange. In
addition, Michael W. Reschke and PGI may, subject to certain limitations, (i)
provide mortgage financing or other debt (including in the form of preferred
equity positions) in any person which is engaged in the primary business of
Prime and (ii) own equity interests in, and engage in the management of, HGP.
For so long as Mr. Reschke serves as an executive officer or director of HGP,
HGP will be prohibited from acquiring or developing any factory outlet center
that is within a 50 mile radius of any outlet center owned or operated by New
Prime.
FEDERAL INCOME TAX CONSEQUENCES OF THE PARTNERSHIP MERGER
The receipt of Prime Partnership Units in the Partnership Merger generally
is not expected to result in the recognition of taxable income or gain by any
Prime Partnership Unitholder or Horizon Partnership Unitholder at the time of
the Partnership Merger. However, the particular tax consequences of the
Partnership Merger for each Horizon Partnership Unitholder or Prime Partnership
Unitholder will depend on a number of factors related to the tax situation of
the individual unitholder, including such unitholder's adjusted tax basis in its
Horizon Partnership Units or Prime Partnership Units at the time of the
Partnership Merger, the assets that the Horizon Partnership Unitholder or Prime
Partnership Unitholder originally contributed to Horizon Partnership or Prime
Partnership in exchange for his or her units, such unitholder's share of the
"unrealized gain" with respect to Horizon Partnership's assets or Prime
Partnership's assets at the time of the Partnership Merger, the extent to which
a unitholder's share of the nonrecourse liabilities of Prime Partnership which
the unitholder includes in its basis for its Prime Partnership Units after the
Partnership Merger is less than such unitholder's share of the nonrecourse
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liabilities of Horizon Partnership or Prime Partnership before the Partnership
Merger. See "Federal Income Tax Consequences of the Transactions--Tax
Consequences of the Partnership Merger."
NO APPRAISAL RIGHTS IN CONNECTION WITH THE PARTNERSHIP MERGER
Limited partners of Prime Partnership and Horizon Partnership are not
entitled to dissenters' appraisal rights under Delaware law, the Horizon
Partnership Agreement or the Prime Partnership Agreement in connection with the
Partnership Merger. Such unitholders of Prime Partnership and Horizon
Partnership will not have the ability to demand and receive payment of the fair
value of their units in lieu of the consideration otherwise payable to such
unitholders pursuant to the Transactions.
ADVERSE CONSEQUENCES OF DEBT FINANCING
Prime Partnership is subject to the risks normally associated with debt or
preferred equity financing, including the risk that Prime Partnership's cash
flow will be insufficient to meet required payments of principal, interest and
distributions, the risk that existing indebtedness may not be refinanced or that
the terms of such refinancing will not be as favorable as the terms of current
indebtedness and the risk that necessary capital expenditures for such purposes
as renovations and other improvements may not be financed on favorable terms or
at all. Upon the consummation of the Transactions, Prime Partnership will be
more leveraged than it was before such consummation. As of December 31, 1997,
Prime Partnership's pro forma ratio of debt to total market capitalization , was
50.5% as compared to an historical debt to total market capitalization of 42.4%
for Prime Partnership as of such date. If Prime Partnership were unable to
refinance its indebtedness on acceptable terms, or at all, Prime Partnership
might be forced to dispose of one or more of the properties on disadvantageous
terms, which might result in losses to Prime Partnership and might adversely
affect the cash available for distributions to unitholders. If interest rates or
other factors at the time of the refinancing result in higher interest rates
upon refinancing, Prime Partnership's interest expense would increase, which
would affect Prime Partnership's ability to make distributions to its
unitholders. Furthermore, if a property is mortgaged to secure payment of
indebtedness and Prime Partnership is unable to meet mortgage payments, the
mortgagee could foreclose upon the property, appoint a receiver and receive an
assignment of rents and leases or pursue other remedies, all with a consequent
loss of income and asset value to Prime Partnership. Foreclosures could also
create taxable income without accompanying cash proceeds, thereby hindering
Prime Partnership's ability to meet the REIT distribution requirements of the
Code.
GUARANTEE OF HGP CREDIT FACILITY; MODIFICATION OF HGP CREDIT FACILITY
Prime Partnership will guarantee (the "Prime Guarantee") up to $10,000,000
of HGP's obligations under the HGP Credit Facility. Accordingly, in the event
HGP is unable to make debt service payments under such facility, the lender may
require Prime Partnership to make payments under the guarantee. See "Policies of
New Prime with respect to Certain Activities--New Prime's Relationship with
HGP."
There can be no assurance that in connection with the closing of the HGP
Credit Facility, and in order to induce Nomura to lend $120 million pursuant to
such facility, the terms of such loan and the Prime Guarantee will not be
modified in a manner less favorable to HGP and New Prime, respectively. Such
modifications may have the effect of (i) increasing the amount of mandatory
annual principal payments, or requiring that a larger portion of HGP's operating
cash flow be applied to repay obligations, under the facility, (ii) increasing
the aggregate amount of indebtedness subject to the Prime Guarantee or (iii)
eliminating the provisions relating to the termination of such guarantee prior
to the repayment in full of all obligations under the HGP Credit Facility.
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RISKS OF OWNERSHIP OF PRIME PARTNERSHIP COMMON UNITS
DISTRIBUTIONS. Upon consummation of the Transactions, the Horizon
Partnership Unitholders will receive Prime Partnership Common Units. The
distribution declared on a Horizon Partnership Unit for each of the first three
quarters of 1997 was $0.35 and the distribution declared on a Prime Partnership
Common Unit Equivalent was $0.08 lower, or $0.27 for each such quarter. There
can be no assurance that Prime Partnership will make distributions or, if
distributions are made, that they will be equal to or in excess of those
historically paid to unitholders of Prime Partnership.
RESTRICTIONS ON TRANSFER OF UNITS. The Prime Partnership Agreement provides
for certain restrictions on a limited partner's ability to transfer his or her
Prime Partnership Common Units. Subject to certain exceptions, a limited partner
may not transfer all or any portion of his or her Prime Partnership Common Units
without (i) providing written notice to the managing general partner, which will
have ten days in which to exercise its rights of first refusal to acquire the
limited partner's Prime Partnership Common Units, and (ii) meeting certain other
requirements set forth in the Prime Partnership Agreement. Notwithstanding its
general prohibition, a limited partner of Prime Partnership may transfer his or
her Prime Partnership Common Units (i) to any general partner of Prime
Partnership, (ii) to his or her parent(s), spouse or descendants, nephews,
nieces, brothers and sisters, (iii) to a trust for the benefit of a charitable
beneficiary or to a charitable foundation, subject to certain limitations, or
(iv) subject to certain limitations, made pledges or other collateral transfers
effected to secure the repayment of a bona fide loan or other extension of
credit. A "transfer" does not include the conversion of a preferred unit into
one or more Prime Partnership Common Units nor the conversion of a Prime
Partnership Common Unit into a New Prime Common Share. Notwithstanding the fact
that Prime Partnership Common Units are redeemable for the cash equivalent of
New Prime Common Shares, for which there is expected to be an active market (or
at the option of New Prime, for New Prime Common Shares) these restrictions may
limit a limited partner's ability to liquidate his or her investment in Prime
Partnership Common Units quickly.
NO PUBLIC MARKET. There is no public market for Prime Partnership Common
Units. However, the Prime Partnership Agreement provides that limited partners
may, subject to certain limitations, redeem their Prime Partnership Common Units
for (i) New Prime Common Shares on a one-for-one basis or (ii) cash equal to the
fair market value of New Prime Common Shares into which such Prime Partnership
Common Units would otherwise have been converted. The determination of whether
the redeeming party receives cash or New Prime Common Shares is within the sole
discretion of New Prime. Further, under the Registration Rights Agreement, Prime
has agreed to keep effective a registration statement providing for the issuance
of Prime Common Shares and Prime Series B Preferred Shares upon the exchange of
Prime Partnership Common Units or Prime Partnership Series B Preferred Units,
respectively, so long as either class of units is outstanding.
LIMITED CONTROL OVER BUSINESS OF PRIME PARTNERSHIP
All decisions regarding the business and operations of Prime Partnership
following the Mergers will be made by New Prime, which will serve as the general
partner of Prime Partnership. Under the Prime Partnership Agreement, the limited
partners of Prime Partnership may not remove New Prime as the general partner.
The inability to remove New Prime from such position may not necessarily be in
the limited partners' interest because the general partner may pursue policies
or actions that the limited partners believe are adverse to their interests.
The limited partners of Prime Partnership have no control over actions of
New Prime as general partner, and do not take part in the operation, management
or control of the business of Prime Partnership. The limited partners of Prime
Partnership have no rights with respect to the election of the New Prime Board
of Directors.
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RISKS CONCERNING PRIME'S OWNERSHIP OF MAJORITY OF PRIME PARTNERSHIP COMMON UNITS
At present, Horizon Partnership Limited Partners vote as a class on matters
requiring consent or approval of limited partners of Horizon Partnership.
However, upon consummation of the Transactions the Horizon Partnership
Unitholders will be limited partners of Prime Partnership. The Prime Partnership
Agreement provides that most decisions made by limited partners concerning the
ongoing business of Prime Partnership are made by a vote of a
majority-in-interest of the limited partners. Upon the consummation of the
Transactions, New Prime will own 77.08% of the Prime Partnership Common Units.
Therefore, New Prime, which will serve as the sole general partner of Prime
Partnership, will be able to control the approval of matters requiring consent
of a majority-in-interest of the limited partners of Prime Partnership, with
certain limited exceptions.
ADVERSE IMPACT OF NEW PRIME'S FAILURE TO CONTINUE TO QUALIFY AS A REIT
New Prime intends to qualify as a REIT under the Code. A REIT generally is
not subject to federal income tax at the corporate level on income which it
currently distributes to its shareholders so long as it distributes at least 95%
of its taxable income (excluding any net capital gain) each year.
No assurance can be given that New Prime will be, or remain, qualified as a
REIT. Qualification as a REIT involves the satisfaction of numerous requirements
(in certain instances, on an annual and quarterly basis) set forth in highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations, and may be affected by various factual
matters and circumstances not entirely within New Prime's control. In the case
of a REIT such as New Prime that holds its assets in partnership form, the
complexity of these Code provisions and of the applicable Treasury Regulations
that have been promulgated thereunder is even greater. Further, no assurance can
be given that future legislation, new Treasury 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.
If New Prime were to fail to maintain qualification as a REIT in any taxable
year, New Prime would not be allowed a deduction in computing its taxable income
for amounts distributed to its shareholders, and thus would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate tax rates. Moreover, unless entitled to
relief under certain statutory provisions, New Prime also would be ineligible
for qualification as a REIT for the four taxable years following the year during
which qualification was lost. Such disqualification would reduce the net
earnings of New Prime available for investment or distribution to shareholders
due to the additional tax liability of New Prime for the years involved. See
"Federal Income Tax Consequences of the Transactions."
EFFECT OF REIT DISTRIBUTION REQUIREMENTS
To maintain its status as a REIT for federal income tax purposes, New Prime
generally will be required each year to distribute to its shareholders at least
95% of its taxable income (excluding any net capital gain). In addition, New
Prime will be subject to federal income tax to the extent it distributes less
than 100% of its taxable income, including any net capital gain, and to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85% of its
ordinary income plus 95% of its net capital gain income plus 100% of its
undistributed income from prior taxable years.
New Prime intends to pay distributions to its shareholders to comply with
the 95% distribution requirement of the Code and to avoid the nondeductible
excise tax described above. New Prime also intends to operate such that its cash
flow from operations, including its share of distributions from Prime
Partnership, will be sufficient to enable it to pay its operating expenses and
meet the distribution requirements of a REIT, but no assurance can be given that
this will be the case. New Prime may be required from time to time, under
certain circumstances, to accrue as income for tax purposes rent or
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interest earned but not yet received. In such event, or upon the repayment of
principal indebtedness, New Prime could have taxable income without sufficient
cash to enable New Prime to meet the REIT distribution requirements.
Accordingly, New Prime could be required to borrow funds or liquidate
investments on adverse terms in order to comply with such requirements. See
"Federal Income Tax Consequences of the Transactions."
PENALTY TAX ON PROHIBITED TRANSACTIONS
Even if New Prime qualifies as a REIT for federal income tax purposes, it
will be subject to a 100% tax on (i.e., the forfeiture of) any net income
derived from a prohibited transaction. (Net income derived from a prohibited
transaction is not taken into account in applying the 95% and 75% gross income
tests necessary to qualify as a REIT.) Net income from a prohibited transaction
is defined as the excess of the gain from prohibited transactions over the
deductions allowed by federal income tax law which are directly connected with
the prohibited transaction. Any loss from a prohibited transaction may not be
taken into account in determining the amount of such net income.
The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property or property that was
involuntarily converted) that is held "primarily for sale to customers in the
ordinary course of a trade or business." Whether property is held primarily for
sale to customers in the ordinary course of a trade or business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. To the extent applicable, New Prime will
attempt to comply with the terms of safe-harbor provisions of the Code
prescribing when asset sales will not be characterized as prohibited
transactions.
Complete assurance cannot be given that New Prime will be able to comply
with the safe-harbor provisions of the Code or avoid owning property, the sale
of which would be subject to the 100% tax on any gain therefrom as a prohibited
transaction.
OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION
For New Prime to qualify as a REIT and thereafter maintain such
qualification, not more than 50% in value of New Prime's outstanding capital
stock may be owned, directly or constructively under the applicable attribution
rules of the Code, by five or fewer individuals (as defined in the Code to
include certain tax-exempt entities, other than, in general, qualified domestic
pension funds) at any time during the last half of any taxable year of New Prime
other than the first taxable year for which the election to be taxed as a REIT
has been made (the "Five or Fewer Requirement"). The Articles of Incorporation
of New Prime (the "New Prime Charter") will contain certain restrictions on the
ownership and transfer of New Prime's capital stock, described below, which are
intended to prevent concentration of stock ownership. These restrictions,
however, do not ensure that New Prime will be able to satisfy the Five or Fewer
Requirement primarily, though not exclusively, as a result of fluctuations in
values among the different classes of New Prime's capital stock. If New Prime
fails to satisfy the Five or Fewer Requirement, New Prime's status as a REIT
will terminate, and New Prime will not be able to prevent such termination.
If New Prime were to fail to qualify as a REIT in any taxable year, New
Prime would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its shareholders. Moreover, unless entitled to relief under
certain statutory provisions, New Prime also would be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. Such disqualification would reduce the net
earnings of New Prime available for investment or distribution to its
shareholders due to the additional tax liability of New Prime for the years
involved.
The New Prime Charter will prohibit ownership, either directly or under the
applicable attribution rules of the Code, of New Prime Series A Preferred
Shares, New Prime Series B Preferred Shares, New
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Prime Series C Preferred Shares or New Prime Common Shares that, if effective,
would result in (i) New Prime being "closely held" within the meaning of Section
856(h) of the Code, (ii) the outstanding shares of the capital stock of New
Prime being beneficially owned by less than 100 Persons (determined without
reference to any rules of attribution), or (iii) New Prime otherwise failing to
qualify as a REIT (including, but not limited to, a transfer or other event that
would result in New Prime owning (directly or under the applicable attribution
rules) an interest in a tenant that is described in Section 856(d)(2)(B) of the
Code if the income derived by New Prime from such tenant would cause New Prime
to fail to satisfy any of the gross income requirements of Section 856(c) of the
Code) (such restrictions constitute the "New Prime Stock Ownership Limit"). Any
attempted transfer of shares to a person who, as a result of such transfer,
would violate the ownership limitations set forth in the New Prime Charter will
be deemed void and the shares purportedly transferred would be converted into
shares of a separate class of capital stock with no voting rights and no rights
to distributions. In addition, ownership, either directly or under the
applicable attribution rules of the Code, of the capital stock in excess of the
ownership limitations set forth in the New Prime Charter generally will result
in the conversion of those shares into shares of a separate class of capital
stock with no voting rights and no rights to distributions.
The New Prime Board of Directors may, subject to the receipt of certain
representations as required by the New Prime Charter and a ruling from the
Internal Revenue Service (the "IRS" or "Service") or an opinion of counsel
satisfactory to it, waive the ownership restrictions with respect to a holder if
such waiver will not jeopardize New Prime's status as a REIT.
The New Prime Stock Ownership Limit (and the limitation upon the ownership
of more than 10% of the outstanding New Prime Series A Preferred Shares by
certain shareholders, which is also provided for in the New Prime Charter) may
(i) discourage a change of control of New Prime, (ii) deter tender offers for
such shares, which offers may be attractive to New Prime's shareholders, or
(iii) limit the opportunity for stockholders to receive a premium for their
shares that might otherwise exist if an investor attempted either to assemble a
block of stock in excess of the New Prime Stock Ownership Limit or 10% of the
outstanding New Prime Series A Preferred Shares or to effect a change of control
of New Prime.
RESTRICTIONS UPON TRANSFER TO AVOID PUBLICLY TRADED PARTNERSHIP STATUS
Code Section 7704 provides that publicly traded partnerships will be taxed
as corporations, unless a certain percentage of their income consists of
"qualifying income." A partnership is "a publicly traded partnership" if
interests in such partnership are either traded on an established securities
market or are "readily tradable on a secondary market (or the substantial
equivalent thereof)." Under the Treasury Regulations promulgated under Code
Section 7704, interests in a partnership are readily tradable on a secondary
market or substantial equivalent thereof if, "taking into account all of the
facts and circumstances, the partners are readily able to buy, sell, or exchange
their partnership interests in a manner that is comparable, economically, to
trading on an established securities market." The Treasury Regulations provide
several safe harbors, which if met, a partnership will not be treated as though
its interests are readily tradeable on a secondary market or the substantial
equivalent thereof.
Prime Partnership will not be a publicly traded partnership taxable as a
corporation immediately after the Partnership Merger whether or not it meets any
applicable safe harbor for being readily tradeable on a secondary market (or the
substantial equivalent thereof). However, a transfer by a Prime Partnership
Unitholder (excluding the conversion to New Prime Shares) will be prohibited if
New Prime determines that such a transfer may reasonably cause Prime Partnership
to be treated as a publicly traded partnership.
Even if Prime Partnership was deemed to be a publicly traded partnership,
depending on circumstances at the time, it still will avoid taxation as a
corporation under Code Section 7704, based on the nature of its income. A
publicly traded partnership is not taxed as a corporation if at least 90% of its
gross income for each taxable year consists of certain passive income, including
interest, dividends, real property rents, and gains from the sale or other
disposition of real property. These are predominantly the types of
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income that Prime Partnership expects to earn. If Prime Partnership satisfied
the 90% gross income test, but was classified as a publicly traded partnership,
it would not be taxed as a corporation, but would be subject to certain special
rules under Code Section 469(k). In such event, a Prime Partnership Unitholder
would be unable to use losses from other passive activities against his
allocable share of Prime Partnership passive income and gain and the passive
activity losses allocable to a Prime Partnership Unitholder could be offset only
against his allocable share of Prime Partnership passive activity income or
gains, and not against income or gains from other passive activities.
If Prime Partnership at any time were considered a publicly traded
partnership and did not satisfy the qualifying income test, then it will be
considered as having transferred its assets at that time to a corporation, and
would be taxed as a corporation for federal income tax purposes, which would
result in adverse consequences to the Prime Partnership Unitholders and would
jeopardize Prime's status as a REIT for federal income tax purposes. This deemed
transfer of assets to a corporation may also result in the recognition of
taxable income to Prime Partnership Unitholders, to the extent that Prime
Partnership's liabilities at that time exceeded the adjusted tax basis of Prime
Partnership's assets, without the receipt of any cash to pay the income tax
liability resulting from such income.
In respect of a conversion to New Prime Shares, an opinion of tax counsel to
New Prime that such conversion will not cause Prime Partnership to cease to
qualify as a partnership for federal income tax purposes generally will be
required as condition to such conversion, and any conversion that does not meet
this condition will be void. Accordingly, the opinion requirement could operate
to void such conversion if such an opinion could not be obtained on the basis
that such conversion caused Prime Partnership to be treated as a publicly traded
partnership, taxable as a corporation. However, as described above, a publicly
traded partnership will not be taxable as a corporation if 90% or more of its
income is "qualifying income." The types of income that are qualifying income
for this purpose generally match those types of income necessary for New Prime
to qualify as a REIT. Accordingly, Prime Partnership anticipates that, even if
it is treated as a publicly traded partnership, it still would not be taxable as
a corporation. Therefore, as a practical matter, the opinion requirement that
the conversion of Prime Partnership Units to New Prime Shares not result in
non-partnership tax treatment will not operate to void any such conversion.
Prime Partnership Unitholders and Horizon Partnership Unitholders are
strongly urged to consult their own tax advisors to determine the extent to
which any of these transfer restrictions may apply to their Prime Partnership
Units.
THE BRIEF HISTORY OF THE OUTLET CENTER INDUSTRY; DECLINE IN DEVELOPMENT OF NEW
CENTERS; COMPETITION WITHIN THE INDUSTRY
THE BRIEF HISTORY OF THE OUTLET CENTER INDUSTRY. The outlet center business
is a relatively young segment of the retailing industry. As this segment of the
retailing industry matures, there can be no assurance that the advantages
offered by this business to consumers and manufacturers will continue. The
outlet center business depends, in part, on the pricing differential between
goods sold in the outlet centers and similar or identical goods sold in
traditional department stores or retail establishments. While this pricing
differential results in part because of lower operating costs resulting from the
elimination of distribution channels and the reduced rent and overhead at outlet
centers, there can be no assurance that traditional retailers will not compete
aggressively to regain sales nor can there be any assurance that the outlet
center business will not be adversely affected by other changes in the
distribution and sale of retail goods.
DECLINE IN DEVELOPMENT OF NEW CENTERS. In recent years, the rate of growth
in the development of new factory outlet centers has declined significantly.
According to VALUE RETAIL NEWS, the number of new centers opened in the United
States decreased from 27 grand openings in 1994 to 22, 13 and seven grand
openings in 1995, 1996 and 1997, respectively. There can be no assurance that
this trend in declining development will not continue, or that the development
of newer factory outlet centers will increase in the future.
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COMPETITION FROM OTHER OUTLET CENTERS. There are numerous developers and
real estate companies that are engaged in the development or ownership of outlet
centers and are expected to compete with Prime Partnership in seeking merchants
for outlet centers. This results in competition for prime locations and for
merchants who operate outlet center stores, particularly for those manufacturers
featuring quality and designer brand name merchandise with proven customer
drawing power.
Because a number of Prime Partnership's outlet centers are located in
relatively undeveloped areas, there are often other potential sites near Prime
Partnership's outlet centers that may be developed into outlet centers by
competitors. As of December 31, 1997, 13 projects in Prime Partnership's
portfolio were located within approximately 12 miles of competing outlet centers
and thus are subject to existing competition. The development of an outlet
center with a more convenient location or lower rents may attract Prime
Partnership's merchants or cause them to seek more favorable lease terms at or
prior to renewal of their leases and, accordingly, may affect adversely the
business, revenues and/or sales volume of Prime Partnership's outlet centers.
COMPETITION FROM TRADITIONAL FULL PRICE RETAILERS AND OTHERS. Most of the
merchandise produced by manufacturers is sold through traditional full price
retail channels, such as large department stores and other mass merchandisers.
Manufacturers generally do not wish to jeopardize retail relationships by
locating their outlet stores in locations that directly compete with traditional
retailers. As a result, Prime Partnership's outlet centers are typically
constructed at least 20 miles from the nearest regional mall. These locations
are generally less attractive to consumers because they tend to require more
travel time. A reduction of pricing discounts by manufacturers, increased
competition by traditional retailers or a perception by consumers that such
pricing differentials are not significant would reduce the competitive advantage
offered by outlet stores to consumers and, consequently, adversely affect the
business, revenues and/or sales volume of Prime Partnership's outlet centers.
There can be no assurance that the outlet center business will not be adversely
affected by other changes in the distribution and sale of retail goods, such as
discount shopping clubs, "off-price" retailers, direct mail and telemarketing.
GENERAL RETAIL INDUSTRY RISKS. The outlet center market is a component of
the retail industry. The retail industry is subject to external factors such as
inflation, consumer confidence, unemployment rates and consumer tastes and
preferences. In the event that the retail industry experiences down cycles,
manufacturers and merchants of retail merchandise may experience economic
difficulties and/or may be less likely to renew existing leases at outlet
centers or to expand distribution channels into new outlet centers.
SHAREHOLDER LITIGATION
On December 10, 1997, a shareholder of Horizon filed a purported class
action lawsuit in the Circuit Court for Muskegon County, Michigan against
Horizon, Prime and certain directors and former directors of Horizon. The
substantive allegations claim that Horizon's directors breached their fiduciary
duties to Horizon's shareholders in approving the Corporate Merger and that the
consideration to be paid to Horizon's shareholders in connection with the
Corporate Merger is unfair and inadequate. The lawsuit requests that such merger
be enjoined or, in the event that the purported transaction is consummated, that
it be rescinded or damages be awarded to the class members. On January 16, 1998,
the defendants answered the complaint, denying that the Horizon Board of
Directors breached its fiduciary duties and denying that such consideration is
unfair or inadequate. If the lawsuit is successful, the Corporate Merger may be
enjoined, thus preventing the Transactions from being consummated.
Alternatively, a court may award damages to the class members, which could have
an adverse effect on the defendants or could make the Transactions economically
inefficient for Prime and/or Horizon. Prime and Horizon intend to vigorously
defend against the lawsuit, but there can be no assurance that the lawsuit will
not be successful, as to all or some of its claims.
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RISKS OF ACQUISITION ACTIVITIES
Prime Partnership intends to pursue acquisitions of factory outlet centers
in the United States. Prime Partnership can provide no assurance as to whether
any of the potential acquisitions it is presently exploring will be consummated
nor as to the final terms or conditions upon which any such transactions may be
completed. Acquisitions of factory outlet centers, like that of commercial real
estate, entail risks that the investment will fail to perform in accordance with
expectations. The success of Prime Partnership's acquisition strategy will be
determined by numerous factors, including Prime Partnership's ability to
identify suitable acquisition opportunities, the degree of competition for such
acquisitions, Prime Partnership's ability to finance such acquisitions on
acceptable terms, the financial performance of the properties following
acquisition and the ability of Prime Partnership to effectively integrate the
operations of acquired properties. The failure by Prime Partnership to achieve
its acquisition plans or to integrate or operate acquired facilities effectively
may have a material adverse effect on Prime Partnership's business, financial
condition and results of operations, and such failure may adversely affect the
ability of Prime Partnership to pay expected distributions to unitholders.
ADVERSE EFFECT OF INABILITY TO PURSUE DEVELOPMENT ACTIVITIES; DEVELOPMENTS MAY
NOT BE PROFITABLE
Prime Partnership intends to pursue development activities as opportunities
arise. Prime Partnership will incur risks in connection with such development
activities in addition to those applicable to the ownership and operation of the
New Prime Properties. These risks include the risks that development
opportunities explored by Prime Partnership may be abandoned or delayed, that
construction costs of a project may exceed original estimates, that occupancy
rates and rents at a completed project will not be sufficient to make the
project profitable, and that Prime Partnership may be unable to obtain any
required governmental approvals or permits. The occurrence of any of the
foregoing may adversely affect the ability of Prime Partnership to pay expected
distributions to unitholders.
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON INCURRENCE OF DEBT
Following the Prime IPO, Prime established a policy of not incurring debt
that would result in a ratio of debt to total market capitalization of more than
50%. In 1995, Prime modified this policy to increase such limit to 60%. Such
increase responded primarily to the substantial decline in the market prices of
Prime's publicly traded equity securities and the significant increase in
Prime's total debt related to its property development activities. Prime
Partnership intends to continue Prime's existing policy. There can be no
assurance, however, that this policy will not be further modified to enable
Prime Partnership to become more highly leveraged. Moreover, the organizational
documents of Prime Partnership will not contain any limitation on the amount of
indebtedness Prime Partnership might incur. If Prime Partnership were to become
more highly leveraged, the resulting increase in Prime Partnership's debt
service obligations could adversely affect Prime Partnership's available cash
flow and ability to make expected distributions to shareholders and increase the
risk of default on Prime Partnership's obligations, including financial
covenants contained in New Prime or Prime Partnership's debt instruments.
GENERAL REAL ESTATE INVESTMENT RISKS
GENERAL. Investments in Prime Partnership will be subject to the risks
incident to the ownership and operation of commercial retail real estate. These
include the risks normally associated with changes in national economic or local
market conditions, competition for merchants from other retail properties,
including other outlet centers, changes in market rental rates, and the need to
periodically renovate, repair and relet space and to pay the costs thereof.
Equity real estate investments are relatively illiquid compared to most
financial assets and, therefore, tend to limit the ability of Prime Partnership
to vary its portfolio promptly in response to changes in economic or other
conditions. Substantially all of the New Prime Properties are outlet centers. In
addition,
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certain significant expenditures associated with each equity investment (such as
debt service, real estate taxes and operating and maintenance costs) are
generally not reduced when circumstances cause a reduction in income from the
investment. If any of Prime Partnership's outlet centers fails to succeed,
either because the concept of the outlet center has lost favor or because of
poor results at an individual center, the ability of Prime Partnership to
convert the center to an attractive alternative use or to sell the center to
recoup Prime Partnership's investment may be limited. Should such an event
occur, Prime Partnership's income and available cash flow would be adversely
affected.
BANKRUPTCY OF MERCHANTS. Because rental income will be a principal source
of operating revenue for Prime Partnership, Prime Partnership's financial
condition and results of operations would be adversely affected if a significant
number of Prime Partnership's merchants were unable to meet their lease
obligations and if, following such defaults, Prime Partnership were unable to
relet the space to new merchants on economically favorable terms. Moreover, the
bankruptcy or insolvency of a single major merchant may have an adverse effect
on the income produced by certain New Prime Properties. In the event of default
by a lessee, Prime Partnership may experience delays in enforcing its rights as
landlord and may incur substantial costs in protecting its investment and
reletting such space in the New Prime Properties.
RENEWAL OF LEASES AND RELETTING OF SPACE. Prime Partnership will be subject
to the risks that, upon expiration of leases for space located in the New Prime
Properties, the leases may not be renewed, the space may not be relet or the
terms of renewal or reletting (including the cost of required renovations or
concessions to merchants) may be less favorable than current lease terms. In
general, the leases relating to Prime Partnership's outlet centers have a term
of five to seven years with an option to renew for a period equal to the length
of the initial term. Because substantially all of Prime Partnership's outlet
centers have been constructed or assumed during the past five years, Prime
Partnership does not have an extensive history of lease renewals with respect to
its current portfolio of leases. As of December 31, 1997, leases will expire
prior to 2003 on a total of approximately 64.2% of the GLA in Prime
Partnership's outlet centers. If Prime Partnership was unable to promptly relet
or renew its leases for all or a substantial portion of the space currently
leased, or if the rental rates upon such renewal or reletting were significantly
lower than expected rates, or if Prime Partnership's reserves for renovations
and concessions proved inadequate, then Prime Partnership's cash flow and,
consequently, Prime Partnership's ability to make expected distributions to unit
holders may be adversely affected.
UNINSURED LOSS. Prime Partnership intends to carry comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to the New
Prime Properties with policy specifications and insured limits customarily
carried for similar properties. There are, however, certain types of losses
(from wars or, in certain locations, earthquakes) that may be either uninsurable
or not insurable on economically viable terms. Should an uninsured loss occur,
Prime Partnership could lose its capital investment and/or the anticipated
profits and cash flow from one or more New Prime Properties.
LIMITS ON CHANGES IN CONTROL
OWNERSHIP LIMIT. The New Prime Stock Ownership Limit, as well as the
ability of New Prime to issue additional New Prime Common Shares or other shares
(which may have rights and preferences senior to New Prime Common Shares), may
discourage a change of control of New Prime and may also (i) deter tender offers
for New Prime Common Shares, New Prime Series A Preferred Shares and New Prime
Series B Preferred Shares, which offers may be advantageous to shareholders and
(ii) limit the opportunity for shareholders to receive a premium for their New
Prime Common Shares, New Prime Series A Preferred Shares and New Prime Series B
Preferred Shares that might otherwise exist if an investor were attempting to
assemble a block of New Prime Common Shares, New Prime Series A Preferred Shares
and New Prime Series B Preferred Shares in excess of the New Prime Stock
Ownership Limit or otherwise effect a change of control of New Prime.
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STAGGERED BOARD. The New Prime Board of Directors will be divided into
three classes of directors. The terms of the classes will expire in 1999, 2000
and 2001, respectively. As the term of each class expires, directors for that
class will be elected for a three-year term and the directors in the other two
classes will continue in office. The staggered terms for directors may impede
the shareholders' ability to change control of New Prime even if a change in
control were in the shareholders' interest.
PREFERRED SHARES. The New Prime Charter will authorize the New Prime Board
of Directors to issue up to 24,315,000 New Prime Preferred Shares and to
establish the preferences and rights (including the right to vote and the right
to convert into New Prime Common Shares) of any New Prime Preferred Shares
issued. The power to issue New Prime Preferred Shares could have the effect of
delaying or preventing a change in control of New Prime even if a change in
control were in the shareholders' interest.
MARYLAND BUSINESS COMBINATION LAW. Under the Maryland General Corporation
Law, as amended (the "MGCL"), certain "business combinations" (including a
merger, consolidation, share exchange or, in certain circumstances, an asset
transfer or issuance or reclassification of equity securities) between a
Maryland corporation subject to Section 3-601 et. seq. of the MGCL and (i) any
person who (a) beneficially owns 10% or more of the voting power of the
corporation's shares after the date on which the corporation had 100 or more
beneficial owners of its stock or (b) is an affiliate or associate of the
corporation and beneficially owned 10% or more of the voting power of the
corporation's shares at any time within the two-year period immediately prior to
the date in question, and after the date on which the corporation had 100 or
more beneficial owners of its stock (an "Interested Stockholder"), or (ii) an
affiliate of such Interested Stockholder, are prohibited for five years after
the most recent date on which the Interested Stockholder became an Interested
Stockholder unless an exemption is available. Thereafter, any such business
combination must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least (a) 80% of the votes entitled
to be cast by holders of outstanding voting shares of the corporation and (b)
two-thirds of the votes entitled to be cast by holders of voting shares of the
corporation other than shares held by the Interested Stockholder with whom (or
with whose affiliate) the business combination is to be effected (unless, among
other conditions, the holders of the common shares of the corporation receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares). Such provisions could have the effect of inhibiting
a change in control even if a change in control were in the shareholders'
interest. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder.
POSSIBLE LIABILITY RELATING TO 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 or toxic substances released on or under its
property. These laws often impose such liability without regard to whether the
owner or operator knew of, or was responsible for, the release of such hazardous
or toxic substances. The cost of any required remediation and the owner's
liability therefor as to any property is generally not limited under such
enactments and could exceed the value of the property and/or the aggregate
assets of the owner. The presence of environmentally hazardous substances, or
the failure to properly remediate such substances, may adversely affect the
owner's ability to sell or rent such property or to borrow using such property
as collateral. Moreover, such laws are subject to change and any such change may
result in significant unanticipated expenditures, which could adversely affect
Prime Partnership's ability to pay distributions to unitholders.
Substantially all of the New Prime Properties have been subject to Phase I
or similar environmental assessments by independent environmental consultants
within the past five years. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public
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records review, an investigation of the surveyed site and surrounding
properties, and preparation and issuance of a written report, but do not include
soil sampling or subsurface investigations. Generally, the environmental
assessments revealed no significant environmental conditions. However, certain
properties had historic or neighboring uses which might have impacted the
properties, contained underground storage tanks, or included wetlands, which
could affect future development. Neither Prime nor Horizon has been notified by
any governmental authority of any non-compliance, liability or other claim in
connection with any of the New Prime Properties, and neither Prime nor Horizon
is aware of any other environmental condition with respect to any of the New
Prime Properties that could materially adversely affect New Prime's financial
condition or results of operations. Nonetheless, it is possible that Prime
Partnership's assessments do not reveal all environmental liabilities or that
there are material liabilities of which Prime Partnership is unaware. Moreover,
there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the New Prime Properties will not be affected by
tenants, by the condition of land or operations in the vicinity of the New Prime
Properties (such as the presence of underground storage tanks) or by third
parties unrelated to Prime Partnership. If compliance with the various laws and
regulations, now existing or hereafter adopted, exceeds Prime Partnership's
budget for such items, Prime Partnership's ability to make expected
distributions to shareholders could be adversely affected.
TAX TERMINATION OF PRIME PARTNERSHIP
Pursuant to Section 708(b)(1)(B) of the Code, if within a twelve-month
period, there is a sale or exchange of 50% or more of the total interest in a
partnership's capital and profit, the partnership terminates for federal income
tax purposes. The Section 708 Regulations provide that if a partnership is
deemed terminated by a sale or exchange of an interest, the following is deemed
to occur: (a) the partnership transfers all of its assets and liabilities to a
new partnership in exchange for an interest in the new partnership; and (b)
immediately thereafter, the terminated partnership distributes all of the
interests in the new partnership to the purchasing partner and the other
remaining partners in liquidation of the terminated partnership. Under the
Section 708 Regulations, the deemed termination of a partnership will result in
the closing of the partnership's taxable year and the voiding of any tax
elections made by the partnership. In addition, the deemed termination requires
the partnership to depreciate its assets as if they were newly acquired by the
partnership at the time of termination. As a result, such assets must be
depreciated over each asset's depreciable life beginning as of the date of the
deemed termination.
The Corporate Merger should result in the termination of Prime Partnership
under Code Section 708(b)(1)(B). Accordingly, under the Section 708 Regulations,
all of the assets of Prime Partnership will be deemed to be contributed to a new
partnership in return for interests in such new partnership, and Prime
Partnership Unitholders would be deemed to be distributed interests in such new
partnership in exchange for their present interests in Prime Partnership.
Although this termination would cause the taxable year of Prime Partnership
to end, to the extent that the taxable years of both Prime Partnership and a
Prime Partnership Unitholder (including Prime) generally end on the same date
(i.e., December 31), as does Prime's taxable year, the closing of Prime
Partnership's taxable year should have no adverse tax consequences to such Prime
Partnership Unitholder. However, the termination of Prime Partnership would
cause the assets of Prime Partnership to be depreciated as if they were newly
acquired by Prime Partnership, probably resulting in lower annual depreciation
deductions to Prime Partnership Unitholders (including Prime) for federal income
tax purposes after the Mergers.
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ISSUANCE OF PREFERRED UNITS
The Prime Partnership Agreement (as defined herein) provides that New Prime,
as general partner may, in its sole discretion, cause Prime Partnership to issue
additional units of partnership interest with rights and preferences that may be
senior to those of Prime Partnership Common Units. Such preferred units are
available for issuance without further action by the limited partners of Prime
Partnership. To the extent preferred units are issued, the holders of Prime
Partnership Common Units may be adversely affected because the holders of such
additional units may have a priority on distributions with respect to Prime
Partnership Common Units or priority upon the liquidation of the assets of Prime
Partnership. The rights and preferences associated with such additional units
may also prevent distributions to the holders of Prime Partnership Common Units
until the obligations of Prime Partnership with respect to such additional units
are satisfied.
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HGP LP RISK FACTORS
Ownership of HGP LP Common Units involves various risks. In addition to
general risks of ownership of HGP LP Common Units and those factors set forth
elsewhere in this Joint Consent Solicitation Statement/Prospectus/Information
Statement, including risks set forth in "Prime Partnership Risk Factors,"
holders of HGP LP Common Units should be aware of, among other things, the
following factors:
LACK OF OPERATING HISTORY AS SEPARATE ENTITY; LIMITED RELEVANCE OF HISTORICAL
FINANCIAL INFORMATION
Upon consummation of the Transactions, HGP LP will own and operate the HGP
Properties. HGP LP does not have an operating history as a separate entity, and
management has historically been able to rely on the earnings, assets and cash
flow of Prime and Horizon in managing the HGP Properties. Furthermore, HGP LP
will be a substantially smaller company than either Horizon Partnership or Prime
Partnership was prior to consummation of the Transactions. Also, the
Transactions may result in some temporary dislocation and inefficiencies to the
business operations, as well as the organization and personnel structure, of HGP
LP. As a result of the foregoing, historical and pro forma results for HGP LP
contained elsewhere in this Joint Consent Solicitation
Statement/Prospectus/Information Statement may not be indicative of its results
for future periods. With the exception of the Prime Guarantee, neither New Prime
nor Prime Partnership is required or intends to provide assistance or services
to HGP or HGP LP after the consummation of the Transactions.
DECLINING OPERATING RESULTS OF HGP PROPERTIES
The initial assets of HGP LP consist of Horizon Partnership and Prime
Partnership properties which have performed poorly relative to other properties
owned by Horizon Partnership and Prime Partnership prior to the Transactions and
have, as a whole, generated declining operating results in recent periods. As of
December 31, 1997, the HGP Properties were 80.5% leased, while the properties to
be contained in New Prime's portfolio were 92.7% leased. In addition, HGP LP's
net income before gain on sale of real estate, extraordinary charge and losses
on impairment on an historical basis was $5,943,000 for the year ended December
31, 1996 compared to a loss of $3,347,000 for the year ended December 31, 1997.
Although the management of HGP LP believes that the performance of these
properties can be improved over time through increased focus on leasing the
properties, remerchandising with nonoutlet merchants, cost-cutting measures and
selective expansion of the HGP Properties, there can be no assurance that the
performance of the properties will improve or not continue to deteriorate. See
"Horizon Group Properties, L.P."
ADVERSE CONSEQUENCES OF DEBT FINANCING
Upon consummation of the Transactions and after making expected borrowings
under the HGP Credit Facility (as hereinafter defined), HGP LP will have
substantial indebtedness and debt service obligations. On a pro forma basis, HGP
LP's total indebtedness of $127,387,000 would represent approximately 75.8% of
its total capitalization as of December 31, 1997. In addition, subject to
restrictions in its debt instruments, HGP LP may incur additional indebtedness
(including additional secured indebtedness and senior indebtedness) from time to
time.
HGP's ability to make required payments under the HGP Credit Facility and
any other debt instruments and required distributions to its shareholders will
be dependent upon HGP's ability to generate cash from operations sufficient for
such purposes. In turn, HGP's future operating performance and ability to make
planned expenditures will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond its control.
There can be no assurance that HGP will be able to generate funds in a manner
that will be sufficient to meet its debt repayment obligations or required
distributions.
The degree to which HGP and HGP LP are leveraged could have important
consequences to holders of HGP Common Shares and HGP LP Common Units, including
the following: (i) HGP and HGP LP's
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ability to obtain additional financing in the future for working capital,
capital expenditures, debt service requirements, general corporate or other
purposes may be materially limited or impaired; (ii) a substantial portion of
HGP and HGP LP's cash flow from operations is expected to be required to be
dedicated to the payment of principal and interest on indebtedness, thereby
reducing the funds available to HGP and HGP LP for other purposes, including
operations and future business opportunities; (iii) HGP and HGP LP's debt
instruments could impose significant financial and operating restrictions on HGP
and HGP LP and their subsidiaries which, if violated, could permit HGP and HGP
LP's creditors to accelerate payments thereunder and foreclose on the collateral
securing such debt instruments; (iv) HGP and HGP LP's flexibility to adjust to
changing market conditions and ability to withstand competitive pressures could
be limited by their leveraged positions and the covenants contained in their
debt instruments, thus putting HGP and HGP LP at a competitive disadvantage; (v)
HGP and HGP LP may be vulnerable to a downturn in general economic conditions or
in their business or be unable to carry out spending that is important to the
maintenance of their business; (vi) borrowings under certain of HGP and HGP LP's
debt instruments are at variable rates of interest, exposing HGP and HGP LP to
the risk of increased interest rates and (vii) HGP and HGP LP's ability to make
distributions.
The HGP Credit Facility requires monthly payments of interest, as well as
principal payments totaling $1.5 million, $1.5 million and $2.0 million during
the first, second and third years, respectively, following the Closing Date,
payable in equal monthly installments. The HGP Credit Facility will mature on
the third anniversary of the Closing Date. HGP does not expect that it will
generate cash flow from operations sufficient to cover repayment of the HGP
Credit Facility when it matures. HGP's ability to repay the HGP Credit Facility
at maturity will be dependent on developing one or more sources of cash prior to
the maturity of the HGP Credit Facility. If HGP is unable to develop such
sources of cash in the future to repay its obligation under the HGP Credit
Facility and to meet its other commitments, it may be required to (i) seek to
refinance all or a portion of the HGP Credit Facility at maturity, (ii) reduce
or delay required or planned expenditures or (iii) seek to sell all or a portion
of its interests in one or more of the HGP Properties. The HGP Credit Facility
will restrict HGP's ability to sell assets and use the proceeds therefrom. HGP's
ability to refinance the HGP Credit Facility or to obtain additional financing
will depend upon HGP's operating performance, as well as prevailing economic and
market conditions, levels of interest rates, refinancing costs and other
factors, many of which are beyond HGP's control. There can be no assurance that
HGP will be able to refinance the HGP Credit Facility on terms acceptable to the
Company, if at all, or to obtain additional financing in a timely manner or that
the proceeds therefrom will be sufficient to effect such refinancing. Any
failure by HGP to repay the HGP Credit Facility when due would have a material
adverse affect on HGP.
In the event that HGP is unable to generate sufficient cash flow and HGP is
otherwise unable to obtain funds necessary to meet required payments of
principal, premium, if any, and interest on its indebtedness (including the HGP
Credit Facility), or if HGP otherwise fails to comply with the various covenants
in the instruments governing such indebtedness, HGP could be in default under
the terms of such indebtedness. In the event of such default, the holders of
such indebtedness could elect to declare all the funds borrowed thereunder to be
due and payable together with accrued and unpaid interest, the lenders under
HGP's debt instruments could elect to terminate their commitments thereunder and
HGP could be forced into bankruptcy or liquidation.
The organizational documents of HGP do not contain any limitation on the
amount of indebtedness HGP may incur. Accordingly, HGP could become highly
leveraged, resulting in an increase in debt service that could increase the risk
of default on HGP's indebtedness.
LACK OF WORKING CAPITAL
HGP LP will be primarily dependent on cash flow from operations to operate
its business. In order to implement its business plan of repositioning the HGP
Properties, HGP LP will be required to make improvements to its properties,
including constructing tenant build-outs and redesigning or reconfiguring
certain retail space. HGP LP does not anticipate that it will be able to
implement its business plan without
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obtaining additional financing. HGP LP's debt instruments, including the HGP
Credit Facility, restrict HGP LP's ability to incur additional indebtedness and
may prevent HGP LP from adequately repositioning the HGP Properties. HGP LP does
not have any commitments for working capital financing and there is no assurance
that HGP LP will have sufficient working capital in the foreseeable future to
execute its business plan. The failure by HGP LP to obtain adequate working
capital financing may have a material adverse effect on HGP LP's business,
financial condition and results of operations.
NO PRIOR PUBLIC MARKET; NO ASSURANCE OF VALUE
Prior to the consummation of the Transactions, there has been no public
market for HGP Common Shares or the HGP LP Common Units. An application will be
made to have the HGP Common Shares listed for quotation in Nasdaq. There can be
no assurance that HGP will obtain a listing (see "--Nasdaq Maintenance
Requirements; Possible Failure to List or Delisting of HGP Common Shares from
Nasdaq"). There can also be no assurance that an active trading market for the
HGP Common Shares will develop, or if such market does develop, be sustained.
The market price of the HGP Common Shares may fluctuate substantially due to a
variety of factors, including quarterly fluctuations in results of operations,
changes in earnings estimates by securities analysts, changes in accounting
principles, sales of HGP Common Shares by existing holders, negative publicity,
loss of key personnel and other factors. In addition, broad market fluctuations
and general economic and political conditions may adversely affect the market
price of the HGP Common Shares regardless of HGP and HGP LP's performance.
Furthermore, there is no assurance as to the value of HGP Common Shares in the
secondary market.
ABSENCE OF DISTRIBUTIONS
Subject to the requirements necessary to maintain its status as a REIT, HGP
does not anticipate paying distributions to shareholders for the foreseeable
future. It is the present intention of HGP to retain all earnings, if any, in
order to fund capital expenditures in accordance with its business plan and
generally to support its ongoing businesses and make payments on its outstanding
indebtedness, including the HGP Credit Facility. Any determination in the future
to pay distributions will be dependent upon HGP's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
at that time by the HGP Board of Directors. HGP's substantial indebtedness and
debt service obligations will further restrict its ability to make distributions
to its shareholders. The terms of the HGP Credit Facility require that HGP's
available cash flow from operations be used first to pay interest payments due
on such credit facility before being distributed to securityholders. See
"Horizon Group Properties, L.P.--Management's Discussion and Financial Analysis
of HGP LP--Liquidity and Capital Resources."
NOVELTY OF TRANSACTION STRUCTURE TO THE FACTORY OUTLET INDUSTRY
The Transactions represent the first attempt of a REIT in the factory outlet
industry to separate its business into two publicly held companies, one to
continue its focus on the acquisition, development and ownership of quality
factory outlet centers and the other to implement a repositioning strategy with
respect to its retail properties. There is no assurance that this strategy can
be successfully implemented in the factory outlet industry. See "--Change in
Business Strategy."
CHANGE IN BUSINESS STRATEGY
The initial assets of HGP LP have historically been operated as factory
outlet centers. As part of its business plan, HGP LP may expand its leasing
efforts to include a broader array of tenants, including local, regional and
national retailers. See "Horizon Group Properties, L.P.--Business Strategy".
This change in business strategy, if implemented, entails numerous risks,
including the risk that HGP LP will be unable to obtain financing to implement
the strategy, attract such non-factory outlet tenants, the addition of such
non-factory outlet tenants will lead to a loss of HGP LP's current factory
outlet center tenants and tenant sales at HGP LP's properties could be reduced
due to a change in market perception caused by the inclusion of non-factory
outlet tenants. In addition, there is no assurance that HGP LP will be able to
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acquire additional properties on terms and conditions that would be accretive to
its securityholders or suitable for repositioning.
FINANCINGS MAY NOT BE SUCCESSFUL
In order to obtain financing necessary to execute its business plan, HGP LP
intends to raise additional equity capital through the public or private equity
markets. Such financing may be obtained through the sale of common or preferred
equity. There can be no assurance that HGP LP will be successful in obtaining
any such financing or that the terms of such financing, including the price at
which equity securities are issued and any resulting dilution to existing
investors, will be favorable to HGP LP and the holders of HGP LP Common Units.
The failure by HGP LP to obtain additional equity financing on favorable terms
may have a material adverse effect on HGP LP's business, financial condition and
results of operations.
LIMITED EXPERIENCE OF HGP'S MANAGEMENT IN FACTORY OUTLET CENTER INDUSTRY
None of the executive officers of HGP are currently employed by Horizon or
Prime. Many of these officers have had limited or no experience in the factory
outlet industry. There is no assurance that these executive officers will be
able to effectively manage and operate the HGP Properties.
CONFLICTS OF INTERESTS OF COMMON DIRECTORS
Upon consummation of the Transactions, Michael W. Reschke and Norman
Perlmutter will serve as directors of both New Prime and HGP. Messrs. Reschke
and Perlmutter may face certain conflicts of interests under Maryland law as a
result of their positions as directors of both companies. For so long as Mr.
Reschke serves as an executive officer or director of HGP, HGP and HGP LP will
be prohibited from acquiring or developing any factory outlet center that is
within a 50 mile radius of any outlet center owned or operated by New Prime.
DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY
HGP LP's cash flow, results of operations and value of its assets would be
adversely affected if a significant number of tenants of the HGP Properties
failed to meet their lease obligations or if HGP LP were unable to lease a
significant amount of space on economically favorable terms. In the event of a
default by a lessee, HGP LP may experience delays in enforcing its rights as
lessor and may incur substantial costs in protecting its investment. The
bankruptcy or insolvency of a major tenant may have an adverse effect on a
property. At any time, a tenant may seek protection under the bankruptcy laws,
which could result in rejection and termination of such tenant's lease and
thereby cause a reduction in the cash flow of the property. No assurance can be
given that the HGP Properties will not experience significant tenant defaults in
the future.
On a pro forma basis as of December 31, 1997, leases representing
approximately 41% of the GLA in the HGP Properties were scheduled to expire
prior to 2001. If HGP LP is unable to promptly relet or renew its leases for all
or a substantial portion of the space currently leased, or if the rental rates
upon such renewal or reletting were significantly lower than existing rates, or
if HGP LP's reserves for renovations and concessions proved inadequate, then HGP
LP's cash flow and operations may be adversely affected.
ADVERSE IMPACT OF THE FAILURE TO CONTINUE TO QUALIFY AS A REIT
HGP intends to qualify, and upon qualification, intends to continue to
qualify, as a REIT under the Code. A REIT generally is not subject to federal
income tax at the corporate level on income which it currently distributes to
its shareholders so long as it distributes to its shareholders at least 95% of
its taxable income (excluding any net capital gain) each year.
No assurance can be given that HGP will remain qualified as a REIT.
Qualification as a REIT involves the satisfaction of the numerous requirements
(in certain instances, on an annual and quarterly basis) set
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forth in highly technical and complex Code provisions for which there are only
limited judicial or administrative interpretations, and may be affected by
various factual matters and circumstances not entirely within HGP's control. In
the case of a REIT such as HGP that holds its assets in partnership form, the
complexity of these Code provisions and of the applicable Treasury Regulations
that have been promulgated thereunder is even greater. Further, no assurance can
be given that future legislation, new Treasury 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.
If HGP were to fail to maintain qualifications as a REIT in any taxable
year, HGP would not be allowed a deduction in computing its taxable income for
amounts distributed to its shareholders, and thus would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate tax rates. Moreover, unless entitled to relief under
certain statutory provisions, HGP also would be ineligible for qualification as
a REIT for the four taxable years following the year during which qualification
was lost. Such disqualification would reduce the net earnings of HGP available
for investment or distribution to shareholders due to the additional tax
liability of HGP for the years involved. See "Horizon Group Properties,
Inc.--Federal Income Tax Consequences."
EFFECT OF REIT DISTRIBUTION REQUIREMENTS
To maintain its status as a REIT for federal income tax purposes, HGP
generally will be required each year to distribute to its shareholders at least
95% of its taxable income (excluding any net capital gain). In addition, HGP
will be subject to federal income tax to the extent it distributes less than
100% of its taxable income, including any net capital gain, and to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85% of its
ordinary income plus 95% of its net capital gain income plus 100% of its
undistributed income from prior taxable years.
HGP intends to pay distributions to its shareholders only to the extent
necessary to comply with the 95% distribution requirement of the Code and to
avoid the nondeductible excise tax described above. HGP anticipates that its
cash flow from operations, including its share of distributions from HGP LP,
will be sufficient to enable it to pay its current level of operating expenses
and meet the distribution requirements of a REIT, but no assurance can be given
that this will be the case. HGP may be required from time to time, under certain
circumstances, to accrue as income for tax purposes rent or interest earned but
not yet received. In such event, or upon the repayment of principal
indebtedness, HGP could have taxable income without sufficient cash to enable
HGP to meet the REIT distribution requirements. Accordingly, HGP could be
required to borrow funds or liquidate investments on adverse terms in order to
comply with such requirements. See "Horizon Group Properties, Inc.--Federal
Income Tax Consequences."
PENALTY TAX ON PROHIBITED TRANSACTIONS
Even if HGP qualifies as a REIT for federal income tax purposes, it will be
subject to a 100% tax on (i.e., the forfeiture of) any net income derived from a
prohibited transaction. (Net income derived from a prohibited transaction is not
taken into account in applying the 95% and 75% gross income tests necessary to
qualify as a REIT.) Net income from a prohibited transaction is defined as the
excess of the gain from prohibited transactions over the deductions allowed by
federal income tax law which are directly connected with the prohibited
transaction. Any loss from a prohibited transaction may not be taken into
account in determining the amount of such net income.
The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property or property that was
involuntarily converted) that is held "primarily for sale to customers in the
ordinary course of a trade or business." Whether property is held primarily for
sale to customers in the ordinary course of a trade or business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. To the extent applicable, HGP will
attempt to comply with the terms of safe-harbor provisions of the Code
prescribing when asset sales will not be characterized as prohibited
transactions.
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Complete assurance cannot be given that HGP will be able to comply with the
safe-harbor provisions of the Code or avoid owning property, the sale of which
would be subject to the 100% tax on any gain therefrom as a prohibited
transaction.
OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION
For HGP to qualify as a REIT and thereafter maintain such qualification, it
must satisfy the Five or Fewer Requirement. The HGP Charter will contain certain
restrictions on the ownership and transfer of HGP's capital stock, described
below, which are intended to prevent concentration of stock ownership. These
restrictions, however, do not ensure that HGP will be able to satisfy the Five
or Fewer Requirement primarily, though not exclusively, as a result of
fluctuations in values among the different classes of HGP's capital shares. If
HGP fails to satisfy the Five or Fewer Requirement, HGP's status as a REIT will
terminate, and HGP will not be able to prevent such termination.
If HGP were to fail to qualify as a REIT in any taxable year, HGP would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates, and would not be allowed a
deduction in computing its taxable income for amounts distributed to its
shareholders. Moreover, unless entitled to relief under certain statutory
provisions, HGP also would be ineligible for qualification as a REIT for the
four taxable years following the year during which qualification was lost. Such
disqualification would reduce the net earnings of HGP available for investment
or distribution to its shareholders due to the additional tax liability of HGP
for the years involved.
The HGP Ownership Restrictions include a prohibition of ownership, either
directly or under the applicable attribution rules of the Code, of HGP Common
Shares that, if effective, would result in (i) HGP being "closely held" within
the meaning of Section 856(h) of the Code, (ii) the outstanding shares of
beneficial interest of HGP being beneficially owned by less than 100 Persons
(determined without reference to any rules of attribution), or (iii) HGP
otherwise failing to qualify as a REIT (including, but not limited to, a
transfer or other event that would result in HGP owning (directly or under the
applicable attribution rules) an interest in a tenant that is described in
Section 856(d)(2)(B) of the Code if the income derived by HGP from such tenant
would cause HGP to fail to satisfy any of the gross income requirements of
Section 856(c) of the Code). Any attempted transfer of shares to a person who,
as a result of such transfer, would violate the ownership limitations set forth
in the HGP Charter will be deemed void and the shares purportedly transferred
would be converted into shares of a separate class with no voting rights and no
rights to distributions. In addition, ownership, either directly or under the
applicable attribution rules of the Code, of the shares in excess of the
ownership limitations set forth in the HGP Charter generally will result in the
conversion of those shares of a separate class of shares with no voting rights
and no rights to distributions.
The HGP Board of Directors may, subject to the receipt of certain
representations as required by the HGP Charter and a ruling from the IRS or any
opinion of counsel satisfactory to it, waive the ownership restrictions with
respect to a holder if such waiver will not jeopardize HGP's status as a REIT.
The HGP Ownership Restrictions may (i) discourage a change of control of
HGP, (ii) deter tender offers for such stock, which offers may be attractive to
HGP's shareholders or (iii) limit the opportunity for shareholders to receive a
premium for their shares that might otherwise exist if an investor attempted
either to assemble a block of shares in excess of the HGP Ownership Limit or to
effect a change of control of HGP.
RESTRICTIONS UPON TRANSFER TO AVOID PUBLICLY TRADED PARTNERSHIP STATUS
Code Section 7704 provides that publicly traded partnerships will be taxed
as corporations, unless a certain percentage of their income consists of
"qualifying income." A partnership is "a publicly traded partnership" if
interests in such partnership are either traded on an established securities
market or are "readily tradeable on a secondary market (or the substantial
equivalent thereof)." Under the Treasury Regulations promulgated under Code
Section 7704, interests in a partnership are readily tradeable on a
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secondary market or substantial equivalent thereof if, "taking into account all
of the facts and circumstances, the partners are readily able to buy, sell, or
exchange their partnership interests in a manner that is comparable,
economically, to trading on an established securities market." The Treasury
Regulations provide several safe harbors, which if met, a partnership will not
be treated as though its interests are readily tradeable on a secondary market
or the substantial equivalent thereof.
Even if HGP LP was deemed to be a publicly traded partnership, depending on
circumstances at the time, it still will avoid taxation as a corporation under
Code Section 7704, based on the nature of its income. A publicly traded
partnership is not taxed as a corporation if at least 90% of its gross income
for each taxable year consists of certain passive income, including interest,
dividends, real property rents, and gains from the sale or other disposition of
real property. These are predominantly the types of income that HGP LP expects
to earn. If HGP LP satisfied the 90% gross income test, but was classified as a
publicly traded partnership, it would not be taxed as a corporation, but would
be subject to certain special rules under Code Section 469(k). In such event, an
HGP LP Common Unitholder would be unable to use losses from other passive
activities against his allocable share of HGP LP passive activity income.
Further, passive activity losses allocable to an HGP LP Common Unitholder could
be offset only against his allocable share of HGP LP passive activity income or
gains, and not against income or gains from other passive activities.
If HGP LP at any time were considered a publicly traded partnership and did
not satisfy the qualifying income test, then it will be considered as having
transferred its assets at that time to a corporation, and would be taxed as a
corporation for federal income tax purposes, which would result in adverse
consequences to the HGP LP Unitholders and would jeopardize Prime's status as a
REIT for federal income tax
purposes. This deemed transfer of assets to a corporation may also result in the
recognition of taxable income to HGP LP Common Unitholders, to the extent that
HGP LP's liabilities at that time exceeded the adjusted tax basis of HGP LP's
assets, without the receipt of any cash to pay the income tax liability
resulting from such income.
A transfer by an HGP LP Common Unitholder of HGP Common Units (including the
conversion to HGP Common Shares) will be prohibited if HGP determines that such
a transfer reasonably may cause HGP LP to be treated as a publicly traded
partnership. HGP LP Common Unitholders are strongly urged to consult their own
tax advisors to determine the extent to which these restrictions may apply to
their HGP LP Common Units.
NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE FAILURE TO LIST OR DELISTING OF HGP
COMMON SHARES FROM NASDAQ
HGP intends to list the HGP Common Shares in Nasdaq. If HGP is unable to
obtain a listing in Nasdaq or if, after listing the HGP Common Shares in Nasdaq,
HGP is unable to satisfy Nasdaq's maintenance criteria in the future, the HGP
Common Shares will be subject to delisting. As a consequence of such delisting
or failure to be listed, trading in the HGP Common Shares would henceforth be
conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the listing requirements for Nasdaq,
or in what are commonly referred to as the "pink sheets." As a result, the
holder of HGP Common Shares could find it more difficult to dispose of, or to
obtain accurate quotations of the price of, the HGP Common Shares.
SEC PENNY STOCK REGULATIONS
If the HGP Common Shares are not listed in Nasdaq and have a market price of
less than $5.00 per share, they may be classified as a "penny stock." SEC
regulations define a "penny stock" to be any non-Nasdaq equity security that has
a market price (as therein defined) of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about commissions payable to both the
broker-dealer and the registered representative and to provide current
quotations for the securities. Finally,
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monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.
The foregoing required penny stock restrictions will not apply to HGP Common
Shares if such securities are listed in Nasdaq and have certain price and volume
information provided on a current and continuing basis or meet certain minimum
net tangible assets or average revenue criteria. There can be no assurance that
HGP Common Shares will qualify for exemption from these restrictions. In any
event, even if HGP Common Shares were exempt from such restrictions, it would
remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to prohibit any person that is engaged in unlawful conduct while
participating in a distribution of a penny stock from associating with a
broker-dealer or participating in a distribution of a penny stock, if the SEC
finds that such a restriction would be in the public interest. If HGP Common
Shares were subject to the rules of penny stocks, the market liquidity for HGP
Common Shares could be severely adversely affected.
In addition, if the HGP Common Shares are not listed in Nasdaq (see
"--Nasdaq Maintenance Requirements; Possible Delisting of HGP Common Shares from
Nasdaq"), they could become subject to Rule 15g-9 under the Exchange Act, which
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000 or $300,000 together with their spouses). For
transactions covered by such rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell HGP Common Shares and may
adversely affect the ability of the holders of HGP Common Shares to sell in the
secondary market any of such securities.
FEDERAL INCOME TAX CONSEQUENCES OF THE HGP LP COMMON UNIT DISTRIBUTION
Prime Partnership should not recognize any gain or loss on the distribution
of the HGP LP Common Units, provided that the HGP LP Common Units are not
"marketable securities." Although it is not entirely clear, the HGP LP Common
Units likely will not be treated as marketable securities because of, among
other reasons, the substantial restrictions upon transfer or conversion of such
units and the general applicability of an exception to such treatment under the
Treasury regulations. In such case, each Prime Partnership Unitholder will have
an initial tax basis in such HGP LP Common Units distributed to he, she or it
equal to the adjusted tax basis that Prime Partnership had in such units
immediately prior to the distribution and will have to reduce his, her or its
adjusted tax basis in his, her or its Prime Partnership Units by the basis of
the HGP LP Common Units distributed to such Prime Partnership Unitholder. Each
Prime Partnership Unitholder, however, also will need to reduce his, her or its
initial tax basis in his, her or its HGP LP Common Units in an amount equal to
his, her or its share of HGP LP's liabilities immediately prior to the
distribution (because all such liabilities will be at least initially allocated
to HGP).
Even in the unlikely event that the HGP LP Common Units are marketable
securities, each pre-Partnership Merger Prime Partnership Unitholder should have
the same federal income tax results from the HGP LP Common Unit Distribution,
provided that his, her or its adjusted tax basis in their Prime Partnership
Units exceeds the value of the HGP LP Common Units such Prime Partnership
Unitholder receives in the distribution. Each Horizon Partnership Unitholder
should have substantially similar tax results; however, following the
distribution, such unitholder's initial tax basis in his, her or its HGP LP
Common Units will equal the fair market value of such units.
Under Code section 704(c)(1)(B), the HGP LP Common Unit Distribution will
cause Horizon Partnership Unitholders to recognize any Code section 704(c)
"built-in gain or loss" they had in respect of the Horizon Contributed
Properties, but only to the extent that the HGP LP Common Units represent an
interest in properties that were not initially contributed to Horizon
Partnership by such Horizon Partnership Unitholders. The amount of Code Section
704(c) gain or loss varies depending upon whether the fair market value of the
HGP LP Common Units which represent an interest in properties that were not
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initially contributed to Horizon Partnership by such Horizon Partnership
Unitholders is more or less than the basis of such properties. Based on
computations using fair market values provided by Prime Partnership, the Horizon
Partnership Unitholders are expected to recognize an aggregate loss, and no
Horizon Partnership Unitholder is expected to recognize any gain, on the
distribution of the HGP LP Common Units.
To the extent any gain or loss is recognized by a Horizon Partnership
Unitholder under Code section 704(c)(1)(B), appropriate adjustments will need to
be made immediately prior to the distribution to Prime Partnership's basis in
the HGP LP Common Units distributed to the historic Prime Partnership
Unitholders and to such unitholders' basis in their Prime Partnership Units.
Further, after the HGP LP Common Unit Distribution, Horizon Partnership
Unitholders should continue to have the remaining Code section 704(c) "built-in
loss" with respect to the underlying Horizon Contributed Properties.
Each Prime Partnership Unitholder and Horizon Partnership Unitholder is
strongly urged to consult with their own tax advisors to determine the tax
consequences of the HGP LP Common Unit Distribution in light of his, her or its
particular circumstances. See "Federal Income Tax Consequences of the
Transactions--Tax Consequences of HGP LP Common Unit Distribution."
LIMITS ON CHANGES IN CONTROL
OWNERSHIP LIMIT. The HGP Share Ownership Limit, as well as the ability of
HGP to issue additional HGP Common Shares or other shares (which may have rights
and preferences senior to the HGP Common Shares), may discourage a change of
control of HGP and may also (i) deter tender offers for the HGP Common Shares,
which offers may be advantageous to shareholders and (ii) limit the opportunity
for shareholders to receive a premium for their HGP Common Shares that might
otherwise exist if an investor were attempting to assemble a block of HGP Common
Shares in excess of the HGP Share Ownership Limit or otherwise effect a change
of control of HGP.
STAGGERED BOARD. The HGP Board of Directors will be divided into three
classes of directors. The terms of the classes will expire in 1999, 2000 and
2001, respectively. As the term of each class expires, directors for that class
will be elected for a three-year term and the directors in the other two classes
will continue in office. The staggered terms for directors may impede the
shareholders' ability to change control of HGP even if a change in control were
in the shareholders' interest.
PREFERRED SHARES. The HGP Charter will authorize the HGP Board of Directors
to issue up to 50,000,000 preferred shares of HGP and to establish the
preferences and rights (including the right to vote and the right to convert
into HGP Common Shares) of any preferred shares of HGP issued. The power to
issue preferred shares of HGP could have the effect of delaying or preventing a
change in control of HGP even if a change in control were in the shareholders'
interest.
MARYLAND BUSINESS COMBINATION LAW. Under the MGCL, certain "business
combinations" (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation subject to Section 3-601 et. seq. of
the MGCL and any Interested Stockholder or an affiliate of such Interested
Stockholder, are prohibited for five years after the most recent date on which
the Interested Stockholder became an Interested Stockholder unless an exemption
is available. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (a) 80% of the votes entitled to be cast by holders of outstanding
voting shares of the corporation and (b) two-thirds of the votes entitled to be
cast by holders of voting shares of the corporation other than shares held by
the Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected (unless, among other conditions, the holders of
the common shares of the corporation received a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its common shares).
Such provisions could have the effect of inhibiting a change in control even if
a change in control were in the shareholders' interest. These provisions of
Maryland law do not apply, however, to business combinations that are approved
or
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exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder.
CHANGES IN POLICIES WITHOUT UNITHOLDER APPROVAL
The investment, financing, borrowing and distribution policies of HGP LP and
its policies with respect to all other activities, growth, debt, capitalization
and operations, will be determined by the Board of Directors of HGP (the "HGP
Board of Directors"). Although it has no present intention to do so, the HGP
Board of Directors may amend or revise these policies at any time and from time
to time at its discretion without a vote of the securityholders of HGP LP. A
change in these policies could adversely affect HGP LP's financial condition,
results of operations and the market price of HGP Common Shares. See "Horizon
Group Properties, Inc.--Policies with Respect to Certain Activities."
GENERAL REAL ESTATE RISKS
If the HGP Properties do not generate revenue sufficient to meet operating
expenses, including debt service and capital expenditures, the financial
condition and results of operations of HGP LP may be adversely affected. HGP
LP's financial condition and results of operations may be adversely affected by
a number of factors, including the international and domestic general economic
climate and local real estate conditions (such as oversupply of or reduced
demand for space and changes in market rental rates); the perceptions by
prospective tenants of the safety, convenience and attractiveness of HGP
Properties; the ability of the owner to provide adequate management, maintenance
and insurance; energy and supply shortages; the ability to collect on a timely
basis all rent from tenants and interest from borrowers; the expense of
periodically renovating, repairing and reletting spaces; and increasing
operating costs (including real estate taxes and utilities) which may not be
passed through to tenants. Certain significant expenditures associated with
investments in real estate (such as mortgage payments, real estate taxes,
insurance and maintenance costs) are generally not reduced when circumstances
cause a reduction in rental revenues from the investment. If an HGP Property is
mortgaged to secure the payment of indebtedness and if HGP LP or the entity in
which HGP LP invests or to which it lends is unable to meet its mortgage
payments, a loss could be sustained as a result of foreclosure on the property
or the exercise of other remedies by the mortgagee. In addition, real estate
values and income from properties are also affected by such factors as
compliance with laws, including tax laws, interest rate levels and the
availability of financing.
OPERATING RISKS
The HGP Properties are subject to operating risks common to the particular
types of property, any and all of which may adversely affect occupancy or rental
rates. Such properties are subject to increases in operating expenses such as
cleaning; electricity; heating, ventilation and air-conditioning; elevator
repair and maintenance; insurance and administrative costs; and other general
costs associated with security, landscaping, repairs and maintenance. While
commercial tenants are often obligated to pay a portion of these escalating
costs, there can be no assurance that they will agree to pay such costs or that
the portion that they agree to pay will fully cover such costs. If operating
expenses increase, the local rental market may limit the extent to which rents
may be increased to meet increased expenses without decreasing occupancy rates.
To the extent rents cannot be increased or costs controlled, the cash flow of
HGP LP and its financial condition may be adversely affected.
UNINSURED LOSS
HGP LP will carry comprehensive liability, fire, extended coverage and
rental loss insurance with respect to all of the properties that it owns, with
policy specifications, insured limits and deductibles customarily carried for
similar properties. There are, however, certain types of losses (such as losses
arising from acts of war or relating to pollution) that are not generally
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, HGP LP
could lose its capital invested in a property, as well as the anticipated future
revenue from such property
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and would continue to be obligated on any mortgage indebtedness or other
obligations related to the property. Any such loss would adversely affect the
financial condition and results of operations of HGP LP.
POTENTIAL ENVIRONMENTAL LIABILITY RELATED TO THE HGP PROPERTIES
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate may become liable for the costs of removal or
remediation of certain hazardous or toxic substances released on or under its
property. These laws often impose such liability without regard to whether the
owner or operator knew of, or was responsible for, the release of such hazardous
or toxic substances. The cost of any required remediation and the owner's
liability therefor as to any property is generally not limited under such
enactments and could exceed the value of the property and/or the aggregate
assets of the owner. The presence of environmentally hazardous substances, or
the failure to properly remediate such substances, may adversely affect the
owner's ability to sell or rent such property or to borrow using such property
as collateral. Moreover, such laws are subject to change and any such change may
result in significant unanticipated expenditures, which could adversely affect
HGP LP's performance.
Substantially all of the HGP Properties have been subject to Phase I or
similar environmental assessments by independent environmental consultants
within the past five years. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
Generally, the environmental assessments revealed no significant environmental
conditions. However, certain properties had historic uses which might have
impacted the properties, or included wetlands, which could affect future
development. Neither Prime nor Horizon have been notified by any governmental
authority of any non-compliance, liability or other claim in connection with any
of the HGP Properties, and neither Prime nor Horizon is aware of any other
environmental condition with respect to any of the HGP Properties that could
materially adversely affect HGP LP's financial condition or results of
operations. Nonetheless, it is possible that HGP LP's assessments do not reveal
all environmental liabilities or that there are material liabilities of which
HGP LP is unaware. Moreover, there can be no assurance that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the HGP Properties will not be
affected by tenants, by the condition of land or operations in the vicinity of
the HGP Properties (such as the presence of underground storage tanks) or by
third parties unrelated to HGP LP. If compliance with the various laws and
regulations, now existing or hereafter adopted, exceeds HGP LP's budget for such
items, HGP LP's ability to make expected distributions to shareholders could be
adversely affected.
COSTS OF COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act of 1990 (the "ADA"), places of
public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with ADA requirements could require both structural and non-structural changes
to the HGP Properties and noncompliance could result in imposition of fines by
the United States government or an award of damages to private litigants.
Although HGP's management believes that its properties are substantially in
compliance with present requirements of the ADA, HGP LP may incur additional
costs of compliance in the future. A number of additional federal, state and
local laws exist which impose further burdens or restrictions on owners with
respect to access by disabled persons and may require modifications to the HGP
Properties, or restrict certain further renovations thereof, with respect to
access by disabled persons. Final regulations under the ADA have not yet been
promulgated and the ultimate amount of the cost of compliance with the ADA or
other such laws is not currently ascertainable. While such costs are not
expected to have a material effect on HGP LP, they could be substantial. If
required changes involve greater expense than HGP LP currently anticipates, HGP
LP's financial condition and results of operations could be adversely affected.
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OTHER LAWS
Real estate properties are also subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to private
litigants. HGP believes that its properties are currently in material compliance
with all such regulatory requirements. However, there can be no assurance that
these requirements will not be changed or that new requirements will not be
imposed which would require significant unanticipated expenditures by HGP LP and
could have an adverse effect on HGP LP's results of operations.
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PRIME PARTNERSHIP CONSENT SOLICITATION INFORMATION
PURPOSE
Prime Partnership Consenting Unitholders are being asked by Prime, in its
capacity as sole general partner of Prime Partnership, to consent to the
Transactions. Consent to the Transactions by the Prime Partnership Consenting
Unitholders is required for consummation of the Transactions.
RECORD DATE; CONSENTS REQUIRED
Neither the Prime Partnership Agreement nor Delaware law requires the
setting of a record date for Prime Partnership Consenting Unitholders entitled
to consent to the Transactions. However, only Prime Partnership Consenting
Unitholders of record of Prime Partnership may consent to the Transactions.
Approval of the Transactions requires the affirmative consent of the holders
of a majority of Prime Partnership Common Units, 27,294,951 of which are owned
by Prime and holders of a majority of Prime Partnership Series C Preferred Units
(other than the 3,636,363 Prime Partnership Series C Preferred Units owned by
Prime). As of April 24, 1998, Prime Partnership had issued and outstanding
35,800,423 Prime Partnership Common Units, 27,294,951 of which are owned by
Prime and 727,273 Prime Partnership Series C Preferred Units (other than the
3,636,363 Prime Partnership Series C Preferred Units owned by Prime). Based on
its ownership of Prime Partnership Common Units, Prime, without the consent of
any other Prime Partnership Common Unitholder, has the authority to provide the
requisite approval of the Transactions. Prime has indicated that it intends to
consent to the Transactions.
SOLICITATION OF CONSENTS
Consents will be solicited by mail, telephone and in person. Solicitations
may be made by certain employees of Prime Partnership, none of whom will receive
additional compensation for such solicitations. Prime Partnership will bear its
own expenses in connection with the consent solicitation. Consents must be
received prior to the execution and delivery of the Delaware Certificate of
Merger with the Delaware Secretary (the "Prime Consent Period").
REVOCATION OF CONSENTS
Prime Partnership Consenting Unitholders may revoke consents until the
expiration of the Prime Consent Period by dating, signing and delivering a
written notice, which clearly expresses the revocation of consent, to Prime
Partnership, or by delivering a properly executed, subsequently dated consent
card withholding a previously granted consent.
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HORIZON PARTNERSHIP CONSENT SOLICITATION INFORMATION
PURPOSE
Horizon Partnership Limited Partners are being asked by Horizon, in its
capacity as sole general partner of Horizon Partnership, to consent to the
Transactions. Consent to the Transactions by the Horizon Partnership Limited
Partners is required for consummation of the Transactions.
RECORD DATE; CONSENTS REQUIRED
Neither the Horizon Partnership Agreement nor Delaware law requires the
setting of a record date for Horizon Partnership Limited Partners entitled to
consent to the Transactions. However, only Horizon Partnership Limited Partners
of record of Horizon Partnership may consent to the Transactions.
Approval of the Transactions requires the affirmative consent of the Horizon
Partnership Limited Partners who own more than 50% of the Horizon Partnership
Units. Pursuant to the terms of the Horizon Partnership Agreement and Delaware
law, the Horizon Partnership Assignees do not have the right to consent to the
Transactions. Each Horizon Partnership Assignee may become a Horizon Partnership
Limited Partner by executing and delivering a signature page to the Horizon
Partnership Agreement prior to the completion of the Horizon Consent Period.
Each Horizon Partnership Assignee that elects to become a Horizon Partnership
Limited Partner prior to the completion of the Horizon Consent Period will have
a right to execute a consent with respect to the Transactions. As of April 24,
1998, Horizon Partnership had issued and outstanding 4,116,193 Horizon
Partnership Units. As of April 24, 1998, 4,039,870 of the outstanding Horizon
Partnership Units were held by the Horizon Partnership Limited Partners and
76,323 of the outstanding Horizon Partnership Units were held by Horizon
Partnership Assignees. Pursuant to the terms of the Horizon Partnership
Agreement, Horizon Partnership Units held by Horizon Partnership Assignees shall
be deemed to have been voted in the same proportion that all Horizon Partnership
Units held by Horizon Limited Partners have been voted.
SOLICITATION OF CONSENTS
Consents will be solicited by mail, telephone and in person. Solicitations
may be made by certain employees of Horizon Partnership, none of whom will
receive additional compensation for such solicitations. Horizon Partnership will
bear its own expenses in connection with the consent solicitation. Consents must
be received prior to the execution and delivery of the Delaware Certificate of
Merger with the Delaware Secretary (the "Horizon Consent Period"). Horizon has
retained MacKenzie Partners to assist in the solicitation of consents. The fee
of such firm for the corporate proxy solicitation is estimated to be $7,500,
plus reimbursement for out-of-pocket costs and expenses and will also cover the
solicitation of partnership consents.
REVOCATION OF CONSENTS
Horizon Partnership Limited Partners may revoke consents until the
expiration of the Horizon Consent Period by dating, signing and delivering a
written notice, which clearly expresses the revocation of consent, to Horizon
Partnership, or by delivering a properly executed, subsequently dated consent
card withholding a previously granted consent.
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THE TRANSACTIONS
PARTIES TO THE TRANSACTIONS
PRIME AND PRIME PARTNERSHIP. Prime is a self-administered and self-managed
REIT engaged in the ownership, development, and management of factory outlet
centers in the United States. Prime believes it is one of the largest owners and
operators of factory outlet centers in the United States based on aggregate GLA
and total revenue. As of December 31, 1997, Prime's portfolio consisted of 28
factory outlet centers in 20 states which totaled approximately 7,217,000 square
feet of GLA. As a fully-integrated real estate firm, Prime provides development,
construction, finance, leasing, marketing and management services for all of the
Prime Properties. The Prime Properties are held and all of Prime's business and
operations are conducted through Prime Partnership. Prime controls Prime
Partnership as its sole general partner and is dependent upon the distributions
or other payments from Prime Partnership in order to meet its financial
obligations. Prime is a Maryland corporation that was incorporated in July 1993
and commenced operations as a publicly traded company on March 22, 1994 upon the
completion of the Prime IPO. Prime and Prime Partnership's executive offices are
located at 100 East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202,
and their telephone number is (410) 234-0782.
HORIZON AND HORIZON PARTNERSHIP. Horizon is a self-administered and
self-managed REIT engaged in the ownership, development and management of
factory outlet centers in the United States. Horizon believes it is one of the
largest owners and operators of factory outlet centers in the United States
based on aggregate GLA and total revenue. As of December 31 1997, Horizon's
portfolio consisted of 37 factory outlet centers (including one power center) in
21 states which totaled approximately 9,907,000 square feet of GLA. On April 1,
1998, Horizon and Horizon Partnership consummated the C&C Contribution Agreement
which provided for the contribution of Horizon's interests in Dole Cannery
Center and Lake Elsinore Center to Horizon/C&C LLC. As a result, Horizon's
portfolio consists of 35 factory outlet centers in 20 states which totals
approximately 9,283,000 square feet of GLA. As a fully integrated real estate
firm, Horizon provides development, construction, finance, leasing, marketing
and management services for all of the Horizon Properties. The Horizon
Properties are held and all of Horizon's business and operations are conducted
through Horizon Partnership. Horizon controls Horizon Partnership as its sole
general partner and is dependent on the distributions or other payments from
Horizon Partnership in order to meet its financial obligations. Horizon is a
Michigan corporation that was incorporated in October, 1984 and commenced
operations as a publicly traded company on November 8, 1993 upon the completion
of the Horizon IPO. Horizon and Horizon Partnership's executive offices are
located at 5000 Hakes Drive, Norton Shores, Michigan 49441, and their telephone
number is (616) 798-9100.
CASTLE & COOKE. On April 1, 1998, Horizon Partnership consummated a
Contribution Agreement (the "C&C Contribution Agreement") with certain
affiliates of Castle & Cooke that provided, among other things, for the
formation of a limited liability company by such parties ("Horizon/C&C LLC").
Pursuant to the C&C Contribution Agreement, Horizon Partnership contributed to
Horizon/C&C LLC (i) all of its rights and obligations under the long-term lease
relating to Horizon's Dole Cannery Outlet Center in Honolulu, Hawaii (the "Dole
Cannery Lease") and certain related assets and liabilities, (ii) a limited
partnership interest (the "Lake Elsinore Partnership Interest") in the
partnership (the "Second Horizon Partnership") that owns Horizon's outlet center
in Lake Elsinore, California (the "Lake Elsinore Center") and (iii) certain
vacant property located adjacent to the Lake Elsinore Center. In connection with
this contribution, Horizon/C&C LLC assumed Horizon Partnership's obligations
under the Dole Cannery Lease arising following the closing. As a result, Horizon
Partnership was released from any obligations under the Dole Cannery Lease
arising following the closing.
The Lake Elsinore Partnership Interest represents substantially all of
Horizon's economic interest in the Lake Elsinore Center and entitles the holder
to receive the available cash flow from such property. In this regard, the Lake
Elsinore Center (together with four other outlet centers owned by Second Horizon
Partnership) is mortgaged to secure the non-recourse obligations of Second
Horizon Partnership under a
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securitized loan facility (the "Securitized Financing"). As of December 31,
1997, aggregate borrowings under the Securitized Financing totaled $98,668,990.
For purposes of the C&C Contribution Agreement, $29,312,540 of the indebtedness
outstanding under the Securitized Financing at December 31, 1997 was allocated
to the Lake Elsinore Center (the "Allocated Debt") and any cash flow generated
by such property will be applied first to pay interest and principal obligations
in respect of the Allocated Debt. The parties have further agreed that Castle &
Cooke or an affiliate of Castle & Cooke will reimburse Horizon to the extent
such cash flow is insufficient to cover debt service with respect to Allocated
Debt and other operating expenses relating to the Lake Elsinore Center.
Alternatively, Horizon Partnership will reimburse Horizon/C&C LLC in the event
the cash flow from the Lake Elsinore Center is applied to pay debt service under
the Securitized Financing that is not attributable to the Allocated Debt or
other operating expenses not related to the Lake Elsinore Center. Upon repayment
of the Allocated Debt in full and the related release of the Lake Elsinore
Center as collateral under the Securitized Financing, the Lake Elsinore
Partnership Interest will be redeemed for fee title to the Lake Elsinore Center.
Under the terms of the C&C Contribution Agreement, Horizon Partnership
acquired an interest in Horizon/C&C LLC. Horizon Partnership will have no
obligation with respect to the operations of Horizon/ C&C LLC nor will it have
any commitment to make any additional capital contributions. It is not
anticipated that any material distributions will be made in respect of Horizon
Partnership's interest in Horizon/C&C LLC or that any redemption price paid for
such interest will be material.
The C&C Contribution Agreement contains provisions that are customary for
transactions of this type, including representations and warranties by Horizon
Partnership relating to the operation and financial condition of the Dole
Cannery Center and the Lake Elsinore Center and indemnities with respect to
breaches of such representations and warranties. Horizon presently manages and
leases the Lake Elsinore Center for a fee. Horizon Partnership, in its capacity
as manager of the Lake Elsinore Center, may subcontract the performance of
certain management services to Horizon/C&C LLC.
NEW PRIME. Upon consummation of the Transactions, New Prime will be a
self-administered and self-managed REIT engaged in the ownership, development,
and management of factory outlet centers in the United States. New Prime
believes that, immediately following the consummation of the Transactions, it
will be the largest owner and operator of factory outlet centers in the United
States. Upon the consummation of the Transactions, New Prime's portfolio will
consist of 48 factory outlet centers in 26 states totaling approximately
13,400,000 square feet of GLA. As a fully-integrated real estate firm, New Prime
will provide development, construction, finance, leasing, marketing and
management services for all of the New Prime Properties. The New Prime
Properties will be held and all of New Prime's business and operations will be
conducted through Prime Partnership. New Prime will control Prime Partnership as
its sole general partner and will be dependent upon the distributions or other
payments from Prime Partnership in order to meet its financial obligations. New
Prime is a Maryland corporation that was incorporated on November 12, 1997, and
will commence operations as a publicly traded company under the name "Prime
Retail, Inc." New Prime and Prime Partnership's executive offices will be
located at 100 East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202,
and their telephone number will be (410) 234-0782.
HGP AND HGP LP. HGP was recently formed by Horizon in connection with the
Transactions. Upon consummation of the Transactions, HGP will be
self-administered and self-managed REIT. HGP's portfolio initially will consist
of 14 factory outlet centers and one power center in 12 states totaling
approximately 3,092,000 square feet of GLA. The HGP Properties will be held and
all of HGP's business and operations will be conducted through HGP LP. HGP will
control HGP LP as its sole general partner and will be dependent upon the
distributions or other payments from HGP LP in order to meet its financial
obligations. HGP is a Maryland corporation that was incorporated on January 21,
1998, and expects to commence operations as a publicly traded company upon
consummation of the Transactions. HGP and HGP LP's executive offices will be
located at 5000 Hakes Drive, Norton Shores, Michigan 49441, and their telephone
number will be (616) 798-9100.
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SUMMARY OF THE TRANSACTIONS
The purpose of the Transactions is to allow Prime and Horizon to merge and
to execute a new business strategy with respect to their factory outlet centers.
The Transactions are designed to enable Prime to acquire 22 of Horizon's best
performing factory outlet centers and to spin off 15 underperforming properties
of Horizon and Prime to a separate public company owned by the shareholders of
New Prime.
The Transactions are intended to maximize long-term value for shareholders
by concentrating Prime's and Horizon's higher quality, more upscale factory
outlet centers in one company and transferring their underperforming assets, in
this case the HGP Properties, to a newly created company with a management team
dedicated to the development and implementation of a business strategy tailored
to address the specific issues posed by such assets. The Transactions are
designed to benefit New Prime by establishing it as the largest outlet center
owner/operator in the United States and enabling it, through its increased size
and market capitalization, to achieve greater economies of scale and improved
access to capital. Prime and Horizon believe that the HGP Properties, which have
performed poorly relative to the New Prime Properties in recent periods, present
challenges that are different from those involved in the management of outlet
centers with strong operating histories and established positions in their local
markets. These challenges include exploring the remerchandising of properties
with non-outlet center tenants. In Prime's and Horizon's view, the HGP
Properties also involve fundamentally different growth opportunities, investment
returns, and financing requirements than the New Prime Properties. Accordingly,
Prime and Horizon have concluded that their long term interests are best served
through the creation of an independent, more narrowly focused corporation to
manage, lease and operate the HGP Properties.
The Transactions consist of the following steps:
- Horizon will contribute 13 of its 35 centers from Horizon Partnership to
HGP LP, a newly-formed limited partnership of which HGP is the sole
general partner.
- HGP will purchase two factory outlet centers from Prime Partnership.
- Prime will make a special cash distribution of $0.60 per share to the
Prime Series B Preferred Shareholders and $0.50 per share/unit to the
holders of Prime Common Shares, Prime Common Units, Prime Partnership
Series C Preferred Units and Prime Series C Preferred Shares (neither
Horizon Common Shareholders nor Horizon Partnership Unitholders will
participate in such distribution).
- Horizon Partnership will merge into Prime Partnership and Horizon
Partnership Unitholders will receive Prime Partnership Common Units.
- Horizon will reincorporate in Maryland by merging into Sky Merger.
- Prime will merge into Sky Merger, and Sky Merger will change its name to
"Prime Retail, Inc." In this merger, each Horizon Common Shareholder will
receive New Prime Common Shares and New Prime Series B Preferred Shares
and outstanding shares of Prime will become shares of New Prime having
substantially identical rights and preferences.
- HGP Common Shares will be distributed to the holders of New Prime Series C
Preferred Shares, New Prime Series B Preferred Shares and New Prime Common
Shares. Limited partnership interests in HGP LP will be distributed to the
limited partners of Horizon Partnership and Prime Partnership.
The Transactions, and the order in which they will be consummated, are set
forth in steps 1-12 contained on the following diagrams:
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PRE-TRANSACTIONS STRUCTURE
THE DIAGRAM BELOW SETS FORTH THE ORGANIZATIONAL STRUCTURES OF PRIME AND
HORIZON PRIOR TO THE CONSUMMATION OF THE TRANSACTIONS AS WELL AS THE PERCENTAGE
OWNERSHIP INTERESTS OF THEIR RESPECTIVE SHAREHOLDERS AND PARTNERS.
[DIAGRAM]
Notes:
(1) Before the conversion of Prime Partnership Common Units, Prime Partnership
Series C Preferred Units, Prime Series B Preferred Shares and Prime Series C
Preferred Shares to Prime Common Shares.
(2) After the conversion of Prime Partnership Common Units, Prime Partnership
Series C Preferred Units, Prime Series B Preferred Shares and Prime Series C
Preferred Shares to Prime Common Shares.
(3) Before the conversion of Horizon Partnership Units to Horizon Common Shares.
(4) After the conversion of Horizon Partnership Units to Horizon Common Shares.
(5) Before the conversion of Prime Partnership Common Units to Prime Common
Shares.
(6) After the conversion of Prime Partnership Common Units and Prime Series C
Preferred Units to Prime Common Shares.
(7) Before the conversion of Horizon Partnership Units to Horizon Common Shares.
(8) After the conversion of Horizon Partnership Units to Horizon Common Shares.
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FORMATION OF SKY MERGER, HGP AND HGP LP
HORIZON HAS FORMED HGP WHICH, THROUGH HGP LP, WILL OWN AND OPERATE THE HGP
PROPERTIES AS AN INDEPENDENT PUBLICLY TRADED COMPANY. IN ADDITION, HORIZON HAS
FORMED SKY MERGER CORP. WHICH WILL BECOME NEW PRIME FOLLOWING THE CORPORATE
MERGER.
1. FORMATION OF SKY MERGER AND HGP. Each of Sky Merger and HGP was recently
formed by Horizon as a wholly owned subsidiary in connection with the
Transactions. Neither Sky Merger nor HGP currently holds any assets or
businesses.
2. FORMATION OF HGP LP. HGP LP, the general partnership interests and limited
partnership interests of which are held by HGP and Horizon Partnership,
respectively, was recently formed in connection with the Transactions. HGP
LP currently holds no assets or businesses.
[DIAGRAM]
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HORIZON PARTNERSHIP CONTRIBUTION
IN ORDER TO SEPARATE CERTAIN OF THE HGP PROPERTIES FROM THE NEW PRIME
PROPERTIES, HORIZON PARTNERSHIP WILL CONTRIBUTE 13 OF ITS 35 OUTLET CENTERS TO
HGP LP.
3. HORIZON PARTNERSHIP CONTRIBUTION. In accordance with the terms of the
Contribution Agreement, Horizon Partnership will contribute to HGP LP
substantially all of the assets relating to 13 of the 35 centers currently
operated by Horizon Partnership which will ultimately be owned and operated
by HGP (the "Horizon Contributed Properties" and, collectively with the
Prime Transferred Properties, the "HGP Properties"), and HGP LP will assume
certain obligations of Horizon Partnership (collectively, the "Horizon
Partnership Contribution"). See "The Contribution Agreement."
[DIAGRAM]
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PRIME PARTNERSHIP SPECIAL DISTRIBUTION
AND PRIME SPECIAL DISTRIBUTION
AS PART OF THE NEGOTIATED TERMS OF THE TRANSACTIONS, CERTAIN SHAREHOLDERS
AND UNITHOLDERS OF PRIME AND PRIME PARTNERSHIP ARE ENTITLED TO RECEIVE THE CASH
DISTRIBUTIONS DESCRIBED BELOW.
4. PRIME PARTNERSHIP SPECIAL DISTRIBUTION. Prior to the Closing, Prime
Partnership will declare a special cash distribution of $0.60 per Series B
preferred unit (each, a "Prime Partnership Series B Preferred Unit") and
$0.50 per Prime Partnership Series C Preferred Unit and Prime Partnership
Common Unit to the record holders of such interests immediately prior to the
Partnership Merger (collectively, the "Prime Partnership Special
Distribution"). The payment date for the Prime Partnership Special
Distribution will be on the Closing Date.
5. PRIME SPECIAL DISTRIBUTION. Prior to the Closing, Prime will declare a
special cash distribution of $0.60 per Prime Series B Preferred Share and
$0.50 per Prime Series C Preferred Share and Prime Common Share to the
record holders of such securities immediately prior to the Partnership
Merger (collectively, the "Prime Special Distribution"). The payment date
for the Prime Special Distribution will be on the Closing Date.
[DIAGRAM]
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PARTNERSHIP MERGER
HORIZON PARTNERSHIP WILL MERGE INTO PRIME PARTNERSHIP TO ENABLE PRIME
PARTNERSHIP TO ACQUIRE 22 OF HORIZON PARTNERSHIP'S BEST PROPERTIES.
6. PARTNERSHIP MERGER. Horizon Partnership will merge with and into Prime
Partnership with Prime Partnership as the surviving partnership. In the
Partnership Merger, limited partners of Horizon Partnership will receive in
exchange for each Horizon Partnership Unit 0.9193 of a Prime Partnership
Common Unit.
[DIAGRAM]
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REINCORPORATION MERGER AND
CORPORATE MERGER
THE REINCORPORATION MERGER WILL BE EFFECTED TO CHANGE THE STATE OF
INCORPORATION OF HORIZON FROM MICHIGAN TO MARYLAND. THIS WILL PERMIT NEW PRIME
TO BE A MARYLAND CORPORATION. THE CORPORATE MERGER WILL BE EFFECTED TO MERGE
PRIME AND HORIZON INTO NEW PRIME.
7. REINCORPORATION MERGER. Horizon and Sky Merger will effectuate the
Reincorporation Merger pursuant to which Sky Merger will survive as a
Maryland corporation. In the Reincorporation Merger, each Horizon Common
Share shall be converted into one Sky Merger Common Share.
8. CORPORATE MERGER. Prime and Sky Merger will effectuate the Corporate Merger
pursuant to which Sky Merger will survive as a Maryland corporation and the
name of Sky Merger will be changed to Prime Retail, Inc. In the Corporate
Merger each holder of a Sky Merger Common Share shall receive 0.597 of a New
Prime Common Share and 0.20 of a New Prime Series B Preferred Share for each
outstanding Sky Merger Common Share. In the Corporate Merger each
outstanding Prime Common Share, Prime Series A Preferred Share, Prime Series
B Preferred Share and Prime Series C Preferred Share shall be converted into
one New Prime Common Share, one New Prime Series A Preferred Share, one New
Prime Series B Preferred Share, and one New Prime Series C Preferred Share,
respectively.
[DIAGRAM]
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HGP LP COMMON UNIT DISTRIBUTION
IN ORDER TO SEPARATE OWNERSHIP OF HGP LP FROM PRIME PARTNERSHIP, PRIME
PARTNERSHIP WILL DISTRIBUTE HGP LP COMMON UNITS TO ITS PARTNERS.
9. PRIME PARTNERSHIP DISTRIBUTION OF HGP LP COMMON UNITS AND HGP COMMON SHARES.
Prime Partnership will declare and distibute all of its HGP LP Common Units
to the recordholders of Prime Partnership Common Units, Prime Partnership
Series B Preferred Units and Prime Partnership Series C Preferred Units such
that 1.19617 HGP LP Common Units will be distributed for every 20 Prime
Series B Preferred Unit and one HGP LP Common Unit will be distributed in
respect of every 20 Prime Partnership Common Units and Prime Partnership
Series C Preferred Units, respectively (the "HGP LP Common Unit
Distribution"). Such distribution shall occur 15 days after the Closing Date
or on such other date as determined in the sole discretion of Prime
Partnership.
[DIAGRAM]
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NEW PRIME CONTRIBUTION AND DISTRIBUTION
HGP COMMON SHARE DISTRIBUTION AND NEBRASKA/INDIANA PROPERTY TRANSFERS
TO ESTABLISH HGP AS AN INDEPENDENT COMPANY, THE COMMON STOCK OF HGP WILL BE
DISTRIBUTED TO CERTAIN SHAREHOLDERS OF NEW PRIME. IN ORDER TO COMPLETE THE
SEGREGATION OF THE HGP PROPERTIES, PRIME'S FACTORY OUTLET CENTERS IN GRETNA,
NEBRASKA AND DALEVILLE, INDIANA WILL BE SOLD TO HGP IN EXCHANGE FOR CASH.
10. NEW PRIME CONTRIBUTION. New Prime will contribute to HGP all of its HGP LP
Common Units in exchange for HGP Common Shares (the "New Prime
Contribution").
11. COMMON SHARE DISTRIBUTION. New Prime will declare a distribution of the HGP
Common Shares that it acquires as a result of the New Prime Contribution to
the record holders of New Prime Common Shares, New Prime Series B Preferred
Shares and New Prime Series C Preferred Shares immediately following the
Corporate Merger such that 1.19617 HGP Common Shares will be distributed
for every 20 New Prime Series B Preferred Shares and one HGP Common Share
will be distributed for every 20 New Prime Common Shares of New Prime
Series C Preferred Shares, respectively (collectively, the "HGP Common
Share Distribution"). The payment date for the Common Share Distribution
shall occur 15 days after the Closing Date or on such other date as
determined in the sole discretion of New Prime.
12. NEBRASKA/INDIANA PROPERTY TRANSFERS. Nebraska Crossing Factory Shops
Limited Partnership will contribute its interest in the factory outlet
center in Gretna, Nebraska (the "Nebraska Prime Transferred Property") to a
wholly-owned limited liability company and will sell its interest in such
limited liability company to HGP for approximately $8 million in cash.
Indianapolis Factory Shops Limited Partnership will contribute its interest
in the factory outlet center in Daleville, Indiana (the "Indiana Prime
Transferred Property" and, together with the Nebraska Prime Transferred
Property, the "Prime Transferred Properties") to a wholly-owned limited
liability company and will sell its interest in such limited liability
company to HGP for approximately $18 million in cash. Such transfers
together are referred to herein as the "Nebraska/Indiana Property
Transfers."
[DIAGRAM]
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POST-TRANSACTIONS STRUCTURE
THE DIAGRAM BELOW SETS FORTH THE ORGANIZATIONAL STRUCTURES OF NEW PRIME AND
HGP IMMEDIATELY FOLLOWING THE CONSUMMATION OF THE TRANSACTIONS AS WELL AS THE
PERCENTAGE OWNERSHIP INTERESTS OF THEIR RESPECTIVE SHAREHOLDERS AND PARTNERS.
[DIAGRAM]
Notes:
(1) Before the conversion of Prime Partnership Common Units, New Prime Series B
Preferred Shares and New Prime Series C Preferred Securities to New Prime
Common Shares.
(2) After the conversion of Prime Partnership Common Units, New Prime Series B
Preferred Shares (including New Prime Series B Preferred Shares issued to
Horizon Common Shareholders pursuant to the Corporate Merger) and New Prime
Series C Preferred Securities to New Prime Common Shares.
(3) Before the conversion of HGP LP Common Units to HGP Common Shares.
(4) After the conversion of HGP LP Common Units to HGP Common Shares.
(5) Before the conversion of Prime Partnership Common Units to New Prime Common
Shares.
(6) After the conversion of Prime Partnership Common Units and Prime Partnership
Series C Preferred Units to New Prime Common Shares.
(7) Before the conversion of HGP LP Common Units to HGP Common Shares.
(8) After the conversion of HGP LP Common Units to HGP Common Shares.
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THE CONTRIBUTION AGREEMENT
THE DESCRIPTION OF THE HORIZON PARTNERSHIP CONTRIBUTION CONTAINED IN THIS
JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE CONTRIBUTION AGREEMENT (THE
"CONTRIBUTION AGREEMENT"), THE FORM OF WHICH IS ATTACHED AS APPENDIX C, AND IS
INCORPORATED HEREIN BY REFERENCE.
BACKGROUND
Horizon, Horizon Partnership, Sky Merger, HGP and HGP LP have agreed to
enter into the Contribution Agreement providing for, among other things, the
principal corporate transactions required to effect the Horizon Partnership
Contribution. The purpose of the Horizon Partnership Contribution is to
facilitate the Mergers by providing for the transfer to HGP LP of the Horizon
Contributed Properties and certain other assets which Prime will not acquire
pursuant to the Merger Agreement.
CONTRIBUTED ASSETS
To effect the Horizon Partnership Contribution, Horizon Partnership will,
and will cause its subsidiaries prior to giving effect to the Horizon
Partnership Contribution (Horizon Partnership and its subsidiaries prior to
giving effect to the Horizon Partnership Contribution are collectively referred
to herein as the "Initial Horizon Partnership Group") to, transfer, assign and
convey to HGP LP as a capital contribution (collectively, the "Contributed
Assets") all of their respective right, title and interest in and to (i) all
capital stock, partnership interests and membership interests of Initial Horizon
Partnership Group in Horizon Partnership, MG Long Island Limited Partnership, MG
Patchogue Limited Partnership, MG Patchogue II Limited Partnership, Third HGI,
L.L.C., and Algondones Outlet L.L.C.; (ii) certain proprietary name rights;
(iii) Horizon's administrative offices located at 5000 Hakes Drive, Norton
Shores, Michigan and office equipment and computer software used therein; and
(iv) all business, assets, including cash, cash equivalents and other capital
items, properties, interests in property and rights of Initial Horizon
Partnership Group primarily related to the ownership and operation of the retail
properties listed immediately below (See "Horizon Group Properties,
L.P.--Properties"):
Bellport Outlet Center in Patchogue, New York
Dry Ridge Outlet Center in Dry Ridge, Kentucky
Horizon Outlet Center--Holland in Holland, Michigan
Horizon Outlet Center--Laughlin in Laughlin, Nevada
Horizon Outlet Center--Monroe in Monroe, Michigan
Horizon Outlet Center--Somerset in Somerset, Pennsylvania
Horizon Outlet Center--Traverse City in Traverse City, Michigan
Horizon Outlet Center--Tulare in Tulare, California
Lakeshore Marketplace in Norton Shores, Michigan
Medford Outlet Center in Medford, Minnesota
New Mexico Outlet Center in Algodones, New Mexico
Sealy Outlet Center in Sealy, Texas
Warrenton Outlet Center in Warrenton, Missouri
RETAINED ASSETS
The Retained Assets will include the following assets (collectively, the
"Retained Assets"): all business, assets, properties, interests in property, and
rights of Initial Horizon Partnership Group, except for the Contributed Assets,
and shall include, without limitation, (i) all membership and other interests in
Finger Lakes Outlet Center, L.L.C. and (ii) any and all of the business, assets,
properties, interests in property and rights, whether tangible or intangible,
relating to the ownership and operation of each of the retail outlet centers
listed below (See "The Prime Partnership Properties" and "The Horizon
Partnership Properties"):
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Berkeley Commons Outlet Center in Williamsburg, Virginia
Berkshire Outlet Village in Lee, Massachusetts
Burlington Outlet Center in Burlington, Washington
Calhoun Outlet Center in Calhoun, Georgia
Chesapeake Village Outlet Center in Queenstown, Maryland
Conroe Outlet Center in Conroe, Texas
Finger Lakes Outlet Center in Finger Lakes, New York
Hillsboro Outlet Center in Hillsboro, Texas
Horizon Outlet Center--Edinburgh in Edinburgh, Indiana
Horizon Outlet Center--Fremont in Fremont, Indiana
Horizon Outlet Center--Oshkosh in Oshkosh, Wisconsin
Horizon Outlet Center--Vero Beach in Vero Beach, Florida
Horizon Outlet Center--Woodbury in Woodbury, Minnesota
Jeffersonville Outlet Center in Jeffersonville, Ohio
Lakeside Marketplace in Kenosha, Wisconsin
Lighthouse Place in Michigan City, Indiana
Outlets at Birch Run in Birch Run, Michigan
Outlets at Gilroy in Gilroy, California
Perryville Outlet Center in Perryville, Maryland
Pismo Beach Outlet Center in Pismo Beach, California
Silverthorne Factory Stores in Silverthorne, Colorado
Tracy Outlet Center in Tracy, California
ASSUMED AND RETAINED LIABILITIES
In connection with the Horizon Partnership Contribution, HGP LP will assume,
undertake to pay, satisfy and discharge when due in accordance with their terms
certain assumed liabilities (the "Assumed Liabilities"), which are defined to
include all liabilities of Initial Horizon Partnership Group and which arise
from the ownership and operation of the Contributed Assets, other than the
Retained Liabilities, and will include, without limitation, (i) all obligations
to indemnify present and former officers and directors of Initial Horizon
Partnership Group under certificates or articles of incorporation, by-laws,
partnership agreements, employment agreements, indemnification agreements or
otherwise, for any matter existing or occurring after the Corporate Merger
Effective Time, (ii) all liabilities relating to any indebtedness for borrowed
money secured by a Contributed Asset, (iii) all leases (whether as lessor,
lessee, sublessee, sublessor or otherwise) and related contracts, and service
contracts, relating to any Contributed Asset and (iv) certain other specified
obligations. "Retained Liabilities" will mean all liabilities of Initial Horizon
Partnership Group other than the Assumed Liabilities and will include, without
limitation, (i) all obligations to indemnify present and former officers and
directors of Initial Horizon Partnership Group under certificates or articles of
incorporation, by-laws, partnership agreements, employment agreements,
indemnification agreements or otherwise arising from any matter at or prior to
the Corporate Merger Effective Time, (ii) all liabilities relating to any
indebtedness for borrowed money and secured by a Retained Asset, (iii) all
leases (whether as lessor, lessee, sublessee, sublessor or otherwise) and
related contracts, and (iv) service contracts, relating to the outlet centers
listed as Retained Assets above.
INDEMNIFICATION
Pursuant to the Contribution Agreement, HGP LP will indemnify and hold
Horizon Partnership harmless from and against Horizon Partnership losses arising
out of or related to the Assumed Liabilities, and Horizon Partnership will
indemnify and hold HGP LP harmless from and against HGP LP losses arising out of
or related to the Retained Liabilities, in each case in accordance with the
terms of the Contribution Agreement.
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THE PARTNERSHIP MERGER
THE DESCRIPTION OF THE PARTNERSHIP MERGER CONTAINED IN THIS JOINT CONSENT
SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, THE FULL TEXT OF WHICH IS
ATTACHED AS APPENDIX A, AND IS INCORPORATED HEREIN BY REFERENCE.
CONSENT SOLICITATION; CONSENT REQUIRED
By this Joint Consent Solicitation Statement/Prospectus/Information
Statement, the Prime Board of Directors, on behalf of Prime as the sole general
partner of Prime Partnership, is soliciting consents from the Prime Partnership
Consenting Unitholders. In addition, the Horizon Board of Directors, on behalf
of Horizon as the sole general partner of Horizon Partnership, is soliciting
consents from the Horizon Partnership Limited Partners. The Prime Partnership
Consenting Unitholders and Horizon Partnership Limited Partners are being asked
to consider and consent to the Transactions. The Transactions must receive the
affirmative consent of (i) a majority of the outstanding Prime Partnership
Common Units, (ii) two-thirds of the outstanding Prime Partnership Series C
Preferred Units and (iii) the Horizon Limited Partners who own more than 50% of
the Horizon Partnership Units owned by all of the Horizon Partnership Limited
Partners. As of December 31, 1997, Prime owned approximately 76.2% of the Prime
Partnership Common Units. Prime intends to consent to the Transactions in its
capacity as the holder of such interests. The Corporate Merger will not be
consummated if the Transactions do not receive the required consents of the
Prime Partnership Consenting Unitholders and the Horizon Partnership Limited
Partners.
PARTNERSHIP MERGER CONSIDERATION
Each of the issued and outstanding Horizon Partnership Units (other than
units held by Horizon or any Horizon Subsidiary) shall be converted pursuant to
the Partnership Merger into the right to receive 0.9193 of a Prime Partnership
Common Unit. As of the Partnership Merger Effective Time, all such Horizon
Partnership Units shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of record of
Horizon Partnership Units shall cease to have any rights thereto, except the
right to receive the Partnership Merger Consideration, any dividend or other
distribution to which such holder is entitled pursuant to the Merger Agreement
and any cash in lieu of fractional units to be issued or paid in consideration
therefor upon surrender of such Horizon Partnership Units without interest.
PARTNERSHIP MERGER EFFECTIVE TIME
Assuming the Prime Partnership Consenting Unitholders and Horizon
Partnership Limited Partners consent to the Transactions, immediately following
the declaration of the Prime Special Distribution and immediately prior to the
declaration of the HGP LP Common Unit Distribution, Horizon Partnership and
Prime Partnership shall consummate the Partnership Merger with Prime Partnership
as the surviving partnership. As soon as practicable after satisfaction of all
conditions to consummation of the Mergers (see "The Corporate
Merger--Representations and Warranties; Conditions to the Mergers"), Prime
Partnership and Horizon Partnership shall file the Delaware Certificate of
Merger with the Delaware Secretary. The Partnership Merger shall become
effective (the "Partnership Merger Effective Time") at such time as shall be
specified in the Delaware Certificate of Merger.
APPOINTMENT OF EXCHANGE AGENT
Prior to the Closing Date, Prime Partnership shall appoint American Stock
Transfer & Trust Company to act as Exchange Agent for the exchange of the
Partnership Merger Consideration upon exchange of the Partnership Merger
Consideration in connection with the Partnership Merger.
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EXCHANGE OF UNITS
Contemporaneous with or as soon as reasonably after the Partnership Merger
Effective Time, Prime Partnership shall mail or otherwise make available to each
holder of record of Horizon Partnership Units whose interest in Horizon
Partnership was converted into the right to receive the Partnership Merger
Consideration, a letter of transmittal with instructions for execution and
delivery of the Prime Partnership Agreement which shall specify that delivery of
the Partnership Merger Consideration shall be effected only upon execution and
delivery of the Prime Partnership Agreement and such other documentation as
Prime Partnership may reasonably specify as necessary in connection with the
consummation of the transactions. Upon execution and delivery of the Prime
Partnership Agreement and such other documentation as specified, each holder of
Horizon Partnership Units shall be entitled to receive from Prime Partnership a
copy of the Prime Partnership Agreement, duly amended to reflect the Partnership
Merger Consideration to be received by such holder as well as any dividends or
distributions to which such holder is entitled. Only holders of record on the
books and records of Horizon Partnership shall be entitled to the Partnership
Merger Consideration and to become a limited partner in Prime Partnership. Until
the execution and delivery of the Prime Partnership Agreement by a holder of
Horizon Partnership Units and such other documentation as specified, such
Horizon Partnership Units shall be deemed at any time after the Partnership
Merger Effective Time to represent only the rights to receive the Partnership
Merger Consideration into which such Horizon Partnership Units shall have been
converted, without interest, and any dividends or other distributions to which
such holder is entitled, without interest. As part of the mailing of this Joint
Consent Solicitation Statement/Prospectus/Information Statement, Horizon
Partnership will provide each Horizon Partnership Unitholder with a letter of
transmittal and signature pages to permit each Horizon Partnership Unitholder to
become a limited partner of Prime Partnership and HGP, L.P. at the Effective
Time.
UNITS AVAILABLE FOR RESALE
The Prime Partnership Common Units to be issued to the holders of Horizon
Partnership Units in the Partnership Merger will be transferable subject to the
restrictions contained in the Prime Partnership Agreement as described under
"Prime Partnership Agreement--Transferability of Interests." Pursuant to the
Registration Rights Agreement, Prime has agreed to keep effective a registration
statement providing for the issuance of Prime Common Shares and Prime Series B
Preferred Shares upon the exchange of Prime Partnership Common Units and Prime
Partnership Series B Preferred Units, respectively, so long as either class of
units is outstanding. See "The Corporate Merger--Registration Rights Agreement."
FEDERAL INCOME TAX CONSEQUENCES OF THE PARTNERSHIP MERGER
The receipt of Prime Partnership Common Units in the Partnership Merger
generally is not expected to result in the recognition of taxable income or gain
by any Prime Partnership Unitholder or Horizon Partnership Unitholder at the
time of the Partnership Merger. However, the particular tax consequences of the
Partnership Merger for each Horizon Partnership Unitholder or Prime Partnership
Unitholder will depend on a number of factors related to the tax situation of
the individual Unitholder, including such unitholder's adjusted tax basis in
his, her or its Horizon Partnership Units or Prime Partnership Units at the time
of the Partnership Merger, the assets that the Horizon Partnership Unitholder or
Prime Partnership Unitholder originally contributed to Horizon Partnership or
Prime Partnership in exchange for his, her or its units, such unitholder's share
of the "unrealized gain" with respect to Horizon Partnership's assets or Prime
Partnership's assets at the time of the Partnership Merger, the extent to which
a unitholder's share of the nonrecourse liabilities of Prime Partnership which
the unitholder includes in its basis for its Prime Partnership Units after the
Partnership Merger is less than such unitholder's share of the nonrecourse
liabilities of Horizon Partnership or Prime Partnership before the Partnership
Merger. Each unitholder is strongly urged to consult with his or her own tax
advisor in order to determine the anticipated tax consequences of the
Partnership Merger for such unitholder in light of his or her specific
circumstances. See "Federal Income Tax Consequences of the
Transactions--Partnership Merger."
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THE REINCORPORATION MERGER
THE DESCRIPTION OF THE REINCORPORATION MERGER CONTAINED IN THIS JOINT
CONSENT SOLICITATION STATEMENT/ PROSPECTUS/INFORMATION STATEMENT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, THE FULL TEXT OF WHICH IS
ATTACHED AS APPENDIX A, AND IS INCORPORATED HEREIN BY REFERENCE.
TERMS OF THE REINCORPORATION MERGER
Immediately following consummation of the Partnership Merger, Horizon and
Sky Merger shall file (i) the Reincorporation Articles of Merger with the
Maryland Department and (ii) the Reincorporation Certificate of Merger with the
Michigan Department, in each case to effectuate the Reincorporation Merger
pursuant to which Sky Merger shall survive as a Maryland corporation. If the
Reincorporation Merger is approved by the requisite vote of shareholders of
Horizon and by Horizon as the sole shareholder of Sky Merger, and the other
conditions to the Reincorporation Merger are satisfied or waived, the
Reincorporation Merger will become effective (the "Reincorporation Merger
Effective Time") immediately following the Partnership Merger Effective Time and
upon the later of (i) the issuance of the Reincorporation Articles of Merger by
the Maryland Department, (ii) the endorsement of the Reincorporation Certificate
of Merger by the Michigan Department or (iii) at a different time established in
either the Reincorporation Articles of Merger or the Reincorporation Certificate
of Merger, not to exceed 30 days after the Reincorporation Articles of Merger or
the Reincorporation Certificate of Merger are accepted for record by the
Maryland Department or the Michigan Department, respectively. It is presently
anticipated that such filing and acceptance will be made on or about June ,
1998, and that the Reincorporation Merger Effective Time will occur on such date
unless a different date is specified in the Reincorporation Articles of Merger
or the Reincorporation Certificate of Merger, although there can be no assurance
as to whether or when the Reincorporation Merger will occur. Following the
Reincorporation Merger, the separate corporate existence of Horizon shall cease,
and Sky Merger shall succeed to all the rights and obligations of Horizon in
accordance with the MGCL and the Michigan Business Corporation Act (the "MBCA").
The New Prime Charter and the bylaws of Sky Merger as amended and restated
pursuant to the Reincorporation Merger (the "New Prime Bylaws") shall continue
in full force and effect thereafter until further amended in accordance with
applicable Maryland law. Such New Prime Charter and New Prime Bylaws shall be
identical in all material respects to the Prime Charter and Prime Bylaws,
respectively, as in effect immediately prior to the Reincorporation Merger. The
purpose of the Reincorporation Merger is to enable New Prime to continue as a
Maryland corporation.
REINCORPORATION MERGER CONSIDERATION; TREATMENT OF STOCK OPTIONS
Upon the Reincorporation Merger Effective Time, each issued and outstanding
Sky Merger Common Share held by Horizon shall be canceled, and each issued and
outstanding Horizon Common Share (other than Horizon Common Shares owned by
Horizon or any subsidiary of Horizon, which shall automatically be canceled and
retired and all rights with respect thereto shall cease to exist), shall be
converted into one Sky Merger Common Share. Each certificate representing issued
and outstanding Horizon Common Shares shall upon consummation of the
Reincorporation Merger be deemed to represent the same number of Sky Merger
Common Shares until consummation of the Corporate Merger (as discussed below),
and each holder of a certificate of Horizon Common Shares shall otherwise cease
to have any rights to such Horizon Common Shares, except the right to receive
any dividends or other distributions with a record date prior to the
Reincorporation Merger Effective Time which may have been declared or made by
Horizon on such Horizon Common Shares which remain unpaid at the Reincorporation
Merger Effective Time. There shall be no further registration of transfers on
the stock transfer books of Horizon of the Horizon Common Shares which were
outstanding immediately prior to the Reincorporation Merger Effective Time. If,
after the Reincorporation Merger Effective Time, Certificates are presented to
New Prime for any reason, they shall be canceled and exchanged. See "The
Corporate Merger--Exchange of Certificates." As of the Reincorporation Merger
Effective Time, each outstanding Horizon Stock Option (as defined in the section
entitled "Interests of Certain Persons in the Transactions") shall be assumed by
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Sky Merger and shall be deemed to constitute an option to acquire (each, a "Sky
Merger Stock Option"), on the same terms and conditions applicable under such
Horizon Stock Option, the same number of Sky Merger Common Shares as the holder
of such Horizon Stock Option would have been entitled to receive pursuant to the
Reincorporation Merger had such holder exercised such Horizon Stock Option in
full immediately prior to the Reincorporation Merger Effective Time at a price
per share equal to the aggregate exercise price for the shares subject to such
Horizon Stock Option divided by the number of full Sky Merger Common Shares
deemed to be purchasable pursuant to such Horizon Stock Option.
THE CORPORATE MERGER
THE DESCRIPTION OF THE CORPORATE MERGER CONTAINED IN THIS JOINT CONSENT
SOLICITATION STATEMENT/PROSPECTUS/ INFORMATION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, THE FULL TEXT OF WHICH IS
ATTACHED AS APPENDIX A, AND IS INCORPORATED HEREIN BY REFERENCE.
TERMS OF THE CORPORATE MERGER
Immediately following consummation of the Reincorporation Merger, Prime and
Sky Merger shall file the Corporate Articles of Merger with the Maryland
Department in order to effectuate the Corporate Merger, pursuant to which Sky
Merger shall survive as a Maryland corporation. The Corporate Merger Effective
Time shall be as specified in the Corporate Articles of Merger. See "--Effective
Time of the Corporate Merger." The New Prime Charter and New Prime Bylaws in
effect immediately after the Reincorporation Merger shall continue in full force
and effect after the Corporate Merger until further amended in accordance with
applicable Maryland law. Following the Corporate Merger, the separate corporate
existence of Prime shall cease, and Sky Merger as New Prime shall continue and
shall succeed to assume all the rights and obligations in accordance with the
MGCL. The name of New Prime shall be "Prime Retail, Inc."
The Corporate Merger Consideration shall consist of the conversion of (i)
each outstanding Horizon Common Share (other than shares held by Horizon or any
subsidiary of Horizon) into 0.20 of a New Prime Series B Preferred Share and
0.597 of a New Prime Common Share, (ii) each outstanding Prime Common Share into
one New Prime Common Share and (iii) each outstanding Prime Series A Preferred
Share, Prime Series B Preferred Share and Prime Series C Preferred Share into
one New Prime Series A Preferred Share, one New Prime Series B Preferred Share,
and one New Prime Series C Preferred Share, respectively. As of the Corporate
Merger Effective Time, all such Sky Merger Common Shares shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such Sky Merger Common
Shares shall cease to have any rights thereto, except the right to receive the
Corporate Merger Consideration, any dividend or other distribution to which such
holder is entitled and any cash in lieu of fractional shares to be issued or
paid in consideration therefor upon surrender of such certificate without
interest.
BACKGROUND OF THE TRANSACTIONS
On October 30, 1996, Horizon engaged Lehman Brothers and Smith Barney Inc.
to consider the strategic alternatives of Horizon. At a Horizon Board of
Directors meeting held on November 25, 1996, Lehman Brothers and Smith Barney
Inc. presented the strategic alternatives available to Horizon which included
(i) continuing to implement Horizon's current business plan, (ii) strategic
acquisitions and combinations, and (iii) strategic merger combinations. The
members of the Horizon Board of Directors engaged in detailed discussions with
Lehman Brothers and Smith Barney Inc., during which the members of management
were excluded for portions thereof. Horizon's Chairman of the Board, President
and Chief Executive Officer, Jeffrey A. Kerr then presented management's
expectations for 1996. Horizon's independent auditor reported that they had
reviewed Horizon's accounting procedures and did not anticipate any year-end
accounting adjustments which would significantly affect earnings other than
adjustments considered necessary by management. Horizon's management then
presented their business plan for 1997 and
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responded to detailed questions by the Horizon Board of Directors. Based upon
these presentations and management's expectations of improvement, the Horizon
Board of Directors decided that the best strategic alternative to follow at that
point in time was to terminate the engagement of Lehman Brothers and Smith
Barney Inc., and to allow Horizon's management to continue with its plan to
revitalize the company. A key element of the plan was to augment management by
hiring a highly skilled and experienced Chief Financial Officer and Chief
Operating Officer. The Horizon Board of Directors decided to immediately focus
on hiring a Chief Operating Officer and engaged Fergeson Associates to assist in
the search.
On February 8, 1997, following two months of operations with no improvement,
the Horizon Board of Directors expressed its concern that management's plan to
revitalize the company was not being successfully implemented. As a result, the
Horizon Board of Directors accepted the resignation of Mr. Kerr as Chairman of
the Board, President and Chief Executive Officer and appointed Norman
Perlmutter, a non-management director, as the non-executive Chairman of the
Board and Ronald L. Piasecki, a non-management director, as Interim President
and Chief Executive Officer while Fergeson Associates conducted an executive
search to identify the successor Chief Executive Officer.
In March of 1997, Michael W. Reschke, Chairman of the Prime Board of
Directors, and Mr. Perlmutter, Chairman of the Horizon Board of Directors, met
at the request of Mr. Reschke and discussed the status of the outlet center
industry. Mr. Reschke suggested the possibility of a business combination. The
discussion concluded with no encouragement of a combination by Mr. Perlmutter.
On March 25, 1997, Prime's management distributed to the Prime Board of
Directors certain information relating to Prime management's proposal that Prime
consider a possible business combination with Horizon, including publicly
available information pertaining to Horizon's business and properties and
certain historical and pro forma information. On March 28, 1997, the Prime Board
of Directors held a special telephonic meeting. All of Prime's directors
participated in the meeting. At the meeting, Prime's management made a
presentation regarding a business combination with Horizon. Following the
presentation, and after discussion, the Prime Board of Directors authorized
Prime's management to pursue discussions with Horizon concerning a business
combination.
On April 1, 1997, Mr. Reschke sent a letter to Mr. Perlmutter expressing an
interest in a possible acquisition of Horizon by Prime for an aggregate
consideration of approximately $14.00 per outstanding Horizon Common Share
payable in a combination of cash and securities of Prime. Horizon responded to
the Prime proposal in a letter dated April 2, 1997, explaining that the Horizon
Board of Directors had not made a decision to sell Horizon, but that the
proposal would be reviewed by the Horizon Board of Directors. The Prime proposal
was discussed at the April 3, 1997 meeting of the Horizon Board of Directors.
After consideration, the Horizon Board of Directors decided that it was not in
the best interests of the shareholders to pursue a transaction with Prime at
that time as the Horizon Board of Directors believed that shareholder value
would be enhanced if Horizon could solve the problems identified by the Board of
Directors, including the hiring of a new Chief Executive Officer.
After an extensive search, James S. Wassel was hired as the President and
Chief Operating Officer of Horizon, effective as of April 24, 1997. The Horizon
Board of Directors considered that Mr. Wassel had significant experience in
asset management and strategic planning and implementation in the commercial
real estate industry and Mr. Wassel was then Senior Vice President of Asset
Management with Crescent Real Estate Equities of Fort Worth, Texas. On June 19,
1997, Mr. Wassel was elected as a director of Horizon and appointed Horizon's
Chief Executive Officer.
In early September 1997, Mr. Reschke contacted Mr. Perlmutter to reassess
the status of the outlet center industry and the possibility of a transaction
between Prime and Horizon. During the week of September 1, 1997, Messrs. Reschke
and Perlmutter met to further discuss the possibility of a transaction between
the two companies. On September 9, 1997, Mr. Wassel met with Mr. Reschke to
discuss the possibility of a transaction between Prime and Horizon.
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At a meeting of the Horizon Board of Directors held on September 10, 1997,
Mr. Perlmutter discussed with the Horizon Board of Directors his meeting with
Mr. Reschke and Prime's interest in merging with Horizon.
On September 18, 1997, a confidentiality agreement was signed by Horizon and
Prime, pursuant to which the parties agreed to share information regarding their
respective companies.
On September 19, 1997, Mr. Wassel had a telephone conversation with Mr.
Reschke during which Mr. Wassel advised Mr. Reschke that Horizon was considering
making a public disclosure that Horizon would begin to consider strategic
alternatives. On September 19, 1997, at a meeting of the Horizon Board of
Directors, the Horizon directors discussed Horizon's performance and the capital
issues facing the company and considered the payment of the third quarter
distribution. In addition, the Horizon Board of Directors discussed the Prime
inquiries, the engagement of Lehman Brothers and the advantages and
disadvantages of making an announcement relating to the decision to explore
strategic alternatives. The meeting was adjourned until the following week to
allow the directors to consider the issues discussed.
On September 22, 1997, at a meeting of the Horizon Board of Directors, the
Horizon Board of Directors decided to declare a third quarter distribution in
the amount of $0.35 per share. In addition, the Horizon Board of Directors
decided to engage Lehman Brothers to evaluate Horizon's strategic alternatives
and to issue a press release announcing such decision to engage Lehman Brothers.
The Horizon Board of Directors concluded that if Horizon was going to continue
its discussions with Prime, Horizon's investment bankers should consider all
alternatives and a press release should be issued to encourage potential bidders
to contact Horizon. The Horizon Board of Directors also authorized Messrs.
Perlmutter and Wassel to meet with Michael J. DeMarco, Senior Vice President of
Lehman Brothers, and representatives from Prime on September 26, 1997, to
discuss further the possibility of a transaction between the companies. At such
time the Board of Directors determined to explore the strategic alternatives,
including a transaction with Prime, despite the progress made by the company's
new Chief Executive Officer, since the Board of Directors believed that it would
take longer to correct Horizon's problems than they originally estimated in
November 1996 when the Board considered its strategic alternatives and in April
1997 when the Board considered the initial indication of interest from Prime.
During the week of September 22, 1997, Messrs. Perlmutter, Wassel and
Reschke met and had several discussions. Messrs. Wassel, Perlmutter and DeMarco
met on September 26, 1997 and discussed the companies' portfolios, general
trends in the outlet center industry, the available structures of a possible
transaction and the range of possible exchange ratios.
Between October 2, 1997 and October 15, 1997, Lehman Brothers approached
approximately 12 additional parties that it believed might have an interest in a
possible transaction with Horizon, based upon the parties' familiarity with the
outlet center industry and ability to meet Horizon's capital and liquidity
needs. Such companies included REIT's in the outlet center industry and
companies involved in other sectors of the real estate industry. Separate
confidentiality agreements were signed by Horizon and seven companies in
addition to Prime, pursuant to which Horizon's investment bankers provided
information relating to Horizon. Four companies other than Prime expressed an
interest in a possible transaction two of which did not make a specific proposal
for a transaction to be completed within the immediate future. The other two
companies did not contemplate the acquisition of all of Horizon's assets. The
Board of Directors of Horizon preferred the pursuit of the Prime proposal
because in the opinion of the Horizon Board of Directors, the Prime proposal was
the best proposal to maximize shareholder value. The factors considered by the
Horizon Board of Directors when analyzing the various proposals included that
the Prime proposal was the only firm offer which contemplated acquiring all of
Horizon's assets and was not subject to any material contingencies, other than
the completion of customary due diligence prior to execution of the agreement,
in the near future. The Horizon Board of Directors believed that the
consummation of a transaction in the near future was important to the
stabilization of Horizon's business. In addition, the Horizon Board of Directors
believed that any transaction which did not include all of
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Horizon's assets would materially decrease the value of the consideration to be
received by the shareholders of Horizon. All merger-related negotiations were
conducted by Lehman Brothers and not directly by Horizon, except the
negotiations between Horizon and Prime.
On October 6, 1997, Prime sent a written proposal to Horizon detailing the
proposed terms of a merger between the companies, including (i) Prime's plan to
separate Horizon's properties into two groups, (ii) a proposed total purchase
price of $14.00 per outstanding Horizon Common Share payable solely in the form
of equity securities of Prime or payable solely in the form of equity securities
of Prime and HGP, and (iii) a distribution to the Horizon Partnership
Unitholders of (a) $13.00 per Horizon Partnership Unit in cash or (b) the same
consideration being offered to the Horizon Common Shareholders.
On October 8, 1997, a meeting was held in Chicago, Illinois, attended by
Messrs. Perlmutter, Wassel, Reschke and Abraham Rosenthal, Chief Executive
Officer of Prime, and legal counsel and investment advisors for both parties.
The parties discussed numerous issues, including pricing, the timing of a
possible transaction and issues relating to the Dole Cannery Lease, such as
Horizon's ability to meet its long-term obligations under the Dole Cannery
Lease. The decision to proceed with structuring a transaction between Horizon
and Prime was made at this meeting.
Subsequent to the meeting on October 8, 1997, Messrs. William H. Carpenter,
Jr., President and Chief Operating Officer of Prime, Reschke and Rosenthal
updated the Prime Board of Directors regarding Prime's discussions with Horizon.
Members of the Prime Board of Directors encouraged Prime management to continue
these discussions.
On October 10, 1997, a conference call was held among Messrs. DeMarco,
Perlmutter, Reschke, Rosenthal, Carpenter and legal counsel for each of the
parties during which the parties discussed the terms outlined in Prime's
proposal, the process of structuring a transaction acceptable to both parties,
and the delivery of due diligence materials to the respective parties.
A meeting of the Horizon Board of Directors was held on October 13, 1997, at
which time the terms of a potential transaction with Prime, including potential
exchange ratios, procedures to determine an exchange ratio and the contribution
and/or retention of certain assets of Horizon were discussed. In addition, to
induce Prime to continue its due diligence and to negotiate a definitive
agreement while Horizon explored other strategic alternatives, including
transactions with other parties, the Horizon Board of Directors authorized the
payment of Prime's out-of-pocket expenses in the event that Horizon undertook a
transaction with another party.
From October 14, 1997 through November 12, 1997, numerous meetings and
telephone conferences occurred between the management of Horizon and Prime and
each company's respective legal counsel and investment bankers regarding the
various legal and business issues and the parties engaged in reciprocal due
diligence.
On October 31, 1997, Prime's management distributed to the Prime Board of
Directors certain information that was prepared by Prime's management relating
to the proposed business combination with Horizon, including a description of
the proposed transactions, information pertaining to Horizon's business and
properties and certain historical and pro forma financial information.
On November 3, 1997, a meeting attended by Mr. Wassel, Mr. Rosenthal and C.
Alan Schroeder, General Counsel of Prime, was held in Baltimore, Maryland to
address operational issues and remaining structural issues relating to HGP.
On November 4, 1997, a meeting was held in Chicago, Illinois that was
attended by Messrs. Wassel, Perlmutter, Reschke, Rosenthal and Robert P.
Mulreaney, Chief Financial Officer and Treasurer of Prime, and each company's
respective legal counsel and investment bankers to address the remaining major
business issues, including the potential exchange ratio, distribution rates and
the amount of the break-up
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fee. At the conclusion of the meeting, Horizon and Prime arrived at a
preliminary business understanding of most major issues and agreed to continue
to work diligently towards a final resolution of the outstanding items.
On November 8, 1997, Horizon's management distributed to the Horizon Board
of Directors certain information relating to the proposed business combination
with Prime, including a description of the proposed transaction, information
pertaining to Prime's business and properties and certain historical and pro
forma information.
On November 8, 1997, Prime's management distributed to the Prime Board of
Directors additional information that was prepared by Prime's management
relating to the proposed business combination with Horizon, including a summary
of the proposed transaction structure and a summary of the Original Merger
Agreement.
On November 12, 1997, Messrs. Reschke and Perlmutter discussed by telephone
certain issues relating to the transactions, including the consideration payable
in connection with the Partnership Merger.
On November 12, 1997, the Horizon Board of Directors held a special meeting
at which members of management, representatives of Lehman Brothers and legal
counsel were present. At the meeting, representatives of Lehman Brothers made a
detailed presentation regarding the proposed merger with Prime. Lehman's written
opinion confirming its oral opinion was delivered on November 12, 1997.
Following the presentation by Lehman Brothers, and after extensive
discussion, the Horizon Board of Directors concluded that the advantages of the
Original Merger Agreement and the transactions contemplated thereby outweighed
the potential benefits of other strategic alternatives, and unanimously approved
the Original Merger Agreement and the related agreements contemplated thereby,
and authorized Horizon's management to enter into such agreements. Lehman
Brothers rendered its opinion to the effect that, as of the date and subject to
the assumptions made, procedures followed, matters considered and limits of its
review, the consideration to be paid in connection with the merger agreement and
the transactions contemplated thereby was fair, from a financial point of view,
to Horizon's shareholders and the limited partners of Horizon Partnership.
On November 12, 1997, a meeting of the Prime Board of Directors was held at
which members of management and representatives of Prime's financial and legal
advisors were present. All of Prime's directors were present with the exception
of Mr. Golden. Mr. Reschke and other members of management provided the Prime
Board of Directors with a review of the background and events leading up to the
proposed business combination with Horizon and set forth in detail the potential
benefits and detriments of the proposed transaction. Prime's legal counsel
presented and explained the terms of the Original Merger Agreement to the Prime
Board of Directors including the closing conditions, termination rights and
break-up fee and expense reimbursement provisions, and advised the Prime Board
of Directors of its fiduciary obligations. In addition, the directors discussed
with management and Prime's advisors the current operations of Prime and
Horizon, the structure of the proposed transaction, the form of consideration
payable in the transactions contemplated by the Original Merger Agreement, the
potential synergies expected by management to result from such transactions and
certain governance, tax and due diligence matters.
At the November 12, 1997 meeting of the Prime Board of Directors,
representatives of FBR made a presentation regarding the Original Merger
Agreement and the transactions contemplated thereby. Following FBR's
presentation, and after extensive discussion, the Prime Board of Directors
concluded that the advantages of the transactions contemplated by the Original
Merger Agreement outweighed the potential risks and the Prime directors present
unanimously approved the Original Merger Agreement and the transactions
contemplated thereby, and authorized Prime's management to enter into such
agreement. FBR rendered its oral opinion to the effect that, as of the date and
subject to the assumptions made, procedures followed, matters considered and
limits of its review, the consideration to be paid by Prime in
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connection with the Original Merger Agreement and the transactions contemplated
thereby was fair, from a financial point of view to Prime's shareholders and the
limited partners of Prime Partnership. FBR's written opinion confirming its oral
opinion was delivered on November 16, 1997.
On November 12, 1997, the Original Merger Agreement was executed as of
November 12, 1997, and a press release announcing such execution was made on
November 13, 1997, prior to the opening of trading on the NYSE.
Following the execution of the Original Merger Agreement, representatives of
Prime, Horizon and each company's respective legal counsel, investment bankers
and accountants commenced preparation of this Joint Proxy/Prospectus/Information
Statement.
By letter dated November 14, 1997, David H. Murdock requested information
from Horizon with respect to the Original Merger Agreement in his capacity as a
shareholder of Horizon. As of February 1, 1998, Mr. Murdock and certain of his
affiliates have represented that they owned 1,099,800, or approximately 4.6%, of
the outstanding Horizon Common Shares. By letter dated November 18, 1997, Castle
& Cooke Properties, Inc. ("CCPI"), the landlord under the Dole Cannery Lease and
an affiliate of Mr. Murdock, alleged that the consummation of the Original
Merger Agreement would violate the terms of the Dole Cannery Lease unless its
prior consent to the transactions contemplated by the Original Merger Agreement
was obtained.
A meeting was held on November 26, 1997 in Snowmass, Colorado attended by
Messrs. Murdock, Perlmutter, Wassel and Reschke. Mr. Murdock stated that he
believed that the transactions contemplated by the Original Merger Agreement
were not in the best interests of Horizon and its shareholders. He also
confirmed the position of CCPI that the proposed merger would constitute a
default under the Dole Cannery Lease unless its consent was obtained. During the
course of the meeting, Mr. Murdock indicated that both he and CCPI would
consider appropriate legal action to assert their respective rights.
By a letter dated December 5, 1997, addressed to Messrs. Perlmutter, Wassel
and Reschke, Mr. Murdock again expressed the belief that the terms of the
transactions contemplated by the Original Merger Agreement were not adequate for
the Horizon Shareholders. In a letter also dated December 5, 1997, CCPI
confirmed that the transactions contemplated by the Original Merger Agreement
required its consent, expressed CCPI's willingness to consider proposals for
resolving issues relating to the Dole Cannery Lease and outlined general
economic and business terms for such a resolution. After consideration of the
proposals made by Mr. Murdock and by CCPI, Horizon and Prime jointly responded
in a letter dated December 9, 1997. Such letter made three alternate proposals
for resolving the issues relating to the merger and to the Dole Cannery Lease: a
buyout of the lease, a joint venture and a restructuring of the lease. Horizon
and Prime believed that it would be in the best interests of New Prime if the
burden of the Dole Cannery Lease could be eliminated as part of the Transactions
due to the uncertainty of the future costs to New Prime relating to the Dole
Cannery Lease and the time and resources that would otherwise be required of
management of New Prime in addressing issues relating to the Dole Cannery Lease.
On December 15, 1997, Messrs. Reschke, Wassel and Murdock met in Los
Angeles, California. After a lengthy discussion, the parties reached an
agreement in principle to structure a transaction whereby (i) CCPI would consent
to the assignment of the Dole Cannery Lease to a new entity which would assume
liability thereunder, (ii) Horizon would be released from further liability
under the Dole Cannery Lease and (iii) Horizon would contribute to such new
entity an interest in a factory outlet center or centers with a current cash
flow approximating the cash flow CCPI currently receives from the Dole Cannery
Lease. Mr. Murdock agreed to vote the Horizon Common Shares that he controls in
favor of the Merger Agreement if it was amended as currently contemplated.
From December 15, 1997 through February 1, 1998, numerous meetings and
telephone conferences occurred among the management of Horizon, Prime, Castle &
Cooke and each company's respective legal counsel regarding the various
alternatives relating to the formation of the new entity, the release of
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Horizon Partnership from further liability under the Dole Cannery Lease, the
identification of the property or properties to be contributed to the new entity
and reciprocal legal and financial due diligence.
In addition, from December 15, 1997 through February 1, 1998, numerous
meetings and telephone conferences occurred between the management of Prime and
Horizon and each company's legal counsel to discuss certain amendments to the
Original Merger Agreement. These amendments included: (i) revising the terms of
the Partnership Merger to eliminate the ability of the holders of Horizon
Partnership Units to receive partial cash; (ii) the elimination of the proposed
distribution of preferred stock of HGP to certain Prime shareholders and
providing for the Prime Special Distribution; (iii) the issuance of HGP Common
Shares to the shareholders of both Prime and Horizon; and (iv) changing the
portfolios of both New Prime and HGP.
On January 24, 1998, Prime's management distributed to the Prime Board of
Directors a description of, and certain information related to, the revisions to
the Original Merger Agreement and the proposed C&C Contribution Agreement and
the Murdock Agreement.
On January 25, 1998, Horizon's management distributed to the Horizon Board
of Directors a description of, and certain information related to, the revisions
to the Original Merger Agreement and the proposed C&C Contribution Agreement and
the Murdock Agreement.
On January 29, 1998, the Horizon Board of Directors held a special meeting
by video and telephone conference at which members of management,
representatives of Lehman Brothers and legal counsel were present. At the
meeting, representatives of Lehman Brothers made a detailed presentation
regarding the Merger Agreement, which included a discussion of the changes
proposed with respect to the Original Merger Agreement.
Following the presentation by Lehman Brothers, and after extensive
discussion, the Horizon Board of Directors unanimously approved the Merger
Agreement concluding that the advantages of the Transactions as proposed to be
amended outweighed the benefits of other strategic alternatives and outweighed
the potential risks. Lehman Brothers rendered its opinion to the effect that, as
of the date and subject to the assumptions made, procedures followed, matters
considered and the limits of its review, the consideration to be paid in
connection with the Transactions were fair, from a financial point of view, to
Horizon's shareholders and the limited partners of Horizon Partnership. The
Horizon Board of Directors discussed the fact that, although the market value of
the securities to be received by Horizon Common Shareholders and the Horizon
Partnership Unitholders was approximately the same as of the date of the meeting
(based on the closing prices at January 28, 1998, the day preceding the board
action, the value to the common shareholders was $14.00 and the value to the
unitholders was $13.90), the form of consideration to be received by the Horizon
Common Shareholders and the Horizon Partnership Unitholders was not the same
and, consequently, the value of such consideration might differ more
substantially in the future based upon fluctuations in the market prices of
Prime's securities. The Horizon Board of Directors determined that in order to
increase the likelihood that the Horizon Partnership Unitholders would vote
favorably on the Transactions, the consideration payable pursuant to the
Partnership Merger would be required to be only in the form of Prime Partnership
Common Units.
In addition, members of management of Horizon and Horizon's legal counsel
presented and explained the terms of the C&C Contribution Agreement and the
Murdock Agreement. Following such presentation, the Horizon Board of Directors
unanimously approved the C&C Contribution Agreement and the Murdock Agreement,
and authorized Horizon management to enter into such agreements.
On January 30, 1998, a meeting of the Prime Board of Directors was held at
which members of management were present and representatives of Prime's
financial and legal advisors were present by telephone. Mr. Reschke and other
members of management described the revised transaction structure and provided
the Prime Board of Directors with a review of the events leading up to the
revised transaction structure. Prime's legal counsel presented and explained the
terms of the Merger Agreement to
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the Prime Board of Directors. FBR's presentation included a discussion of (i)
the fairness from a financial point of view to Prime and its shareholders and
partners of the consideration to be paid by Prime in the Transactions, (ii) a
summary of the financial terms of the Transactions, and (iii) a discussion of
the impact of the proposed Transactions on Prime. Also included in FBR's oral
presentation was an outline of FBR's fairness opinion process.
Following FBR's presentation, the Prime Board of Directors concluded that
the advantages of the Transactions as proposed to be amended outweighed the
potential risks and unanimously approved the Merger Agreement. FBR rendered its
oral opinion to the effect that, as of the date and subject to the assumptions
made, procedures followed, matters considered and limits of its review, the
consideration to be paid by Prime in connection with the Transaction was fair,
from a financial point of view, to Prime's shareholders and the limited partners
of Prime Partnership. FBR's written opinion confirming its oral opinion was
delivered on February 1, 1998.
In addition, members of management of Prime and Prime's legal counsel
presented and explained the terms of the C&C Contribution Agreement and the
Murdock Agreement. Following such presentation, the Prime Board of Directors
unanimously approved the C&C Contribution Agreement and the Murdock Agreement,
and authorized Prime management to enter into such agreements to which Prime was
a party.
From January 30, 1998 through February 1, 1998, representatives of Horizon
and Prime and their respective legal counsel negotiated the remaining terms of
the Merger Agreement. The Merger Agreement was executed as of February 1, 1998.
From January 30, 1998 through February 1, 1998, representatives of Horizon,
Prime, Mr. Murdock and Castle & Cooke and their respective legal counsel
negotiated the remaining terms of the C&C Contribution Agreement and the Murdock
Agreement. The C&C Contribution Agreement and the Murdock Agreement were
executed as of February 1, 1998.
On February 2, 1998, Prime and Horizon issued a press release announcing the
execution of the Merger Agreement and the C&C Contribution Agreement and the
Murdock Agreement.
ADVANTAGES AND DISADVANTAGES OF THE TRANSACTIONS; RECOMMENDATION OF THE PRIME
BOARD OF DIRECTORS
The Prime Board of Directors believes that the Transactions, including the
consideration to be paid by Prime, is fair to and in the best interests of
Prime, Prime Partnership and their respective security holders. Accordingly, the
Prime Board of Directors, on behalf of Prime, in its capacity as sole general
partner of Prime Partnership, unanimously approved the Partnership Merger and
the other transactions contemplated by the Merger Agreement and unanimously
recommends that the Prime Partnership Common Unitholders and Prime Partnership
Series C Preferred Unitholders consent to the Partnership Merger and the other
transactions contemplated by the Merger Agreement.
ADVANTAGES
In reaching this determination, the Prime Board of Directors consulted with
Prime's management as well as its financial advisor and legal counsel, and
considered the short-term and long-term interests of Prime, Prime Partnership
and their respective securityholders. The Prime Board of Directors reviewed and
relied upon, although it did not specifically adopt, the conclusions of the
opinion of its financial advisor. See "--Opinion of Financial Advisor--Prime."
The material factors that the Prime Board of Directors considered in approving
the Transactions, which it deemed favorable, are as follows:
1. BENEFITS OF BEING THE LARGEST OUTLET CENTER OWNER/OPERATOR IN THE
UNITED STATES. The Prime Board of Directors believes that the Transactions
would establish New Prime as the largest outlet center owner/operator in the
United States. New Prime would own and operate 48 outlet centers containing
approximately 13,400,000 square feet of GLA as compared to Prime's existing
outlet center
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portfolio containing 28 properties with approximately 7,217,000 square feet.
The Prime Board of Directors believe that by virtue of its larger size New
Prime should be better positioned to attract and retain tenants and to
develop and implement marketing and advertising programs, among other
things. New Prime should also have improved access to capital markets which
should enable it to obtain debt or other financing upon more favorable
terms.
2. INCREASED MARKET CAPITALIZATION AND LIQUIDITY. Based on the
closing prices of Prime Common Shares and Prime Series B Preferred Shares on
September 30, 1997, New Prime would have a pro forma total market
capitalization of approximately $2.3 billion as compared to Prime's pro
forma total market capitalization before the Transactions of $1.3 billion on
such date. The Prime Board of Directors believes that this larger total
market capitalization would likely result in higher trading volumes for New
Prime Common Shares and New Prime Series B Preferred Shares and enhanced
liquidity for the holders of such securities.
3. COST SAVINGS AND OPERATING EFFICIENCIES. The Prime Board of
Directors believes that the Transactions will result in opportunities to
achieve economies of sale and operating efficiencies. The Prime Board of
Directors based this belief on management's estimate that New Prime would
realize a pro forma decrease in general and administrative expenses. For the
year ended December 31, 1997, Prime's pro forma general and administrative
expense is $9.6 million or $0.72 per square foot compared to $0.79 per
square foot on a historical basis.
4. ACCRETIVE IMPACT OF TRANSACTIONS ON PRO FORMA NET INCOME (LOSS) PER
COMMON UNIT. The Unaudited Pro Forma Consolidated Statements of Operations
for the nine months ended September 30, 1997 demonstrate the positive impact
of the Transactions on Prime Partnership's net income (loss) per common
unit. On a pro forma basis giving effect to the Transactions, Prime
Partnership's net income per common unit for the nine months ended September
30, 1997 was $0.01 compared to a loss per Prime Partnership Common Unit of
($0.43) on a pre-Transactions pro forma basis during the same period.
5. USE OF EQUITY RATHER THAN CASH. The Prime Board of Directors
viewed as favorable the fact that the Partnership Merger could be effected
through the issuance of new equity valued at approximately $389.0 million
(based upon the closing prices of Prime Common Shares on January 30, 1998)
rather than the use of available cash or cash raised from debt offerings.
6. FBR FAIRNESS OPINION. FBR delivered an oral opinion on January 30,
1998 to the effect that, as of such date and based upon and subject to
certain matters stated therein, the consideration to be paid by Prime in
connection with the Transactions was fair, from a financial point of view,
to Prime, Prime Partnership and their securityholders. The Prime Board of
Directors viewed such opinion as favorable not only because of the
conclusion reached by FBR, but also because such conclusion was consistent
with the opinion of Prime's management.
7. TERMS OF THE MERGER AGREEMENT. The Prime Board of Directors
reviewed the terms of the Merger Agreement with Prime's management, its
legal counsel and financial advisors. Based on that review, the Prime Board
of Directors believes the terms of the Merger Agreement to be fair to Prime,
Prime Partnership and their respective securityholders.
8. TAX-FREE NATURE OF THE PARTNERSHIP MERGER. For federal income tax
purposes the Partnership Merger will be a tax-free transaction for Prime
Partnership, which the Prime Board of Directors viewed as favorable because,
no gain or loss will be recognized by Prime Partnership in connection with
the Partnership Merger.
9. DISTRIBUTIONS OF HGP LP COMMON UNITS. In connection with the
Transactions, the common and convertible preferred unitholders of Prime will
receive HGP LP Common Units. Although the Prime Board of Directors did not
assign a particular value to such units, it viewed as favorable the fact
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that such units would be distributed as a dividend and enable such Prime
Partnership unitholders to benefit from the continuing operations of HGP LP.
10. SPECIAL CASH DISTRIBUTIONS. The Prime Board of Directors viewed as
favorable the fact that in connection with the Transactions, holders of
common and convertible preferred shares/units of Prime and Prime Partnership
will receive the Prime Special Distribution and Prime Partnership Special
Distribution, as applicable.
DISADVANTAGES
The Prime Board of Directors also considered the following potentially
negative factors which could arise from the Transactions: (1) the significant
costs involved in connection with consummating the Transactions; (2) the
substantial management time and effort required to effectuate the Transactions
and integrate the Prime Acquired Properties with Prime's existing properties and
operations; and (3) the Transactions would increase by approximately $572.0
million the total debt of Prime Partnership as of September 30, 1997. In
addition, Prime Partnership's ratio of debt to total market capitalization would
increase to 48.8% on a pro forma basis as of September 30, 1997 after the
Transactions compared to a ratio of 41.3% for Prime Partnership on a pro forma
basis before the Transactions. The Prime Board of Directors recognized that such
increase could adversely affect the ability of Prime Partnership to obtain debt
financing for additional growth and would subject Prime Partnership's operations
(after the Partnership Merger) to the risks of higher leverage. Overall,
however, the Prime Board of Directors concluded that the increase in debt would
be within Prime's policies with respect to the incurrence of debt. In addition,
the Prime Board of Directors considered the possible adverse effects upon the
market for Prime Common Shares and Prime Series B Preferred Shares and upon
Prime's ability to raise capital and issue equity in the capital markets which
might result if the Transactions were not consummated. Finally, the Prime Board
of Directors considered the risk that the anticipated benefits of the
Transactions might not be fully realized and the capacity of Prime Partnership
to effectively merge its expanded portfolio of properties. The Prime Board of
Directors did not believe that these negative factors were sufficient, either
individually or collectively, to outweigh the advantages of the Transactions.
OTHER CONSIDERATIONS
The Prime Board of Directors viewed as adequate the conditions to the
closing in the Merger Agreement, including the condition that no change in the
financial condition, business or operations of Horizon will have occurred that
would have a Horizon Material Adverse Effect (as defined in the Merger
Agreement). The Prime Board of Directors acknowledged the indemnification
provisions relating to directors and officers of Horizon as a continuing
obligation of New Prime and approved such provisions as part of the overall
transaction.
In view of the wide variety of factors considered in connection with its
evaluation of the Transactions, the Prime Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determination.
Further, the Prime Board of Directors did not obtain independent appraisals of
the market value of the properties or other assets involved in the Transactions.
RECOMMENDATION
The Prime Board of Directors believes that the proposed transaction is fair
to and in the best interests of Prime, Prime Partnership and their respective
securityholders. The Prime Board of Directors unanimously approved the
Partnership Merger and the other transactions contemplated by the Merger
Agreement and unanimously recommends that the Prime Series C Preferred
Unitholders and Prime Common
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Unitholders consent to the Partnership Merger and the other transactions
contemplated by the Merger Agreement.
In the event the Transactions are not consummated for any reason, Prime will
continue to pursue its business objectives.
ADVANTAGES AND DISADVANTAGES OF THE TRANSACTIONS; RECOMMENDATION OF THE HORIZON
BOARD OF DIRECTORS
The Horizon Board of Directors believes that the Transactions, including the
consideration to be paid by Prime, are fair and in the best interests of
Horizon, Horizon Partnership and their respective securityholders. Accordingly,
Horizon's Board of Directors, on behalf of Horizon, in its capacity as sole
general partner of Horizon Partnership, has unanimously approved the Merger
Agreement and the transactions contemplated thereby, including the Partnership
Merger, the transfer of Horizon Partnership Units by Horizon and its withdrawal
as general partner of Horizon Partnership, and unanimously recommends approval
of the Merger Agreement and the transactions contemplated thereby, by the
Horizon Partnership Unitholders. In reaching its determination, the Horizon
Board of Directors consulted with Horizon management, as well as financial
advisors, legal counsel and accountants, and considered a number of factors. The
Horizon Board of Directors reviewed and relied upon, although it did not
specifically adopt, the conclusions of the opinions of its financial advisor.
See "--Opinion of Financial Advisor--Horizon."
ADVANTAGES
The material factors that the Horizon Board of Directors considered in
approving the Transactions and unanimously recommending approval of the
Transactions are that:
1. BENEFITS OF BEING THE LARGEST OUTLET CENTER OWNER/OPERATOR IN THE
UNITED STATES. As a result of the Transactions, New Prime would be better
positioned to compete in the outlet shopping center industry.
2. INCREASED LIQUIDITY. The Transactions would enhance New Prime's
ability to meet its continuing need for liquidity.
3. INCREASED ACCESS TO EQUITY AND DEBT MARKETS. The Transactions
would provide greater access to the public equity and debt markets and would
increase New Prime's ability to raise capital at reasonable rates.
4. STRONGER CAPITAL BASE. Prime is deemed to have a stronger capital
base with which to support the Horizon properties to be acquired by Prime.
5. SUPERIOR PROPOSAL. After reviewing Horizon's strategic
alternatives, which included maintaining the status quo, raising capital
through a debt or equity offering, liquidating the company's assets,
acquiring a competitor and merging with another company, the Horizon Board
of Directors determined that the Transactions were the best alternative
reasonably available to Horizon's and Horizon Partnership's securityholders
to maximize such securityholder value. The Horizon Board of Directors
believed that, after management's discussions with its investment bankers
and after discussions with other REITs which requested and received
information about Horizon, no other prospective purchasers were reasonably
expected to make a proposal superior to that made by Prime.
6. POSSIBLE REDUCTION OR ELIMINATION OF HORIZON DISTRIBUTION. Based
upon management's analysis of Horizon's performance during 1997 and
Horizon's liquidity, the Horizon Board of Directors believed that it would
be necessary to reevaluate its distribution policy and consider the possible
reduction or elimination of future distributions.
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7. LEHMAN FAIRNESS OPINION. The consideration to be paid to Horizon
and Horizon Partnership securityholders is fair to such securityholders. In
reaching its determination, the Horizon Board of Directors considered the
investigation performed by Horizon and its advisors as to the financial
conditions and business of Prime, as well as the opinion, analyses and
presentations of Lehman Brothers with respect to the strategic alternatives
available to Horizon, including the opinion that, subject to certain
factors, the consideration to be received in the Transactions by Horizon and
Horizon Partnership is fair from a financial point of view to their
securityholders.
8. TAX-FREE NATURE OF THE PARTNERSHIP MERGER. The Partnership Merger
will be tax-free for federal income tax purposes with respect to the Horizon
Partnership Unitholders, which the Horizon Board of Directors viewed as
favorable because no gain or loss would be recognized by a unitholder of
Horizon Partnership (except with respect to any cash received by a
unitholder of Horizon Partnership in lieu of a fractional interest in a
Prime Partnership Common Unit).
9. DISTRIBUTIONS OF HGP LP COMMON UNITS. In connection with the
Transactions, the Horizon Partnership Unitholders will receive HGP LP Common
Units. Although the Horizon Board of Directors did not assign a particular
value to such shares, it viewed as favorable the fact that such units would
be distributed as a dividend and enable such Horizon Partnership Unitholders
to benefit from the continuing operations of HGP LP.
DISADVANTAGES
The Horizon Board of Directors also considered the following potentially
negative factors, which could arise from the Transactions:
1. BENEFITS NOT FULLY REALIZED. The risk that the anticipated benefits
from the Transactions may not be fully realized.
2. LOWER DISTRIBUTION. For each of the first three quarters of 1997,
the distribution declared on a Horizon Partnership Unit was $0.35 and the
distribution declared on the Prime Partnership Common Unit Equivalent was
$0.08 lower, or $0.27, for each such quarter.
3. DECREASE IN MARKET PRICE. The possibility that the market price of
Prime's shares, and thus the consideration to be paid to the Horizon Common
Shareholders, may decrease in value prior to the time the Corporate Merger
becomes effective.
4. COSTS OF THE TRANSACTIONS. The significant costs involved in
connection with the consummation of the Transactions.
5. MANAGEMENT TIME AND EFFORT. The substantial management time and
effort required to effectuate the Transactions.
6. BREAK-UP FEES AND BREAK-UP EXPENSES. Under certain circumstances
Horizon may be required to pay Prime a Break-up Fee of $20,000,000 and
Break-up Expenses of up to $4,500,000 if the Merger Agreement is terminated.
OTHER CONSIDERATIONS
Furthermore, the Horizon Board of Directors considered the actual and
potential conflicts of interest of certain members of Horizon's management. See
"Interests of Certain Persons in the Transactions."
In view of the wide variety of factors considered in connection with its
evaluation of the Transactions, the Horizon Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weight to the specific factors considered in reaching its determination.
Further, the Horizon Board of Directors did not obtain independent appraisals of
the market value of properties or other assets involved in the Transactions.
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The Horizon Board of Directors relied on the Lehman Brothers' fairness
opinion as one of the factors that it examined in making its determination that
the Transactions are fair and in the best interests of Horizon, Horizon
Partnership and their respective securityholders.
RECOMMENDATION
The Horizon Board of Directors believes that the proposed transaction is
fair and in the best interest of Horizon, Horizon Partnership and their
securityholders. Accordingly, the Horizon Board of Directors unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Partnership Merger, the transfer of Horizon Partnership Units by
Horizon and its withdrawal as general partner of Horizon Partnership, and
unanimously recommends that the holders of Horizon Partnership Units consent to
the Merger Agreement and the transactions contemplated thereby, including the
Partnership Merger.
In the event that the Transactions are not consummated for any reason,
Horizon will continue to pursue its business objectives of (i) maximizing funds
from operations available for distribution to Horizon and Horizon Partnership
securityholders, (ii) increasing the value of its properties by continuing its
growth through the active management and expansion of existing factory outlet
centers and selective development and acquisition of new factory outlet centers,
(iii) holding its properties for long-term investment and (iv) continuing its
disposition of poorly performing centers. In addition, Horizon intends to seek
additional debt or equity financing and may seek other strategic alternatives,
including the sale of Horizon. Horizon has no commitment for any additional
financing and there is no assurance that any such financing will be available or
that Horizon's continuing business plan will be successfully implemented.
Furthermore, the Horizon Board of Directors will reevaluate its distribution
policy.
OPINION OF FINANCIAL ADVISOR--PRIME
At the meeting of the Prime Board of Directors on January 30, 1998, FBR
rendered its oral opinion to the Prime Board of Directors that, as of such date,
the consideration to be paid by Prime in connection with the proposed
Transactions was fair from a financial point of view to Prime and Prime
Partnership. FBR has confirmed its January 30, 1998 oral opinion by delivering
its written opinion to the Prime Board of Directors, dated February 1, 1998,
that, as of such date, the consideration to be paid by Prime in connection with
the proposed Transactions was fair from a financial point of view to Prime and
Prime Partnership. FBR has not been requested to, and will not update its
opinion prior to the Closing. FBR did not make a recommendation to Prime with
respect to the amount of consideration to be paid by Prime in connection with
the proposed Transactions. No limitations were imposed by the Prime Board of
Directors upon FBR with respect to the investigations made or procedures
followed in rendering its opinion. In the opinion of Prime, no events or
significant changes in information have occurred that would alter the opinion of
FBR and there were no specific factors which did not support the opinion of FBR.
However, if such an event or change does occur, including, without limitation,
an amendment to the Merger Agreement which materially affects the financial
terms of such agreement, a revised fairness opinion will be requested. No
limitations were imposed by the Prime Board of Directors upon FBR, and no
instructions were given by the Prime Board of Directors to FBR with respect to
the investigations made or procedures followed by it in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF FBR, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITS ON THE REVIEW UNDERTAKEN, IS
ATTACHED AS APPENDIX D TO THIS JOINT CONSENT SOLICITATION
STATEMENT/PROSPECTUS/INFORMATION STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. PRIME PARTNERSHIP COMMON UNITHOLDERS AND PRIME PARTNERSHIP SERIES C
PREFERRED UNITHOLDERS ARE URGED TO READ THE OPINION IN ITS
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ENTIRETY. FBR'S WRITTEN OPINION IS ADDRESSED TO THE PRIME BOARD OF DIRECTORS, IS
DIRECTED ONLY TO THE CONSIDERATION TO BE PAID IN CONNECTION WITH THE
TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY PRIME CONSENTING
UNITHOLDER AS TO WHETHER SUCH PRIME CONSENTING UNITHOLDER SHOULD CONSENT. THE
OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF THE TRANSACTIONS AND ANY OTHER
TRANSACTIONS OR BUSINESS STRATEGIES DISCUSSED BY THE PRIME BOARD OF DIRECTORS AS
ALTERNATIVES TO THE TRANSACTIONS, OR THE DECISION OF THE PRIME BOARD OF
DIRECTORS TO PROCEED WITH THE TRANSACTIONS. THE SUMMARY OF THE OPINION OF FBR
SET FORTH IN THIS JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In arriving at its opinion, FBR, among other things, (i) reviewed Horizon's
Annual Reports, Forms 10-K and related financial information for the two fiscal
years ended December 31, 1996, and December 31, 1995, and Horizon's Forms 10-Q
and the related unaudited financial information for the periods ended June 30,
1997, March 31, 1997, and September 30, 1997; (ii) reviewed Prime's Forms 10-K
and related financial information for the two fiscal years ended December 31,
1996, and December 31, 1995, Prime's unaudited financial information for the
period ended September 20, 1997, released October 28, 1997, and Prime's Forms
10-Q and the related unaudited financial information for the periods ended June
30, 1997, and March 31, 1997; (iii) reviewed certain information, including
financial forecasts, relating to the business, earnings, cash flow, assets and
prospects of Horizon and Prime, furnished to FBR by the management of Horizon
and Prime, respectively, including forecasts of Horizon's financial performance
prepared by Prime's management; (iv) participated in discussions with certain
members of senior management of Prime and Horizon concerning their business and
prospects; (v) reviewed the historical market prices and trading activity for
Horizon Common Shares and Prime Series B Preferred Shares and Prime Common
Shares and compared them with those of certain publicly traded companies which
FBR deemed to be reasonably comparable to Horizon and Prime, respectively; (vi)
compared the results of operations of Horizon and Prime with that of certain
companies which FBR deemed to be reasonably comparable to Horizon and Prime,
respectively; (vii) reviewed the pro forma effect of the Transactions on New
Prime's capitalization ratios, FFO and future cash flows; (viii) reviewed the
Merger Agreement and certain related documents; and (ix) performed such other
analyses and reviewed such other information as FBR deemed appropriate. FBR also
held discussions with certain members of the managements of Prime and Horizon
with respect to certain aspects of the Transactions, and the past and current
business operations of Prime and Horizon, the financial condition and future
prospects and operations of Prime and Horizon, and certain other matters
believed necessary or appropriate to FBR's inquiry. In addition, FBR reviewed
such other financial studies and analyses and considered such other information
as it deemed appropriate for the purposes of its opinion.
FBR relied upon and assumed, without independent verification, the accuracy
and completeness of all information that was publicly available or that was
furnished to it by Prime and Horizon or otherwise reviewed by FBR, and FBR has
not assumed any responsibility of liability therefor. FBR has not conducted any
independent valuation or appraisal of any assets or liabilities of Horizon or
Prime, nor have any valuations or appraisals been provided to FBR. In relying on
financial analyses and forecasts provided to FBR, FBR has assumed that they have
been reasonably prepared based on assumptions reflecting the best currently
available estimates and good faith judgments of the management of Prime as to
the expected future results of operations and financial condition of Horizon and
its properties. FBR has also assumed that the Transactions will have the tax
consequences described in discussions with, and materials furnished to FBR, by
representatives of Prime and Prime Partnership, and that the other transactions
contemplated by the Merger Agreement will be consummated as described in the
Merger Agreement.
No representation or warranty was made by FBR, Prime or Horizon or any of
their respective affiliates to any of such other parties with respect to these
projections. Financial projections are subject to
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contingencies beyond management's control, and realization of the projections
depends on numerous factors, including among other things, the cost of
integrating the companies, the completion of pending developments, the actual
cost in relation to such projects and decisions by management to modify business
plans to address changing needs and a changing operating environment. All
material events and circumstances cannot be predicted and unanticipated events
and circumstances are likely to occur. Accordingly, there may be differences
between the projected results of operations and the actual results of operations
of the respective companies, and such differences could be material. In the
event that the financial projections prove to be materially different, the
conclusions reached in the opinion of FBR could be materially affected.
FBR's opinions are based on regulatory, economic, monetary, market, and
other conditions as in effect on, and the information made available to FBR as
of, the date of such opinions. Such developments may affect the written opinion
dated February 1, 1998, and FBR does not have any obligation to update, revise,
or reaffirm such opinion. FBR expressed no opinion as to the price at which the
shares to be issued in the Transactions to the shareholders of New Prime may
trade at any time.
In accordance with customary investment banking practice, FBR informed Prime
that FBR employed generally accepted valuation methods in reaching its opinion.
At the meeting of the Prime Board of Directors held on January 30, 1998, FBR
orally presented certain financial analyses in connection with the delivery of
its opinion. Such oral opinion was not accompanied with written materials. The
following is a summary of the material analyses utilized by FBR in connection
with providing its opinion.
PRO FORMA MERGER ANALYSIS. FBR analyzed the effect of the Transactions on,
among other things, estimates of FFO per Prime Common Share for the year ended
December 31, 1998. FBR combined the estimated 1998 operating results for Horizon
and Prime and assumed certain savings in accounting adjustments and savings in
general and administrative expense per estimates.
FBR also analyzed the effect of the Transactions on Prime's pro forma equity
market capitalization and total capitalization, and 1998 pro forma leverage
ratios and distribution payout ratio. In this regard, FBR noted that the pro
forma equity market capitalization for Prime would be approximately $1.12
billion, assuming (1) a share price for Prime Common Shares of $14.81 and 35.80
million Prime Common Shares outstanding after completion of the Transactions;
(2) a share price for Prime Series A Preferred Shares of $26.00 and 2.30 million
Prime Series A Preferred Shares outstanding; (3) a share price for Prime Series
B Preferred Shares of $24.50 and 2.98 million Prime Series B Preferred Shares
outstanding; (4) a share price for Prime Series C Preferred Shares of $14.81 and
4.36 million shares outstanding; and (5) a share price for Horizon Common Shares
of $11.88 and 28.29 million shares outstanding. Share price assumptions are
based on the respective closing share prices on January 30, 1998, for each
equity share. FBR further noted that (i) Prime's ratio of debt to total
capitalization would increase slightly, upon completion of the Transactions,
from 40.20% prior to the Transactions to 49.69% after the assumption of
Horizon's outstanding debt plus the incremental debt incurred from the payment
of certain transaction costs and (ii) the ratio of debt plus preferred stock to
total capitalization would increase from 56.43% to 63.91%. Assuming a
post-transaction annual distribution for Prime of $1.18 per share, its pro forma
distribution payout ratio would be 78.85%, as compared to 89.95% prior to the
Mergers.
PUBLIC TRADING MULTIPLES ANALYSIS. Using publicly available information,
FBR compared selected financial and stock market data of Horizon with similar
data for selected publicly traded companies (each, a "Comparable Company" and,
collectively, the "Comparable Companies") engaged in business which FBR judged
to be analogous to Horizon's. The companies selected by FBR were: (a) Chelsea
GCA Realty, Inc.; (b) FAC Realty Trust, Inc.; (c) Tanger Factory Outlet Centers,
Inc.; (d) Horizon (when comparing comparable companies to Prime); and (e) Prime
(when comparing comparable companies to Horizon).
For each Comparable Company, publicly available financial performance data
through the twelve months ended December 31, 1997 was measured. FBR calculated
the multiples of current stock price, averaged across calendar year 1997, to
analysts' estimates for 1998 consensus FFO as reported by Nelson
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Information, Inc. ("Nelson's") for each of the Comparable Companies to determine
the 1998 FFO trading multiples. Nelson's is an on-line data service available to
subscribers which compiles earnings estimates by research analysts. FBR's
calculations resulted in a range of 1998 FFO multiples from 5.72x to 10.67x.
These multiples were then applied to Horizon's 1998 FFO per share consensus
estimate as reported by Nelson's, yielding a range of implied trading values of
approximately $9.49 to $17.71 per Horizon Common Share compared to an implied
transaction price per Horizon Common Share of $13.74 as of February 2, 1997.
SELECTED TRANSACTION ANALYSIS. Using publicly available information, FBR
examined selected transactions with respect to purchase price per share to
calculate FFO transaction multiples. Specifically, FBR reviewed the following
nine transactions: (i) Equity Office Properties Trust with Beacon Properties
Corporation; (ii) Equity Residential Properties Trust with Evans Withycombe
Residential, Inc.; (iii) The Meditrust Companies with Santa Anita Realty
Enterprises; (iv) Post Properties, Inc. with Columbus Realty Trust; (v) Equity
Residential Properties Trust with Wellsford Residential Properties Trust; (vi)
Camden Property Trust with Paragon Group, Inc.; (vii) United Dominion Realty
Trust, Inc. with South West Property Trust, Inc.; (viii) Chateau Communities,
Inc. with ROC Communities, Inc.; and (ix) Horizon Outlet Centers, Inc. with
McArthur/Glen Realty Corp. FBR observed a range of transaction multiples from
6.09x to 15.17x based on consensus FFO estimates for the acquired companies.
This range was then applied to Horizon's 1998 FFO per share consensus estimate
as reported by Nelson's, resulting in a range of equity values for Horizon
Common Shares of between $10.12 and $25.18 per share. FBR noted that the implied
price for Horizon Common Shares was within this range.
AVERAGE TRANSACTION PREMIUM ANALYSIS. FBR reviewed mergers and acquisitions
of U.S. public REITs in negotiated transactions with values over $50 million,
utilizing publicly available data and data provided by NAREIT, to derive a range
of premiums paid over the public trading prices per share five trading days
prior to the announcement of such transactions for the periods from 1995 to
1997. FBR noted that the reasons for, and circumstances surrounding, each of the
transactions analyzed were diverse and that premiums fluctuate among different
industry sectors based on perceived growth, synergies, strategic value and the
type of consideration utilized in the transaction.
The analyses indicated that the average of premiums paid over the public
trading prices adjusted for deviations was 11.20% in the period from 1995 to
1997 (the premiums ranged from -3.99% to 21.01%). FBR applied the median premium
to Horizon's closing price of $13.1875 on November 6, 1997 (five trading days
prior to the announcement of the merger), to derive an implied price per Horizon
Common Share of $14.66.
HISTORICAL EXCHANGE RATIO ANALYSIS. FBR reviewed the historical exchange
ratio of the daily closing price per Horizon Common Share to the daily closing
price per Prime Common Share and per Prime Series B Preferred Share for the
365-day period from January 29, 1997, to January 29, 1998. FBR noted a low to
high range of between $11.88 to $16.18 (with an average price of $13.83) for the
Prime Common Shares, between $22.75 and $24.89 (with an average price of $23.72)
for the Prime Series B Preferred Shares; and an average exchange ratio of 0.597
for the Prime Common Shares and 0.200 for the Prime Series B Preferred Shares,
in the stated 365-day period. In addition, such analysis implied a one-year
historical share price value range for Horizon Common Shares of $11.54 to $14.59
(with an average price of $13.00), as calculated by multiplying the daily 1997
Prime Common Share and Prime Series B Preferred Share closing prices by their
respective exchange ratios.
DISCOUNTED CASH FLOW ANALYSIS. FBR performed discounted cash flow analysis
(i.e., an analysis of the present value of the projected levered cash flows for
the periods using a range of discount rates) of Horizon based upon projections
of Horizon's cash flow for the years 1998 to 2000, inclusive. A range of
terminal value capitalization rates from 8.5% to 12.5% was applied to year 2000
cash flows to determine a terminal value. This value, and the intervening annual
cash flows from year 1998 through 2000 were discounted at a range of discount
rates from 10% to 12% (the range of capitalization and discount rates selected
is representative of similar real estate properties). The present value of
developments was added to the discounted cash flow value. This sum was then
divided by the total Horizon Common Shares outstanding to arrive at an implied
value of $13.58 to $19.59 per Horizon Common Share.
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CONTRIBUTION ANALYSIS. FBR reviewed certain estimated future operating and
financial information (including, among other things, total rental revenues,
NOI, EBITDA, and FFO) for Prime and Horizon for 1998. Based upon 1998
contribution, including synergies and accounting adjustments, Horizon would
contribute 43% of NOI, 38% of EBITDA, and 57% of FFO, while maintaining a 42%
equity ownership in the combined entity.
As a part of its investment banking business, FBR and its affiliates are
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate,
and other purposes. FBR was selected to deliver an opinion to the Prime Board of
Directors with respect to the Transactions on the basis of such experience and
its familiarity with Prime.
FBR will receive a fee of $3,000,000 from Prime, which is contingent and
payable upon consummation of the Transactions, for the delivery of its opinion
and related advisory work. Prime reimbursed FBR for its reasonable expenses
incurred in connection with its services, including the fees and disbursements
of counsel, and agreed to indemnify FBR against certain liabilities, including
liabilities arising under federal securities laws. In the event the Transactions
are not consummated, Prime will reimburse FBR for any additional reasonable out
of pocket expenses, including costs of travel and reasonable legal fees,
incurred in connection with its services.
FBR and its affiliates maintain banking and other business relationships
with Prime and its affiliates pursuant to which FBR has received an aggregate of
approximately $13,009,329 in fees over the past two years. Of this amount,
approximately $7,773,925 was earned in connection with the underwriting of Prime
Series B Preferred Shares and secondary offerings of Prime Common Shares;
approximately $5,235,404 was earned in connection with the initial public
offerings and secondary offerings of the common stock of Prime's affiliates. In
the ordinary course of their businesses, FBR and its affiliates may actively
trade the equity securities of Prime or Horizon for their own accounts or for
the accounts of customers and, accordingly, they may at any time hold long or
short positions in such securities.
OPINION OF FINANCIAL ADVISOR--HORIZON
On September 25, 1997, Horizon and Horizon Partnership engaged Lehman
Brothers to act as its financial advisor to assist in the Horizon Board of
Directors' study of strategic alternatives available to Horizon and Horizon
Partnership. As part of its role as financial advisor, Lehman Brothers rendered
its opinion as to the fairness, from a financial point of view, to the Horizon
Common Shareholders and the Horizon Partnership Unitholders of the consideration
to be received by such parties in the Transactions.
On January 29, 1998, Lehman Brothers delivered its oral opinion, which
opinion was subsequently confirmed in writing, that, as of such date, and
subject to assumptions, factors and limitations as described in that opinion,
the consideration to be received by the shareholders and limited partners of
Horizon and Horizon Partnership, respectively, was fair to such securityholders
from a financial point of view. Lehman Brothers has not been requested to, and,
unless requested, will not, update its opinion prior to Closing.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS IS ATTACHED AS
APPENDIX E TO THIS JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. HORIZON PARTNERSHIP
UNITHOLDERS ARE URGED TO READ SUCH OPINION FOR A DISCUSSION OF THE ASSUMPTIONS
MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY LEHMAN
BROTHERS IN RENDERING ITS OPINION. THE SUMMARY OF THE OPINION SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION.
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In the opinion of Horizon, no event or significant changes in information
have occurred that would alter the opinion of Lehman Brothers. However, if such
an event or change does occur, including, without limitation, an amendment to
the Merger Agreement which materially affects the financial terms of such
agreement, a revised fairness opinion will be requested.
No limitations were imposed by, and no instructions were given by, Horizon
or Horizon Partnership on the scope of Lehman Brothers' investigation or the
procedures to be followed by Lehman Brothers in rendering its opinion. Lehman
Brothers was not requested to and did not make any recommendation to the Horizon
Board of Directors as to the form or amount of the consideration to be received
by the Horizon shareholders and limited partners in the Transactions, which was
determined through arms-length negotiations between Horizon and Prime. In
arriving at its opinion, Lehman Brothers did not ascribe a specific range of
values to Horizon, but made its determination as to the fairness, from a
financial point of view, of the consideration to be received by the shareholders
and limited partners on the basis of the financial and comparative analyses
described below. Lehman Brothers' opinion is for the use and benefit of the
Horizon Board of Directors and was rendered to the Horizon Board of Directors in
connection with its consideration of the Transactions and is not intended to be
and does not constitute a recommendation to any shareholder or limited partner
as to how such shareholder or limited partner should vote with respect to the
Transactions at the Horizon Special Meeting. Lehman Brothers was not requested
to opine as to, and its opinion does not in any manner address, Horizon's
underlying business decision to proceed with or effect the Transactions.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (1) the
Merger Agreement and the specific terms of the Transactions, (2) publicly
available information concerning Horizon and Prime which Lehman Brothers
believed to be relevant to its analysis, (3) financial and operating information
with respect to the business, operations and prospects of Horizon and Prime
furnished to Lehman Brothers by Horizon and Prime, (4) a trading history of
Horizon Common Shares from November 3, 1993 to the present and a comparison of
that trading history with those of other companies which Lehman Brothers deemed
relevant, (5) a comparison of the historical financial results and present
financial condition of Horizon and Horizon Partnership with those of other
companies which Lehman Brothers deemed relevant, (6) a trading history of Prime
Common Shares from March 15, 1994 to the present and a comparison of that
trading history with those of other companies which Lehman Brothers deemed
relevant and the terms of, and a trading history of Prime Series B Preferred
Shares from March 15, 1994 to the present and a comparison of that trading
history with those of other securities that Lehman Brothers deemed relevant, (7)
a comparison of the historical financial results and present financial condition
of Prime with those of other companies which Lehman Brothers deemed relevant,
(8) potential liquidation values of the properties of Horizon furnished to
Lehman Brothers by Horizon, (9) the results of Lehman Brothers' efforts to
solicit indications of interest and proposals from third parties with respect to
a purchase of all or a portion of the business and/or properties of Horizon
which efforts produced preliminary indications of interest from two parties
other than Prime however, because Prime was the only party to make a firm offer
for all of Horizon's properties, without any material contingencies, it was not
possible to compare from a financial point of view the relative value of other
indications of interest, (10) alternatives available to Horizon on a stand-alone
basis to fund their on-going capital and operating requirements and (11) the
potential pro forma financial effects of the Transactions on Prime (including,
without limitation, the formation of HGP and HGP LP.) In addition, Lehman
Brothers had discussions with the managements of Horizon and Prime concerning
their respective business, operations, assets, financial condition and prospects
and the cost savings, operating synergies and strategic benefits expected to
result from a combination of certain of the businesses and properties of Horizon
and Prime and have undertaken such other studies, analyses and investigations as
Lehman Brothers deemed appropriate. Lehman Brothers did not identify any
specific material factors which did not support its fairness opinion.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information given to Lehman
Brothers without assuming any responsibility for
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independent verification of such information and further relied upon the
assurances of the managements of Horizon and Prime that they are not aware of
any facts or circumstances that would make such information inaccurate or
misleading. With respect to the financial projections of New Prime, upon advice
of Horizon and Prime, Lehman Brothers assumed that such projections were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the managements of Horizon and Prime as to the future financial
performance of Horizon, Prime and New Prime and that Horizon, Prime and New
Prime will perform substantially in accordance with such projections. Lehman
Brothers was not provided with, and did not have access to, financial
projections for Prime or New Prime for any period subsequent to their 1998
fiscal year. In arriving at its opinion, Lehman Brothers conducted only a
limited physical inspection of the properties of Horizon and Prime and did not
make or obtain any evaluations or appraisals of the assets or liabilities of
Horizon or Prime. Upon advice of Horizon, Lehman Brothers assumed that the
Transactions will qualify as tax-free reorganizations within the meaning of
Section 368(a) of the Code and therefore as a tax-free transaction to the
shareholders of Horizon except to the extent that they receive a taxable
dividend of shares of HGP. In addition, Lehman Brothers assumed that the
Transactions will generally be tax-free to the limited partners of Horizon
Partnership. Lehman Brothers' opinion necessarily is based upon market, economic
and other conditions as they exist on, and can be evaluated as of, the date of
its opinion.
In connection with the preparation and delivery of its opinion, Lehman
Brothers performed a variety of financial and comparative analyses, as described
below. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial and comparative
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Furthermore, in arriving at its opinion, Lehman Brothers did not
attribute any particular weight to any analysis and factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Lehman Brothers believes that its analyses
must be considered as a whole and that considering any portion of such analyses
without considering all analyses and considered factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, Lehman Brothers made numerous assumptions with respect to industry
performance, general business, economic conditions, the competitive environment
in the markets in which Horizon and Prime operate and other matters. Many of
these assumptions are beyond the control of Horizon and Prime. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses or assets do not purport to be appraisals or to reflect the prices
at which such businesses or assets actually may be sold.
STOCK TRADING HISTORY. Lehman Brothers considered various historical data
concerning the history of the trading prices for Horizon Common Shares for the
period from November 3, 1993, the date of Horizon's initial public offering, to
January 22, 1998 and the relationship between the price movements of the common
stock and the relative price performance of Horizon as compared to the Horizon
Peer Group (as defined below) for the period January 1, 1996 to January 22,
1998. Lehman Brothers reviewed the historical trading prices for the Horizon
Common Shares and noted that the mean daily closing price of the Horizon Common
Shares from its initial public offering through January 22, 1998 was $20.83,
with a low of $10.33 on April 23, 1997 and a high of $28.75 on both February 23,
1994 and June 7, 1994. Horizon's one month stock price performance, one quarter
stock price performance, one year stock price performance and 24.7-month stock
price performance (January 1, 1996 - January 22, 1998) was 8.5%, (18.3%),
(35.6%) and (47.5%), respectively. Lehman Brothers also reviewed the stock
trading history of the Prime Peer Group (as defined below) for the same period.
The mean of the Prime Peer Group's one month stock price performance, one
quarter stock price performance, one year stock price performance and 24.7-month
stock price performance (January 1, 1996 - January 22, 1998) was 1.8%, (1.3%),
15.0%, and 9.6%, respectively. Additionally, Lehman Brothers reviewed the
performance of the S&P 500 and the "Lehman Brothers' REIT Index" for the same
period. The "Lehman Brothers' REIT Index" is defined as a market
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capitalization weighted index of 103 real estate investment trusts across nine
real estate sectors indexed to January 1, 1996. The one-month, one-quarter,
one-year and 24.7-month performance of the S&P 500 was 1.0%, (0.6%), 22.5%, and
56.4%, respectively, while the performance of the Lehman Brothers REIT Index for
the same periods was 1.9%, 3.3%, 17.0%, and 51.2%, respectively.
Lehman Brothers considered various historical data concerning the trading
prices for Prime Common Shares for the period from March 15, 1994, the date of
the Prime IPO to January 22, 1998 and the relationship between the price
movements of the Prime Common Shares and the relative performance of Prime as
compared to the Prime Peer Group for the same period. Lehman Brothers reviewed
the historical trading prices for Prime Common Shares and noted that the mean
daily closing price of Prime Common Shares from the Prime IPO through January
22, 1998 was $13.72, with a low of $11.00 on twenty-two different dates in 1996
(the latest was August 6, 1996) and a high of $20.00 on March 18, 21 and 22,
1994 and April 11, 1994. Prime's one month stock price performance, one quarter
stock price performance, one year stock price performance and 24.7-month stock
price performance (January 1, 1996 - January 22, 1998) was 6.4%, 1.6%, 22.8%,
and 30.5%, respectively. Lehman Brothers also reviewed the stock trading history
of the Prime Peer Group (as defined below) for the same period. The mean of the
Prime Peer Group's one month stock price performance, one quarter stock price
performance, one year stock price performance and 24.7-month stock performance
(January 1, 1996 - January 22, 1998) was 2.3%, (6.2%), 0.4%, and (9.9%).
Additionally, Lehman Brothers reviewed the performance of the S&P 500 and the
Lehman Brothers' REIT Index for the same period. The one-month, one-quarter,
one-year and 24.7-month performance of the S&P 500 was 1.0%, (0.6%), 22.5%, and
56.4%, respectively, while the performance of the Lehman Brothers REIT Index for
the same periods was 1.9%, 3.3%, 17.0%, and 51.2%, respectively.
ANALYSES OF SELECTED RELEVANT PUBLICLY TRADED COMPANIES. Using publicly
available information, Lehman Brothers compared selected financial data of
Horizon with similar data of selected publicly-traded REITs engaged in
businesses considered by Lehman Brothers to be relevant. Specifically, Lehman
Brothers included in its review Prime, Tanger Factory Outlet Centers, Inc.,
Chelsea GCA Realty, Inc., and FAC Realty Trust, Inc., (the "Horizon Peer
Group"). Lehman Brothers reviewed and compared selected financial statistics and
ratios for Horizon with those of the Horizon Peer Group. In the analysis, Lehman
Brothers reviewed debt-to-total market capitalization ratios, latest twelve
months' ("LTM") FFO multiples, and 1997 and 1998 estimated FFO multiples. The
LTM, 1997 estimated and 1998 estimated FFO multiples were calculated as a ratio
of current market price divided by the LTM FFO per share and estimated 1997 and
1998 estimated FFO per share for each of the comparable companies. The 1997 and
1998 FFO per share estimates were based upon the mean of publicly-available
earnings estimates published by research analysts as available by First Call
Investor Services. Lehman Brothers divided the comparable companies into two
different comparable groups and then analyzed Horizon with respect to each of
them. The first group, (the "Well-Capitalized Owners"), is comprised of Chelsea
GCA Realty, Inc. and Prime. Both of these companies have higher 1998 FFO
multiples than the second group, (the "Highly-Leveraged Owners"), comprised of
FAC Realty Trust, Inc. and Tanger Factory Outlet Centers, Inc.
Lehman Brothers compared Horizon Common Shares to those of the Horizon Peer
Group based on the financial statistics and ratios described above. The mean
debt-to-total market capitalization ratio for the Well-Capitalized Owners was
36.5% while the mean debt-to-total market capitalization for the Highly-
Leveraged Owners was 54.7%. Horizon's debt-to-total market capitalization was
64.4%, or 76.4% higher than the Well-Capitalized Owners and 17.7% higher than
the Highly-Leveraged Owners. The mean LTM FFO multiple for the Well-Capitalized
Owners was 12.4x while the mean LTM FFO multiple for the Highly-Leveraged Owners
was 8.0x. Horizon's LTM FFO multiple was 7.3x or 41.1% lower than the Well-
Capitalized Owners and 8.8% lower than the Highly-Leveraged Owners. The mean
1997 estimated FFO multiple for the Well-Capitalized Owners was 12.3x while the
mean 1997 estimated FFO multiple for the Highly-Leveraged Owners was 7.9x.
Horizon's 1997 estimated FFO multiple was 7.9x or 35.8% lower than the
Well-Capitalized Owners and equal to the Highly-Leveraged Owners. The mean 1998
estimated FFO multiple for the Well-Capitalized Owners was 10.7x while the mean
1998 estimated FFO multiple for the
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Highly-Leveraged Owners was 7.3x. Horizon's 1998 estimated FFO multiple was 7.3x
or 31.8% lower than the Well-Capitalized Owners and equal to the
Highly-Leveraged Owners.
Lehman Brothers also compared selected financial data of Prime with similar
data of selected publicly traded REITs engaged in businesses considered by
Lehman Brothers to be relevant. Specifically, Lehman Brothers included in its
review Horizon, Tanger Factory Outlet Centers, Inc., Chelsea GCA Realty, Inc.,
and FAC Realty Trust, Inc. ("Prime Peer Group"). Lehman Brothers compared the
Prime Common Shares to those of the Prime Peer Group based on the financial
statistics and ratios described above. In this analysis, Chelsea GCA Realty,
Inc. comprises the Well-Capitalized Owners and FAC Realty Trust, Inc., Tanger
Factory Outlet Centers, Inc. and Horizon comprise the Highly-Leveraged Owners.
The mean debt-to-total market capitalization ratio for the Well-Capitalized
Owners was 27.5% while the mean debt-to-total market capitalization ratio for
the Highly-Leveraged Owners was 57.9%. Prime's debt-to-total market
capitalization ratio was 45.5%, or 65.5% higher than the Well-Capitalized Owners
and 21.4% lower than the Highly-Leveraged Owners. The mean LTM FFO multiple for
the Well-Capitalized Owners was 12.7x while the mean LTM FFO multiple for the
Highly-Leveraged Owners was 7.8x. Prime's LTM FFO multiple was 12.1x or 4.7%
lower than the Well-Capitalized Owners and 55.1% higher than the
Highly-Leveraged Owners. The mean 1997 estimated FFO multiple for the
Well-Capitalized Owners was 12.5x while the mean 1997 estimated FFO multiple for
the Highly-Leveraged Owners was 7.9x. Prime's 1997 estimated FFO multiple was
12.1x or 3.2% lower than the Well-Capitalized Owners and 53.2% higher than the
Highly-Leveraged Owners. The mean 1998 estimated FFO multiple for the
Well-Capitalized Owners was 11.1x while the mean 1998 estimated FFO multiple for
the Highly-Leveraged Owners was 7.3x. Prime Inc.'s 1998 estimated FFO multiple
was 10.4x or 6.3% lower than the Well-Capitalized Owners and 42.5% higher than
the Highly-Leveraged Owners.
VALUATION ANALYSIS OF PRIME SERIES B PREFERRED SHARES. Lehman reviewed the
historical trading prices for the Prime Series B Preferred Shares and noted that
the mean daily closing price of the Prime Series B Preferred Shares from its
issue date of March 15, 1994 through January 22, 1998 was $21.06, with a low of
$16.25 on March 15, 1996 and a high of $26.25 on March 19, 1994. Prime Series B
Preferred Shares' one month stock price performance, one quarter stock price
performance, one year stock price performance and 24.7-month stock price
performance (January 1, 1996 - January 22, 1998) was 2.1%, (1.5%), 8.2%, and
(3.4%), respectively. Lehman Brothers analyzed the stock trading history of the
Prime Series B Preferred Shares against the Prime Common Shares and the inverted
30 Year Treasury Bond. Lehman Brothers observed that the Prime Series B
Preferred Shares' trading pattern closely tracked that of the Prime Common
Shares and not that of the inverted 30 Year Treasury Bond. Lehman Brothers also
evaluated the Prime Series B Preferred Shares utilizing a convertible preferred
derivative model. The derivative model takes into account the particular
characteristics of the issue including the credit rating, the number of years
before the issue is callable, the price at call, the coupon rate, and the
present value of all future coupon payments assuming a discount rate of 9.95%
which was based upon a spread of 400 basis points over the 30 year Treasury Bond
on January 23, 1998. According to this analysis, a Prime Series B Preferred
Share is valued at $24.59 which is determined by the simple bond value of the
issue ($21.94) plus the value of the investor call option ($4.05) minus the
value of the issuer call option ($1.40).
ASSET LIQUIDATION ANALYSIS. Lehman Brothers analyzed the liquidation values
provided by Horizon for each of Horizon's 35 properties after taking into
account the transactions contemplated by the C&C Contribution Agreement. Lehman
Brothers used Horizon's estimates of stabilized NOI and applied a cap rate to
determine value. The cap rates are based on the overall quality of the centers,
tenant mix at each center, physical condition of each center and future growth
potential.
The analysis produced an aggregate liquidation value for all of Horizon's
properties of $10.62 - $12.17 per share. This represented a cap rate of 10.7% -
11.2%, respectively, on the portfolio. The cap rates on the individual centers
ranged from a low of 9.0% to a high of 15.5%.
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PRO FORMA MERGER ANALYSIS. Lehman Brothers performed an analysis of the
effect of the Transactions on Prime's pro forma FFO per share based on Horizon's
and Prime's projected operating results. Lehman Brothers combined the projected
operating results of Horizon and Prime to arrive at a pro forma FFO for New
Prime. Lehman Brothers' analysis was based on an assumed exchange ratio of 0.597
of a Prime Common Share and 0.20 of a Prime Series B Preferred Share for each
share of Horizon Common Stock and an assumed exchange rate of 0.9193 share of
limited partnership unit of Prime Partnership for each Horizon Partnership Unit.
Based on this analysis, Lehman Brothers concluded that the Transactions would be
accretive to Prime's FFO in 1998. In addition, managements of both Horizon and
Prime believe that the Transactions will be accretive to Prime's FFO in 1998.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Horizon Board of Directors
selected Lehman Brothers because of its expertise, reputation and familiarity
with the real estate industry.
As compensation for its services in connection with the Transactions,
Horizon has agreed to pay Lehman Brothers a fee contingent upon consummation of
the Transactions of $6,000,000, as well as to reimburse Lehman Brothers for
reasonable expenses. In the event the Transactions are not consummated, Lehman
Brothers would be entitled to reimbursement of such expenses. In addition,
Horizon has agreed to indemnify Lehman Brothers for certain liabilities that may
arise out of its engagement by Horizon and the rendering of its opinion.
Lehman Brothers is acting as financial advisor to Horizon in connection with
the Transactions. Lehman Brothers has also performed various investment banking
services for Horizon in the past and has received customary fees for such
services. In the ordinary course of its business, Lehman Brothers may trade in
the shares of Horizon and Prime for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, Lehman Brothers Holdings Inc., an affiliate of
Lehman Brothers, has outstanding a first mortgage loan to Horizon secured by 16
of Horizon's properties which had a balance outstanding as of January 27, 1998
of approximately $254,000,000 and such loan is due in full upon the closing of
the Transactions.
EFFECTIVE TIME OF THE CORPORATE MERGER
If the Transactions are approved by the requisite vote of the Horizon Common
Shareholders and the Prime Shareholders, and the other conditions to the
Transactions are satisfied or waived, the Corporate Merger will become effective
immediately following the effectiveness of the Partnership Merger and upon the
later of (i) the acceptance for record of the Corporate Articles of Merger by
the Maryland Department, or (ii) at a different time established in the
Corporate Articles of Merger, not to exceed 30 days after the Corporate Articles
of Merger are accepted for record by the Maryland Department. It is presently
anticipated that such filing and acceptance will be made on or about June ,
1998, and that the Corporate Merger Effective Time will occur on such date
unless a different date is specified in the Corporate Articles of Merger, as
discussed above, although there can be no assurance as to whether or when the
Corporate Merger will occur. See "--Representations and Warranties; Conditions
to the Mergers."
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGERS
The Merger Agreement contains representations and warranties by Prime and
Horizon regarding, among other things, their organization and good standing,
capitalization, ownership and capitalization of their subsidiaries,
qualification to do business, authority to enter into the Merger Agreement and
related agreements, filings with the Commission, reliability of financial
statements, compliance with applicable laws and regulations, taxation and
qualification as a REIT, properties, development rights, environmental
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matters, contracts, debt instruments, employee benefit plans, undisclosed
liabilities and the absence of certain legal proceedings and other events,
including material adverse changes in the parties' businesses, financial
condition or results of operations. These representations and warranties in the
Merger Agreement will not survive the Corporate Merger Effective Time.
The respective obligations of Prime and Horizon to effect the Mergers are
subject to the following conditions: (i) approval of the Transactions by the
limited partners and shareholders, as the case may be, of Horizon Partnership,
Prime Partnership, Horizon and Prime, (ii) approval by the NYSE of the listing
of the New Prime Common Shares and New Prime Series B Preferred Shares to be
issued in the Corporate Merger and the New Prime Common Shares reserved for
issuance upon exchange of Prime Partnership Common Units issued in the
Partnership Merger, (iii) the Registration Statement shall be effective and
shall not be the subject of any stop order or proceeding by the Commission
seeking a stop order, (iv) no injunctions or restraints shall have been issued
by any court of competent jurisdiction preventing the consummation of the
Mergers, (v) all state securities or "blue sky" laws shall have been complied
with, and (vi) all material actions by or in respect of filings with any
governmental entity required for the consummation of the Mergers shall have been
obtained.
The respective obligations of Horizon and Prime to effect the Mergers are
also subject to the following additional conditions: (i) all representations and
warranties made by the parties shall be true and correct as of the Closing Date,
which shall be deemed the case unless the aggregate economic losses caused by
the breach of such representations and warranties exceeds $50,000,000, (ii) each
party shall have performed in all material respects its obligations under the
Merger Agreement, (iii) as of the Closing Date, since February 1, 1998, neither
party, nor any of their subsidiaries, will have suffered a material adverse
change in its business, financial condition or results of operations taken as a
whole that have resulted or would result individually, or in the aggregate, in
economic losses equal to or greater than $50,000,000 or more (a "Material
Adverse Change"), (iv) each party shall have received an opinion of counsel from
counsel to the other party stating that its client was organized and has
operated in conformity with the requirements for qualification as a REIT under
the Code, (v) each party shall have received an opinion of counsel dated as of
the closing date, to the effect that the Mergers will qualify as a
reorganization under the provisions of Section 368(a) of the Code and (vi) each
party shall have received a "comfort letter" from the other party's accountants.
The obligations of Prime to effect the Mergers are subject to the following
conditions: (i) the Contribution Agreement and all of the conditions to the
consummation of the transactions contemplated by the Contribution Agreement
shall have been satisfied and each of the transactions contemplated thereby
shall have been completed to the extent required to be completed thereunder as
of such time; and (ii) all of the voting shares of First HGI, Inc., HGI
Perryville, Inc., MG Third Party Services Corp., HGI Management Corp. and Second
HGI, Inc. (other than any such shares owned by Horizon Partnership) shall have
been transferred to Prime Retail Services, Inc., or its designees or assigns, in
accordance with the terms of the Amended and Restated Stock Purchase Agreement
entered into by Ronald Piasecki dated as of February 1, 1998 relating to the
voting capital stock of each of First HGI, Inc., HGI Perryville, Inc., MG Third
Party Services Corp., HGI Management Corp. and Second HGI, Inc. (as amended, the
"Stock Purchase Agreement").
REGULATORY MATTERS
Prime and Horizon believe that the Transactions may be consummated without
notification being given or certain information being furnished to the Federal
Trade Commission (the "FTC") or the Antitrust Division of the Department of
Justice (the "Antitrust Division") pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR Act"), and that no waiting period
requirements under the HSR Act are applicable to the Transactions. However, at
any time before or after the Corporate Merger Effective Time, either the
Antitrust Division or the FTC could take such action under the antitrust laws as
it deems necessary or desirable in the public interest, or certain other persons
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could take action under the antitrust laws, including seeking to enjoin the
Transactions. Prime and Horizon believe that consummation of the Transactions
would not violate any antitrust laws. However, there can be no assurance that a
challenge to the Transactions on antitrust grounds will not be made or, if a
challenge is made, what the result will be.
TERMINATION PROVISIONS
The Merger Agreement provides that it may be terminated at any time prior to
the filing of the Delaware Certificate of Merger with the Delaware Secretary in
connection with the Partnership Merger, whether before or after the Horizon or
Prime shareholder approvals necessary to consummate the transactions
contemplated in the Merger Agreement are obtained, by mutual written consent
duly authorized by the Boards of Directors of Prime and Horizon. In addition,
the Merger Agreement may be terminated by Prime or Horizon (i) if the Mergers
have not been consummated by July 31, 1998 (provided the terminating party will
not have breached in any material respect its obligations under the Merger
Agreement in any manner that will have proximately contributed to the occurrence
of such failure), (ii) upon a breach of any representation, warranty, covenant,
obligation or agreement, on the part of the non-terminating party set forth in
the Merger Agreement, such that certain conditions set forth in the Merger
Agreement would be incapable of being satisfied by July 31, 1998, (iii) if the
requisite vote of the shareholders of Prime or Horizon will not have been
obtained at the meeting of such shareholders, or (iv) if a judgment, injunction,
order, decree, ruling or action by any competent governmental authority
preventing the consummation of any of the Mergers shall have become final and
non-appealable.
The Merger Agreement may be terminated by Horizon upon payments to Prime of
the Break-up Fee and Break-up Expenses, if prior to the Horizon Shareholders
Meeting, the Horizon Board of Directors withdraws or modifies its approval or
recommendation of the Mergers in connection with, or approves or recommends, a
Superior Acquisition Proposal. The Merger Agreement may be terminated by Prime
if (i) prior to the Horizon Shareholders Meeting, the Horizon Board of Directors
withdraws or modifies in any manner adverse to Prime its approval or
recommendation of the Mergers in connection with, or approves or recommends, a
Superior Acquisition Proposal, (ii) Horizon enters into any agreement for any
Acquisition Proposal, or (iii) the Horizon Board of Directors or any committee
thereof shall have resolved to do any of the foregoing.
The Merger Agreement defines an "Acquisition Proposal" as any proposal or
offer, that constitutes or may reasonably be expected to lead to, or otherwise
with respect to, (i) a merger, acquisition, consolidation, share exchange,
business combination or similar transaction, (ii) any tender offer or exchange
offer for 10% or more of the outstanding Horizon Common Shares or the filing of
a registration statement under the Securities Act in connection therewith, (iii)
a transaction resulting in the issuance of securities representing 10% or more
of the outstanding equity securities of Horizon, (iv) the sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the assets or
equity securities (including, without limitation, partnership interests and
units) of Horizon or Horizon Partnership or (v) any public announcements of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing, other than the transactions contemplated by the
Merger Agreement.
The Merger Agreement defines a "Superior Acquisition Proposal" as a bona
fide Acquisition Proposal made by a third party which a majority of the members
of the Horizon Board of Directors resolves in good faith to be in the best
interests of and more favorable to the Horizon Shareholders than the Mergers and
which the Horizon Board of Directors determines is reasonably capable of being
consummated.
BREAK-UP FEE AND EXPENSES
Except as described below, each party shall bear its own fees and expenses
in connection with the transactions contemplated by the Merger Agreement.
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Horizon and Horizon Partnership are obligated to pay Prime Partnership
Break-up Expenses (as defined below) and a fee (a "Break-up Fee") equal to the
lesser of (A) $20,000,000 and (B) the maximum amount which Prime Partnership can
receive without causing Prime to be disqualified as a REIT under the Code, under
the following circumstances:
(i) if the Merger Agreement is terminated by Horizon as a result of the
Horizon Board of Directors having, prior to the Horizon Shareholders
Meeting, withdrawn or modified in any manner adverse to Prime its approval
or recommendation of the Transactions in connection with, or approved or
recommended, a Superior Acquisition Proposal; provided, however, that
Horizon and Horizon Partnership will have no obligation to pay the Break-up
Fee if, at the time of such termination of the Merger Agreement, Horizon was
also entitled to terminate the Merger Agreement as a result of a breach of
any representation, warranty, covenant, obligation or agreement on the part
of Prime or Prime Partnership;
(ii) if the Merger Agreement is terminated by Prime as a result of (A)
the Horizon Board of Directors having, prior to the Horizon Shareholders
Meeting, withdrawn or modified in any manner adverse to Prime its approval
or recommendation of the Transactions in connection with, or having approved
or recommended, any Superior Acquisition Proposal, (B) Horizon having
entered into any agreement for any Acquisition Proposal, or (C) the Horizon
Board of Directors or any committee thereof having resolved to do any of the
foregoing; provided, however, that Horizon and Horizon Partnership will have
no obligation to pay the Break-up Fee if, at the time of such termination of
the Merger Agreement, Horizon was also entitled to terminate the Merger
Agreement as a result of a breach of any representation, warranty, covenant,
obligation or agreement on the part of Prime or Prime Partnership; or
(iii) if the Merger Agreement is terminated by Prime as a result of (A) a
breach of any representation, warranty, covenant, obligation or agreement on
the part of Horizon or Horizon Partnership, (B) if any representation or
warranty of Horizon or Horizon Partnership shall become untrue such that
certain conditions precedent to the Mergers are unfulfilled, (C) the
existence of a final and non-appealable judgment, injunction, order, decree
or action by any governmental entity of competent authority preventing the
consummation of the Mergers (if primarily resulting from any action or
inaction of Horizon of any Horizon subsidiary), (D) the Mergers not being
consummated before July 31, 1998 (or as otherwise extended), (E) the failure
of the Mergers to be approved by the requisite vote at the Horizon
Shareholders Meeting or any adjournment thereof or as a result of failure to
obtain the requisite approvals of the partners of Horizon Partnership and
HGP LP and, prior to the time of such termination, an Acquisition Proposal
has been received by Horizon or any Horizon subsidiary, and either prior to
the termination of the Merger Agreement or within 12 months thereafter,
Horizon or any Horizon subsidiary enters into any written Acquisition
Proposal which is subsequently consummated (whether or not any such
Acquisition Proposal is the same Acquisition Proposal which had been
received at the time of the termination of the Merger Agreement).
Horizon and Horizon Partnership are obligated to pay Prime Partnership a
Break-up Fee if, prior to the Horizon Shareholders Meeting, the Horizon Board of
Directors shall have withdrawn or modified in any manner adverse to Prime its
approval or recommendation of the Mergers and, within 12 months after
termination of the Merger Agreement, Horizon or Horizon Partnership enters into
any written Acquisition Proposal which is subsequently consummated (whether or
not any Acquisition Proposal had been received prior to the time of the
termination of the Merger Agreement).
Horizon and Horizon Partnership are obligated to pay Prime Partnership an
amount ("Break-up Expenses") equal to the lesser of (A) $4,500,000, (B) Prime
Partnership's out-of-pocket expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby (including, without
limitation, all attorneys', accountants' and investment bankers' fees and
expenses) and (C) the maximum amount which Prime Partnership can receive without
causing it to be disqualified as a REIT under the
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Code, under the following circumstances, unless, at the time of termination of
the Merger Agreement, Horizon was also entitled to terminate the Merger
Agreement as a result of a breach of any representation, warranty, covenant,
obligation or agreement on the part of Prime or Prime Partnership:
(i) if the Merger Agreement is terminated by Prime as a result of a
breach of any representation, warranty, covenant, obligation or agreement on
the part of Horizon or Horizon Partnership or if any representation or
warranty of Horizon or Horizon Partnership shall become untrue, such that
certain conditions precedent to the Mergers would be incapable of being
satisfied by July 31, 1998; or
(ii) if the Merger Agreement is terminated by Prime or Horizon as a
result of the failure of the Mergers to be approved by the requisite vote at
the Horizon Shareholders Meeting or any adjournment thereof or as a result
of failure to obtain the requisite approvals of the partners of Horizon
Partnership and HGP LP.
Prime and Prime Partnership shall be obligated to pay Horizon Partnership
Break-up Expenses equal to the lesser of (A) $4,500,000, (B) Horizon
Partnership's out-of-pocket expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby (including, without
limitation, all attorneys', accountants' and investment bankers' fees and
expenses) and (C) the maximum amount which Horizon Partnership can receive
without causing it to be disqualified as a REIT under the Code, under the
following circumstances, unless, at the time of termination of the Merger
Agreement, Prime was also entitled to terminate the Merger Agreement as a result
of a breach of any representation, warranty, covenant, obligation or agreement
on the part of Horizon or Horizon Partnership:
(i) if the Merger Agreement is terminated by Horizon as a result of a
breach of any representation, warranty, covenant, obligation or agreement on
the part of Prime or Prime Partnership or if any representation or warranty
of Prime or Prime Partnership shall become untrue, such that certain
conditions precedent to the Mergers would be incapable of being satisfied by
July 31, 1998; or
(ii) if the Merger Agreement is terminated by Prime or Horizon as a
result of the failure of the Mergers to be approved by the requisite vote at
the Prime Shareholders Meeting or any adjournment thereof or as a result of
failure to obtain the requisite approvals of the partners of Prime
Partnership.
NO SOLICITATION OF OTHER TRANSACTIONS
Horizon has agreed, for itself and in its capacity as general partner of
Horizon Partnership, that neither it nor any of the Horizon subsidiaries will,
nor will any of them permit any of its officers, directors, employees,
affiliates, agents, investment bankers, financial advisors, attorneys,
accountants, brokers, finders or other representatives to invite, initiate,
solicit or encourage directly or indirectly, any inquiries, proposals,
discussions or negotiations or the making or implementation of, any Acquisition
Proposal or engage in any discussions or negotiations concerning, or provide any
confidential or non-public information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal, provided that
nothing in the Merger Agreement prohibits the Horizon Board of Directors
(including with respect to Horizon's capacity as general partner of the Horizon
Partnership) from (i) furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited Acquisition
Proposal, if, and only to the extent that, (A) a majority of the members of the
Horizon Board of Directors determines in good faith that such action is required
for the Horizon Board of Directors to comply with its duties to shareholders
imposed by applicable law and (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity Horizon
provides written notice to Prime to the effect that it is furnishing information
to, or entering into discussions with, such person or entity; and (ii) making
any disclosure required by applicable law with regard to an Acquisition
Proposal. The foregoing provisions are not to be construed to (i) permit Horizon
to terminate the Merger Agreement (except as specifically described in the
Merger Agreement, (ii) permit Horizon to enter into an agreement for an
Acquisition Proposal during the term of the Merger Agreement or (iii) affect any
other obligation of
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Horizon under the Merger Agreement; provided however, that a majority of the
Horizon Board of Directors may approve and recommend a Superior Acquisition
Proposal and, in connection therewith, withdraw or modify its approval or
recommendation of the Merger Agreement and the Mergers if such majority
determines in good faith, based upon the advice of outside counsel, that such
action is required for the Horizon Board of Directors to comply with its duties
to shareholders imposed by applicable law.
CONVERSION OF SHARES
Upon the Reincorporation Merger Effective Time, each certificate
representing Horizon Common Shares shall, without any action on the part of the
holder thereof, be deemed to represent a certificate evidencing the same number
of Sky Merger Common Shares.
Upon the Corporate Merger Effective Time, each certificate representing
outstanding Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares or Prime Series C Preferred Shares will, without any action on
the part of the holder thereof, thereafter represent the same number of New
Prime Common Shares, New Prime Series A Preferred Shares, New Prime Series B
Preferred Shares or New Prime Series C Preferred Shares, as the case may be.
Upon the Corporate Merger Effective Time, each Horizon Common Share
outstanding immediately prior to the Corporate Merger Effective Time (other than
any Horizon Common Shares held by Horizon or any Horizon subsidiary, which in
each case shall be automatically canceled and retired and all rights with
respect thereto shall cease to exist) shall be converted into the right to
receive 0.20 of a New Prime Series B Preferred Share and 0.597 of a New Prime
Common Share. As of the Corporate Merger Effective Time, no Horizon Common
Shares shall be outstanding, and all Horizon Common Shares shall automatically
be canceled and retired and all rights with respect thereto shall cease to
exist, and each holder of a certificate representing any Horizon Common Shares
shall cease to have any rights with respect thereto, except the right to
receive, upon surrender of such certificate in accordance with the applicable
provision of the Merger Agreement, certificates representing the New Prime
Common Shares and New Prime Series B Preferred Shares required to be delivered
under the Corporate Articles of Merger and any dividends or other distributions
with a record date prior to the Corporate Merger Effective Time which may have
been declared or made by Horizon on such Horizon Common Shares which remain
unpaid at the Corporate Merger Effective Time and any cash in lieu of fractional
shares to be issued or paid in consideration therefor upon surrender of such
certificate, without interest.
The issuance, terms and conditions of the New Prime Common Shares, New Prime
Series A Preferred Shares, New Prime Series B Preferred Shares and New Prime
Series C Preferred Shares will be governed by the New Prime Charter. For a
detailed description of certain provisions of the New Prime Charter, see
"Certain Provisions of Maryland Law and New Prime's Charter and Bylaws" and
"Comparison of Rights of Shareholders."
APPOINTMENT OF EXCHANGE AGENT
Prior to the Closing Date, Prime shall appoint American Stock Transfer &
Trust Company to act as Exchange Agent for the exchange of the Corporate Merger
Consideration upon surrender of certificates representing issued and outstanding
Horizon Common Shares.
EXCHANGE OF CERTIFICATES
As soon as reasonably practicable after the Corporate Merger Effective Time,
the Exchange Agent shall mail, to each holder of record of a certificate or
certificates which immediately prior to the Corporate Merger Effective Time
represented outstanding Horizon Common Shares (the "Certificates") whose shares
were converted into the right to receive the Corporate Merger Consideration
pursuant to the Merger Agreement, a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent
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and shall be in a form and have such other provisions as New Prime may
reasonably specify) and (ii) instructions for surrendering the Certificates in
exchange for the Corporate Merger Consideration. Upon surrender of a Certificate
for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive the Corporate Merger Consideration relating to the Horizon Common
Shares represented by such Certificate, as well as any dividends, other
distributions or cash in lieu of fractional shares to which such holder is
entitled pursuant to the Merger Agreement, and the Certificate so surrendered
shall be canceled. In the event of a transfer of ownership of Horizon Common
Shares which is not registered in the transfer records of Horizon, payment may
be made to a person other than the person in whose name the Certificate so
surrendered is registered upon compliance with certain requirements as to
endorsement and the payment of taxes. Until surrendered, each Certificate shall
be deemed after the Corporate Merger Effective Time to represent only the right
to receive upon surrender the Corporate Merger Consideration, without interest,
relating to the Horizon Common Shares represented by such Certificate, and any
dividends, other distributions or fractional shares to which such holder is
entitled pursuant to the Merger Agreement. No interest will be paid or will
accrue on the Corporate Merger Consideration upon the surrender of any
Certificate or on any dividends, other distributions or cash in lieu of
fractional shares pursuant to the Merger Agreement.
CONDUCT OF BUSINESS PENDING THE MERGERS
During the period from the date of the Merger Agreement to the Corporate
Merger Effective Time, except as consented to in writing by Prime or as
expressly provided for in the Merger Agreement, the C&C Contribution Agreement
or the Murdock Agreement, Horizon and Horizon Partnership shall, and shall cause
(or, in the case of Horizon subsidiaries that Horizon or Horizon Partnership do
not control, shall use reasonable best efforts to cause) each of the Horizon
subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary course and
in substantially the same manner as heretofore conducted;
(b) use commercially reasonable efforts to preserve intact its business
organizations, goodwill and ongoing businesses and keep available the services
of its officers and employees;
(c) confer on a regular basis with one or more representatives of Prime to
report operational matters of materiality and any proposals to engage in
material transactions (except with respect to Acquisition Proposals, as to which
the no solicitation provisions of the Merger Agreement shall apply);
(d) promptly notify Prime of any material emergency or other material change
in the condition (financial or otherwise), business, properties, assets,
liabilities or the normal course of its businesses or in the operation of its
properties, or of any material governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated);
(e) promptly deliver to Prime true and correct copies of any report,
statement or schedule filed with the Commission subsequent to the date of the
Merger Agreement;
(f) maintain its books and records in accordance with GAAP consistently
applied and not change in any material manner any of its methods, principles or
practices of accounting in effect at the Horizon Financial Statement Date (as
defined in the Merger Agreement), except as may be required by the Commission,
applicable law or GAAP;
(g) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities, subject
to extensions permitted by law, provided Horizon notifies Prime that it is
availing itself of such extensions and provided such extensions do not adversely
affect Horizon's status as a qualified REIT under the Code;
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(h) not make any tax election (unless required by law or necessary to
preserve Horizon's status as a REIT or the status of any Horizon subsidiary as a
partnership for federal income tax purposes, as the case may be) and not make or
rescind any express or deemed election relative to taxes;
(i) make all capital expenditures, and expenditures relating to leasing, in
accordance with a capital budget of Horizon delivered to Prime prior to the date
of the Merger Agreement (the "Horizon Capital Budget") and will not (A) acquire,
enter into any option to acquire, or exercise an option or other right or
election or enter into any other commitment or contractual obligation (each, a
"Commitment") for the acquisition of any real property or other transaction
involving in excess of $100,000 which is not included in the Horizon Capital
Budget approved by Prime, encumber assets or commence construction of, or enter
into any Commitment to develop or construct other real estate projects, except
in the ordinary course of its retail property business or (B) incur or enter
into any Commitment to incur additional indebtedness (secured or unsecured)
except for working capital under its revolving line(s) of credit and Commitments
for indebtedness disclosed to Prime;
(j) not (1) amend its articles of incorporation, or its bylaws, or the
articles or certificate of incorporation, bylaws, code of regulations,
partnership agreement, operating agreement or joint venture agreement or
comparable charter or organization document of any Horizon subsidiary or (2)
amend or otherwise modify or waive any rights under either of the C&C
Contribution Agreement or the Murdock Agreement to which it is a party;
(k) not split, combine or reclassify any capital stock, partnership or other
ownership interests and make no change in the number of shares of capital stock,
membership interests or units of limited partnership interest issued and
outstanding, other than pursuant to the redemption of Horizon Partnership Units
pursuant to the Horizon Partnership Agreement or the exercise of Horizon Stock
Options (as defined and further described in the section entitled "Interests of
Certain Persons in the Transactions");
(l) grant no options or other right or commitment relating to its shares of
capital stock, membership interests or units of limited partnership interest or
any security convertible into its shares of capital stock, membership interests
or units of limited partnership interest, or any security the value of which is
measured by shares of capital stock, or any security subordinated to the claim
of its general creditors and, except as contemplated by the Merger Agreement,
not amend or waive any rights under any of the Horizon Stock Options;
(m) except as provided in the Merger Agreement (see "--Dividends and
Distributions") and in connection with the use of Horizon Common Shares to pay
the exercise price or tax withholding in connection with equity-based employee
benefit plans by the participants therein, not (i) authorize, declare, set aside
or pay any dividend or make any other distribution or payment with respect to
any Horizon Common Shares or Horizon Partnership Units or (ii) directly or
indirectly redeem, purchase or otherwise acquire any shares of capital stock,
membership interests or units of partnership interest or any option, warrant or
right to acquire, or security convertible into, shares of capital stock,
membership interests, or units of partnership interest of Horizon, except for
(A) exchanges of Horizon Common Shares required under Section 5.4 of the Horizon
Charter in order to preserve the status of Horizon as a REIT under the Code and
(B) redemptions of Horizon Partnership Units, whether or not outstanding on the
date of this Agreement, under the Horizon Partnership Agreement in which Horizon
Common Shares are utilized;
(n) not sell, lease, mortgage, subject to lien or otherwise dispose of any
of the Horizon Properties, except in connection with a transaction that is made
in the ordinary course of business and is the subject of a binding contract in
existence on the date of the Merger Agreement and disclosed to Prime; provided,
however, without the prior written consent of Prime, leases of space in all
Horizon Properties which are to be contributed to HGP LP pursuant to the Horizon
Partnership Contribution may be made in accordance with the leasing plans or
parameters which shall be agreed from time to time between Horizon Partnership
and Prime (notwithstanding any provision of the Merger Agreement to the
contrary, a Horizon subsidiary shall be permitted to enter into any lease for
any space in any property owned by it if such Horizon
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subsidiary provides written notice to Prime with respect to the terms of a
proposed lease and Prime does not object in writing by notice to such Horizon
subsidiary to the terms of such lease within one business day after the receipt
of the aforesaid notice from such Horizon subsidiary);
(o) not sell, lease, mortgage, subject to lien or otherwise dispose of any
of its personal property or intangible property, except in connection with a
transaction that is permitted by the Merger Agreement or that is made in the
ordinary course of business and is not material, individually or in the
aggregate;
(p) not make any loans, advances or capital contributions to, or investments
in, any other person (whether by the purchase, redemption or other acquisition
of the equity or debt of such person or otherwise), other than loans, advances
and capital contributions to Horizon subsidiaries in existence on the date
hereof and advances to employees in the ordinary course of business consistent
with past practice;
(q) not incur, pay, discharge, satisfy or settle any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the ordinary
course of business consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto) furnished
to Prime or incurred in the ordinary course of business consistent with past
practice;
(r) not guarantee the indebtedness of another person, enter into any "keep
well" or other agreement to maintain any financial statement condition of
another person or enter into any arrangement having the economic effect of any
of the foregoing;
(s) not enter into any Commitment with any officer, director or affiliate of
Horizon or any of the Horizon subsidiaries or any material Commitment with any
consultant;
(t) except as disclosed to Prime, not increase any compensation or enter
into or amend any employment agreement disclosed to Prime with any of its
officers, directors or employees, other than as required by any contract or plan
or in accordance with waivers by employees of benefits under such agreements and
other than normal year end bonuses in keeping consistent with past practice and
annual salary increases not exceeding 5%; provided, however, that for any
officer or employee earning an annual salary in excess of $75,000, Horizon may
provide such employee with an annual salary increase only after consulting with
Prime before effecting such increase;
(u) not adopt any new employee benefit plan, incentive plan, severance plan,
stock option or similar plan or amend any existing plans or rights, except for
changes to severance benefits to provide that an employee whose position is
transferred to a location outside the standard metropolitan statistical area in
which such employee is currently employed shall not forfeit severance benefits
by reason of failure to accept such transfer, and changes which are required by
law;
(v) not settle any shareholder derivative, class action claims or other suit
or claims arising out of or in connection with any of the transactions
contemplated by the Merger Agreement;
(w) not change the ownership of any of its subsidiaries, except changes
which arise as a result of the acquisition of Horizon Partnership Units in
exchange for Horizon Common Shares pursuant to exercise of the Horizon
Partnership Units redemption right under the Horizon Partnership Agreement;
(x) not accept a promissory note in payment of the exercise price payable
under any option to purchase Horizon Common Shares;
(y) not enter into or amend or otherwise modify or waive any rights under
any agreement or arrangement for the persons that are affiliates, or as of the
date hereof, all officers, directors or employees, of Horizon, Horizon
Partnership or any Horizon subsidiary not approved by a majority of the
"independent" members of the Horizon Board of Directors;
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(z) not directly or indirectly or through a subsidiary, merge or consolidate
with, acquire all or substantially all of the assets of, or acquire the
beneficial ownership of a majority of the outstanding capital stock or other
equity interest in any person or entity unless such transaction has been
approved by Prime.
Notwithstanding any provision of the Merger Agreement to the contrary, (i)
on or prior to the Closing, Horizon or Horizon Partnership shall be permitted to
make any or all of certain payments previously disclosed to Prime without the
consent of Prime and (ii) Horizon and Horizon Partnership shall be permitted to
take any and all actions expressly set forth in a quarterly operating budget,
prepared by Horizon and approved by Prime in writing prior to the commencement
of each quarter.
During the period from the date of the Merger Agreement to the Corporate
Merger Effective Time, except as (i) contemplated by the Merger Agreement
including as contemplated by the Contribution and Distribution Agreement or (ii)
consented to in writing by Horizon, Prime and Prime Partnership shall, and shall
cause (or, in the case of Prime subsidiaries that Prime or Prime Partnership do
not control, use reasonable best efforts to cause) each of the Prime
subsidiaries to:
(a) use commercially reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its officers and
employees;
(b) confer on a regular basis with one or more representatives of Horizon to
report operational matters of materiality which would have a Prime Material
Adverse Effect (as defined in the Merger Agreement);
(c) promptly notify Horizon of any material emergency or other material
change in the condition (financial or otherwise), business, properties, assets,
liabilities, prospects or the normal course of its businesses or in the
operation of its properties, or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated);
(d) promptly deliver to Horizon true and correct copies of any report,
statement or schedule filed with the Commission subsequent to the date of the
Merger Agreement;
(e) maintain its books and records in accordance with GAAP consistently
applied and not change in any material manner any of its methods, principles or
practices of accounting in effect at the Prime Financial Statement Date (as
defined in the Merger Agreement), except as may be required by the Commission,
applicable law or GAAP;
(f) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities, subject
to extensions permitted by law, provided such extensions do not adversely affect
Prime's status as a qualified REIT under the Code;
(g) not make or rescind any express or deemed election relative to taxes
(unless required by law or necessary to preserve Prime's status as a REIT or the
status of any Prime subsidiary as a partnership for federal income tax purposes
or as a qualified REIT subsidiary under Section 856(i) of the Code, as the case
may be);
(h) not amend the Prime Charter or the Prime Bylaws, or the articles or
certificate of incorporation, bylaws, code of regulations, partnership
agreement, operating agreement or joint venture agreement or comparable charter
or organization document of any Prime subsidiary, including the Prime
Partnership Agreement (except to the extent necessary to reflect the admission
of additional limited partners and other amendments in connection therewith that
can be made by Prime without a vote of limited partners and that will not,
individually or in the aggregate, materially adversely affect the rights or
obligations of holders of Prime Partnership Common Units);
(i) except as provided in the Merger Agreement (see "--Dividends and
Distributions") and in connection with the use of Prime Common Shares to pay the
exercise price or tax withholding in connection with equity-based employee
benefit plans by the participants therein, not (A) authorize,
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declare, set aside or pay any dividend or make any other distribution or payment
with respect to any Prime Common Shares or Prime Partnership Common Units or (B)
directly or indirectly redeem, purchase or otherwise acquire any shares of
capital stock, membership interests or units of partnership interest or any
option, warrant or right to acquire, or security convertible into, shares of
capital stock, membership interests, or units of partnership interest of Prime,
except for (1) conversions of Prime Common Shares required under Section 4.9.5
or Section 4.5.7, respectively, of the Prime Charter in order to preserve the
status of Prime as a REIT under the Code and (2) exchanges of Prime Partnership
Common Units, whether or not outstanding on the date of the Merger Agreement,
under the Prime Partnership Agreement in which Prime Common Shares are utilized;
(j) not sell, lease, mortgage, subject to lien or otherwise dispose of any
of the Prime Properties, except in connection with a transaction that would not
reasonably be expected to have a Prime Material Adverse Effect;
(k) not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise) if it would
reasonably be expected to have a Prime Material Adverse Effect; and
(l) except as contemplated by the Merger Agreement, not directly or
indirectly through a subsidiary, merge or consolidate with, or acquire all or
substantially all of the assets of, or the beneficial ownership of a majority of
the outstanding capital stock or other equity interests in any person or entity
whose securities are registered under the Exchange Act unless such transaction
has been approved by Horizon.
DIVIDENDS AND DISTRIBUTIONS
The Merger Agreement provides that from and after February 1, 1998, Horizon
and Horizon Partnership, on the one hand, and Prime and Prime Partnership, on
the other hand, are restricted from declaring or paying any dividend or
distribution to its shareholders or partners, as the case may be, without the
prior written consent of Prime or Horizon, respectively; provided, however, that
such written consent is not required for the declaration and payment of (i) (a)
a distribution of $0.295 per Prime Common Share, $0.65625 per Prime Series A
Preferred Share, $0.53125 per Prime Series B Preferred Shares, $0.295 per Prime
Series C Preferred Share, $0.295 per Prime Series C Preferred Unit and $0.295
per Prime Common Unit, each payable on February 17, 1998 to
shareholders/unitholders of record as of February 2, 1998 and (b) a distribution
with respect to each Horizon Common Share or Horizon Partnership Unit in the
first quarter of 1998 in an amount equal to $0.105, (ii) a quarterly
distribution with respect to each Horizon Common Share or Horizon Partnership
Unit in any quarterly period ending after March 31, 1998 in an amount up to the
product of (A) 0.9193 times (B) the dividend or distribution declared in respect
of each Prime Common Share or Prime Partnership Common Unit in such quarterly
period, (iii) Prime regular quarterly distributions in the amount of $0.295 per
Prime Series C Preferred Share and $0.295 per Prime Common Share, (iv) any
distribution contemplated by the Contribution Agreement and (v) any distribution
contemplated by Section 1.14(d), Section 1.16 or Section 1.17 of the Merger
Agreement; provided, however, that, except for distributions described in the
foregoing clauses (i) and (iv), the record date for each distribution with
respect to the Horizon Common Shares and the Horizon Partnership Units, on the
one hand, shall be the same date as the record date for the quarterly
distributions for the Prime Common Shares and the Prime Partnership Units, on
the other hand. The foregoing restrictions do not apply to the extent a
distribution by Horizon or Prime is necessary for Horizon or Prime, as
applicable, to maintain REIT status.
WAIVER AND AMENDMENT
The Merger Agreement provides that, at any time prior to the Corporate
Merger Effective Time, either party may, in writing, (i) extend the time for the
performance of any of the obligations or other acts of the other party contained
in the Merger Agreement or in any document delivered pursuant thereto,
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(ii) waive any inaccuracies in the representations and warranties contained in
the Merger Agreement or in any document delivered pursuant thereto or (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained in the Merger Agreement.
The Merger Agreement provides that it may be amended by the parties in
writing by action taken by the Boards of Directors of Prime and Horizon, at any
time before or after approval of the Merger Agreement by the shareholders of
Prime or Horizon and prior to the filing of the Delaware Certificate of Merger
with the Delaware Secretary. After any such approval by the shareholders of
Prime or Horizon or the partners of Prime Partnership or Horizon Partnership, no
amendment, modification or supplement may be made which by law requires the
further approval of shareholders or partners without obtaining such further
approval. If Prime or Horizon waives a material condition to the consummation of
the Mergers, such company will resolicit the approval of its limited partners
and shareholders.
STOCK EXCHANGE LISTING
New Prime will apply to list New Prime Common Shares, New Prime Series A
Preferred Shares and New Prime Series B Preferred Shares on the NYSE. Approval
of the listing of the New Prime Series B Preferred Shares and the New Prime
Common Shares on the NYSE, subject to official notice of issuance, is a
condition to the respective obligations of the parties to consummate the
Transactions.
ANTICIPATED ACCOUNTING TREATMENT
The Mergers will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Purchase accounting treatment of a merger is
the same as the accounting treatment used for the acquisition of any group of
assets. The fair market value of the consideration given by New Prime in the
Corporate Merger will be used as the valuation basis of the combination. The
assets acquired and liabilities assumed of Sky Merger will be recorded at the
relative fair market values as of the Corporate Merger Effective Date. The
financial statements of New Prime will reflect the combined operations of Prime
and Sky Merger from the date of the Corporate Merger.
SHARES AVAILABLE FOR RESALE
The issuance of New Prime Common Shares and New Prime Series B Preferred
Shares upon consummation of the Corporate Merger will be registered under the
Securities Act. Such shares may be traded freely and without restriction by
those shareholders not deemed to be "affiliates" of Horizon or Prime as that
term is defined in the rules and regulations promulgated pursuant to the
Securities Act. "Affiliates" are generally defined as persons who control, are
controlled by or are under common control with an issuer. This Joint Consent
Solicitation Statement/Prospectus/Information Statement does not cover any
resales of New Prime Common Shares and New Prime Series B Preferred Shares
received by affiliates of Horizon or Prime. See "--Registration Rights
Agreement."
REGISTRATION RIGHTS AGREEMENT
On the Closing Date, New Prime will enter into the registration rights
agreement (the "Registration Rights Agreement") for the benefit of certain
holders of New Prime Series B Preferred Shares, New Prime Common Shares, Prime
Partnership Series B Preferred Units and Prime Partnership Common Units
(collectively, the "Registration Rights Holders"). Pursuant to the Registration
Rights Agreement, New Prime has agreed to cause a registration statement on Form
S-3 to be filed within thirty (30) days from the Closing Date for the sale of
New Prime Series B Preferred Shares and New Prime Common Shares (i) issuable
upon the exchange of units in Prime Partnership or (ii) held by certain
affiliates of Prime and Horizon. New Prime shall use its reasonable efforts to
cause such registration statement to be declared effective by the Commission as
soon as reasonably practicable and once effective, to keep the registration
statement continuously effective under the Securities Act until such date as
there are no longer any Registration Rights Holders with registrable securities
outstanding.
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STOCK PURCHASE AGREEMENT
Pursuant to the Merger Agreement, Prime Services Corp and Ronald Piasecki
entered into the Stock Purchase Agreement. Upon consummation of the Transactions
and pursuant to such Stock Purchase Agreement, Mr. Piasecki shall transfer to
Prime Services Corp or such person or persons as Prime Services Corp shall
designate all of the shares of First HGI, Inc., HGI Perryville, Inc., MG Third
Party Services Corp., HGI Management Corp. and Second HGI, Inc. owned by him,
constituting all the outstanding shares of such companies which are not owned by
Horizon Partnership, for fair market value in an amount up to $50,000.
SHAREHOLDER LITIGATION
On December 10, 1997, a shareholder of Horizon filed a purported class
action lawsuit in the Circuit Court for Muskegon County, Michigan against
Horizon, Prime and certain directors and former directors of Horizon. The
substantive allegations claim that Horizon's directors breached their fiduciary
duties to Horizon's shareholders in approving the Corporate Merger and that the
consideration to be paid to Horizon's shareholders in connection with the
Corporate Merger is unfair and inadequate. The lawsuit requests that such merger
be enjoined or, in the event that the purported transaction is consummated, that
it be rescinded or damages be awarded to the class members. On January 16, 1998,
the defendants answered the complaint, denying that the Horizon Board of
Directors breached its fiduciary duties and denying that such consideration is
unfair or inadequate. Prime and Horizon intend to defend themselves vigorously.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain executive officers, directors and key employees of Horizon have been
granted stock options and/or have entered agreements providing them with cash
payments and/or certain rights upon the occurrence of Specified Events. The
Transactions are a Specified Event within the meaning of the aforementioned
agreements. The following sets forth the cash payments and/or other benefits
which will be provided to key executives, directors and key employees of Horizon
in connection with the consummation of the Transactions.
BENEFITS TO CERTAIN DIRECTORS AND OFFICERS
James S. Wassel, President and Chief Executive Officer of Horizon, has
entered into an amendment dated as of November 12, 1997 to his employment
agreement with Horizon pursuant to which the parties agreed to the following:
(i) upon the occurrence of a Specified Event, the Board of Directors will make
every commercially reasonable effort to have Mr. Wassel's Horizon stock options
substituted upon appropriate and equitable terms; (ii) if Mr. Wassel's
employment with Horizon is terminated as the result of a Specified Event,
Horizon shall pay Mr. Wassel the amounts payable to him under the terms and
conditions of the employment agreement had he remained employed for the entire
term of the employment agreement and the ownership of the life insurance policy
established thereunder shall be transferred to Mr. Wassel; (iii) if Mr. Wassel's
employment is terminated as the result of a Specified Event he shall also be
entitled to certain amounts payable in connection with his relocation expenses;
(iv) a provision pursuant to which Mr. Wassel shall receive an additional
payment in an amount equal to Mr. Wassel's tax liability on any compensation he
receives from Horizon which is treated as an "excess parachute payment" within
the meaning of the Code; and (v) to amend the definition of Specified Event to
include a merger with another entity if on any date within the twelve month
period immediately following the merger the members of Horizon's Board of
Directors as of the date immediately preceding the merger no longer constitute a
majority of the members of Horizon's Board of Directors.
Under the terms of Mr. Wassel's employment agreement, as amended, upon the
occurrence of a Specified Event, Mr. Wassel shall receive the greater of (x) his
base salary plus the maximum bonus he is
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entitled to under the terms of the agreement and (y) the amount of base salary
and bonus actually paid to Mr. Wassel for the most recently completed
twenty-four month period. In addition, upon the occurrence of a Specified Event,
Mr. Wassel shall receive a payment of the amount required to cover any
additional tax liability incurred because any income or compensation paid to Mr.
Wassel is treated as an "excess parachute payment" for purposes of the Code. The
issuance of 35,000 restricted Horizon Common Shares which Mr. Wassel is entitled
to receive under the terms of his Employment Agreement, (15,000 shares on April
15, 1999 and 20,000 on April 15, 2000) will be accelerated so that all of such
shares will be issued Mr. Wassel as of the effectiveness of the Transactions. In
addition, the vesting under Mr. Wassel's options of his right to purchase
100,000 Horizon Common Shares on the earlier of (i) the date on which the
reported closing price of a Horizon Common Share on the NYSE exceeds $16 per
share for twenty consecutive trading sessions and (ii) the seventh anniversary
of the approval of Horizon's 1997 Stock Option Plan shall be accelerated to
occur as of the effectiveness of the Transactions and the vesting under Mr.
Wassel's option of the right to purchase 100,000 Horizon Common Shares on the
earlier of (x) the date on which the reported closing price of a Horizon Common
Share on the NYSE exceeds $20 per share for twenty consecutive trading sessions
and (y) the seventh anniversary of the approval of Horizon's 1997 Stock Option
Plan shall be accelerated and occur as of the effectiveness of the Transactions.
Norman Perlmutter will resign as Chairman of the Board of Horizon, but will
become a member of the Prime Board of Directors. In addition, Robert D.
Perlmutter and William P. Dickey, current directors of Horizon, will become
Directors of Prime. Norman Perlmutter shall continue to serve on the Board of
Directors of HGP. Mr. N. Perlmutter, the Chairman of the Horizon Board of
Directors, has entered into an agreement dated as of October 23, 1997, pursuant
to which Mr. Perlmutter has agreed, commencing on January 1, 1998, to serve as
the Chairman of the Board of Horizon, if so elected, for a period equal to the
shorter of (i) three (3) years and (ii) the date on which the failure of Mr. N.
Perlmutter to serve as the Chairman of the Board of Horizon shall not cause a
default under the Lehman Loan. Under the terms of the agreement by and among Mr.
N. Perlmutter, Horizon and Horizon Partnership, Mr. N. Perlmutter shall receive
three equal annual installments of $333,333, commencing January 1, 1998. The
amounts payable to Mr. N. Perlmutter shall be accelerated in the event that his
failure to serve as Chairman of the Board of Horizon shall not cause a default
under the Lehman Loan prior to January 1, 2000.
The Horizon Compensation Committee awarded Ronald L. Piasecki, Vice Chairman
of Horizon, a bonus in the amount of $150,000 in consideration for his services
rendered as the former Interim Chief Executive Officer and the Chairman of the
Executive Committee of Horizon with such amount to be paid in twelve equal
monthly installments commencing in January, 1998. Any remaining outstanding
payments shall become immediately due and payable to Mr. Piasecki upon the
consummation of a Specified Event of Horizon.
Pursuant to the Stock Purchase Agreement, Mr. Piasecki has agreed to sell
all his shares of First HGI, Inc., HGI Perryville, Inc., MG Third Party Services
Corp., HGI Management Corp., and Second HGI, Inc. to Prime Services Corp for
fair market value up to $50,000.
Upon consummation of the Transactions, certain options to purchase an
aggregate of 1,798,266 Horizon Common Shares (each a "Horizon Stock Option")
will be converted into options to acquire the number of New Prime Common Shares
equal to 0.9193 times the number of Horizon Common Shares subject to such
options at an aggregate exercise price per share equal to the exercise price per
share set forth in each such option including: (a) the options to purchase
656,432 Horizon Common Shares under the Horizon Long Term Incentive Plan, (b)
the options to purchase 441,834 Horizon Common Shares under the Horizon 1993
Stock Option Plan, (c) the options to purchase 55,000 Horizon Common Shares
under the Horizon Director/Stock Option Plan, including the option to purchase
5,000 Horizon Common Shares held by Norman Perlmutter, and (d) the options to
purchase an aggregate of 645,000 Horizon Common Shares under the Horizon 1997
Stock Option Plan including the options held by Mr. Wassel to purchase 400,000
shares and Norman Perlmutter to purchase 125,000 shares and the options held or
to be acquired by Paul Comarato to purchase 35,000 shares and Stephen J. Moore
to purchase 80,000 shares.
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Each option shall continue to be exercisable until its expiration date
notwithstanding the termination of employment, death or disability of the
optionee.
AMENDMENTS TO AGREEMENTS WITH CERTAIN SHAREHOLDERS
The Consulting and Non-Competition Agreement dated March 13, 1995 by and
among Cheryl McArthur, Horizon and Horizon Partnership has been amended to
provide that upon the effectiveness of a Specified Event of Horizon or Horizon
Partnership, Ms. McArthur's obligation to perform consulting duties thereunder
shall be terminated. Ms. McArthur is the former chief executive officer and
founder of McArthur/Glen and the wife of Norman Perlmutter.
Horizon and Horizon Partnership have entered into separate agreements with
Alan Glen and Cheryl McArthur pursuant to which the parties have agreed to
terminate certain prior agreements regarding, among other things, certain
outlots owned by Mr. Glen and Ms. McArthur upon the occurrence of a Specified
Event of Horizon or Horizon Partnership. Mr. Glen is a former director of
Horizon.
AGREEMENTS WITH CERTAIN OFFICERS AND KEY EMPLOYEES
Horizon and Horizon Partnership have entered into separate agreements with
Paul Comarato, Vice President of Operations, Stephen J. Moore, Senior Vice
President of Marketing and Communication and an officer of Horizon, pursuant to
which each individual has agreed to continue such person's employment with
Horizon until the occurrence of a Specified Event of Horizon or Horizon
Partnership. The terms of the agreements provide that (i) Mr. Moore shall
receive a bonus in the amount of $236,250 and an option to purchase 50,000
Horizon Common Shares, (ii) Mr. Comarato shall receive a bonus in the amount of
$196,875 and an option to purchase 15,000 Horizon Common Shares, and (iii) a key
employee shall receive a bonus in the amount of $54,000 and an option to
purchase 5,000 Horizon Common Shares.
AGREEMENTS RELATING TO FINGER LAKES
As of April 3, 1998, Prime Partnership entered into an agreement to purchase
all of the outstanding membership interests of FLOC, L.L.C. (other than such
interests held by Horizon Partnership) of Horizon's Finger Lakes Outlet Center,
L.L.C. for a purchase price of $46,100,000. The purchase price is payable in
cash, or at the option of FLOC, L.L.C., in Prime equity securities based on the
average closing price of such securities during the ten days prior to closing.
In the event this option is exercised the amount of the purchase price will be
increased by 2.5%. Closing of the transaction is expected to occur
simultaneously with, and is conditioned upon, consummation of the Mergers. FLOC,
L.L.C. is owned by a pension fund which is advised by Heitman Capital Management
Corporation, an affiliate of Heitman Financial Ltd., of which Norman Perlmutter
is Chairman of the Board and Chief Executive Officer.
RETENTION PROGRAM
Horizon has implemented a retention program for key employees pursuant to
which up to an aggregate of $990,000 may be paid to such key employees who
continue to be employed through a specified period or who are terminated without
cause prior to such date.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the terms of the Merger Agreement, New Prime will indemnify each
officer, director and employee of Horizon or any Horizon subsidiary against all
losses, claims, damages, costs, expenses, liabilities or judgments or amounts
that are paid in settlement in connection with, any claim, action, suit,
proceeding or investigation to the extent related to, or to the extent arising
out of the fact that such person is or was a director, officer or employee of
Horizon or any Horizon subsidiary. The directors, officers and employees of
Horizon will be indemnified by New Prime against claims asserted prior to, or at
or after the consummation of the Transactions to the full extent permitted under
the MGCL. In addition, New Prime
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will obtain and maintain in effect upon the consummation of the Transactions and
continuing until the sixth anniversary thereof "run-off" directors and officers
liability insurance with a coverage amount and other terms and conditions
comparable to Horizon's existing insurance policy covering the directors and
officers of Horizon with respect to their service as such prior to the
consummation of the Transactions.
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS
The following discussion summarizes the federal income tax considerations of
the Transactions and of continuing ownership of Prime Partnership Units that are
material to Prime Partnership Unitholders and Horizon Partnership Unitholders.
The following discussions were prepared based on consultation with Winston &
Strawn, special counsel to Prime Partnership, and Rudnick & Wolfe, special
counsel to Horizon Partnership, in connection with the Transactions and
continuing ownership of Prime Partnership Units. In the opinion of Rudnick &
Wolfe and Winston & Strawn, the following discussion, to the extent it
constitutes matters of law or legal conclusions, is accurate in all material
respects. Opinions of counsel are not binding on the IRS. Thus, there can be no
assurance that the IRS will agree with the following discussion and positions
described therein, or that the IRS will not seek to challenge such positions,
which challenge may be sustained by the courts.
The information set forth below is based on the Code, final, temporary and
proposed Treasury Department regulations promulgated thereunder (such
regulations are hereafter referred to as the "Treasury Regulations"), current
administrative interpretations, and court decisions. No assurance can be given
that future legislation, Treasury Regulations, administrative interpretations,
and court decisions will not significantly change the law, and thereby affect
the accuracy of this discussion. Any such change in law could apply
retroactively.
Neither Prime, Horizon, Prime Partnership, Horizon Partnership, New Prime,
HGP nor HGP LP intend to obtain a ruling from the IRS concerning the tax
consequences of the Transactions or any of the other matters set forth herein.
The discussions in this section do not constitute tax advice to any person.
The following summary is not intended to be comprehensive. It does not
address the state, local or foreign tax consequences of the Transactions or of
subsequent ownership of Prime Partnership Units, nor does it discuss all aspects
of federal income taxation that may be relevant to Prime Partnership Unitholders
or Horizon Partnership Unitholders in light of their particular circumstances.
Except where indicated, the discussion below describes general federal income
tax considerations applicable to individuals who are citizens or residents of
the United States, and therefore has limited application to domestic
corporations and persons subject to special federal income tax treatment, such
as foreign persons, tax-exempt entities, regulated investment companies and
insurance companies.
BECAUSE OF THE PARTICULAR TAX ATTRIBUTES OF PARTNERS OF PRIME PARTNERSHIP
AND HORIZON PARTNERSHIP, THE TRANSACTIONS MAY HAVE DIFFERING TAX IMPLICATIONS
FOR SUCH PARTNERS. THUS, EACH PRIME PARTNERSHIP UNITHOLDER AND HORIZON
PARTNERSHIP UNITHOLDER IS STRONGLY URGED TO CONSULT WITH HIS, HER OR ITS OWN TAX
ADVISORS TO DETERMINE THE TAX CONSEQUENCES OF THE TRANSACTIONS AND THE
SUBSEQUENT OWNERSHIP OF PRIME PARTNERSHIP UNITS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES. THE FOLLOWING DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR
CAREFUL TAX PLANNING.
TAX CONSEQUENCES OF THE HORIZON PARTNERSHIP CONTRIBUTION
EFFECT OF CONTRIBUTING PROPERTIES TO HGP LP. In general, a contribution of
property to a partnership in exchange for an interest in such partnership is a
nonrecognition transaction under Code Section 721(a). Pursuant to the Horizon
Partnership Contribution, Horizon Partnership will contribute the Horizon
Contributed Properties subject to liabilities to HGP LP. No gain or loss will be
recognized by Horizon Partnership (or by Horizon Partnership Unitholders) as a
result of the Horizon Partnership Contribution
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of such properties under Code Section 721(a). Under Code Section 722, a
contributing partner receives an initial tax basis in its partnership interest
equal to the adjusted tax basis such partner had in the property contributed at
the time of contribution increased by the amount (if any) of gain recognized
under Code Section 721(b) as a result of the contribution of such property. No
gain will be recognized by Horizon Partnership under Code Section 721(b) as a
result of the Horizon Partnership contribution of the Horizon Contributed
Properties; therefore, the initial tax basis Horizon Partnership receives in the
HGP LP Common Units received will equal the adjusted tax basis which it had in
the Horizon Contributed Properties contributed. Under Code Section 723 the
initial tax basis of property contributed to a partnership by a partner equals
the adjusted tax basis of such contributed property in the hands of the
contributing partner increased by any gain recognized by the contributing
partner. Therefore, HGP LP's initial tax basis in the Horizon Contributed
Properties will equal the adjusted tax basis Horizon Partnership had in the
Horizon Contributed Properties at the time of contribution.
CODE SECTION 704(C) CONSEQUENCES TO HORIZON PARTNERSHIP
UNITHOLDERS. Pursuant to Code Section 704(c), income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for a partnership interest in the partnership must be
allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of contribution of such property. The amount of
such unrealized gain or unrealized loss is generally equal to the difference
between the fair market value and the adjusted tax basis of contributed property
at the time of initial contribution ("Built-in Gain" and "Built-in Loss,"
respectively). The Horizon Contributed Properties include properties that had
Built-in Gains or Built-in Losses when contributed to Horizon Partnership (prior
to the Horizon Partnership Contribution) by Horizon Partnership Unitholders.
However, the Treasury Regulations under Code Section 704(c) provide that if
property with Built-in Gain or Built-in Loss is contributed in a nonrecognition
transaction to another partnership in exchange for an interest in such
partnership, then no amount of such Built-In Gain or Built-In Loss is recognized
by any partner of the contributing partnership, and the partnership interests
received will then constitute the Built-In Gain or Built-in Loss property of the
contributing partner in the hands of the contributing partnership. Therefore,
because the Horizon Contributed Properties, which were Built-in Gain or Built-in
Loss properties with respect to the Horizon Partnership Unitholders will be
transferred to HGP LP in a nonrecognition transaction under Code Section 721(a),
no gain or loss will be recognized by Horizon Partnership or Horizon Partnership
Unitholders, under Code Section 704(c)(1)(A) as a result of such transfer, and
the HGP LP Common Units held by Horizon Partnership will be considered the
Built-in Gain or Built-in Loss property of the Horizon Partnership Unitholders
for purposes of Code Section 704(c).
TAX CONSEQUENCES OF THE PARTNERSHIP MERGER
GENERAL. Pursuant to, and subject to the terms and conditions of the
Agreement and Plan of Merger, Prime and Horizon have agreed that Horizon
Partnership will merge with and into Prime Partnership under the DRULPA with
Prime Partnership as the surviving partnership. Under the terms of such
transaction, each outstanding Horizon Partnership Unit shall be converted by the
Partnership Merger into the right to receive 0.9193 Prime Partnership Common
Units.
TRANSFER OF HORIZON PARTNERSHIP ASSETS TO PRIME PARTNERSHIP/TERMINATION OF
HORIZON PARTNERSHIP. The IRS regards transactions whereby the businesses of two
or more partnerships are combined in a single partnership, regardless of the
form of the transaction and regardless of whether the transaction constitutes a
merger or consolidation under state law, as mergers or consolidations for
purposes of Code Section 708. Therefore, the Partnership Merger will constitute
a merger of Horizon Partnership with and into Prime Partnership for purposes of
Code Section 708.
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Under Code Section 708(b)(2)(A), in the case of a merger of two or more
partnerships, the resulting partnership shall be considered the continuation of
the merging partnership whose members own an interest of more than 50% in the
capital and profits of the resulting partnership. Following the Partnership
Merger, the Prime Partnership Unitholders prior to the Partnership Merger will
own more than 50% in the capital and profits of Prime Partnership after the
Partnership Merger. Therefore, Prime Partnership will be considered the
surviving partnership under Code Section 708.
A partnership that terminates as a result of a merger is treated as
contributing its assets to the resulting partnership and then liquidating,
distributing interests in the resulting partnership to its partners. Thus, as a
result of the Partnership Merger, Horizon Partnership will be treated for
federal income tax purposes as if it had directly contributed all of its assets
(subject to all of its liabilities) to Prime Partnership in exchange for Prime
Partnership Common Units and subsequently liquidated, distributing all of such
Prime Partnership Common Units to its partners.
Subject to the exceptions discussed below, under Code Section 721(a) no gain
or loss will be recognized by Horizon Partnership, Prime Partnership, Horizon
Partnership Unitholders or Prime Partnership Unitholders upon the Partnership
Merger and the deemed Horizon Partnership contribution of its assets (subject to
its liabilities) to Prime Partnership in consideration for Prime Partnership
Common Units.
ALLOCATION OF PRIME PARTNERSHIP LIABILITIES. Subsequent to the Partnership
Merger, Prime Partnership's recourse and nonrecourse liabilities will be
allocated among the Prime Partnership Unitholders in accordance with Code
Section 752 and the Treasury Regulations. To the extent that a Prime Partnership
Unitholder has a smaller allocation of Prime Partnership liabilities after the
Partnership Merger than it had in Prime Partnership or Horizon Partnership, as
applicable, before the Partnership Merger, such holder of Prime Partnership
Units will be deemed to have received a cash distribution equal to the
difference. Under Code Section 731, to the extent this deemed cash distribution
exceeds such partner's adjusted tax basis in its Prime Partnership Units, he,
she or it will be required to recognize gain.
A partnership liability is a recourse liability to the extent that any
partner or a related person bears the economic risk of loss for that liability.
A partner's share of recourse liabilities equals the portion of that liability,
if any, for which that partner or a related person bears such economic risk of
loss. Prime Partnership Unitholders are not expected to bear the economic risk
of loss for any liabilities of Prime Partnership. However, Prime, as the sole
general partner of Prime Partnership, currently does and will bear the economic
risk of loss for certain liabilities of Prime Partnership. Accordingly, under
Code Section 752, such liabilities will constitute recourse liabilities and will
be allocable to Prime.
A partnership liability is a nonrecourse liability to the extent that no
partner or related person bears the economic risk of loss for that liability. A
partner's share of nonrecourse liabilities equals the sum of: (1) the partner's
share of partnership "minimum gain" determined in accordance with the rules of
Code Section 704(b) and Treasury Regulations thereunder; (2) the amount of any
taxable gain that would be allocated to the partner under Code Section 704(c) if
the partnership (in a taxable transaction) disposed of all partnership property
subject to one or more partnership nonrecourse liabilities in full satisfaction
of those liabilities and for no other consideration; and (3) the partner's share
of excess nonrecourse liabilities of the partnership (i.e., those liabilities
not allocated under (1) and (2) above) as generally determined in accordance
with the partner's share of profits. Both the Treasury Regulations and official
pronouncements of the IRS indicate that there is significant flexibility in
determining a partner's share of partnership profits for purposes of determining
the partner's share of nonrecourse liabilities.
The Prime Partnership Agreement provides for the allocation of Prime
Partnership nonrecourse liabilities in a manner that is intended to comply with
these Treasury Regulations and IRS pronouncements. In particular, the Prime
Partnership Agreement provides a method for determining each Prime Partnership
Limited Partner's share of profits for purposes of allocating the third tier of
excess nonrecourse liabilities that is based upon, and intended to comply with,
Revenue Ruling 95-41 issued by the IRS.
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Pursuant to the Prime Partnership Agreement, Prime Partnership believes that its
method of determining each partner's relevant interest in Prime Partnership
"profits" should result in no Prime Partnership Unitholder after the Partnership
Merger (including former Horizon Partnership Unitholders) being required to
recognize gain from a deemed distribution under Code Sections 752 and 731.
Nevertheless, there is no assurance that this method will be respected, so Prime
Partnership Unitholders are strongly urged to consult with their own tax advisor
to determine the extent (if any) of any increase or reduction in the amount of
nonrecourse liabilities allocated to such partner as a result of the Partnership
Merger.
CODE SECTION 751(B). Notwithstanding Code Section 731, under Code Section
751(b), a non-pro rata distribution of either cash or property by a partnership
generally is subject to being recast if such distribution has the effect of
distributing such to certain partners more or less than their allocable share of
the "unrealized receivables" or "substantially appreciated inventory items"
(collectively, the "hot assets") of the partnership. The definition of
unrealized receivables and inventory items for this purpose is broader than the
literal meaning of such term, and generally includes the right to receives
payment for non-capital goods delivered or to be delivered, services rendered or
to be rendered, various "recapture" items such as Code Section 1245 property and
non-capital assets. To the extent Code Section 751(b) applies to a distribution
of non-hot assets (such as cash), the partners who receive the distribution
generally are treated as receiving a deemed distribution in the same amount that
includes their pro rata share of the partnership's hot assets, which are then
treated as exchanged (in a taxable transaction) by such partners in return for
additional non-hot assets. Thus, the application of Code Section 751(b) may
cause the distributing partnership (and thus non-distributee partners) as well
as the distributee partners to recognize income.
A shift of the allocation of liabilities of any Prime Partnership Unitholder
(including a former Horizon Partnership Unitholder) under Code Section 752, and
resulting deemed cash distribution, from the Partnership Merger presumably will
not be pro rata to the Prime Partnership Unitholders. Accordingly, any such
Prime Partnership Unitholder, as the deemed distributee of such cash
distribution, may recognize income under Code Section 751(b) in respect of the
Partnership Merger from a deemed exchange by such partners of Prime Partnership
hot assets, deemed distributed to them, in return for part of the deemed cash
distributed to them under Code Section 752. However, the amount of any such
income is not expected to be material to any Prime Partnership Unitholder.
BASIS IN PRIME PARTNERSHIP UNITS RECEIVED. Code Section 732(b) provides
that the basis of property (other than money) distributed to a partner in
liquidation of the partner's interest in the partnership shall be an amount
equal to the adjusted basis of such partner's interest in the partnership
reduced by any cash distributed in the same transaction. Therefore, each Prime
Partnership Unitholder (including each former Horizon Partnership Unitholder)
will have an initial tax basis in his Prime Partnership Units received in the
Partnership Merger equal to such partner's basis in the Prime Partnership Units
or Horizon Partnership Units held by such partner, subject to adjustment by
operation of Code Sections 751 and 752.
Code Section 752 provides that an increase in a partner's share of
partnership liabilities is treated as a contribution of money by such partner to
the partnership, and a reduction in a partner's share of partnership liabilities
is treated as a distribution of money to such partner by the partnership. Under
Code Section 722, a contribution of cash by a partner increases a partner's
adjusted basis in his partnership interest, and under Code Section 733, a
distribution of cash to a partner reduces a partner's adjusted basis in his
partnership interest.
The Partnership Merger may cause a Prime Partnership Unitholder (including a
former Horizon Partnership Unitholder) to receive an allocation of liabilities
from Prime Partnership that is greater or less than the amount of liabilities
than was previously allocated to such partner by Prime Partnership or Horizon
Partnership, respectively. Accordingly, each Prime Partnership Unitholder
(including each Horizon Partnership Unitholder) will have an adjusted basis in
its Prime Partnership Units equal to such
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partner's adjusted basis in its Prime Partnership Units or Horizon Partnership
Units, respectively, immediately prior to the deemed liquidation of Horizon
Partnership, increased or decreased by any actual or deemed contribution or
distribution, respectively, of money in connection with the Partnership Merger.
The effect of receiving money from Prime Partnership upon a Prime Partnership
Unitholder is discussed above.
Notwithstanding the above, to the extent any deemed distribution under Code
Section 752 to a Prime Partnership Unitholder (including any former Horizon
Partnership Unitholder) causes such partner to recognize income from a deemed
exchange of non-hot assets of Prime Partnership under Code Section 751(b), such
deemed distribution (or part thereof treated as part of such deemed exchange)
will not result in a reduction in such Prime Partnership Unitholder's adjusted
tax basis in its Prime Partnership Units.
CODE SECTION 707(A)(2)(B) SALE. Notwithstanding the foregoing, to the
extent a Horizon Partnership Unitholder has a deemed distribution under Code
Section 752 from the Partnership Merger, then to the extent that such Horizon
Partnership Unitholder's share of nonrecourse liabilities which are reduced
pursuant to the Partnership Merger, constitutes a reduction is such unitholder's
share of "non-qualified liabilities" (generally defined as liabilities that were
incurred within two years prior to the contribution), any such deemed
distribution to a Horizon Partnership Unitholder may be recast as part of a
deemed sale of such Horizon Partnership Unitholder's Horizon Partnership Units
(or underlying interest in the Horizon Properties) under Code Section
707(a)(2)(B). This deemed sale otherwise will result in gain or loss to such
Horizon Partnership Unitholder as if it had sold Horizon Partnership Units (or
Horizon Partnership had sold such underlying Horizon Properties). Any gain or
loss recognized under Code Section 707(a)(2)(B) upon such deemed sale would
otherwise be allocated, at least in part, to the Horizon Partnership Unitholders
under Code Section 704(c).
However, Horizon Partnership believes that the nonrecourse liabilities which
are allocated to Horizon Partnership Common Unitholders are qualified
liabilities because such liabilities were incurred more than two years prior to
the contribution and, as a result, any deemed distribution pursuant to Code
Section 752 will not result in any deemed sale or recognition of taxable gain or
loss under Code Section 707(a)(2)(B).
CODE SECTION 704(C) VALUATION. Following the Partnership Merger, the value
of the Horizon Properties for purposes of determining Code Section 704(c)
Built-in Gain and Built-in Loss for the Horizon Properties, but not for the
properties of Prime Partnership prior to the Partnership Merger, will be
recomputed. As a result of this revaluation of the Horizon Properties, the
capital account balances of the Prime Partnership Unitholders before the
Partnership Merger will be relatively higher (based upon relative fair market
values of the Prime Properties and the Horizon Properties) than those of the
Horizon Partnership Unitholders. This difference may mean that, upon any
liquidation of Prime Partnership, the pre-Partnership Merger Prime Partnership
Unitholders would receive a greater liquidating distribution than would former
Horizon Partnership Unitholders, in proportion to their relative ownership of
Prime Partnership Units.
SUBSEQUENT ADJUSTMENTS TO ADJUSTED TAX BASIS OF PRIME PARTNERSHIP
UNITS. The adjusted basis of a Prime Partnership Unitholder in its Prime
Partnership Units after the Partnership Merger generally will be increased by
(a) its share of Prime Partnership taxable income, (b) its contributions to the
capital of Prime Partnership, and (c) increases in its allocable share of the
liabilities of Prime Partnership. Generally, such holder's adjusted basis in his
Prime Partnership Units will be decreased (but not below zero) by (1) its share
of Prime Partnership's taxable losses and Prime Partnership nondeductible
expenditures which are not chargeable to capital, (2) cash distributions made to
such holder by Prime Partnership, and (3) decreases in his, her or its allocable
share of the liabilities of Prime Partnership.
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TAX CONSEQUENCES OF TAX TERMINATION OF PRIME PARTNERSHIP
Based upon a numerical analysis prepared by Prime Partnership, the Corporate
Merger should result in a technical "termination" of Prime Partnership under
Code Section 708(b)(1)(B). Upon such termination, the following steps will be
deemed to occur: (a) Prime Partnership transfers all of its assets and
liabilities to a new partnership in exchange for an interest in such new
partnership; and (b) immediately thereafter, the terminated partnership
distributes all of the interests in the new partnership to the partners of Prime
Partnership in liquidation of Prime Partnership.
Under the Treasury Regulations, one result of this termination is that the
taxable year of Prime Partnership will end. However, to the extent that the
taxable years of both Prime Partnership and a Prime Partnership Unitholder
generally end on the same date (i.e., December 31), the closing of Prime
Partnership's taxable year should have no adverse federal income tax
consequences to such Prime Partnership Unitholder. This termination also will
cause the assets of Prime Partnership to be depreciated as if they were newly
acquired by Prime Partnership, probably resulting in lower annual depreciation
deductions to Prime Partnership (and, accordingly, the Prime Partnership
Unitholders) for federal income tax purposes.
However, the termination of Prime Partnership will also terminate all of its
current federal income tax elections, including those made under Code Section
704(c), allowing Prime Partnership to make new such elections in respect of its
current Prime Properties and the Horizon Properties. The Treasury Regulations
provide for generally three different methods for taking into account any
Built-in Gain or Built-in Loss for purposes of Code Section 704(c). The first of
these methods, the "traditional method", provides that the tax items of income,
gain, loss and deduction from a Built-in Gain or Built-in Loss property be
allocated among the partners in order to take into account (and reduce) such
Built-in Gain or Built-in Loss. However, the traditional method fails to take
into account the fact that the total tax items of income, gain, loss or
deduction in respect of a Built-in Gain or Built-in Loss property that may be
allocated to the partners with Built-in Gain or Built-in Loss cannot exceed the
total partnership tax items of income, gain, loss or deduction with respect to
such property (the "ceiling rule"). The ceiling rule may cause the contributing
partner of the Built-in Gain or Built-in Loss property to fail to recognize all
such Built-in Gain or Built-in Loss.
In order to avoid the effect of the ceiling rule, the Treasury Regulations
provide for other methods, including the "traditional method with curative
allocations." This method generally cures the possible effect of the ceiling
rule by allocating other partnership tax items of income, gain, loss or
deduction to make up the difference of items under the ceiling rule.
Upon the termination of Prime Partnership, Prime Partnership intends to
elect the traditional method with respect to its pre-Partnership Merger
properties and intends to elect the traditional method with curative allocations
in respect of the Horizon Properties (other than the interest of HGP LP Common
Units, for which Prime Partnership intends to elect the traditional method).
Prime Partnership and Horizon Partnership believe that these elections are
appropriate and should be respected.
Although a partnership generally has this choice of Code Section 704(c)
method with respect to each property, including with respect to different items
of contributed property, the partnership must consistently apply a single method
with respect to each item of contributed property and the overall method or
combination of methods must be reasonable based upon the facts and circumstances
and underlying purposes of Code Section 704(c). Prime Partnership and Horizon
Partnership believe that the above elections with respect to Prime Properties
(including the Horizon Properties) should be respected as reasonable and
consistent with the underlying purposes of Code Section 704(c). However, there
is no assurance that the IRS will not challenge this combination of methods.
Such a challenge, if successful, could cause one or more Prime Partnership
Unitholders to recognize more taxable income or less taxable loss, both
currently or on an ongoing basis, in respect of their Prime Partnership Units.
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TAX CONSEQUENCES OF THE NEBRASKA/INDIANA PROPERTY TRANSFERS
GENERAL. Two lower tier partnerships of Prime Partnership, Nebraska
Crossing Factory Shops Limited Partnership and Indianapolis Factory Shops
Limited Partnership will contribute their respective interests in the Prime
Transferred Properties to two wholly-owned limited liability companies and such
lower tier partnerships will transfer their respective interests in such limited
liability companies to HGP for approximately $26 million of cash.
CODE SECTION 704(C) Under Code Section 704(c), to the extent that any
property that has Built-in Gain or Built-in Loss is sold, the contributing
partner must recognize such all or part of the Built-in Gain or Built-in Loss
which would have been recognized if the partnership had sold such property for
its fair market value. The amount of Built-in Gain or Built-in Loss recognized
will be subject to the ceiling rule, depending upon the Code Section 704(c)
method applicable to such property.
The sale of the interest in the limited liability company holding the
Nebraska Prime Transferred Property will be subject to Code Section 704(c),
causing the Prime Partnership Unitholders that contributed the Nebraska Prime
Transferred Property to recognize the Built-In Gain or Built-In Loss with
respect to such property (subject to the Code Section 704(c) method). As
discussed above, Prime Partnership intends to elect the traditional method in
respect of its Prime Properties that are not Horizon Properties. Based on an
analysis prepared by Prime Partnership, under this election, no Prime
Partnership Unitholder would recognize any taxable gain under Code Section
704(c) upon the sale of the interest in the limited liability company holding
the Nebraska Prime Transferred Property.
Although a partnership generally has a choice of Code Section 704(c) method
with respect to each property, including with respect to different items of
contributed property, the partnership must consistently apply a single method
with respect to each item of contributed property and the overall method or
combination of methods must be reasonable based upon the facts and circumstances
and underlying purposes of Code Section 704(c). Prime Partnership believes that
the above elections with respect to Prime Transferred Properties should be
respected as reasonable and consistent with the underlying purposes of Code
Section 704(c). However, there is no assurance that the IRS will not challenge
this method. If such a challenge were successful, the analysis prepared by Prime
Partnership indicates that certain Prime Partnership Unitholders (excluding any
former Horizon Partnership Unitholders) could recognize significant taxable gain
in respect of Code Section 704(c)(1)(B) from sale of the Nebraska Prime
Transferred Property.
RECOGNITION OF TAX LOSS UPON SALE OF INDIANA PRIME TRANSFERRED
PROPERTY. The Nebraska/Indiana Property Transfers should be a sale of such
properties under Code Section 1001. Accordingly, Nebraska Crossing Factory Shops
Limited Partnership and Indianapolis Factory Shops Limited Partnership should
each recognize gain or loss to the extent that the basis in the Prime
Transferred Property is less than or greater than its adjusted tax basis in such
property. Based upon current estimates Nebraska Crossing Factory Shops Limited
Partnership and Indianapolis Factory Shops Limited Partnership should realize an
aggregate loss of approximately $19 million upon such sale. This loss should be
a Code Section 1231 loss, and should be allocated to Prime Partnership and
thereafter to Prime Partnership Unitholders as a separately stated partnership
item.
However, whether any loss recognized on the sale of the Prime Transferred
Properties will be of any benefit depends upon whether the loss recognized would
be disallowed under Code Section 267. Under Code Section 267, a loss on the sale
of an asset between a partnership and a corporation is disallowed if the two
entities are under common control following the exchange. For purposes of Code
Section 267, a partnership and corporation are under common control if the same
persons own, based upon certain attribution rules, more than fifty percent of
the corporation's stock (on a value basis) and interests in the partnership
representing more than fifty percent of its capital or profits.
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Based upon current due diligence as to the ownership of Nebraska Crossing
Factory Shops Limited Partnership Indianapolis Factory Shops Limited Partnership
and HGP, under the applicable attribution rules, these entities should not be
under common control immediately following the Nebraska/Indiana Property
Transfers or the Transactions. Consequently, the loss recognized by Nebraska
Crossing Factory Shops Limited Partnership and Indianapolis Factory Shops
Limited Partnership upon the sale of the Prime Transferred Properties should not
be disallowed under Code Section 267.
Accordingly, each Prime Partnership Unitholder should be able to offset any
distributive share of Code Section 1231 gains it has from Prime Partnership with
such allocable share of such loss, and any excess of such allocable share of
such loss over such partner's allocable share of Code Section 1231 gains
otherwise should be deductible against such partner's allocable share of income
and gain from Prime Partnership as an ordinary loss (subject to the restrictions
regarding passive losses, the "at-risk" rules and other loss restrictions for
pass-through entities).
However, there are no assurances that the IRS would not take a different
position as the application of the relevant attribution rules in such a way as
to assert that such loss is disallowed under Code Section 267. In such case, if
such assertion were successful, neither Nebraska Crossing Factory Shops Limited
Partnership, Indianapolis Factory Shops Limited Partnership nor any Prime
Partnership Unitholder would recognize its distributive share of such loss.
TAX CONSEQUENCES OF THE PRIME PARTNERSHIP SPECIAL DISTRIBUTION
GENERAL. Prior to the Closing, Prime Partnership will declare a
distribution of cash equal to $0.60 per Prime Partnership Series B Preferred
Unit and $0.50 per Prime Partnership Series C Preferred Unit and Prime
Partnership Common Unit to the record holders on the date of declaration. The
payment of the Prime Partnership Special Distribution will occur on the Closing
Date.
TAX CONSEQUENCES OF THE PRIME PARTNERSHIP SPECIAL DISTRIBUTION. Under Code
Section 731, a distribution of money by a partnership to a partner results in
gain recognition only to the extent the amount of money exceeds the partner's
adjusted basis in his partnership interest. Under Code Section 733, the Prime
Partnership Unitholders will be required to reduce their basis in their Prime
Partnership Units by the amount of cash received and recognize gain to the
extent the cash distribution exceeds their basis in their partnership interest.
Notwithstanding Code Section 731, under Code Section 751(b), a non-pro rata
distribution of either cash or property by a partnership generally is subject to
being recast if such distribution has the effect of distributing such to certain
partners more or less than their allocable share of the "unrealized receivables"
or "substantially appreciated inventory items" (collectively, the "hot assets")
of the partnership. The definition of unrealized receivables and inventory items
for this purpose is broader than the literal meaning of such terms, and
generally includes the right to receives payment for non-capital goods delivered
or to be delivered, services rendered or to be rendered, various "recapture"
items such as Code Section 1245 property and non-capital assets. To the extent
Code Section 751(b) applies to a distribution of non-hot assets (such as cash),
the partners who receive the distribution generally are treated as receiving a
deemed distribution in the same amount that includes their pro rata share of the
partnership's hot assets, which are then treated as exchanged (in a taxable
transaction) by such partners in return for additional non-hot assets. Thus, the
application of Code Section 751(b) may cause the distributing partnership (and
thus non-distributee partners) as well as the distributee partners to recognize
income.
However, because the Prime Partnership Special Distribution will be pro rata
to the classes of Prime Partnership Unitholders to whom it was made, an
exception to Code Section 751(b) should apply such that neither Prime
Partnership nor any Prime Partnership Unitholder will recognize any income in
respect of the Prime Partnership Special Distribution under Code Section 751(b).
(Moreover, the amount of any such income is not expected to be material to any
Prime Partnership Unitholder.)
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TAX CONSEQUENCES OF THE HGP LP COMMON UNIT DISTRIBUTION
GENERAL. Prime Partnership will declare a distribution of HGP LP Common
Units to the record holders of Prime Partnership Common Units, Prime Partnership
Series B Preferred Units and Prime Partnership Series C Preferred Units
immediately following the Partnership Merger such that each holder of Prime
Partnership Series B Preferred Units receives 1.196 times more the number or
portion of HGP LP Common Units distributed in respect of each Prime Partnership
Common Unit and Prime Partnership Series C Preferred Unit.
MARKETABLE SECURITIES. In general, under Code Section 731, a distribution
of money by a partnership to a partner results in gain recognition only to the
extent the amount of money exceeds the partner's adjusted basis in his
partnership interest. Under Code Section 731(b), a distribution of property,
other than money, by a partnership to a partner does not result in taxable gain
to the partner, and the distributee partner generally has an initial tax basis
in such properties equal to the lesser of the basis the partnership had in such
property and the distributee partner's adjusted tax basis in such partnership.
The term "money" for purposes of Code Section 731 includes "marketable
securities." The term marketable securities includes financial instruments, such
as stock and other equity interests, that are actively traded as of the date of
the distribution, and financial instruments that are readily convertible into or
exchangeable for money or marketable securities.
Although it is not entirely clear, it is unlikely that HGP LP Common Units
distributed to Prime Partnership Unitholders will be considered marketable
securities, and, therefore, subject to the gain recognition requirements of Code
Section 731, because of, among other reasons, the substantial restrictions upon
transfer or conversion of such units and the general applicability of an
exception to such treatment under the Treasury regulations. Accordingly, it is
likely that a distribution of HGP LP Common Units to a holder of Prime
Partnership Units in connection with the Partnership Merger will not constitute
a distribution of money to any Prime Partnership Unitholder under Code Section
731 and will not result in gain recognized by any Prime Partnership Unitholder
under Code Section 731. Further, in such case, each Prime Partnership Unitholder
will have an initial tax basis in such HGP LP Common Units equal to the lesser
of Prime Partnership's adjusted tax basis in such units and such Prime
Partnership Unitholder's adjusted tax basis in the Prime Partnership Units in
respect of which such distribution was made. However, such Prime Partnership
Unitholders will also have to reduce his, her or its initial tax basis in his,
her or its HGP LP Common Units in an amount equal to a share of HGP LP's
nonrecourse liabilities immediately prior to the distribution (because after
such distribution all such liabilities will at least be allocated to HGP).
Finally, even in the unlikely event that the HGP LP Common Units are treated
as marketable securities, each Prime Partnership Unitholder should have the same
federal tax consequences from such distribution of HGP LP Common Units, provided
that his, her or its adjusted tax basis in his, her or its Prime Partnership
Units exceeds the fair market value of the HGP LP Common Units distributed to
such Prime Partnership Unitholder. Each Horizon Partnership Unitholder should
have substantially similar tax results, except that, following such
distribution, each such Horizon Partnership Unitholder's initial tax basis in
his, her or its HGP LP Common Units will equal the fair market value of such
units and the holding period for such HGP LP Common Units will begin upon the
date of receipt.
CODE SECTIONS 704(C)(1)(B). Pursuant to Code Section 704(c), income, gain,
loss and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for a partnership interest in the
partnership must be allocated in a manner such that the contributing partner is
charged with, or benefits from, respectively, the unrealized gain or unrealized
loss associated with the property at the time of contribution of such property.
The Horizon Contributed Properties include properties that had Built-in Gains or
Built-in Losses when contributed to Horizon Partnership pursuant to the Horizon
Partnership Contribution. These Built-in Gain and Built-in Loss properties were
contributed to Horizon Partnership by Horizon Partnership Unitholders.
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Under Code Section 704(c)(1)(B), to the extent that any property that has
Built-in Gain or Built-in Loss is distributed to a partner, other than the
partner which contributed such property, within five years (for property
contributed to a partnership before June 9, 1997, seven years for property
contributed to a partnership after June 8, 1997) of the time such property was
contributed, the contributing partner must recognize all or part of such of the
Built-in Gain or Built-in Loss which would be recognized if the partnership had
sold such property for its fair market value, depending upon the Code Section
704(c) method applicable to such property.
The HGP LP Common Unit Distribution will be a distribution in respect of the
Horizon Unitholders that is subject to Code Section 704(c)(1)(B) because such
distribution consists of the distribution of HGP LP Common Units which were
"contributed" by Horizon Partnership to Prime Partnership (through the
Partnership Merger) within the last seven years. Further, under Treasury
Regulations, such Code Section 704(c)(1)(B) event with respect to Horizon
Partnership will carry through and be a Code Section 704(c)(1)(B) event to those
Horizon Partnership Unitholders that contributed the Horizon Contributed
Properties to Horizon Partnership within five years of the HGP LP Common Unit
Distribution. Accordingly, the Horizon Partnership Unitholders should recognize
any Code Section 704(c) Built-in Gain or Built-in Loss upon the HGP LP Common
Unit Distribution to the extent that the HGP LP Common Units represent an
interest in properties that were not initially contributed to Horizon
Partnership by such Horizon Partnership Unitholders. The amount of Code Section
704(c) gain or loss varies depending upon whether the fair market value of the
HGP LP Common Units, which represent an interest in properties that were not
initially contributed to Horizon Partnership by such Horizon Partnership
Unitholders, is more or less than the basis of such properties. Based on
computations by Prime Partnership and Horizon Partnership, the Horizon
Partnership Unitholders are expected to recognize an aggregate net taxable loss.
The Treasury Regulations provide for generally three different methods for
taking into account any Built-in Gain or Built-in Loss for purposes of Code
Section 704(c). The first of these methods, the "traditional method" provides
that the tax items of income, gain, loss and deduction from a Built-in Gain or
Built-in Loss property be allocated among the partners in order to take into
account (and reduce) such Built-in Gain or Built-in Loss. However, the
traditional method fails to take into account the fact that the total tax items
of income, gain, loss or deduction in respect of a Built-in Gain or Built-in
Loss property cannot exceed the total partnership income, gain, loss or
deduction with respect to such property (the "ceiling rule"). The ceiling rule
may result in the contributing partner of the Built-in Gain or Built-in Loss
property to fail to recognize all such Built-in Gain or Built-in Loss.
In order to avoid the effect of the ceiling rule, another elective method is
the "traditional method with curative allocations." This method generally cures
the possible effect of the ceiling rule by allocating other partnership tax
items of income, gain, loss or deduction to make up the difference of items
under the ceiling rule.
Prime Partnership intends to elect the traditional method with respect to
its pre-Partnership Merger Prime Properties and intends to elect the traditional
method with curative allocations in respect of the Horizon Properties (other
than the interest transferred in respect of HGP LP, for which Prime Partnership
intends to elect the traditional method). Although a partnership generally has
this choice of Code Section 704(c) method with respect to each of its
properties, including with respect to different items of contributed property,
the partnership must consistently apply a single method with respect to each
item of contributed property, and the overall method or combination of methods
must be reasonable based upon the facts and circumstances and underlying
purposes of Code Section 704(c). Prime Partnership and Horizon Partnership each
believes that the above election with respect to HGP LP Common Units should be
respected as reasonable and consistent with the underlying purposes of Code
Section 704(c). However, there is no assurance that the IRS will not challenge
this combination of methods. If such a challenge were successful, the analysis
done by Horizon Partnership indicates that the aggregate net taxable loss that
the former Horizon Partnership Unitholders would recognize in respect of Code
Section 704(c)(1)(B) from the HGP LP Common Unit Distribution would be less.
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To the extent any former Horizon Partnership Unitholder recognizes gain or
loss in respect of Code Section 704(c)(1)(B) from the HGP LP Common Unit
Distribution, such unitholder will adjust its tax basis in its Prime Partnership
Units, and the initial tax basis of Prime Partnership in its HGP LP Common
Units, and thus the Prime Partnership Unitholder recipients of such HGP LP
Common Units, will also be adjusted for any such gain or loss recognized.
CODE SECTION 737. If a partner contributes property to a partnership that
has Built-in Gain or Built-in Loss and such contributing partner receives a
distribution of property from the partnership within five years of contribution
of the Built-in Gain or Built-in Loss property for property contributed to a
partnership before June 9, 1997 (or within seven years of contribution for
property contributed to a partnership after June 8, 1997), then the amount of
gain or loss that such contributing partner must recognize upon receipt of a
distribution of property is determined under Code Section 737. Under Code
Section 737 in the case of any distribution by a partnership to a partner, such
partner shall be treated as recognizing gain in an amount equal to the lesser of
(i) the excess (if any) of (a) the fair market value of property (other than
money) received in the distribution over (b) the adjusted basis of such
partner's interest in the partnership immediately before the distribution
reduced (but not below zero) by the amount of money received in the distribution
or (ii) the net precontribution gain of the partner. "Net precontribution gain"
is defined under Code Section 737 as the net gain (if any) which would have been
recognized by the distributee partner under Code Section 704(c)(1)(B) if all
property which had been contributed to the partnership by the distributee
partner within seven years for property contributed to a partnership after June
8, 1997, and is held by such partnership immediately before the distribution,
had been distributed by such partnership to another partner. Pursuant to Code
Section 704(c), income, gain, loss and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for a
partnership interest in the partnership must be allocated in a manner such that
the contributing partner is charged with, or benefits from, respectively, the
Built-in Gain or Built-in Loss associated with the property at the time of the
contribution of such property.
Pursuant to the HGP LP Common Unit Distribution, the pre-Partnership Merger
Prime Partnership Unitholders will receive a distribution of HGP LP Common
Units. Therefore, under Code Section 737 if any such partner contributed
property with Built-in Gain to Prime Partnership within the last five or seven
years, as applicable, such partner will be required to recognize gain equal to
the lesser of the excess (if any) of the fair market value of the HGP LP Common
Units received in the distribution over the adjusted basis of such partner's
interest in the Prime Partnership immediately before the distribution reduced
(but not below zero) by the amount of any money received in the distribution or
the partner's Built-in Gain. However, based upon an analysis done by Prime
Partnership, no Prime Partnership Limited Partner should recognize any gain
under Code Section 737 in respect of the HGP LP Common Unit Distribution.
ENTITY CLASSIFICATION
Substantially all of Prime's investments are held indirectly through Prime
Partnership and other subsidiaries which are treated as partnerships for federal
income tax purposes. In general, partnerships are "pass-through" entities which
are not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership.
CLASSIFICATION OF PRIME PARTNERSHIP AND SUBSIDIARY PARTNERSHIPS. Interests
in the Prime Partnership, as well as certain subsidiaries which are treated as
partnerships for federal income tax purposes (collectively, the "Subsidiary
Partnerships"), involve special tax considerations, including the possibility of
a challenge by the IRS of the Prime Partnership's status as a partnership (as
opposed to an association taxable as a corporation) for federal income tax
purposes. If Prime Partnership was treated as an association, such partnership
would be taxable as a corporation and therefore be subject to an entity-level
tax on its income. In addition, a change in Prime Partnership's status for tax
purposes might be treated as a taxable event in
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which case the Prime Partnership Unitholders might incur a tax liability without
any related cash distributions.
Under the relevant Treasury Regulations (the "Entity Classification
Regulations"), a domestic business entity not otherwise classified as a
corporation and which has at least two members (an "Eligible Entity") may elect
to be taxed as a partnership for federal income tax purposes. The Entity
Classification Regulations apply for tax periods beginning on or after January
1, 1997 (the "Regulations Effective Date"). Unless it elects otherwise, an
Eligible Entity in existence prior to the Regulations Effective Date will have
the same classification for federal income tax purposes that it claimed under
the Treasury Regulations in effect prior to the Regulations Effective Date. In
addition, an Eligible Entity with two or more members and which did not exist,
or did not claim a classification, prior to the Regulations Effective Date, will
be classified as a partnership for federal income tax purposes unless it elects
otherwise. Prime Partnership and each of the Subsidiary Partnerships that were
in existence prior to the Regulations Effective Date claimed classification as a
partnership for federal tax purposes. Accordingly, Prime Partnership and each
Subsidiary Partnership will be treated as a partnership for federal income tax
purposes.
PUBLICLY TRADED PARTNERSHIPS. Code Section 7704 provides that a publicly
traded partnership will be taxed as a corporation, unless a certain percentage
of its income consists of "qualifying income." A partnership is "a publicly
traded partnership" if interests in such partnership are either traded on an
established securities market or are "readily tradable on a secondary market (or
the substantial equivalent thereof)." Under the Treasury Regulations promulgated
under Code Section 7704, interests in a partnership are readily tradable on a
secondary market or substantial equivalent thereof if, "taking into account all
of the facts and circumstances, the partners are readily able to buy, sell, or
exchange their partnership interests in a manner that is comparable,
economically, to trading on an established securities market." Furthermore,
interests in a partnership are tradeable as such if (i) interests in the
partnership are regularly quoted by any person, such as a broker or dealer,
making a market in the interests; (ii) any person regularly makes available to
the public (including customers or subscribers) bid or offer quotes with respect
to interests in the partnership and stands ready to effect buy or sell
transactions at the quoted prices for itself or on behalf of others; (iii) the
holder of an interest in the partnership has a readily available, regular, and
ongoing opportunity to sell or exchange the interest through a public means of
obtaining or providing information of offers to buy, sell, or exchange interests
in the partnership; or (iv) prospective buyers and sellers otherwise have the
opportunity to buy, sell, or exchange interests in the partnership in a time
frame and with the regularity and continuity that is comparable to that
described in (i), (ii) or (iii). The Treasury Regulations provide several safe
harbors, which if met, a partnership will not be treated as though its interests
are readily tradeable on a secondary market or the substantial equivalent
thereof.
Any transfer by a Prime Partnership Unitholder (excluding the conversion to
New Prime Shares) will be void to the extent that New Prime reasonably
determines that such transfer may cause Prime Partnership to be treated as a
publicly traded partnership. Prime Partnership Unitholders and Horizon
Partnership Common Unitholders are strongly urged to consult their own tax
advisors to determine the extent to which these restrictions may apply to their
Prime Partnership Units.
Even if Prime Partnership or a Subsidiary Partnership were deemed to be a
publicly traded partnership, depending on circumstances at the time, it still
will avoid taxation as a corporation under Code Section 7704, based on the
nature of its income. A publicly traded partnership is not taxed as a
corporation if at least 90% of its gross income for each taxable year consists
of certain passive income, including interest, dividends, real property rents,
and gains from the sale or other disposition of real property. These are
predominantly the types of income that Prime Partnership expects to earn. If
Prime Partnership satisfied the 90% gross income test, but was classified as a
publicly traded partnership, it would not be taxed as a corporation, but would
be subject to certain special rules under Code Section 469(k). In such event, a
Prime Partnership Unitholder would be unable to use losses from other passive
activities against his allocable share of Prime Partnership passive activity
losses allocable to a Prime Partnership Unitholder
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could be offset only against his allocable share of Prime Partnership passive
activity income or gains, and not against income or gains from other passive
activities.
Winston & Strawn, as special counsel to the Prime Partnership, has given its
opinion that Prime Partnership is a partnership, and not a publicly traded
partnership taxable as a corporation, for federal income tax purposes. Rudnick &
Wolfe, as special counsel to the HGP LP, has given its opinion that each of HGP
LP and its subsidiaries formed as partnerships are partnerships, and not
publicly traded partnerships, for federal income tax purposes. Opinions of
counsel are not binding on the Internal Revenue Service. Thus, there can be no
assurance that the IRS will agree with the following discussion and positions
described therein, or that the IRS will not seek to challenge such positions,
which challenge may be sustained by the courts.
If Prime Partnership at any time were considered a publicly traded
partnership and did not satisfy the qualifying income test, then it will be
considered as having transferred its assets at that time to a corporation, and
would be taxed as a corporation for federal income tax purposes, which would
result in adverse consequences to the Prime Partnership Unitholders and would
jeopardize Prime's status as a REIT for federal income tax purposes. This deemed
transfer of assets to a corporation may also result in the recognition of
taxable income to Prime Partnership and its partners, to the extent that its
liabilities at that time exceeded the adjusted tax bases of its assets, without
the receipt of any cash to pay the income tax liability resulting from such
income.
ALLOCATIONS OF PARTNERSHIP ITEMS
REQUIREMENTS UNDER CODE SECTION 704(B). Under Code Section 704(b), a
partnership's allocation of any item of income, gain, loss or deduction to a
partner will be respected for federal income tax purposes so long as it has
"substantial economic effect," or is otherwise deemed to be allocated in
accordance with the partner's "interest in the partnership." If the allocation
does not satisfy this standard, the item will be reallocated among the partners
on the basis of their respective interests in the partnership, determined by
taking into account all the facts and circumstances. Taxable income of Prime
Partnership (ignoring Code Section 704(c) allocations) is generally allocated
among the Prime Partnership Unitholders first to the Prime Partnership Series A
Preferred Unitholders, to the extent of their cumulative unpaid preferential
distributions, then to the Prime Partnership Series B Preferred Unitholders, to
the extent of their cumulative unpaid preferential distributions, then to the
Prime Partnership Series C Preferred Unitholders, to the extent of their
cumulative unpaid preferential distributions, and finally to the Prime
Partnership Common Unitholders, in proportion to the number of Prime Partnership
Common Units held by such Prime Partnership Common Unitholder. The allocations
of partnership items under the Prime Partnership Agreement are intended to have
substantial economic effect, based on the applicable Regulations.
Notwithstanding such intention, however, there can be no assurance that the
allocations under the Prime Partnership Agreement will not be challenged by the
IRS or that partnership items will not be required to be reallocated as a result
of such challenge.
SECTION 704(C) ALLOCATION. Gain or loss recognized by Prime Partnership
upon disposition of an item of contributed property which has Built-In Gain or
Built-In Loss, respectively, remaining after prior adjustments for depreciation
and other items will be allocated to the contributing partners, as required
under Code Section 704(c) and the Code Section 704(c) methods to be elected by
Prime Partnership. Any additional gain or loss with respect to the Prime
Properties will be allocated among all of the Prime Partnership Unitholders in
the manner provided under the Prime Partnership Agreement for allocations of
profits and losses, as described above.
The Treasury Regulations provide for generally three different methods for
taking into account any Built-in Gain or Built-in Loss for purposes of Code
Section 704(c). The first of these methods, the "traditional method" provides
that the tax items of income, gain, loss and deduction from a Built-in Gain or
Built-in Loss property be allocated among the partners in order to take into
account (and reduce) such
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Built-in Gain or Built-in Loss. However, the traditional method fails to take
into account the fact that the total tax items of income, gain, loss or
deduction in respect of a Built-in Gain or Built-in Loss property cannot exceed
the total partnership income, gain, loss or deduction with respect to such
property (the "ceiling rule"). The ceiling rule may result in the contributing
partner of the Built-in Gain or Built-in Loss property to fail to recognize all
such Built-in Gain or Built-in Loss.
In order to avoid the effect of the ceiling rule, another elective method is
the "traditional method with curative allocations." This method generally cures
the possible effect of the ceiling rule by allocating other partnership tax
items of income, gain, loss or deduction to make up the difference of items
under the ceiling rule.
Prime Partnership intends to elect the traditional method with respect to
its pre-Partnership Merger Prime Properties and intends to elect the traditional
method with curative allocations in respect of the Horizon Properties (other
than HGP LP Common Units, for which Prime Partnership intends to elect the
traditional method). Based on estimates by Prime Partnership and Horizon
Partnership, this combination of elections generally has a more favorable result
to pre-Partnership Merger Prime Partnership Unitholders than other combinations
of these approaches for the Horizon Properties and other Prime Properties in
terms of the rate of inclusion of taxable income in respect of Code Section
704(c) gain or loss of such Prime Partnership Unitholders.
Although a partnership generally has this choice of Code Section 704(c)
method with respect to each property, including with respect to different items
of contributed property, the partnership must consistently apply a single method
with respect to each item of contributed property and the overall method or
combination of methods must be reasonable based upon the facts and circumstances
and underlying purposes of Code Section 704(c). Prime Partnership believes that
the above elections with respect to Prime Properties (including the Horizon
Properties) should be respected as reasonable and consistent with the underlying
purposes of Code Section 704(c). However, there is no assurance that the IRS
will not challenge this combination of methods. Such a challenge, if successful,
could cause one or more Prime Partnership Unitholders to recognize more taxable
income or less taxable loss on an ongoing basis in respect of their Prime Units.
PRIME PARTNERSHIP DISTRIBUTIONS
Under Code Section 731, distributions of money (and marketable securities)
by Prime Partnership to a Prime Partnership Unitholder generally will not be
taxable to such Prime Partnership Unitholder to the extent such distributions do
not exceed the Prime Partnership Unitholder's adjusted basis in its Prime
Partnership Units immediately before the distribution. Distributions in excess
of a Prime Partnership Unitholder's basis in his Prime Partnership Units
(arising from either an actual distribution of cash or a deemed distribution of
cash resulting from a shifting of partnership liabilities) will be considered
gain recognized from the sale or disposition of the holder's Prime Partnership
Units.
DISPOSITIONS AND EXCHANGES/REDEMPTIONS OF PRIME PARTNERSHIP UNITS
DISPOSITION OF PRIME PARTNERSHIP UNITS. If a Prime Partnership Unit is sold
or otherwise disposed of, the determination of gain or loss will be based on the
difference between the amount realized and the adjusted tax basis for such Prime
Partnership Unit. Upon the sale of a Prime Partnership Unit, a Prime Partnership
Unitholder's "amount realized" will be the sum of the cash and fair market value
of other property received, plus the portion of Prime Partnership's liabilities
allocated to the Prime Partnership Unit sold. Upon a gift of a Prime Partnership
Unit, the amount realized will be the portion of Prime Partnership's liabilities
allocable to such Prime Partnership Unit. To the extent that the amount realized
exceeds the adjusted basis of the Prime Partnership Unit disposed of, the Prime
Partnership Unitholder will recognize gain. The tax liability resulting from
such gain could exceed the amount of cash received upon such disposition.
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EXCHANGE/REDEMPTION OF PRIME PARTNERSHIP UNITS. Under the Prime Partnership
Agreement, each Prime Partnership Common Unit may be exchanged for one New Prime
Common Share or the cash equivalent (subject to certain restrictions). An
exchange of Prime Partnership Units for either cash or New Prime Common Shares
will constitute a sale of Prime Partnership Units by such Prime Partnership
Unitholder to Prime. Such sale will be fully taxable to the Prime Partnership
Unitholder, and such Prime Partnership Unitholder will be treated as realizing
for tax purposes an amount equal to the sum of the cash or the value of the New
Prime Common Shares received in the exchange plus the amount of any Prime
Partnership liabilities allocable to the redeemed Prime Partnership Units at the
time of the exchange.
TAX RETURNS AND OTHER TAX MATTERS AFFECTING HOLDERS OF PRIME PARTNERSHIP UNITS
Prime Partnership must file with the IRS an annual information return for
federal income tax purposes. Prime Partnership will furnish to each Prime
Partnership Unitholder on a timely basis a Schedule K-1 which sets forth the
allocable share of Prime Partnership's income, gains, losses, deductions and
credits, if any, as well as certain other information to be used in the Prime
Partnership Unitholder's tax return. The information return filed by Prime
Partnership may be audited by the IRS. Adjustments (if any) resulting from such
an audit may result in adjustments to the Prime Partnership Unitholder's tax
return, and possibly may result in an audit of that return, which would not
necessarily be limited to Prime Partnership items.
The Code contains special procedures that specify the manner in which IRS
audit adjustments of partnership items are resolved. Partnerships generally are
treated as separate entities for purposes of federal tax audits, judicial review
of IRS adjustments and tax settlement proceedings. The tax treatment of
partnership items is determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with each partner.
The Code provides for one partner to be designated as the "Tax Matters Partner"
("TMP") for these purposes. The Prime Partnership Agreement appoints New Prime,
its general partner, as TMP. As the TMP, New Prime has all the rights and
obligations of the TMP under the Code. The Prime Partnership Unitholders
generally will be required to treat Prime Partnership items on their federal
income tax returns in a manner consistent with the treatment of the items on the
Prime Partnership information return. In general, that consistency requirement
will be waived if the Prime Partnership Unitholder files a statement with the
IRS identifying the inconsistency. Failure to satisfy the consistency
requirement, if not waived, will result in an adjustment to conform the
treatment of the item by the Prime Partnership Unitholder to the treatment on
the Prime Partnership return. Even if the consistency requirement is waived,
adjustments to the Prime Partnership Unitholder's tax liability with respect to
partnership items may result from an audit of Prime Partnership's or the Prime
Partnership Unitholder's tax return. Intentional or negligent disregard of the
consistency requirement may subject a Prime Partnership Unitholder to
substantial penalties.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
PASSIVE ACTIVITY RULES. The passive activity rules of Code Section 469
generally provide that individuals, estates, trusts and certain closely held
corporations and personal service corporations may deduct losses from passive
activities (including rental activities, as well as trade or business activities
in which the taxpayer does not materially participate) only to the extent of the
taxpayer's income from passive activities. For most Prime Partnership Limited
Partners, their distributive share of Prime Partnership taxable income or loss
is likely to be treated as passive activity income or loss (although Prime
Partnership also may have a substantial amount of portfolio income from earnings
on reserves). However, if Prime Partnership or any Subsidiary Partnership was to
be classified as a publicly traded partnership under Code Section 469(k), any
passive activity losses arising from the publicly traded partnership that are
allocable to an Prime Partnership Unitholder could be used solely to offset
passive activity gains or income from Prime Partnership and could not be offset
with losses from other passive activities. See "--Entity Classification."
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OTHER LOSS LIMITATIONS. An Prime Partnership Unitholder may not deduct his
share of Prime Partnership losses to the extent that such losses exceed the
lesser of (1) the adjusted tax basis of his Prime Units at the end of Prime
Partnership's taxable year in which the loss occurs, and (2) the amount for
which the Prime Partnership Unitholder is considered "at risk" at the end of
that year under Code Section 465. In general, a partner will initially be "at
risk" to the extent of the cash investment in his respective partnership
interest (unless he borrowed amount on a nonrecourse basis to acquire such
interest) plus such partner's share (as determined under Code Section 752) of
such partnership's "qualified nonrecourse financing" (within the meaning of Code
Section 465(b)(6)). Losses disallowed to a Prime Partnership Unitholder as a
result of these rules can be carried forward and may be allowed to the extent
that such partner's adjusted basis or "at risk" amount (whichever was the
limiting factor) increases in a subsequent year. The "at risk" rules apply to
(a) an individual, (b) a shareholder of a corporation that is an S corporation,
and (c) a corporation if more than 50% of the value of stock of such corporation
is owned directly or indirectly by five or fewer individuals during the last
half of the taxable year.
STATE AND LOCAL TAXES
Prime Partnership will own properties and conduct business operations in a
number of states, and, thus, Prime Partnership and its partners may be subject
to income tax, withholding and tax reporting requirements in a number of
jurisdictions. Prime Partnership intends to provide its partners with sufficient
and timely state and local income tax information upon which they may rely in
reporting and otherwise complying with their state and local income tax
obligations.
ALTERNATIVE MINIMUM TAX
The Code contains different sets of minimum tax rules applicable to
corporate and noncorporate taxpayers. The discussion below relates only to the
alternative minimum tax applicable to noncorporate taxpayers. CORPORATE
INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE EFFECT OF
THE CORPORATE MINIMUM TAX PROVISIONS FOLLOWING CONSUMMATION OF THE PARTNERSHIP
MERGER.
Noncorporate taxpayers are subject to an alternative minimum tax ("AMT") to
the extent the tentative minimum tax ("TMT") exceeds the regular income tax
otherwise payable. The highest rate of tax imposed on alternative minimum
taxable income ("AMTI") in computing TMT is 28%. AMTI consists of the taxpayer's
taxable income, as adjusted under Code Sections 56 and 58, plus his items of tax
preference, reduced by an exemption amount.
In computing AMTI, for all depreciable property placed in service after
December 31, 1986, an alternative cost recovery (i.e., depreciation) system is
substituted for the cost recovery system used in calculating the regular tax.
Cost recovery for most real property of the type to be owned by Prime
Partnership is computed under the straight-line method over a 40-year life for
purposes of computing AMTI rather than the 31.5-year life used for most
nonresidential real property under the regular tax system. (For regular tax and
AMT purposes, different recovery periods will apply to personal property and
certain real estate improvements owned by Prime Partnership.)
The limitation on the deduction of passive activity losses applies to the
calculation of AMTI as well as the regular tax, although the amount of passive
activity deductions disallowed for AMTI purposes will be less than the amount
disallowed for regular tax purposes to the extent that the lower depreciation
rates used in computing AMTI depreciation produce smaller passive activity
losses.
Prime Partnership itself is not subject to the alternative minimum tax, but
each Prime Partnership Unitholder is required to take into account his share of
Prime Partnership's tax preference items and adjustments in order to compute
AMTI. Since the impact of this tax depends on each Prime Partnership
Unitholder's particular situation, Prime Partnership Unitholders are urged to
consult their own tax
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advisors as to the applicability of the alternative minimum tax following
consummation of the Partnership Merger.
QUALIFICATION OF NEW PRIME AS A REIT
GENERAL. Horizon elected REIT status commencing with its taxable year
ending December 31, 1994. In the opinion of Rudnick & Wolfe, which has acted as
counsel to Horizon, Horizon was organized and has operated in conformity with
the requirements for qualification and taxation as a REIT under the Code for its
taxable years ended December 31, 1994 through December 31, 1997. Winston &
Strawn has opined that, subsequent to the Corporate Merger, New Prime's proposed
method of operation described in this Joint Proxy
Statement/Prospectus/Information Statement and as represented by Prime and
Horizon will enable New Prime to meet the requirements for qualification and
taxation as a REIT for federal income tax purposes. It must be emphasized that
this opinion is based on various assumptions relating to the organization and
operation of New Prime and its subsidiaries, and is conditioned upon certain
representations made by Prime, Prime Partnership and Horizon as to certain
relevant factual matters, including matters related to the organization,
expected operation, and assets of New Prime and its subsidiaries. New Prime's
qualification and taxation as a REIT depend upon New Prime's ability to meet on
a continuing basis, through actual annual operating and other results, the
various requirements under the Code and described in the Joint Proxy
Statement/Prospectus/Information Statement with regard to, among other things,
the sources of its gross income, the composition of its assets, the level of its
dividends to shareholders, and the diversity of its share ownership. Neither
Winston & Strawn nor Rudnick & Wolfe will review New Prime's compliance with
these requirements on a continuing basis. No assurance can be given that the
actual results of the operations of New Prime and its subsidiaries, the sources
of their income, the nature of their assets, the level of New Prime's dividends
to shareholders and the diversity of its share ownership for any given taxable
year will satisfy the requirements under the Code for qualification and taxation
as a REIT.
In any year in which New Prime qualifies as a REIT, generally it will not be
subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to shareholders. This treatment substantially
eliminates the "double taxation" (at both the corporate and shareholder levels)
that generally results from the use of corporate investment vehicles. New Prime
may, however, be subject to tax at normal corporate rates upon any taxable
income or capital gain not distributed. If New Prime should fail to satisfy
either the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which it fails the 75% or the 95% test, multiplied by a fraction
intended to reflect its profitability. New Prime will also be subject to a 100%
tax on net income derived from any "prohibited transaction," as described below.
In addition, if New Prime should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior years, New Prime would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed. New Prime may also be subject to the corporate "alternative minimum
tax," as well as tax in certain situations and on certain transactions not
presently contemplated. New Prime will use the calendar year both for federal
income tax purposes and for financial reporting purposes.
In order to qualify as a REIT, New Prime must meet, among others, the
following requirements:
SHARE OWNERSHIP TEST. Shares of beneficial interest of New Prime must be
held by a minimum of 100 persons for at least 335 days of a taxable year that is
12 months, or during a proportionate part of a taxable year of less than 12
months. In addition, no more than 50% in value of the shares of beneficial
interest of New Prime may be owned, directly or indirectly and by applying
certain constructive ownership rules, by five or fewer individuals during the
last half of each taxable year. Prime and Horizon believe that they have each
satisfied both of these tests, and that New Prime will continue to do so. In
order to help comply with the second of these tests, New Prime has placed
certain restrictions on the transfer of the New Prime
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Common Shares, the New Prime Series A Preferred Shares, the New Prime Series B
Preferred Shares and the New Prime Series C Preferred Shares that are intended
to prevent further concentration of share ownership.
ASSET TESTS. At the close of each quarter of New Prime's taxable year, New
Prime must satisfy two tests relating to the nature of its assets. First, at
least 75% of the value of New Prime's total assets must be represented by any
combination of interests in real property, interests in mortgages on real
property, shares in other REITs, cash, cash items and certain government
securities. Second, although the remaining 25% of New Prime's assets generally
may be invested without restriction, securities in this class may not exceed
either (i) 5% of the value of New Prime's total assets as to any one issuer, or
(ii) 10% of the outstanding voting securities of any one issuer. Where New Prime
invests in a partnership, it will be deemed to own a proportionate share of the
partnership's assets. New Prime's investment in properties through its interest
in Prime Partnership and other subsidiaries which are partnerships for federal
income tax purposes will constitute qualified assets for purposes of the 75%
asset test.
GROSS INCOME TESTS. There are two separate percentage tests relating to the
sources of New Prime's gross income which must be satisfied for each taxable
year. For purposes of these tests, where New Prime invests in a partnership, New
Prime will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of New Prime as it has in the hands of the partnership.
1. THE 75% TEST. At least 75% of New Prime's gross income for each taxable
year must be "qualifying income." Qualifying income generally includes (i) rents
from real property (except as modified below); (ii) interest on obligations
collateralized by mortgages on, or interests in, real property; (iii) gains from
the sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of New Prime's trade or business ("dealer property"); (iv)
distributions on shares in other REITs, as well as gain from the sale of such
shares; (v) abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of a mortgage collateralized by such property ("foreclosure
property"); (vii) commitment fees received for agreeing to make loans
collateralized by mortgages on real property or to purchase or lease real
property; and (viii) certain qualified temporary investment income attributable
to the investment of new capital received by New Prime in exchange for its
shares (including the securities offered hereby) during the one-year period
following the receipt of such new capital.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if New Prime, or an owner of 10% or more of New Prime, directly or
constructively owns 10% or more of such tenant. In addition, 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. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person. Finally, for rents received to qualify as rents from
real property, New Prime generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom New Prime derives no revenue. The "independent contractor"
requirement, however, does not apply to the extent that the services provided by
New Prime are "usually or customarily rendered" in connection with the rental of
space for occupancy only, and are not otherwise considered "rendered to the
occupant."
New Prime, through certain of its subsidiaries, will provide certain
services with respect to the properties of Horizon and Prime and any newly
acquired properties. Prime and Horizon each believe that the services provided
by such subsidiaries are usually or customarily rendered in connection with the
rental of space for occupancy only, and therefore that the provision of such
services has not caused, and will not
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in the future cause the rents received with respect to the Properties to fail to
qualify as rents from real property for purposes of the 75% and 95% gross income
tests.
2. THE 95% TEST. At least 95% of New Prime's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends including New Prime's share
of dividends paid by Prime Services Corp (which will own all of the voting
shares of First HGI, Inc., HGI Perryville, Inc., MG Third Party Services Corp.,
HGI Management Corp. and Second HGI, Inc. (other than any such shares owned by
Horizon Partnership)), Prime Retail Finance, Inc., Prime Retail Finance II,
Inc., Prime Retail Finance IV, Inc., Prime Retail Finance V, Inc. and Prime
Retail Stores, Inc. (collectively, the "Prime Finance Corporations"), which are
corporations for federal income tax purposes, and interest on any obligations
not collateralized by an interest in real property and any payments made on
behalf of New Prime by a financial institution pursuant to a rate protection
agreement will be included as qualifying income for purposes of the 95% gross
income test, but not for purposes of the 75% test. For purposes of determining
whether New Prime complies with the 75% and 95% income tests, qualifying income
does not include income from prohibited transactions. A "prohibited transaction"
is a sale of dealer property, excluding certain dealer property held by New
Prime for at least four years and excluding foreclosure property.
New Prime's investment in the New Prime Properties, through Prime
Partnership, in major part will give rise to rental income qualifying under the
75% and 95% gross income tests. Gains on sales of the New Prime Properties or of
New Prime's interest in Prime Partnership will generally qualify under the 75%
and 95% gross income tests. Each of Prime and Horizon believes that the income
on its other investments will not cause New Prime to fail the 75% or 95% gross
income test for any year, and each of Prime and Horizon anticipates that this
will continue to be the case for New Prime.
Even if New Prime fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still 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: (i) New Prime's failure to comply was
due to reasonable cause and not to willful neglect; (ii) New Prime reports the
nature and amount of each item of its income included in the tests on a schedule
attached to its tax return; and (iii) any incorrect information on this schedule
is not due to fraud with intent to evade tax. If these relief provisions apply,
New Prime, however, will still be subject to a 100% tax based upon the greater
of the amount by which it fails either the 75% or 95% gross income test for that
year, less certain adjustments.
New Prime, through Prime Services Corp (which will own all of the voting
shares of First HGI, Inc., HGI Perryville, Inc., MG Third Party Services Corp.,
HGI Management Corp. and Second HGI, Inc. (other than any such shares owned by
Horizon Partnership)) will provide certain services with respect to the
properties of New Prime and any newly acquired properties. Prime believes that
the services provided by Prime Services Corp and its subsidiaries are usually or
customarily rendered in connection with the rental of space for occupancy only,
and therefore the provision of such services has not caused, and will not in the
future cause, the rents received with respect to the properties to fail to
qualify as rents from real property for purposes of the 75% and 95% gross income
tests.
ANNUAL DISTRIBUTION REQUIREMENTS. New Prime, in order to qualify as a REIT,
is required to make dividend distributions (other than capital gain dividends)
to its shareholders each year in an amount at least equal to (A) the sum of (i)
95% of New Prime's REIT taxable income (computed without regard to the dividends
paid deduction and New Prime'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. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before New Prime
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that New Prime
does not distribute all of its net capital gain
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or distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains or ordinary corporate tax rates, as the case may be.
Each of Prime and Horizon has made and intends to continue, and intends for
New Prime, to make timely distributions sufficient to satisfy the annual
distribution requirements. In this regard, the partnership agreement of Prime
Partnership authorizes New Prime, as general partner, to take such steps as may
be necessary to cause Prime Partnership to distribute to its partners an amount
sufficient to permit New Prime to meet these distribution requirements. It is
possible that New Prime may not have sufficient cash or other liquid assets to
meet the 95% dividend requirement, due to the payment of principal on debt or to
timing differences between the actual receipt of income and actual payment of
expenses on the one hand, and the inclusion of such income and deduction of such
expenses in computing New Prime's REIT taxable income on the other hand. To
avoid any problem with the 95% distribution requirement, New Prime will closely
monitor the relationship between its REIT taxable income and cash flow and, if
necessary, will borrow funds (or cause Prime Partnership or other of its
subsidiaries to borrow funds) in order to satisfy the distribution requirement.
FAILURE TO QUALIFY. If New Prime fails to qualify for taxation as a REIT in
any taxable year and the relief provisions do not apply, New Prime 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 New Prime fails to qualify will not be required and, if made, will not be
deductible by New Prime. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income, and, subject to certain limitations in the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, New Prime also will be
ineligible for qualification as a REIT for the four taxable years following the
year during which qualification was lost.
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PRIME PARTNERSHIP AND HGP LP
SELECTED UNAUDITED PRO FORMA
FINANCIAL DATA
The following table sets forth the selected unaudited pro forma financial
data for Prime Partnership and HGP LP after their giving effect to the
Transactions as if it had occurred on the dates indicated herein and the other
pro forma adjustments described in the notes to the unaudited pro forma
financial statements included elsewhere in the Joint Consent Solicitation
Statement/Prospectus/Information Statement.
The selected unaudited pro forma operating data are presented as if the
Transactions had been consummated at the beginning of the earliest period
presented.
The selected unaudited pro forma balance sheet data is presented as if the
Transactions had occurred on December 31, 1997. The Transactions have been
accounted for under the purchase method of accounting in accordance with the
Accounting Principles Board Opinion No. 16. In the opinion of management, all
significant adjustments necessary to reflect the effects of the Transactions
have been made.
The selected pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the unaudited pro forma financial
statements and notes thereto included elsewhere in the Joint Consent
Solicitation Statement/Prospectus/Information Statement.
The selected unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual results of Prime Partnership and Horizon Partnership would have
been for the period and dates presented nor does such data purport to represent
the results of future periods.
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PRIME PARTNERSHIP AND HGP LP
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
YEAR ENDED DECEMBER 31, 1997
-----------------------------
PRIME PARTNERSHIP HGP LP
----------------- ----------
(IN THOUSANDS, EXCEPT PER
UNIT INFORMATION)
<S> <C> <C>
OPERATING DATA:
REVENUES
Base rents......................................................................... $ 175,548 $ 27,416
Percentage rents................................................................... 8,140 151
Tenant reimbursements.............................................................. 66,732 9,341
Income from investment partnerships................................................ 243 --
Interest and other................................................................. 15,593 2,638
----------------- ----------
Total revenues................................................................. 266,256 39,546
EXPENSES
Property operating................................................................. 51,261 7,862
Real estate taxes.................................................................. 19,655 3,782
Depreciation and amortization...................................................... 61,670 4,489
General and administrative......................................................... 8,233 3,500
Interest........................................................................... 81,210 10,034
Impairment and severance........................................................... -- 6,949
Other charges...................................................................... 6,988 2,696
----------------- ----------
Total expenses................................................................. 229,017 39,312
----------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS AND EXTRAORDINARY
ITEM............................................................................. 37,239 234
Loss allocated to minority interests............................................... 76 --
----------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM........................ 37,315 234
Income allocated to preferred unitholders.......................................... 23,245 --
----------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM APPLICABLE TO COMMON
UNITS............................................................................ $ 14,070 $ 234
----------------- ----------
----------------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM PER COMMON UNIT:
General partner.................................................................. $ 0.31 $ 0.07
----------------- ----------
----------------- ----------
Limited partners................................................................. $ 0.31 $ 0.07
----------------- ----------
----------------- ----------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
General partner.................................................................. 33,587 2,770
Limited partners................................................................. 12,391 619
----------------- ----------
45,978 3,389
----------------- ----------
----------------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
PRIME
PARTNERSHIP HGP LP
----------------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in rental property, net................................................. $ 1,751,257 $ 157,099
Total assets....................................................................... 1,867,030 176,749
Total debt......................................................................... 1,095,841 127,387
Minority interests................................................................. 3,666 --
Partners' capital.................................................................. 714,062 40,565
</TABLE>
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PRIME PARTNERSHIP
SELECTED HISTORICAL FINANCIAL DATA
The following sets forth summary historical financial data for the three
years ended December 31, 1997, 1996 and 1995, the periods from January 1, 1994
to March 21, 1994 and March 22, 1994 to December 31, 1994 and the year ended
December 31, 1993 are derived from the consolidated financial statements of
Prime Partnership and Prime Retail Properties. The Combined Financial Statements
for Prime Retail Properties combine the balance sheet data and results of
operations of eleven predecessor partnerships, the 40% equity interest in two
predecessor partnerships that previously owned properties, and the management
and development operations acquired by Prime from PGI in connection with the
Prime IPO. Because of the Prime IPO and the related transactions pertaining to
the formation of Prime, results of operations for Prime Partnership after March
21, 1994 are not comparable for recent periods. The following financial
information should be read in conjunction with, the financial statements, notes
thereto and other financial information included elsewhere in this Joint Consent
Solicitation Statement/ Prospectus/Information Statement.
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(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PREDECESSOR
PRIME PARTNERSHIP (COMBINED)
---------------------------------------------- ----------------------------
PERIOD FROM PERIOD FROM
MARCH 22 JANUARY 1
YEAR ENDED DECEMBER 31, TO TO YEAR ENDED
------------------------------- DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
--------- --------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue............................ $ 129,092 $ 89,040 $ 77,398 $ 45,369 $ 6,330 $ 21,800
Total expenses........................... 109,077 81,170 63,542 35,233 8,738 25,673
--------- --------- --------- ------------- ------------- -------------
INCOME (LOSS) BEFORE MINORITY
INTERESTS.............................. 20,015 7,870 13,856 10,132 (2,408) (3,873)
Income allocated to minority interests... (189) (140) (167) (46) -- --
--------- --------- --------- ------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM................................... 19,826 7,730 13,689 10,086 (2,408) (3,873)
Extraordinary item....................... (2,061) (4,280) -- -- -- --
--------- --------- --------- ------------- ------------- -------------
NET INCOME (LOSS)........................ 17,765 3,450 13,689 10,086 $ (2,408) $ (3,873)
------------- -------------
------------- -------------
Income allocated to preferred
unitholders............................ 12,995 14,236 20,944 16,290
--------- --------- --------- -------------
NET INCOME (LOSS) APPLICABLE TO COMMON
UNITS.................................. $ 4,770 $ (10,786) $ (7,255) $ (6,204)
--------- --------- --------- -------------
--------- --------- --------- -------------
NET INCOME (LOSS) APPLICABLE TO COMMON
UNITS:
General partner........................ $ 3,305 $ (5,193) $ (1,724) $ (1,465)
Limited partner........................ 1,465 (5,593) (5,531) (4,739)
--------- --------- --------- -------------
Total.................................... $ 4,770 $ (10,786) $ (7,255) $ (6,204)
--------- --------- --------- -------------
--------- --------- --------- -------------
EARNINGS (LOSS) PER COMMON UNIT:
General partner (including $0.07 and
$0.25 net loss per unit from
extraordinary item in 1997 and 1996,
respectively)........................ $ 0.17 $ (0.63) $ (0.60) $ (0.51)
--------- --------- --------- -------------
--------- --------- --------- -------------
Limited partner (including $0.07 and
$0.25 net loss per unit from
extraordinary item in 1997 and 1996,
respectively)........................ $ 0.17 $ (0.63) $ (0.60) $ (0.51)
--------- --------- --------- -------------
--------- --------- --------- -------------
WEIGHTED AVERAGE UNITS OUTSTANDING:
General partner........................ 19,189 8,221 2,875 2,850
Limited partner........................ 8,505 8,855 9,221 9,221
--------- --------- --------- -------------
Total.................................... 27,694 17,076 12,096 12,071
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
---------------------------------
PRIME RETAIL PROPERTIES (COMBINED)
DECEMBER 31, -----------------------------------------
--------------------------------- DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
----------- --------- --------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Rental property (before accumulated
depreciation).................................. $ 904,518 $ 604,751 $ 454,471 $ 376,181 $ 180,170 $ 185,394
Net investment in rental property................ 822,502 583,081 414,282 349,513 164,159 169,674
Total assets..................................... 911,834 670,347 462,758 386,198 186,034 190,685
Bonds and notes payable.......................... 515,265 499,523 305,954 214,025 188,378 184,037
Total liabilities................................ 548,542 526,584 326,094 232,917 198,244 197,400
Total partners' capital (deficit)................ 359,381 139,777 132,257 (11,217) (12,210) (6,715)
</TABLE>
137
<PAGE>
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PRIME RETAIL, L.P. PREDECESSOR (COMBINED)
-------------------------------------------- ----------------------
PERIOD PERIOD YEAR
MARCH 22 JAN. 1 ENDED
YEAR ENDED DEC. 31, TO TO DEC. 31,
------------------------------- DEC. 31, MARCH 21, ---------
1997 1996 1995 1994 1994 1993
--------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Supplemental Data:
Funds from operations (1)............................. $ 48,187 $ 34,652 $ 29,046 $ 22,154 $ 139 $ 4,351
Ratio of earnings to combined fixed charges and
preferred unit distributions(2)..................... 1.06x -- -- -- -- --
Excess of combined fixed charges and preferred unit
dividends over earnings (2)......................... $ -- $ (9,745) $ (10,262) $ (7,507) $ (2,366) $ (4,423)
Net cash (used in) provided by operating activities... $ 46,695 $ 42,245 $ 32,272 $ 17,573 $ (1,873) $ 14,450
Net cash used in investing activities................. $(229,702) $(232,291) $ (81,967) $(149,435) $ (1,239) $ (54,210)
Net cash provided by financing activities............. $ 185,366 $ 179,042 $ 56,634 $ 134,845 $ 4,087 $ 39,907
Distributions declared per common unit................ $ 1.18 $ 1.18(3) $ 0.623 $ -- $ -- $ --
Factory outlet GLA (sq. ft.).......................... 7,217 5,780 4,331 3,382 1,839 1,839
</TABLE>
- ------------------------
NOTES:
(1) Prime Partnership's management believes that in order to facilitate a clear
understanding of the consolidated historical operating results of Prime
Partnership, FFO should be considered in conjunction with net income (loss)
as presented in the financial statements included in this Joint Consent
Solicitation Statement/Prospectus/Information Statement. Management believes
that FFO is an important and widely used measure of the operating
performance of REITs which provides a relevant basis for comparison to other
REITs. Therefore, FFO is presented to assist investors in analyzing the
performance of Prime Partnership. In March 1995, NAREIT issued a
clarification of its definition of FFO. Although Prime Partnership has
adopted the NAREIT definition of FFO, Prime Partnership cautions that the
calculation of FFO may vary from entity to entity and as such the
presentation of FFO by Prime Partnership may not be comparable to other
similarly titled measures of other reporting companies. FFO does not
represent cash flow from operating activities in accordance with GAAP and is
not indicative of cash available to fund all of Prime Partnership's cash
needs. FFO should not be considered as an alternative to net income or any
other GAAP measure as an indicator of performance and should not be
considered as an alternative to cash flow as a measure of liquidity or the
ability to service debt or to pay dividends. A reconciliation of income
(loss) before allocation to minority interests and preferred unitholders to
FFO is as follows:
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PRIME PARTNERSHIP PREDECESSOR (COMBINED)
---------------------------------------------- ------------------------
PERIOD PERIOD
MARCH 22 JAN. 1
YEAR ENDED DEC. 31, TO TO YEAR ENDED
--------------------------------- DEC. 31, MARCH 21, DEC. 31,
1997 1996 1995 1994 1994 1993
--------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before allocations to
minority interests and preferred
unitholders........................... $ 20,015 $ 14,001(i) $ 13,856 $ 10,132 $ (2,408) $ (3,873)
FFO ADJUSTMENTS
Depreciation and amortization........... 26,414 18,703 14,884 9,508 2,173 7,504
Unconsolidated joint venture
adjustments (ii)...................... 1,758 1,948 306 2,514 374 720
--------- ----------- --------- ----------- ----------- -----------
FFO before allocation to minority
interests and preferred unitholders... $ 48,187 $ 34,652 $ 29,046 $ 22,154 $ 139 $ 4,351
--------- ----------- --------- ----------- ----------- -----------
--------- ----------- --------- ----------- ----------- -----------
</TABLE>
- ------------------------
NOTES:
(i) Excludes a nonrecurring charge of $6,131 related to the prepayment of a
long-term debt during 1996.
(ii) Amounts include net preferential partner distributions from a joint
venture partnership of $400, $162 and $2,538 for the years ended
December 31, 1996 and 1995 and for the period from March 22, 1994 to
December 31, 1994, respectively.
(2) For purposes of these computations, earnings consist of income (loss) less
income from unconsolidated investment partnerships, plus fixed charges
(excluding capitalized interest). Combined fixed charges and preferred unit
dividends consist of interest costs whether expensed or capitalized and
amortization of debt issuance costs and preferred unit dividends.
For the years ended December 31, 1996, 1995, 1994 and 1993, Prime's earnings
were inadequate to cover fixed charges and preferred unit distributions. A
reconciliation of income (loss) before minority interests to excess of combined
fixed charges and preferred unit distributions and dividends over earnings as
follows:
138
<PAGE>
<TABLE>
<CAPTION>
PRIME PARTNERSHIP
PRIME RETAIL, L.P. PREDECESSOR
---------------------------------------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 22 TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before minority
interests.................... $ 20,015 $ 7,870 $ 13,856 $ 10,132 $ (2,408) $ (3,873)
Interest incurred.............. 39,078 26,853 22,394 8,491 2,585 9,277
Amortization of capitalized
interest..................... 343 284 222 152 42 161
Amortization of debt issuance
costs........................ 2,330 2,407 3,309 2,160 695 362
Amortization of interest rate
protection contracts......... 1,390 1,383 1,276 797 -- --
Less interest earned on
interest rate protected
contracts.................... (115) (201) (721) (224) -- --
Less capitalized interest...... (3,818) (3,462) (2,675) (1,277) -- (711)
------------- ------------- ------------- ------------- ------------- -------------
Earnings..................... 59,223 35,134 37,661 20,231 914 5,216
------------- ------------- ------------- ------------- ------------- -------------
Interest incurred.............. 39,078 26,853 22,394 8,491 2,585 9,277
Amortization of debt issuance
costs........................ 2,330 2,407 3,309 2,160 695 362
Amortization of interest rate
protection contracts......... 1,390 1,383 1,276 797 -- --
Preferred unit distributions... 12,995 14,236 20,944 16,290 -- --
------------- ------------- ------------- ------------- ------------- -------------
Combined Fixed Charges and
Preferred Unit
Distributions.............. 55,793 44,879 47,923 27,738 3,280 9,639
------------- ------------- ------------- ------------- ------------- -------------
Excess of Combined Fixed
Charges and Preferred Unit
Distributions over
Earnings..................... --$......... $ (9,745) $ (10,262) $ (7,507) $ (2,366) $ (4,423)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Ratio of Earnings to Combined
Fixed Charges and Preferred
Unit Distributions........... 1.06 -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
- ------------------------
(3) Excludes a special cash distribution of $0.145 per Prime Partnership Common
Unit paid in July 1996.
139
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PRIME PARTNERSHIP
(AMOUNTS IN THOUSANDS, EXCEPT UNIT AND PER SQUARE FOOT INFORMATION)
INTRODUCTION
The following discussion and analysis of the consolidated financial
condition and results of operations of Prime Partnership and the Prime
Partnership Predecessor (as defined herein) should be read in conjunction with
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Joint Consent Solicitation Statement/Prospectus/Information Statement. The
combined financial statements of Prime Partnership combine the balance sheet
data and results of operations of the Prime Partnership Predecessor which were
contributed to Prime Partnership simultaneously with the completion, on March
22, 1994, of the Prime IPO. Historical results and percentage relationships set
forth herein are not necessarily indicative of future operations.
CAUTIONARY STATEMENTS
The following discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains certain forward-looking
statements which reflect management's current views with respect to future
events and financial performance. Such forward-looking statements are subject to
certain risks and uncertainties; including, but not limited to, the effects of
future events on Prime Partnership's financial performance; the risk that Prime
Partnership may be unable to finance its planned development activities; risks
related to the retail industry in which Prime Partnership's factory outlet
centers compete, including the potential adverse impact of external factors,
such as inflation, consumer confidence, unemployment rates and consumer tastes
and preferences; risks associated with Prime Partnership's property acquisition
activities, such as the lack of predictability with respect to financial
returns; risks associated with Prime Partnership's property development
activities, such as the potential for cost overruns, delays and the lack of
predictability with respect to the financial returns associated with these
development activities; the risk of potential increases in market interest rates
from current levels; risks associated with Prime Partnership's property
acquisition activities, such as the uncertainty as to whether these transactions
may be completed and the lack of predictability with respect to the financial
returns; and risks associated with real estate ownership, such as the potential
adverse impact of changes in local economic climate on the revenues and the
value of Prime Partnership's properties.
PORTFOLIO GROWTH
Prime Partnership has grown by developing and acquiring factory outlet
centers and expanding its existing factory outlet centers. Prime Partnership's
factory outlet portfolio consisted of 28 operating factory outlet centers
totaling 7,217,000 square feet of GLA at December 31, 1997, compared to 21
factory outlet centers totaling 5,780,000 square feet of GLA at December 31,
1996, and 17 factory outlet centers totaling 4,331,000 square feet of GLA at
December 31, 1995.
During 1997, Prime Partnership purchased seven factory outlet centers
totaling 1,221,000 square feet of GLA and opened four expansions to existing
factory outlet centers totaling 224,000 square feet of GLA. Additionally, Prime
Partnership acquired its joint venture partner's 25% partnership interest in
Buckeye Factory Shops Limited Partnership ("Buckeye") on September 2, 1997 and
now owns 100% of this factory outlet center with 205,000 square feet of GLA.
During 1996, Prime Partnership opened two new factory outlet centers and nine
expansions, and acquired two factory outlet centers from an unrelated third
party, adding 1,449,000 square feet of GLA in the aggregate. Additionally, Prime
Partnership purchased its joint venture partner's first mortgage and 50%
partnership interest in Grove City Factory Shops Partnership on November 1, 1996
and owns 100% of this factory outlet center with 533,000 square feet of GLA. The
140
<PAGE>
significant increases in the number of Prime Partnership's operating properties
and total GLA during 1996 and 1997 are collectively referred to as the
"Portfolio Expansion."
RESULTS OF OPERATIONS
A summary of the consolidated operating results for the years ended December
31, 1997, 1996, and 1995 is presented in TABLE 1. A summary of the operating
results for the years ended December 31, 1997, 1996 and 1995 expressed in
amounts calculated on a weighted average occupied GLA basis is presented in
TABLE 2.
141
<PAGE>
TABLE 1--CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Base rents................................................................... $ 78,049 $ 54,710 $ 46,368
Percentage rents............................................................. 3,277 1,987 1,520
Tenant reimbursements........................................................ 37,519 25,254 22,283
Income from investment partnerships.......................................... 103 1,239 1,729
Interest and other........................................................... 10,144 5,850 5,498
---------- ---------- ----------
Total revenues............................................................. 129,092 89,040 77,398
EXPENSES
Property operating........................................................... 29,492 20,421 17,389
Real estate taxes............................................................ 9,417 5,288 4,977
Depreciation and amortization................................................ 26,704 19,253 15,436
General and administrative................................................... 4,232 3,090 2,830
Interest..................................................................... 36,122 24,532 20,821
Other charges................................................................ 3,110 8,586 2,089
---------- ---------- ----------
Total expenses............................................................. 109,077 81,170 63,542
---------- ---------- ----------
INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM...................... 20,015 7,870 13,856
Income allocated to minority interests....................................... (189) (140) (167)
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM............................................. 19,826 7,730 13,689
Extraordinary item--loss on early extinguishment of debt..................... (2,061) (4,280) --
---------- ---------- ----------
NET INCOME................................................................... 17,765 3,450 13,689
Income allocated to preferred unitholders.................................... 12,995 14,236 20,944
---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON UNITS................................. $ 4,770 $ (10,786) $ (7,255)
---------- ---------- ----------
---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON UNITS:
General partner............................................................ $ 3,305 $ (5,193) $ (1,724)
Limited partners........................................................... 1,465 (5,593) (5,531)
---------- ---------- ----------
Total.................................................................. $ 4,770 $ (10,786) $ (7,255)
---------- ---------- ----------
---------- ---------- ----------
EARNINGS (LOSS) PER COMMON UNIT:
General partner (including $0.07 and $0.25 net loss per unit from
extraordinary item in 1997 and 1996, respectively)....................... $ 0.17 $ (0.63) $ (0.60)
---------- ---------- ----------
---------- ---------- ----------
Limited partners (including $0.07 and $0.25 net loss per unit from
extraordinary item in 1997 and 1996, respectively)....................... $ 0.17 $ (0.63) $ (0.60)
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE UNITS OUTSTANDING:
General partner............................................................ 19,189 8,221 2,875
Limited partners........................................................... 8,505 8,855 9,221
---------- ---------- ----------
Total.................................................................. 27,694 17,076 12,096
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
142
<PAGE>
TABLE 2--STATEMENTS OF OPERATIONS ON A WEIGHTED AVERAGE PER SQUARE FOOT
BASIS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
GLA at end of period(1).............................................................. 7,326 5,684 4,134
Weighted average occupied GLA........................................................ 5,735 4,075 3,458
Executed leases at end of period (GLA)............................................... 6,854 5,252 3,950
Factory outlet centers in operation at end of period(2).............................. 28 21 17
New factory outlet centers opened(2)................................................. -- 2 3
Factory outlet centers expanded(2)................................................... 4 9 4
Factory outlet centers acquired(2)................................................... 7 2 --
Community centers in operation at end of period...................................... 3 3 3
States operated in at end of period.................................................. 20 16 14
PORTFOLIO WEIGHTED AVERAGE PER SQUARE FOOT(2):
REVENUES
Base rents........................................................................... $ 13.61 $ 13.43 $ 13.41
Percentage rents..................................................................... 0.57 0.49 0.44
Tenant reimbursements................................................................ 6.54 6.20 6.44
Interest and other................................................................... 1.79 1.74 2.09
--------- --------- ---------
Total revenues..................................................................... 22.51 21.86 22.38
EXPENSES
Property operating................................................................... 5.14 5.01 5.03
Real estate taxes.................................................................... 1.64 1.30 1.44
Depreciation and amortization........................................................ 4.66 4.72 4.46
General and administrative........................................................... 0.74 0.76 0.82
Interest............................................................................. 6.30 6.02 6.02
Other charges........................................................................ 0.54 2.11(4) 0.60
--------- --------- ---------
Total expenses..................................................................... 19.02 19.92 18.37
--------- --------- ---------
Income before minority interests and extraordinary item.............................. $ 3.49 $ 1.94 $ 4.01
--------- --------- ---------
FACTORY OUTLET CENTERS WEIGHTED AVERAGE PER SQUARE FOOT(3):
REVENUES
Base rents........................................................................... $ 14.19 $ 14.18 $ 14.36
Percentage rents..................................................................... 0.63 0.55 0.51
Tenant reimbursements................................................................ 6.96 6.75 7.16
Interest and other................................................................... 1.75 0.82 0.66
--------- --------- ---------
Total revenues..................................................................... 23.53 22.30 22.69
EXPENSES
Property operating................................................................... 5.40 5.45 5.54
Real estate taxes.................................................................... 1.67 1.29 1.46
Depreciation and amortization........................................................ 4.67 4.87 4.38
Interest............................................................................. 6.31 6.82 6.81
Other charges........................................................................ 0.43 0.81(5) 0.23
--------- --------- ---------
Total expenses..................................................................... 18.48 19.24 18.42
--------- --------- ---------
Income before minority interests, corporate general and administrative expenses, and
extraordinary item.................................................................. $ 5.05 $ 3.06 $ 4.27
--------- --------- ---------
--------- --------- ---------
</TABLE>
143
<PAGE>
- ------------------------
NOTES:
(1) Includes total GLA in which Prime Partnership receives substantially all of
the economic benefit.
(2) Includes factory outlet centers operated under unconsolidated joint venture
partnerships with unrelated third parties.
(3) Based on occupied GLA weighted by months of operation.
(4) Includes certain nonrecurring charges of $6,131, or $1.51 per square foot,
relating to the prepayment of long-term debt recorded during 1996.
(5) Includes certain nonrecurring charges of $1,806, or $0.51 per square foot,
relating to the prepayment of long-term debt recorded during 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
SUMMARY
For the year ended December 31, 1997, Prime Partnership reported net income
of $17,765. During the third quarter of 1997, the Prime Partnership reported an
extraordinary loss of $2,061 related to the prepayment of certain long-term
debt. For the year ended December 31, 1997, the net income applicable to common
unitholders was $4,770 or $0.17 per common unit. For the year ended December 31,
1996, Prime Partnership reported net income of $3,450. These results included a
nonrecurring charge and an extraordinary loss of $6,131 and $4,280,
respectively, related to the prepayment of certain long-term debt. For the year
ended December 31, 1996, the net loss applicable to common unitholders was
$10,786 or $0.63 per common unit.
REVENUES
Total revenues were $129,092 for the year ended December 31, 1997, compared
to $89,040 for the year ended December 31, 1996, an increase of $40,052, or
45.0%. Base rents increased $23,339, or 42.7%, in 1997 compared to 1996. These
increases were primarily due to the Portfolio Expansion, including the effect of
the acquisition of seven factory outlet centers from unrelated third parties and
Prime Partnership's purchase of its joint venture partner's 25% partnership
interest in a factory outlet center on September 2, 1997. Straight-line rents
(included in base rents) were $643 and $600 for the years ended December 31,
1997 and 1996, respectively. The average base rent per square foot for new
factory outlet leases negotiated and executed by Prime Partnership was $15.52
and $15.36 for the years ended December 31, 1997 and 1996, respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, increased $1,290, or 64.9%, during the year
ended December 31, 1997 compared to the same period in 1996. This increase was
attributable to higher reported merchant sales in 1997 and the Portfolio
Expansion.
As summarized in TABLE 3, merchant sales reported to Prime Partnership
increased by $389.9 million, or 37.3%, to $1,434.2 million from $1,044.3 million
for the years ended December 31, 1997 and 1996, respectively. The increase in
total reported merchant sales is primarily due to the Portfolio Expansion,
including the effect of the acquisition of certain properties in 1997. The
weighted average reported merchant sales per square foot increased by 3.1% to
$236.20 per square foot in 1997 from $229.08 per square foot in 1996. Total
merchant occupancy cost per square foot increased slightly from $21.12 in 1996
to $21.36 in 1997 but decreased as a percentage of reported sales from 8.64% to
8.39%, respectively. The decrease in the cost of merchant occupancy to reported
sales is primarily due to an increase in the weighted average reported merchant
sales per square foot for Prime Partnership's entire factory outlet portfolio.
144
<PAGE>
TABLE 3--SUMMARY OF REPORTED MERCHANT SALES(1)
A summary of reported factory outlet merchant sales and related data for
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Total reported merchant sales (in millions)(1)............................... $ 1,434.2 $ 1,044.3 $ 809.6
---------- ---------- ---------
---------- ---------- ---------
Weighted average reported merchant sales per square foot(2):
All store sales............................................................ $ 236.20 $ 229.08 $ 235.99
---------- ---------- ---------
---------- ---------- ---------
Same-space sales........................................................... $ 231.89 $ 232.45
---------- ----------
---------- ----------
Total merchant occupancy cost per square foot(3)............................. $ 21.36 $ 21.12 $ 21.64
---------- ---------- ---------
---------- ---------- ---------
Cost of merchant occupancy to reported sales(4).............................. 9.04% 9.22% 9.17%
---------- ---------- ---------
---------- ---------- ---------
Cost of merchant occupancy (excluding marketing contributions) to reported
sales(5).................................................................... 8.39% 8.64% 8.48%
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
- ------------------------
NOTES:
(1) Total reported merchant sales summarizes gross sales generated by merchants
and includes changes in merchant mix and the effect of new space created
from the acquisition and opening of new and expanded factory outlet centers.
Several of Prime Partnership's factory outlet centers were constructed,
expanded or acquired during the time periods contained in TABLE 3 and
therefore, reported sales for such new openings, expansions and acquisitions
were reported only for the partial period and were not annualized. TABLE 3
should be read in conjunction with the information summarized under the
caption "The Prime Partnership Properties".
(2) Weighted average reported sales per square foot is based on reported sales
divided by the weighted average square footage occupied by the merchants
reporting those sales. Same-space sales is defined as the weighted average
reported merchant sales per square foot for space open since January 1,
1996.
(3) Total merchant occupancy cost per square foot includes base rents,
percentage rents and tenant reimbursements which includes tenant marketing
contributions.
(4) Computed as follows: total merchant occupancy cost per square foot divided
by total weighted average reported merchant sales per square foot.
(5) Computed as follows: total merchant occupancy cost per square foot
(excluding marketing contributions paid by merchants) divided by total
weighted average reported merchant sales per square foot.
Tenant reimbursements, which represent the contractual recovery from tenants
of certain operating expenses, increased by $12,265, or 48.6%, in 1997 over
1996. These increases are primarily due to the Portfolio Expansion, including
the effect of the acquisition of seven factory outlet centers from unrelated
third parties and Prime Partnership's purchase of its joint venture
partnership's first mortgage and 25% partnership interest in a factory outlet
center on September 2, 1997.
As shown in TABLE 4, tenant reimbursements as a percentage of recoverable
property operating expenses and real estate taxes was 96.4% in 1997 compared to
98.2% in 1996. These levels reflect Prime Partnership's continued efforts to
contain operating expenses at its properties while requiring merchants to pay
their pro rata share of these expenses. TABLE 4 sets forth recoveries from
merchants as a percentage of total recoverable expenses for 1997, 1996, and
1995:
145
<PAGE>
TABLE 4--TENANT RECOVERIES AS A PERCENTAGE OF TOTAL RECOVERABLE EXPENSES
<TABLE>
<CAPTION>
PERCENTAGE OF EXPENSES
YEAR RECOVERED FROM TENANTS(1)
- ------------------------------------------------ -------------------------
<S> <C>
1997............................................ 96.4%
1996............................................ 98.2%
1995............................................ 99.6%
</TABLE>
- ------------------------
NOTE:
(1) Total recoverable expenses include property operating expenses and real
estate taxes.
Income from investment partnerships decreased by $1,136, or 91.7%, to $103
for the year ended December 31, 1997 compared to $1,239 for the year ended
December 31, 1996. This decrease reflects Prime Partnership's purchase of (i)
its joint venture partner's first mortgage and 50% partnership interest in Grove
City Factory Shops Partnership on November 1, 1996 and (ii) its joint venture
partner's first mortgage and 25% partnership interest in Buckeye on September 2,
1997. As a result of these acquisitions, Prime Partnership owns 100% of both
Grove City Factory Shops and Buckeye Factory Shops. Prior to the acquisition
dates, the operating results of these factory outlet centers were accounted for
under the equity method of accounting. Commencing on the date of acquisition,
the operating results of these factory outlet centers were included in the
consolidated results of Prime Partnership.
Interest and other income increased by $4,294, or 73.4%, to $10,144 during
the year ended December 31, 1997 as compared to $5,850 for the year ended
December 31, 1996. The increase reflects higher (i) interest income of $2,954,
(ii) gains on sales of land of $988, (iii) municipal assistance income of $903,
(iv) push cart income of $304, (v) temporary tenant income of $218, (vi) lease
termination income of $213 and (vii) all other ancillary income of $22.
Partially offsetting these increases were reduced property, development and
construction management fees and leasing commissions of $1,308. The increase in
interest income was primarily due to interest earnings on Prime Partnership's
expansion loan escrow account included in restricted cash.
Property operating expenses increased by $9,071, or 44.4%, to $29,492 in
1997 compared to $20,421 in 1996. Real estate taxes increased by $4,129, or
78.1%, to $9,417 in 1997 from $5,288 in 1996. Depreciation and amortization
expense increased by $7,451, or 38.7%, to $26,704 in 1997 compared to $19,253 in
1996. The increases in property operating expenses, real estate taxes, and
depreciation and amortization expense were primarily due to the Portfolio
Expansion, including the effect of the acquisition of seven factory outlet
centers from unrelated third parties and Prime Partnership's purchase of its
joint venture partner's first mortgage and 25% partnership interest in a factory
outlet center on September 2, 1997.
TABLE 5--COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE
The components of depreciation and amortization expense for the years ended
December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Buildings and improvements....................................................... $ 13,987 $ 9,471 $ 8,159
Land improvements................................................................ 2,838 2,161 1,440
Tenant improvements.............................................................. 7,372 5,165 3,563
Furniture and fixtures........................................................... 847 668 552
Leasing commissions(1)........................................................... 1,660 1,788 1,722
--------- --------- ---------
Total.................................................................... $ 26,704 $ 19,253 $ 15,436
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
NOTE:
(1) In accordance with GAAP, leasing commissions is classified as intangible
assets. Therefore, the amortization of leasing commissions is reported as a
component of depreciation and amortization expense.
146
<PAGE>
As shown in TABLE 6, interest expense increased by $11,590, or 47.2%, to
$36,122 in 1997 compared to $24,532 in 1996. This increase reflects higher
interest incurred of $12,194, a reduction in interest earned on interest rate
protection contracts of $86, an increase in amortization of deferred financing
costs of $11, and an increase in amortization of interest rate protection
contracts of $7. Partially offsetting these items was an increase in the amount
of interest capitalized in connection with development projects of $708.
The increase in interest incurred is primarily attributable to an increase
of $166,015 in Prime Partnership's average debt outstanding during 1997 compared
to 1996. The increase in interest incurred also reflects a slightly higher
weighted average interest rate for 1997 compared to 1996. The weighted average
interest rates were 7.36% and 7.22% for 1997 and 1996, respectively.
TABLE 6--COMPONENTS OF INTEREST EXPENSE
The components of interest expense for the years ended December 31, 1997,
1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest incurred................................................................ $ 36,551 $ 24,357 $ 19,354
Interest capitalized............................................................. (4,056) (3,348) (2,336)
Interest earned on interest rate protection contracts............................ (115) (201) (721)
Amortization of deferred financing costs......................................... 2,352 2,341 3,248
Amortization of interest rate protection contracts............................... 1,390 1,383 1,276
--------- --------- ---------
Total.................................................................... $ 36,122 $ 24,532 $ 20,821
--------- --------- ---------
--------- --------- ---------
</TABLE>
Other charges decreased by $5,476, or 63.8%, to $3,110 in 1997 compared to
$8,586 for 1996. The 1996 amount reflects a nonrecurring loss of $6,131 related
to the prepayment of certain long-term debt. Excluding this nonrecurring loss,
other charges increased by $655, or 26.7%, in 1997. This increase reflects
higher marketing costs of $272, an increase in the provision for uncollectible
accounts receivable of $260, an increase in the provision for potentially
unsuccessful pre-development efforts of $150, offset by a decrease in other
miscellaneous charges of $27.
TABLE 7--CAPITAL EXPENDITURES
The components of capital expenditures for 1997, 1996, and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------- ------------- ---------
<S> <C> <C> <C>
New developments............................................... $ 34,175 $ 33,787 $ 59,222
Property acquisitions, net..................................... 191,345(1) 131,593(2) --
Expansions and renovations..................................... 37,941 20,428 19,237
Re-leasing tenant allowances................................... 561 473 616
------------- ------------- ---------
Total........................................................ $ 264,022 $ 186,281 $ 79,075
------------- ------------- ---------
------------- ------------- ---------
</TABLE>
- ------------------------
NOTES:
(1) Includes the net assets acquired by Prime Partnership during 1997 consisting
of (i) the purchase of seven factory outlet centers ($166,987) and (ii) the
purchase of Prime Partnership's joint venture partner's partnership interest
in Buckeye ($24,358).
(2) Includes the net assets acquired by Prime Partnership during 1996 consisting
of (i) the purchase of two factory outlet centers ($71,770) and (ii) the
purchase of Prime Partnership's joint venture partner's partnership interest
in Grove City Factory Shops ($57,094).
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<PAGE>
TABLE 8--CONSOLIDATED QUARTERLY SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------- ------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues................................. $ 36,168 $ 31,549 $ 31,213 $ 30,162 $ 25,928 $ 21,831
Total expenses................................. 28,208 27,175 27,263 26,431 22,043 17,461
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before minority interests and
extraordinary item............................ 7,960 4,374 3,950 3,731 3,885 4,370
Income allocated to minority interests......... (44) (63) (52) (30) (33) (42)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item........ 7,916 4,311 3,898 3,701 3,852 4,328
Extraordinary item--loss on early
extinguishment of debt........................ -- (2,061) -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).............................. 7,916 2,250 3,898 3,701 3,852 4,328
Income allocated to preferred unitholders...... 3,715 3,094 3,093 3,093 3,000 3,000
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common units... $ 4,201 $ (844) $ 805 $ 608 $ 852 $ 1,328
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common units:
General partner.............................. $ 2,985 $ (585) $ 523 $ 382 $ 521 $ 810
Limited partner.............................. 1,216 (259) 282 226 331 518
----------- ----------- ----------- ----------- ----------- -----------
Total.......................................... $ 4,201 $ (844) $ 805 $ 608 $ 852 $ 1,328
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Earnings per common unit:
General partner (including $0.07 and $0.35
net loss per unit from extraordinary item
in third quarter 1997 and second quarter
1996, respectively......................... $ 0.12 $ (0.03) $ 0.03 $ 0.03 $ 0.04 $ 0.06
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Limited partners (including $0.07 and $0.35
net loss per unit from extraordinary item
in third quarter 1997 and second quarter
1996, respectively)........................ $ 0.12 $ (0.03) $ 0.03 $ 0.03 $ 0.04 $ 0.06
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Weighted average units outstanding:
General partner.............................. 27,295 19,160 15,795 14,344 13,405 13,322
Limited partners............................. 8,505 8,505 8,505 8,505 8,505 8,508
----------- ----------- ----------- ----------- ----------- -----------
Total.......................................... 35,800 27,665 24,300 22,849 21,910 21,830
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Distributions paid per common unit:
General partner.............................. $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.295(1)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Limited partners............................. $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.295
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
SECOND FIRST
QUARTER QUARTER
--------- -----------
<S> <C> <C>
Total revenues................................. $ 20,150 $ 21,131
Total expenses................................. 23,825 17,841
--------- -----------
Income (loss) before minority interests and
extraordinary item............................ (3,675) 3,290
Income allocated to minority interests......... (40) (25)
--------- -----------
Income (loss) before extraordinary item........ (3,715) 3,265
Extraordinary item--loss on early
extinguishment of debt........................ (4,280) --
--------- -----------
Net income (loss).............................. (7,995) 3,265
Income allocated to preferred unitholders...... 3,000 5,236
--------- -----------
Net income (loss) applicable to common units... $ (10,995) $ (1,971)
--------- -----------
--------- -----------
Net income (loss) applicable to common units:
General partner.............................. $ (2,820) $ (468)
Limited partner.............................. (8,175) (1,503)
--------- -----------
Total.......................................... $ (10,995) (1,971)
--------- -----------
--------- -----------
Earnings per common unit:
General partner (including $0.07 and $0.35
net loss per unit from extraordinary item
in third quarter 1997 and second quarter
1996, respectively......................... $ (0.89) $ (0.16)
--------- -----------
--------- -----------
Limited partners (including $0.07 and $0.35
net loss per unit from extraordinary item
in third quarter 1997 and second quarter
1996, respectively)........................ $ (0.89) $ (0.16)
--------- -----------
--------- -----------
Weighted average units outstanding:
General partner.............................. 3,171 2,875
Limited partners............................. 9,193 9,221
--------- -----------
Total.......................................... 12,364 12,096
--------- -----------
--------- -----------
Distributions paid per common unit:
General partner.............................. $ 0.295 $ 0.295
--------- -----------
--------- -----------
Limited partners............................. $ 0.219 $ 0.227
--------- -----------
--------- -----------
</TABLE>
- ------------------------
NOTE:
(1) Excludes a special cash distribution of $0.145 per common share relating to
Prime's exchange offer completed in June 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
SUMMARY
For the year ended December 31, 1996, Prime Partnership reported net income
of $3,450. These results included a nonrecurring charge and an extraordinary
loss of $6,131 and $4,280, respectively, related to the prepayment of certain
long-term debt. For the year ended December 31, 1996, the net loss
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<PAGE>
applicable to common unitholders was $10,786, or $0.63 per common unit. For the
year ended December 31, 1995, Prime Partnership reported net income of $13,689.
For the year ended December 31, 1995, the net loss applicable to common
unitholders was $7,255, or $0.60 per common unit.
REVENUES
Total revenues were $89,040 for the year ended December 31, 1996, as
compared to $77,398 for the year ended December 31, 1995, an increase of
$11,642, or 15.0%. Base rents increased $8,342, or 18.0%, in 1996 compared to
1995. These increases were primarily due to the Portfolio Expansion, including
the effect of the acquisition of two factory outlet centers from an unrelated
third party on November 1, 1996 and Prime Partnership's purchase of its joint
venture partner's 50% partnership interest in a factory outlet center on
November 1, 1996. Straight-line rents (included in base rents) were $600 and
$931 for the years ended December 31, 1996 and 1995, respectively. The average
base rent per square foot for new factory outlet leases negotiated and executed
by Prime Partnership was $15.36 and $14.90 for the years ended December 31, 1996
and 1995, respectively.
As summarized in TABLE 3, merchant sales reported to Prime Partnership
increased by $234.7 million, or 29.0%, to $1,044.3 million from $809.6 million
for the years ended December 31, 1996 and 1995, respectively. The increase in
total reported merchant sales was primarily due to the Portfolio Expansion,
including the effect of the acquisition of certain properties in 1996. However,
the weighted average reported merchant sales per square foot decreased by 2.9%
to $229.08 per square foot from $235.99 per square foot for the years ended
December 31, 1996 and 1995, respectively. Prime Partnership's factory outlet
centers (including centers operated under partnerships with unrelated third
parties) contained an average of 275,238 and 254,765 square feet of GLA at
December 31, 1996 and 1995, respectively. The increase in the cost of merchant
occupancy to reported sales was primarily due to a decrease in the weighted
average reported merchant sales per square foot for Prime Partnership's entire
factory outlet portfolio.
Tenant reimbursements, which represent the contractual recovery from tenants
of certain operating expenses, increased by $2,971, or 13.3%, in 1996 over 1995.
These increases were primarily due to the Portfolio Expansion, including the
effect of the acquisition of two factory outlet centers from an unrelated third
party and Prime Partnership's purchase of its joint venture partner's first
mortgage and 50% partnership interest in a factory outlet center on November 1,
1996.
As shown in TABLE 4, tenant reimbursements as a percentage of recoverable
operating expenses were 98.2% in 1996 compared to 99.6% in 1995. These levels
reflect Prime Partnership's continued efforts to contain operating expenses at
its properties while requiring merchants to pay their pro rata share of these
expenses. TABLE 4 highlights the trend of recoveries from merchants as a
percentage of total recoverable expenses and real estate taxes.
Income from investment partnerships decreased by $490, or 28.3%, to $1,239
for the year ended December 31, 1996 compared to $1,729 for the year ended
December 31, 1995. This decrease reflected Prime Partnership's purchase of its
joint venture partner's first mortgage and 50% partnership interest in Grove
City Factory Shops Partnership on November 1, 1996. As a result of its
acquisition, Prime Partnership owns 100% of this factory outlet center and,
therefore, commencing November 1, 1996, its operations were included in the
consolidated results of Prime Partnership. Prior to November 1, 1996, Prime
Partnership accounted for its interest under the equity method of accounting.
The decrease in income from investment partnerships in 1996 compared to 1995 was
offset, in part, by the openings of Arizona Factory Shops (Phase II-September
1996) and Buckeye (Phase I-November 1996).
Interest and other income increased by $352, or 6.4%, to $5,850 during the
year ended December 31, 1996 as compared to the year ended December 31, 1995.
The increase reflected higher temporary and customer service income, lease
termination income, and property management fees of $736, $620, and $149,
respectively, partially offset by lower leasing commissions, real estate
brokerage commissions,
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<PAGE>
ancillary income, interest income, municipal assistance income, and construction
and development management fees of $364, $278, $139, $115, $104 and $47,
respectively. Also offsetting this increase was a $106 gain on the sale of land
during the year ended December 31, 1995.
Property operating expense increased by $3,032, or 17.4%, to $20,421 in 1996
compared to $17,389 in 1995. Real estate taxes increased by $311, or 6.2%, to
$5,288 in 1996 from $4,977 in 1995. Depreciation and amortization expense
increased by $3,817, or 24.7%, to $19,253 in 1996, compared to $15,436 in
1995.The increases in property operating expenses, real estate taxes and
depreciation and amortization expense were primarily due to the Portfolio
Expansion, including the acquisition of two factory outlet centers from an
unrelated third party and Prime Partnership's purchase of its joint venture
partner's 50% partnership interest in a factory outlet center on November 1,
1996.
As shown in TABLE 6, interest expense increased by $3,711, or 17.8%, to
$24,532 in 1996 compared to $20,821 in 1995. This increase reflected higher
interest incurred of $5,003, an increase in amortization of interest rate
protection contracts of $107, and a reduction in interest earned on interest
rate protection contracts of $520, partially offset by a decrease in
amortization of deferred financing costs of $907 and an increase in the amount
of interest capitalized in connection with development projects of $1,012.
The increase in interest incurred was primarily attributable to an increase
of approximately $86,256 in Prime Partnership's average debt outstanding during
1996 compared to 1995. Additionally, the increase in interest incurred was
offset by a decrease of 0.59% in the weighted average interest rate for the year
ended December 31, 1996 compared to the same period in 1995. The weighted
average interest rates were 7.22% and 7.81% for 1996 and 1995, respectively.
The decrease in amortization of deferred financing costs was primarily
attributable to reduced amortization expense related to certain deferred
financing costs which were written-off in 1996. These costs were part of the
$10,411 nonrecurring loss recorded in the second quarter of 1996 related to a
binding loan commitment that Prime Partnership obtained on June 5, 1996 in
connection with Prime Partnership's refinancing approximately $253,000 of debt.
Other charges increased by $6,497 to $8,586 in 1996 compared to $2,089 for
1995. This increase is primarily due to the nonrecurring loss of $6,131
described above. Excluding this nonrecurring charge, other charges increased by
$366, or 17.5%, to $2,455 in 1996 reflecting a higher provision for
uncollectible accounts receivable of $364, an increase in ground lease expense
of $228, offset by a lower provision for potentially unsuccessful
pre-development efforts of $204 and a decline in miscellaneous other charges of
$24.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
For the year ended December 31, 1997, net cash provided by operating
activities was $46,695, net cash used in investing activities was $229,702 and
cash provided by financing activities was $185,366.
The primary uses for investing activities during 1997 included (i) costs
associated with the acquisition of seven factory outlet centers and the purchase
of an unrelated joint venture partner's 25% partnership interest in a factory
outlet center, (ii) costs associated with development and construction of
expansions to existing factory outlet centers aggregating 224,000 square feet of
GLA which opened during 1997, (iii) costs associated with the completion of
factory outlet centers and expansions to existing factory outlet centers
aggregating 930,000 square feet of GLA which opened during 1996, and (iv) costs
for pre-development activities associated with future developments.
The sources of cash from financing activities during 1997 included (i)
contributions from Prime of $233,019, (ii) proceeds from notes payable of
$160,057, and (iii) contributions from limited partners of
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<PAGE>
$9,710. Such proceeds were partially offset by (i) principal repayments on notes
payable of $175,683 and (ii) distributions to partners of $40,890.
SOURCES AND USES OF CASH--CAPITAL CONTRIBUTIONS
In February and March 1997, Prime Partnership received capital contributions
from Prime of $31,754 (the "February Contribution") that were used (i) to repay
certain outstanding indebtedness aggregating $26,500, (ii) to fund development
and construction activities, and (iii) for general operating purposes. As a
result of the February Contribution, Prime Partnership issued to Prime 2,390,300
Prime Partnership Common Units and 175,800 Prime Partnership Series B Preferred
Units.
On September 8, 1997, Prime Partnership issued 727,273 Prime Partnership
Series C Preferred Units at $13.75 per unit pursuant to the initial sale under
the private placement (the "Private Placement"). In addition, in September 1997,
Prime Partnership received a capital contribution from Prime and issued to Prime
11,500,000 common units (the "September 1997 Contribution"). As a result of the
September 1997 Contribution and the initial sale under the Private Placement
(collectively, the "September Capital Transactions"), Prime Partnership received
proceeds of $161,930. A portion of the proceeds from the September Capital
Transactions were used (i) to repay certain outstanding corporate indebtedness
aggregating $113,410 and (ii) to acquire the 25% partnership interest of Prime
Partnership's joint venture partner in Buckeye for $23,148 (including $22,642 of
mortgage indebtedness relating to such property). The remaining proceeds from
the September Capital Transactions of $26,192 were used (i) to fund development
and construction activities, (ii) to fund property acquisitions, and (iii) for
general operating purposes.
On December 2, 1997, Prime Partnership received a capital contribution of
$49,045 from Prime and issued to Prime 3,636,363 Prime Partnership Series C
Preferred Units. Prime Partnership used such proceeds to acquire Niagara
International Factory Outlets and Shasta Factory Stores.
SOURCES AND USES OF CASH--1997 PROPERTY ACQUISITIONS
On February 13, 1997, Prime Partnership acquired Oak Creek Factory Stores,
Bend Factory Outlets and Factory Outlets at Post Falls from an unrelated third
party for an aggregate purchase price of $37,250. Prime Partnership financed the
purchase with loan proceeds from a financial institution and a $4,000 promissory
note issued to the seller. The operating results of Prime Partnership for 1997
include the results of these acquisitions effective with the closing on February
13, 1997.
Oak Creek Factory Outlets is located in Sedona, Arizona, which is north of
Phoenix and south of the Grand Canyon. Oak Creek Factory Outlets contains
approximately 82,000 square feet of GLA and was 100% executed at December 31,
1997. Bend Factory Outlets is located in Bend, Oregon, which is east of Eugene,
Oregon and southeast of Portland. Bend Factory Outlets contains approximately
97,000 square feet of GLA and was 86% executed at December 31, 1997. Factory
Outlets at Post Falls is located in Post Falls, Idaho, which is 30 miles east of
Spokane, Washington. Factory Outlets at Post Falls contains approximately
179,000 square feet of GLA and was 84% executed at December 31, 1997.
On September 2, 1997, Prime Partnership acquired the 25% partnership
interest in Buckeye from its joint venture partner, SBRC, for $23,148 (including
$22,642 of mortgage indebtedness relating to such property), thereby increasing
its ownership percentage in such property to 100%. Prior to September 2, 1997,
Prime Partnership accounted for its 75% investment in Buckeye using the equity
method of accounting. Commencing September 2, 1997, the operating results of
Buckeye are consolidated. Prime Partnership financed the acquisition with
proceeds from the September Offering.
On October 29, 1997, Prime Partnership acquired Tidewater Outlet Mall,
Manufacturer's Outlet Mall, Kittery Outlet Village (collectively "Prime Retail
Outlets of Kittery"), and Latham Factory Outlet Center
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<PAGE>
(the "Latham Property") from an unrelated third party for an aggregate purchase
price of $26,000. Prime Partnership financed the purchase with proceeds from the
September Offering.
Prime Retail Outlets of Kittery are located in Kittery, Maine and serve the
Boston, Massachusetts and Portland, Maine markets. Prime Retail Outlets of
Kittery contain approximately 121,000 square feet of GLA, and were 100% executed
as of December 31, 1997. The Latham Property is located in Latham, New York,
north of Albany, New York and south of Saratoga Springs, New York. The Latham
Property contains approximately 43,000 square feet of GLA and was 100% executed
as of December 31, 1997.
On December 2, 1997, Prime Partnership acquired Niagara and Shasta from an
unrelated third party for an aggregate purchase price of $101,000 including the
assumption of mortgage indebtedness of $31,368. Prime Partnership financed the
purchase with proceeds from the September Contribution and the Private
Placement.
Niagara is located in Niagara Falls, New York and serves Buffalo, New York;
Ontario, Canada; and tourist markets. Niagara contains approximately 534,000
square feet of GLA and was 88% executed as of December 31, 1997. Shasta is
located six miles west of Redding, California and serves the Northern California
tourist market. Shasta contains approximately 165,000 square feet of GLA and was
91% executed as of December 31, 1997.
During 1998, Prime Partnership will explore acquisitions of factory outlet
centers in the United States and in Europe as well as consider possible
strategic acquisitions of other assets in the retail sector. Prime Partnership
has evaluated and is evaluating such opportunities and prospects and will
continue to do so throughout 1998. Prime Partnership cannot predict if any
transaction will be consummated, nor the terms or form of consideration
required.
PLANNED DEVELOPMENT
Management believes that there is sufficient demand for continued
development of new factory outlet centers and the expansion of certain existing
factory outlet centers. Prime Partnership expects to open approximately 751,000
square feet of GLA during 1998. At December 31, 1997, the budgeted remaining
capital expenditures for 1998 planned developments aggregated approximately
$78,200, while anticipated capital expenditures related to the completion of
expansion of existing factory outlet centers opened during 1997 (aggregating
224,000 square feet of GLA) approximated $5,200.
Management believes that Prime Partnership has sufficient capital and
capital commitments to fund the remaining capital expenditures associated with
its 1997 and 1998 development activities. These funding requirements are
expected to be met, in large part, with the proceeds from various loan
facilities, including the financing of certain unencumbered properties. If
adequate financing for such development and expansion is not available, Prime
Partnership may not be able to develop new centers or expand existing centers at
currently planned levels.
Prime Partnership currently plans to open one new factory outlet center and
several expansions in 1999 that are expected to contain approximately 400,000
square feet of GLA, in the aggregate, and have a total expected development cost
of approximately $56,000. Prime Partnership expects to fund the development cost
of these projects from (i) certain line of credit facilities, (ii) joint venture
partners, (iii) retained cash flow from operations, (iv) construction loans, and
(v) contributions from Prime. As of December 31, 1997, there were no material
commitments with regard to the construction of the new factory outlet centers
and expansions scheduled to open in 1999. There can be no assurance that Prime
Partnership will be successful in obtaining the required amount of equity
capital or debt financing for the 1999 planned openings or that the terms of
such capital raising activities will be as favorable as Prime Partnership has
experienced in prior periods.
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<PAGE>
DEBT TRANSACTIONS
On February 13, 1997, Prime Partnership closed on $30,000 of loan facilities
with Nomura Asset Capital Corporation ("Nomura"). The transaction provided (i) a
$27,000 nonrecourse first mortgage loan (the "First Mortgage Loan"), and (ii) a
junior secured loan (the "Junior Secured Loan") of $3,000. The First Mortgage
Loan (i) is cross collateralized by first mortgages on three of Prime
Partnership's factory outlet centers, (ii) bears a fixed rate of interest of
8.35%, and (iii) requires monthly principal and interest payments pursuant to a
360-month amortization schedule. The Junior Secured Loan is a recourse loan to
Prime Partnership that (i) is secured by a pledge of excess cash flow after debt
service on the First Mortgage Loan, (ii) bears a variable interest rate at the
London Interbank offered rate for 30-day deposits in U.S. dollars ("30-day
LIBOR") plus 1.95%, (iii) matures in three years, (iv) requires monthly
interest-only payments through April 10, 1998 and (v) monthly principal and
interest payments thereafter.
On July 11, 1997, Prime Partnership's $15,000 unsecured line of credit (the
"Unsecured Line") was renewed. The purpose of the Unsecured Line is to provide
working capital to facilitate the funding of short-term operating cash needs of
Prime Partnership. The Unsecured Line bears an interest rate of 30-day LIBOR
plus 2.50% and matures on July 11, 1998. No amounts were outstanding under the
Unsecured Line at December 31, 1997.
In September 1997, Prime Partnership repaid certain outstanding corporate
indebtedness aggregating $113,410, including the Junior Secured Loan, with
proceeds from contributions from Prime. As a result of the prepayment of such
indebtedness, Prime Partnership incurred an extraordinary loss of $1,423 related
to the write-off of certain unamortized financing costs. Prime Partnership also
incurred an extraordinary loss of $638 related to the write-off of certain
unamortized financing costs in connection with the Buckeye Acquisition (see Note
5--"Investment in Partnerships" of the Notes to the Consolidated Financial
Statements).
On November 13, 1997, Prime Partnership closed on a term loan with Nomura
Securities (Bermuda) Ltd. ("Nomura Securities") of $53,290 (the "Term Loan").
The Term Loan is a recourse loan to Prime Partnership that (i) is secured by a
pledge of excess cash flow after debt service on a first mortgage loan
collateralized by 16 of Prime Partnership's factory outlet centers, (ii) bears a
variable interest rate of 30-day LIBOR plus 1.95%, (iii) matures on November 11,
1999, (iv) requires monthly interest-only payments through February 10, 1998 and
monthly interest payments and quarterly principal payments thereafter that
approximate a six-year amortization schedule, and (v) may be subject to earlier
principal payments via "mark-to-market" of the underlying debt instrument.
In addition, on November 13, 1997, Prime Partnership closed on a term loan
with Nomura Securities of $3,000 (the "Second Term Loan"). The Second Term Loan
is a recourse loan to Prime Partnership that (i) is secured by a pledge of
excess cash flow after debt service on a first mortgage loan collaterlized by
three of Prime Partnership's factory outlet centers, (ii) bears a variable
interest rate of 30-day LIBOR plus 1.95%, (iii) matures on February 13, 2000,
(iv) requires monthly interest-only payments through April 10, 1998 and monthly
principal and interest payments thereafter that approximate a five-year
amortization schedule, and (v) may be subject to earlier principal payments via
"mark-to-market" of the underlying debt instrument.
On December 2, 1997, Prime Partnership assumed a $31,328 mortgage loan in
connection with the purchase of Niagara (the "Niagara Loan"). The Niagara Loan
(i) bears a fixed rate of interest of 6.83%, (ii) requires monthly principal and
interest payments that approximates a 25-year amortization schedule, and (iii)
is collateralized by Niagara International Factory Outlets.
On December 31, 1997, Prime Partnership obtained from a financial
institution a commitment for a construction mortgage loan in an amount not to
exceed $20,396 (the "Construction Mortgage Loan"). The Construction Mortgage
Loan (i) bears a variable interest rate at the financial institution's prime
rate or, at Prime Partnership's option, a LIBOR index plus 1.75%, (ii) matures
on December 31, 1999, and
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(iii) requires monthly interest-only payments. The Construction Mortgage Loan is
collateralized by a first mortgage on Lebanon Factory Shops, a factory outlet
center located in Lebanon, Tennessee. At December 31, 1997, no amounts were
outstanding on the Construction Mortgage Loan.
DEBT REPAYMENTS AND PREFERRED UNIT DISTRIBUTIONS
Prime Partnership's aggregate indebtedness was $515,265 and $499,523 at
December 31, 1997 and 1996, respectively. At December 31, 1997, such
indebtedness had a weighted average maturity of 6.5 years and bore interest at a
weighted average interest rate of 7.36% per annum. At December 31, 1997,
$74,729, or 14.5%, of such indebtedness bore interest at fixed rates and
$440,536, or 85.5%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable-rates. Of the variable-rate indebtedness outstanding
at December 31, 1997, $355,996 is scheduled to convert to a fixed rate of 7.782%
in November 1998 for the remaining five-year term of such indebtedness.
At December 31, 1997, Prime Partnership held interest rate protection
contracts on all $28,250 of its floating rate tax-exempt indebtedness which
expire in 1999 and approximately $355,996 of other floating rate indebtedness
which expires in November 1998 (or approximately 80.8% of its total floating
rate indebtedness). In addition, Prime Partnership held additional interest rate
protection contracts on $43,900 (of which $22,000 expires in July 1998 and
$21,900 expires in April 1999) of the $355,996 floating rate indebtedness to
further reduce Prime Partnership's exposure to increases in interest rates. See
Note 2-- "Summary of Significant Accounting Policies" and Note 7--"Bonds and
Notes Payable" of the Notes to Consolidated Financial Statements for additional
information concerning the accounting policies and significant terms of the
interest rate protection contracts.
Prime Partnership's ratio of debt to total market capitalization at December
31, 1997 (defined as total long-term debt divided by the sum of: (a) the
aggregate market value of the outstanding Prime Partnership Common Units,
assuming the full exchange of Prime Partnership Series C Preferred Units into
Prime Partnership Common Units; (b) the aggregate market value of the
outstanding units of Prime Partnership Series B Preferred Units; (c) the
aggregate liquidation preference of Prime Partnership Series A Preferred Units
at $25.00 per unit; and (d) the total long-term debt of Prime Partnership) was
42.4%.
Prime Partnership is obligated to repay $13,951 and $50,179 of mortgage
indebtedness during 1998 and 1999, respectively. Annualized cumulative
distributions on Prime Partnership Series A Preferred Units, Prime Partnership
Series B Preferred Units and Prime Partnership Series C Preferred Units
outstanding as of December 31, 1997 are $6,038, $6,336, and $5,149,
respectively. These distributions are payable quarterly, in arrears.
Prime Partnership anticipates that cash flow from operations, together with
cash available from borrowings and other sources, including proceeds from the
September Contribution and the Private Placement, will be sufficient to satisfy
its debt service obligations, expected distribution requirements and operating
cash needs for the next year.
ECONOMIC CONDITIONS
Substantially all of the merchants' leases contain provisions that somewhat
mitigate the impact of inflation. Such provisions include clauses providing for
increases in base rent and clauses enabling Prime Partnership to receive
percentage rentals based on merchants' gross sales. Substantially all leases
require merchants to pay their proportionate share of operating expenses,
including common area maintenance, real estate taxes and promotion, thereby
reducing Prime Partnership's exposure to increased costs and operating expenses
resulting from inflation. At December 31, 1997, Prime Partnership maintained
interest rate protection contracts to protect against increases in interest
rates on certain floating rate indebtedness (see "--Debt Repayments and
Preferred Unit Distributions").
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Prime Partnership intends to reduce operating and leasing risks by managing
its existing portfolio of properties with the goal of improving its tenant mix,
rental rates and lease terms and attracting high fashion, upscale manufacturers
and national brand-name manufacturers as merchants.
YEAR 2000
Recognizing the need to ensure that Prime Partnership's operations will not
be adversely impacted by year 2000 software failures, management has assessed
the potential impact of the year 2000 on the processing of date-sensitive
information by Prime Partnership's computerized information systems. Based on
this assessment, management believes that Prime Partnership's primary
computerized information systems are Year 2000 compliant and Prime Partnership's
operations will not be adversely impacted by Year 2000 software failures.
FUNDS FROM OPERATIONS
Prime Partnership's management believes that to facilitate a clear
understanding of Prime Partnership's operating results, FFO should be considered
in conjunction with net income (loss) presented in accordance with GAAP.
In March 1995, NAREIT established guidelines clarifying the definition of
FFO. FFO is defined as net income (loss) (determined in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization after adjustments for unconsolidated partnerships
and joint ventures.
Management believes that FFO is an important and widely used measure of the
operating performance of REITs which provides a relevant basis for comparison to
other REITs. Therefore, FFO is presented to assist investors in analyzing the
performance of Prime Partnership. Prime Partnership's FFO is not comparable to
FFO 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
Prime Partnership. Therefore, Prime Partnership cautions that the calculation of
FFO may vary from entity to entity and as such the presentation of FFO by Prime
Partnership may not be comparable to other similarly titled measures of other
reporting companies. Prime Partnership believes that in order to facilitate a
clear understanding of its operating results, FFO should be examined in
conjunction with net income determined in accordance with GAAP. FFO does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income as an indication of
Prime Partnership's performance or to cash flows as a measure of liquidity or
ability to make distributions.
TABLE 9 provides a reconciliation of income before allocation to minority
interests and preferred unitholders to FFO for the years ended December 31,
1997, 1996, and 1995. FFO increased $13,535, or 39.1% to $48,187 for year ended
December 31, 1997 from $34,652 for year ended December 31, 1996. The increase in
FFO primarily reflects the $6,131 nonrecurring charge related to the prepayment
of certain long-term debt in 1996, offset by the Portfolio Expansion, including
the effect of the acquisition of certain properties in November 1996.
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TABLE 9--FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income before allocations to minority interests and preferred unitholders..... $ 20,015 $ 14,001 $ 13,856
FFO ADJUSTMENTS:
Real estate depreciation and amortization..................................... 26,414 18,703 14,884
Unconsolidated joint venture adjustments...................................... 1,758 1,948 306
---------- ---------- ----------
FFO before allocations to minority interests and preferred unitholders........ $ 48,187 $ 34,652 $ 29,046
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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<PAGE>
BUSINESS OF PRIME PARTNERSHIP
GENERAL
Prime Partnership was organized as a Delaware limited partnership on March
22, 1994. Upon completion of the Prime IPO, Prime, a self-administered and
self-managed REIT, became the general partner of Prime Partnership which owns
interests in and provides development, leasing, marketing and management
services for 28 upscale factory outlet centers and three community shopping
centers with a total of 7,217,000 and 424,000 feet of GLA at December 31, 1997,
respectively. The Prime Properties are located throughout the United States,
generally near large metropolitan areas.
As used herein, unless the context otherwise requires, the term "Prime
Partnership" shall mean Prime Partnership, Prime, its general partner, and those
entities owned or controlled by Prime Partnership.
Prime Partnership's executive offices are located at 100 East Pratt Street,
Baltimore, Maryland 21202 (telephone 410-234-0782).
BUSINESS
Prime Partnership is engaged primarily in the ownership, development,
construction, acquisition, leasing, marketing and management of factory outlet
centers throughout the United States. Factory outlet centers have become an
established segment of the retail industry, enabling value-oriented shoppers to
purchase designer and brand-name products directly from manufacturers at
discounts generally ranging from 25% to 50% below regular department and
specialty store prices.
Since entering the factory outlet center business in 1988 (through the
retail division of PGI, from whom Prime Partnership acquired certain Prime
Properties and management and development operations), Prime Partnership has
become one of the leading developers and operators in the industry having
successfully developed or acquired outlet centers containing approximately 7.2
million square feet of GLA at December 31, 1997, including approximately
1,221,000 square feet of GLA that was acquired and approximately 224,000 square
feet of GLA that was developed and completed during 1997.
Prime Partnership pursues acquisition and development strategies designed to
take advantage of growth opportunities in the factory outlet segment of the
retail industry and to distinguish itself among its competitors. Prime
Partnership strives to differentiate itself from competitors in the outlet
center industry by owning and operating larger outlet centers with highly
accessible locations, a larger and more diverse merchandising mix, extensive
food and recreational amenities and quality architecture and landscaping, all
designed to create an upscale environment in which to showcase merchandise and
encourage shopping.
The average outlet center in Prime Partnership's portfolio contains 257,750
square feet of GLA at December 31, 1997, compared to an industry average of
approximately 177,656 square feet as reported in January 1997 by VALUE RETAIL
NEWS, an industry trade magazine whose advisory board and executive committee
includes William H. Carpenter, Jr., President and Chief Operating Officer of
Prime Partnership. Management believes that the considerable size of its outlet
centers, coupled with Prime Partnership's established base of national and
international manufacturers of designer and brand-name merchandise,
significantly enhances the competitive position of Prime Partnership's factory
outlet centers.
Management has developed close working relationships with its merchants to
understand and better anticipate the merchants' immediate and long-term
merchandising strategies and retail space requirements. Prime Partnership
established The Manufacturers Forum-Registered Trademark-, an organization of
over 100 manufacturers that conducts between three and six industry meetings per
year--two of which meetings are held at semi-annual conventions. The meetings
are organized and hosted by executives of Prime Partnership and are attended by
senior executives from member manufacturers. Industry experts are invited to
attend as guest speakers to discuss ideas, trends, data and other issues
pertinent to the ongoing growth of the factory outlet center business. The
Manufacturers Forum-Registered Trademark- was developed as an educational tool
for both Prime
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Partnership and the member merchants, including new manufacturers that are
investigating opening factory outlet stores, and allows both Prime Partnership
and member merchants to stay up-to-date with changes in the industry. Topics
discussed at The Manufacturers Forum-Registered Trademark- lead to stronger
relationships with key merchants and a shared vision with the manufacturers as
to future growth of the industry.
STRATEGIES FOR GROWTH
Prime Partnership intends, on a long-term basis, to increase its per share
FFO and the value of its portfolio of factory outlet centers through the active
management and expansion of existing factory outlet centers and the selective
acquisition and development of factory outlet centers. FFO does not represent
cash flow from operating activities in accordance with GAAP, is not indicative
of cash available to fund all of Prime Partnership's cash needs and should not
be considered as an alternative to net income or any other GAAP measure as an
indicator of Prime Partnership's performance or as an alternative to cash flow
as a measure of liquidity or the ability to service debt or pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Prime Partnership--Funds from Operations."
Prime Partnership intends to continue to increase its FFO per share over
time by (i) selectively acquiring, expanding, and developing factory outlet
centers that offer strong prospects for cash flow growth and capital
appreciation, subject to the availability of debt financing on favorable terms
and additional equity capital and (ii) managing, leasing and marketing its
portfolio of retail properties to increase consumer traffic, sales per square
foot, tenant occupancy levels, and the effective base and percentage rents.
While no assurances can be given that Prime Partnership will successfully
implement the foregoing objectives, Prime Partnership intends to employ the
following strategies:
- ACQUISITION OF EXISTING OUTLET CENTERS. Prime Partnership explores
opportunities to acquire factory outlet centers or interests therein that
are compatible with Prime Partnership's existing portfolio and offer
attractive yields, potential cash flow growth and capital appreciation.
Prime Partnership draws upon its development, leasing, operating and
marketing expertise to improve such centers through expansion and/or
remerchandising or reletting. Properties may be acquired separately or as
part of a portfolio, and may be required for cash and/or in exchange for
equity securities of Prime Partnership. During 1997, Prime Partnership
acquired seven centers totaling 1,221,000 square feet of GLA for an
aggregate purchase price of $164,300.
- PLANNED DEVELOPMENT OF NEW FACTORY OUTLET CENTERS. Prime Partnership
develops new factory outlet centers on sites with favorable demographics,
access to interstate highways, good visibility and favorable market
conditions that generally can accommodate a minimum of 300,000 square feet
of GLA over multiple phases. In March 1997, Prime Partnership commenced
construction on the Outlet Village of Lebanon, located east of Nashville,
Tennessee. The Outlet Village of Lebanon, which will contain approximately
208,000 square feet of GLA, has a total expected development cost of
approximately $28,900 and is expected to open in the second quarter of
1998. In October 1997, Prime Partnership commenced construction on the
Outlet Village of Hagerstown located west of Baltimore, Maryland and
northwest of Washington, D.C. The Outlet Village of Hagerstown, which will
contain approximately 216,000 square feet of GLA, has a total expected
development cost of approximately $29,300 and is expected to open in the
third quarter of 1998. Management believes that there is sufficient demand
for continued development of new factory outlet centers and the expansion
of existing outlet centers.
- STRATEGIC EXPANSIONS OF EXISTING CENTERS. Prime Partnership selectively
expands its existing factory outlet centers in phased developments that
respond to merchant and consumer demand, thereby maximizing returns from
these outlet centers through higher effective rents from new merchants
based on the proven success and customer drawing power of existing phases.
Prime Partnership expects to open approximately 327,000 square feet of GLA
during 1998 in connection with planned
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expansions of existing centers. As of February 28, 1998, Prime Partnership
owned, or held under long-term lease, land contiguous to its outlet
centers to construct additional phases totaling approximately 1,500,000
square feet of GLA. Prime Partnership also holds options to purchase
property adjoining its existing factory outlet centers upon which
additional expansions could be constructed.
- ACTIVE PROPERTY MANAGEMENT. Prime Partnership monitors and seeks to
enhance the operating performance of its centers through intensive
merchant and property management, and by providing experienced and
professional on-site management. Property managers and marketing directors
work with leasing representations of Prime Partnership systematically
review merchant performance, merchandising mix and layout in order to
improve sales per square foot. Through its intensive management efforts,
Prime Partnership attempts to reduce the average occupancy cost on its
outlet portfolio while at the same time continuing to provide a high level
of merchant and customer service, maintenance and security.
- INNOVATIVE MARKETING AND PROMOTION. Prime Partnership continuously seeks
to increase the sales performance of each factory outlet center and
markets its factory outlet centers with promotional materials and
advertising strategies that target and attract customers. Substantially
all factory outlet centers have an experienced marketing director who
creates and administers retail marketing strategies that are designed to
highlight each factory outlet center's unique merchandising strengths,
customized to the local customer base and demographics. Prime Partnership
advertises its centers using a wide variety of media that can include
television, radio and print advertising, promotions, billboards, special
events, and an extensive public relations program. These activities are
supported by quantitative and qualitative market research based on such
information gathering techniques as focus groups and detailed customer
surveys. To better understand the needs and expectations of its customers,
Prime Partnership routinely conducts exit surveys, the results of which
are closely reviewed by senior management and, when appropriate, merchants
in the center. All of these activities are monitored and reviewed at least
quarterly by senior marketing management of Prime Partnership.
COMPETITION
Prime Partnership's outlet centers compete for customers primarily with
outlet centers built and operated by different developers, traditional shopping
malls, and "off-price" retailers. Prime Partnership carefully considers the
degree of existing and planned competition in a proposed trade area before
developing a new outlet center. Merchants of outlet centers carefully avoid
direct competition with major retailers and their own full-price stores.
Generally, this is accomplished by locating outlet centers at least 20 miles
from the nearest regional mall. For this reason, Prime Partnership's outlet
centers compete only to a limited extent with traditional retail malls in or
near metropolitan areas.
Prime Partnership's outlet centers compete to a limited extent with various
full-price and off-price retailers in the highly fragmented retailing industry.
However, management believes that the majority of Prime Partnership's customers
visit outlet centers specifically for designer and brand-name goods at
discounted prices. Traditional full-and off-price retailers are often unable to
provide such a variety of products at attractive prices.
Because several of Prime Partnership's outlet centers are located in
relatively undeveloped areas, there are often other potential sites near Prime
Partnership's outlet centers that may be developed into outlet centers by
competitors. Seven projects in Prime Partnership's portfolio, Factory Outlets at
Post Falls (Post Falls, Idaho), Gulf Coast Factory Shops (Ellenton, Florida),
Magnolia Bluff Factory Shops (Darien, Georgia), Ohio Factory Shops
(Jeffersonville, Ohio), Oxnard Factory Outlet (Oxnard, California), Prime Retail
Outlets of Kittery (Kittery, Maine) and San Marcos Factory Shops (San Marcos,
Texas), are located within twelve miles of competing factory outlet centers and,
therefore, are subject to direct outlet
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competition. The existence or development of an outlet center with a more
convenient location or lower rents may attract Prime Partnership's merchants or
cause them to seek more favorable lease terms at or prior to renewal of their
leases and, accordingly, may affect adversely the business, revenues and/or
sales volume of Prime Partnership's outlet centers.
Prime Partnership's community shopping centers compete with similar
community shopping centers located in the same geographic trade areas.
RELATIONSHIP WITH MUNICIPALITIES
Because of the favorable impact that Prime Partnership's properties may have
on a local community's economy by generating sales and property taxes and
increasing employment in the area, local communities often assist Prime
Partnership with respect to zoning, economic incentives or favorable business
development legislation. Prime Partnership explores opportunities to obtain
incentives from local, county and state governments in connection with the
development of its factory outlet centers. Such incentives often fund the cost
of off-site sewer and water services to the site, required highway improvements
and, on occasion, the cost of land and various on-site improvements.
MORTGAGE AND OTHER DEBT FINANCING OF PRIME PARTNERSHIP
The following table sets forth certain information regarding the mortgage
debt, other debt and tax-exempt financing of Prime Partnership (in thousands
except percentages):
<TABLE>
<CAPTION>
ACTUAL DEBT ESTIMATED
ANNUAL PRINCIPAL SERVICE PAID BALLOON
INTEREST BALANCE FOR YEAR PAYMENT
RATE AT AS OF ENDED MATURITY DUE AT
DESCRIPTION NOTES 12/31/97 12/31/97 12/31/97 DATE MATURITY
- ------------------------------------------------------------ ----- -------- --------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Variable rate tax-exempt bonds (the "Bonds"), collateralized
by properties in Chattanooga, TN and Knoxville, TN........ (1) 3.85% $ 28,250 $ 1,097 (1) $ 28,250(1)
Urban Development Action Grant Loans, collateralized by
property in Chattanooga, TN............................... (2) 6.00% 4,650 264 (2) 1,462(2)
Term loan, LIBOR plus 1.95%, quarterly principal and monthly
interest payments, collateralized by excess cash flow of
sixteen properties located throughout the United States... (3) 7.95% 53,290 56,581 11/11/99 39,238
Term loan, LIBOR plus 1.95%, monthly principal and interest
payments, collateralized by excess cash flow of three
properties located throughout the United States........... (3) 7.95% 3,000 3,141 02/13/00 2,131
Unsecured Promissory Note, LIBOR plus 3.50%, interest-only
payments.................................................. (4) -- -- 16,876 (4) --
Unsecured Line of Credit, $15,000 LIBOR plus 2.50%,
interest-only payments.................................... (5) 8.50% -- 58,210 7/11/98 --
Mortgage Loan, LIBOR plus 1.51%, monthly installments of
$2,580 including interest, collateralized by sixteen
properties located throughout the United States........... 7.51% 355,996 28,548 11/11/03 40,436
Mortgage Loan, 8.35% monthly installments of $215 including
interest, collateralized by three properties located
throughout the United States.............................. 8.35% 26,784 2,095 06/11/07 2,507
</TABLE>
160
<PAGE>
<TABLE>
<CAPTION>
ACTUAL DEBT ESTIMATED
ANNUAL PRINCIPAL SERVICE PAID BALLOON
INTEREST BALANCE FOR YEAR PAYMENT
RATE AT AS OF ENDED MATURITY DUE AT
DESCRIPTION NOTES 12/31/97 12/31/97 12/31/97 DATE MATURITY
- ------------------------------------------------------------ ----- -------- --------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loan, 9.375%, monthly installments of $71 including
interest, collateralized by property in Lombard, IL....... 9.38% 6,735 846 03/01/04 5,038
Mortgage Loan, 7.50%, monthly installments of $29 including
interest, collateralized by property in Knoxville, TN..... 7.50% 3,732 343 06/22/00 3,581
Mortgage Loan, 8.50%, unsecured, quarterly interest-only
payments, collateralized by three properties located
throughout the United States.............................. (6) 8.50% -- 4,185 (6) --
Mortgage Loan, 6.83%, monthly installments of $218 including
interest, collateralized by property in Niagara Falls,
NY........................................................ 6.83% 31,328 218 06/1/06 25,888
Unsecured term loan, 8.25%, monthly interest-only payments,
collateralized by properties in Loveland, CO and Odessa,
MO........................................................ 8.25% 1,500 11,358 08/31/98 500
--------- ------------ ---------
$ 515,265 $183,762 $ 150,031
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
- --------------------------
Notes:
(1) Floating rate adjusted weekly or monthly by a third party remarketing agent.
The Bonds consist of four issues. For two issues in the aggregate principal
amount of $19,250,000, the floating rate shall be no less than 80% and no
more than 120% of the average of the rate of no less than ten other
tax-exempt bond issues of a similar credit rating. For two issues in the
aggregate principal amount of $9,000,000, the floating rate shall be no less
than 90% or more than 120% of the average of the rate of no less than five
other comparable tax-exempt bond issues. Two issues in the aggregate
principal amount of $19,250,000 mature in December 2012 and two other issues
in the aggregate principal amount of $9,000,000 mature in December 2014. In
March 1994, Prime Partnership purchased five-year interest rate caps to
protect Prime Partnership against increases in a specified underlying
tax-exempt bond index above 3.0% the first year, 3.5% the second year, 4.0%
the third year, 4.5% the fourth year and 5.0% the fifth year. The Estimated
Balloon Payment Due at Maturity for these Bonds in the table above reflects
the aggregate principal amount due for all four issues. On December 31,
1997, the Bonds were collateralized by letters of credit (the "Letters of
Credit") issued by a group of financial institutions pursuant to a master
letter of credit agreement. A letter of credit fee of 1.0% per annum of the
stated amount of the Letters of Credit is payable quarterly in advance to
such financial institutions. The Letters of Credit were collateralized by a
reimbursement agreement under the master letter of credit agreement (the
"Reimbursement Agreement") which obligates an insurance company to reimburse
the financial institutions for any funds drawn on the Letters of Credit. In
addition, in March 1994, the issuing partnerships, Prime Partnership and an
insurance entered into standby bond purchase and indemnity agreements (the
"Standby Agreements") in order to address the scheduled expirations of
various credit enhancements, including the Letters of Credit, through March
21, 1999.
(2) The loans are due under four separate promissory notes. Two notes in the
aggregate principal amount of $3,823,000 mature in August 2016 and two other
notes in the aggregate principal amount of $827,000 mature in September
2019. No interest was payable on the notes with an aggregate principal
amount of $3,823,000 until September 1995, however, interest accrued on such
notes at 3% per annum until that time. After September 1995, interest is
payable monthly at 3% per annum for two years. Thereafter, payments of
principal and interest will be payable monthly in an amount that would fully
amortize the loan at a rate of 6% per annum over a period of 21 years with a
balloon payment due in August 2016
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provided that Prime Partnership maybe required to pay the remaining balance
of the loan in August 2014. With respect to the remaining promissory notes
in an aggregate principal amount of $827,000, interest accrues at 3% per
annum through September 1994. After September 1994, interest is payable at
3% per annum for three years. Thereafter, payments of principal and interest
are payable monthly in an amount that would fully amortize the loan at a
rate of 6% per annum over a period of 22 years with the final installment
due in September 2019 provided that Prime Partnership may be required to pay
the remaining balance of the loan in September 2017. The Estimated Balloon
Payment Due at Maturity for these notes in the table above reflects the
principal amount due at the first call date. In addition, the notes that
aggregate $3,823,000 entitle the City of Chattanooga to a contingent
interest in a cash flow from the project under certain circumstances.
(3) The loan was repaid in full in September 1997. On November 13, 1997, a new
loan was entered into with the same terms.
(4) The loan was paid in full on September 2, 1997.
(5) This is a revolving line of credit and, accordingly, debt service payment
includes all repayments of advances during 1997.
(6) The loan was paid in full on September 2, 1997.
JOINT VENTURE FINANCING
Prime Partnership has entered into various joint venture investment
partnerships with an unrelated third party that are accounted for under the
equity of accounting. The investment partnerships obtain financing for these
developments from the unrelated third party. The following table sets forth
certain information regarding Prime Partnership's joint venture financings:
<TABLE>
<CAPTION>
ACTUAL DEBT ESTIMATED
ANNUAL PRINCIPAL RECOURSE SERVICE PAID BALLOON
INTEREST BALANCE AMOUNT FOR YEAR PAYMENT
RATE AT AS OF AS OF ENDED MATURITY DUE AT
DESCRIPTION NOTES 12/31/97 12/31/97 12/31/97 12/31/97 DATE MATURITY
- ----------------------------------------------------- ----- -------- --------- -------- ------------ -------- ---------
(000'S) (000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona Factory Shops Partnership- notes payable,
LIBOR plus 1.00% collateralized by property in
Phoenix, AZ........................................ (1) 7.03% $ 32,684 $ 3,210 (1) $30,261
Buckeye Factory Shops Partnership--notes payable,
LIBOR plus 2.00%, collateralized by property in
Burbank, OH........................................ (2) -- -- 23,717 (2) --
Oxnard Factory Outlet Partners--notes payable, LIBOR
plus 1.00%, collateralized by property in Oxnard,
CA................................................. (3) 6.84% 14,845 1,495 (3) 14,443
Oxnard Factory Outlet Partners--note payable,
collateralized by property in Oxnard, CA........... (4) 4.00% 510 $ 153 -- 6/9/04 510
--------- -------- ------------ ---------
$ 48,039 $ 153 $28,422 $45,214
--------- -------- ------------ ---------
--------- -------- ------------ ---------
</TABLE>
162
<PAGE>
- ------------------------
Notes:
(1) Consists of two notes payable related to an existing construction loan.
Interest charged on the notes payable is based on LIBOR plus 1.00%, adjusted
according to the underlying LIBOR contracts. Commencing March 1996 and
August 1997, monthly principal payments of $55,000 and $23,100 respectively,
are required. Assuming the line is fully drawn, the estimated balloon
payment due at maturity will be approximately $22,175,792 and 8,085,100,
respectively.
(2) The loan was paid in full on September 2, 1997.
(3) Consists of two notes payable related to previously existing construction
loans with outstanding balances of $14,845,000 and $0, respectively.
Interest charged on the notes payable is based on LIBOR plus 1.00% as of the
respective draw dates. Interest is due and payable monthly. Commencing July
1995, a combined monthly principal payment of $33,500 is required with
balloon payments totaling $14,433,000 in the aggregate due on December 1 and
13, 1998 (dates of maturity).
(4) Interest accrues commencing on June 9, 1994. Payments are required
quarterly, commencing on October 15, 1999. Payments shall be in the amount
of 20% of net cash flow, as defined, for the calendar quarter preceding the
quarter in which payment is due. Payments shall be applied first to charges
assessed by the lender, if any second to interest and third to principal.
CERTAIN TAX INFORMATION
Prime Partnership's aggregate gross tax basis of depreciable real property
and depreciable personal property for federal income tax purposes in the Prime
Properties was $859.0 million and $647.1 million as of December 31, 1997 and
1996, respectively. Depreciation on the Prime Properties is computed using the
Modified Accelerated Cost Recovery System under the Code over the estimated
useful life of the real property and land improvements which ranges from 15 to
39 years. The average annual rate for real property is 2.56% and a variable rate
for land improvement ranges from 2.95% to 9.50%. The aggregate real estate tax
expenses on the Prime Properties for calendar year 1995 was approximately $5.0
million. Virtually all of Prime Partnership's leases contain provisions
requiring merchants to pay as additional rent a proportionate share of real
estate taxes, including real estate tax increases resulting from improvements in
the applicable Prime Property, and certain other operating expenses.
LEGAL PROCEEDINGS
Prime Partnership is involved in various legal matters incidental to its
business. The outcome of litigation is not susceptible to easy or certain
prediction. While an unfavorable outcome in a particular proceeding could have a
significant effect on Prime Partnership's consolidated results of operations in
a future reporting period, Prime Partnership believes ultimate resolution of
these matters, would not, either singly or in the aggregate, significantly
affect Prime Partnership's results of operations, liquidity or financial
position.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or redemption of certain
hazardous substances on their property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous substances. The costs of redemption or removal may be substantial, and
the presence of the hazardous substances, or the failure to promptly remediate
them, may adversely affect the owner's ability to sell the real estate or to
borrow using the real estate as collateral. In connection with its ownership and
operation of the Prime Properties, Prime Partnership may be potentially liable
for the costs of removal or remediation of hazardous substances.
163
<PAGE>
Prime Partnership has no knowledge, nor has Prime Partnership been notified
by any governmental authority of any material noncompliance, liability or claim
relating to hazardous substances in connection with any properties in which any
of such entities now has or heretofore had an interest. However, no assurances
can be given that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition of
the Prime Properties will not be affected by merchants and occupants of the
Prime Properties, by the condition of properties in the vicinity of the Prime
Properties (such as the presence of underground storage tanks) or by third
parties unrelated to Prime Partnership.
INSURANCE
Management believes that each of the Prime Properties is covered by adequate
fire, flood, and property insurance provided by reputable companies and with
commercially reasonable deductibles and limits.
EMPLOYEES
As of December 31, 1997, Prime Partnership had 560 employees. Prime
Partnership believes that its relations with its employees are satisfactory.
EXECUTIVE OFFICERS
The executive officers of Prime, the sole general partner of Prime
Partnership, and their ages and positions as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---------------------------- ----------------------------------------------------------------------------- ---
<S> <C> <C>
Michael W. Reschke Chairman of the Board, Director 42
Abraham Rosenthal Chief Executive Officer, Director 48
William H. Carpenter, Jr. President, Chief Operating Officer, Director 46
Glenn D. Reschke Executive Vice President, Development and Acquisitions, Director 46
Robert P. Mulreaney Executive Vice President, Chief Financial Officer and Treasurer 39
David G. Phillips Executive Vice President, Operations and Marketing 36
C. Alan Schroeder Executive Vice President, General Counsel and Secretary 40
R. Bruce Armiger Senior Vice President, Development and Construction Management Services 52
Steven S. Gothelf Senior Vice President, Finance 37
Anya T. Harris Senior Vice President, Marketing and Communications 31
John S. Mastin Senior Vice President, Leasing 51
Steven M. McGhee Senior Vice President, Operations 43
</TABLE>
BIOGRAPHIES OF EXECUTIVE OFFICERS
For a description of the executive officers of Prime and New Prime, see
"Management and Operation of New Prime After the Transactions--Directors and
Executive Officers."
164
<PAGE>
THE PRIME PARTNERSHIP PROPERTIES
GENERAL
Prime Partnership's strategy is to build on its reputation and experience in
the factory outlet center business and to capitalize on the current trend in
value-oriented retailing through the selective acquisition and development of
factory outlet centers and the strategic expansion of its existing factory
outlet centers. As a fully-integrated real estate company, Prime Partnership
provides development, construction, finance, leasing, accounting, marketing and
management services for all of its properties. At December 31, 1997, Prime
Partnership's portfolio consisted of the following properties: (i) 28 factory
outlet centers aggregating 7,217,000 square feet of GLA (including 595,000
square feet of GLA at factory outlet centers owned through joint venture
partnerships), (ii) three community shopping centers aggregating 424,000 square
feet of GLA and (iii) 159,000 square feet of GLA of office space.
The following list includes some of the lead tenants in the Prime
Partnership's outlet centers based on leases executed as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF % OF LEASED
TENANT STORES GLA
- ---------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
PHILLIPS-VAN HEUSEN
BASS.................................................................................. 19 1.82%
VAN HEUSEN............................................................................ 24 1.46
GEOFFREY BEENE........................................................................ 21 1.32
IZOD.................................................................................. 16 0.51
GANT.................................................................................. 6 0.25
--- -----
SUBTOTAL PHILLIPS-VAN HEUSEN........................................................ 86 5.36
DRESS BARN, INC.
WESTPORT, LTD./WESTPORT WOMAN/DRESS BARN.............................................. 29 2.75
SBX................................................................................... 2 0.19
--- -----
SUBTOTAL DRESS BARN, INC............................................................ 31 2.94
SARA LEE
L'EGGS/HANES/BALI/PLAYTEX............................................................. 22 1.46
CHAMPION.............................................................................. 6 0.29
COACH................................................................................. 11 0.42
SOCKS GALORE.......................................................................... 3 0.06
--- -----
SUBTOTAL SARA LEE..................................................................... 42 2.24
CASUAL CORNER GROUP, INC.
CASUAL CORNER OUTLET.................................................................. 16 1.08
CASUAL CORNER WOMAN................................................................... 9 0.35
PETITE SOPHISTICATE................................................................... 16 0.59
--- -----
SUBTOTAL CASUAL CORNER GROUP, INC..................................................... 41 2.01
OFF 5TH-SAKS FIFTH AVENUE............................................................... 8 2.39
LEVI'S OUTLET........................................................................... 16 2.04
BUGLE BOY............................................................................... 23 1.90
MIKASA.................................................................................. 16 1.83
GAP..................................................................................... 12 1.74
REEBOK.................................................................................. 12 1.57
OSHKOSH B'GOSH/GENUINE KIDS............................................................. 25 1.51
NIKE.................................................................................... 9 1.49
SPRINGMAID-WAMSUTTA..................................................................... 14 1.46
</TABLE>
165
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF LEASED
TENANT STORES GLA
- ---------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
CORNING-REVERE.......................................................................... 20 1.44%
JONES NEW YORK.......................................................................... 33 1.42
DESIGN'S INC./BOSTON TRADER............................................................. 12 1.38
VANITY FAIR/LEE/WRANGLER/BARBIZON....................................................... 4 1.36
CARTERS................................................................................. 19 1.34
POLO/RALPH LAUREN....................................................................... 11 1.21
READING CHINA & GLASS................................................................... 3 1.05
ANN TAYLOR.............................................................................. 8 0.88
JOCKEY.................................................................................. 16 0.82
EDDIE BAUER............................................................................. 7 0.80
LIZ CLAIBORNE........................................................................... 5 0.73
AMERICAN OUTPOST........................................................................ 13 0.66
NINE WEST............................................................................... 17 0.64
DANSKIN................................................................................. 9 0.64
ESPRIT.................................................................................. 5 0.61
GUESS?.................................................................................. 7 0.58
J. CREW................................................................................. 6 0.58
BROOKS BROTHERS......................................................................... 7 0.53
DONNA KARAN............................................................................. 8 0.50
BOSE.................................................................................... 9 0.50
COUNTY SEAT............................................................................. 6 0.49
VILLEROY & BOCH......................................................................... 8 0.47
TOMMY HILFIGER.......................................................................... 9 0.47
SONY.................................................................................... 5 0.42
NAUTICA................................................................................. 6 0.29
NORDIC TRACK............................................................................ 6 0.24
ANNE KLEIN.............................................................................. 3 0.14
ELLEN TRACY............................................................................. 2 0.10
FIRST CHOICE/ESCADA..................................................................... 2 0.05
--- -----
TOTAL................................................................................... 601 48.80%
--- -----
--- -----
</TABLE>
Lead tenants are placed in strategic locations designed to draw customers
into the outlet center and to encourage them to shop at more than one store.
Prime Partnership continually examines the placement of tenants within each
center and, in collaboration with its tenants, adjusts the size and location of
their space within the center to improve sales per square foot.
Prime Partnership strives to identify tenants with potential credit problems
at an early stage by closely monitoring tenant's performance. Prime Partnership
has worked successfully to limit its delinquencies and bad debt losses. During
the year ended December 31, 1997, total bad debt expense was approximately $970
or .01% of total revenues. Prime Partnership has not lost any material revenue
related to tenant bankruptcies or other lease defaults.
166
<PAGE>
PRIME PARTNERSHIP'S OUTLET CENTERS
The table set forth below summarizes certain information with respect to
Prime Partnership's existing centers as of December 31, 1997.
<TABLE>
<CAPTION>
GRAND GLA PERCENTAGE
FACTORY OUTLET CENTERS PHASE OPENING DATE (SQ. FT.) LEASED(1)
- ------------------------------------------------------------ --------- ------------------ ---------- -------------
<S> <C> <C> <C> <C>
Niagara International Factory Outlets (2)--Niagara Falls,
New York.................................................. I July 1982 300,000 96%
II August 1985 234,000 79
---------- ---
534,000 88
Prime Retail Outlets of Kittery (3)--Kittery Maine.......... I April 1984 25,000 100
II May 1984 78,000 100
III August 1989 18,000 100
---------- ---
121,000 100
Latham Factory Outlets (3)--Latham, New York................ I August 1987 43,000 100
Warehouse Row Factory Shops(4)--Chattanooga, Tennessee...... I November 1989 95,000 94
II August 1993 26,000 94
---------- ---
121,000 94
Oak Creek Factory Stores (5)--Sedona, Arizona............... I August 1990 82,000 100
San Marcos Factory Shops--San Marcos, Texas................. I August 1990 177,000 99
II August 1991 70,000 100
III August 1993 117,000 98
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
---------- ---
419,000 99
Shasta Factory Stores (2)--Anderson, California............. I August 1990 165,000 91
Factory Outlets at Post Falls (5)--Post Falls, Idaho........ I July 1991 111,000 92
II July 1992 68,000 71
---------- ---
179,000 84
Gulf Coast Factory Shops--Ellenton, Florida................. I October 1991 187,000 98
II August 1993 123,000 100
III October 1996 30,000 100
---------- ---
340,000 99
Triangle Factory Shops--Raleigh-Durham, North Carolina...... I October 1991 181,000 99
II July 1996 6,000 100
---------- ---
187,000 99
Coral Isle Factory Shops--Naples/Marco Island, Florida...... I December 1991 94,000 100
II December 1992 32,000 82
---------- ---
126,000 95
</TABLE>
167
<PAGE>
<TABLE>
<CAPTION>
GRAND GLA PERCENTAGE
FACTORY OUTLET CENTERS PHASE OPENING DATE (SQ. FT.) LEASED(1)
- ------------------------------------------------------------ --------- ------------------ ---------- -------------
<S> <C> <C> <C> <C>
Castle Rock Factory Shops--Castle Rock, Colorado............ I November 1992 181,000 97%
II August 1993 94,000 99
III November 1992 95,000 100
IV August 1993 110,000 100
---------- ---
480,000 99
Bend Factory Outlets (5)--Bend, Oregon...................... I December 1992 97,000 86
Ohio Factory Shops--Jeffersonville, Ohio.................... I July 1993 186,000 98
II November 1993 100,000 100
IIB November 1994 13,000 75
IIIA August 1996 35,000 100
IIIB March 1997 73,000 73
---------- ---
407,000 93
Gainesville Factory Shops--Gainesville, Texas............... I August 1993 210,000 89
II November 1994 106,000 92
---------- ---
316,000 90
Nebraska Crossing Factory Stores--Gretna, Nebraska*......... I October 1993 192,000 88
Rocky Mountain Factory Stores (6)--Loveland, Colorado....... I May 1994 139,000 100
II November 1994 50,000 100
III May 1995 114,000 100
IV May 1996 25,000 100
---------- ---
328,000 100
Oxnard Factory Outlet (7)--Oxnard, California............... I June 1994 148,000 88
Grove City Factory Shops (8)--Grove City, Pennsylvania...... I August 1994 235,000 99
II November 1994 95,000 100
III November 1995 85,000 99
IV November 1996 118,000 99
---------- ---
533,000 99
Huntley Factory Shops--Huntley, Illinois.................... I August 1994 192,000 98
II November 1995 90,000 88
---------- ---
282,000 92
Florida Keys Factory Shops--Florida City, Florida........... I September 1994 208,000 88
Indiana Factory Shops--Daleville, Indiana*.................. I November 1994 208,000 90
IIA November 1996 26,000 35
---------- ---
234,000 84
Kansas City Factory Outlets (6)--Odessa, Missouri........... I July 1995 191,000 100
II November 1996 105,000 66
---------- ---
296,000 88
</TABLE>
168
<PAGE>
<TABLE>
<CAPTION>
GRAND GLA PERCENTAGE
FACTORY OUTLET CENTERS PHASE OPENING DATE (SQ. FT.) LEASED(1)
- ------------------------------------------------------------ --------- ------------------ ---------- -------------
<S> <C> <C> <C> <C>
Magnolia Bluff Factory Shops (9)--Darien, Georgia........... I July 1995 238,000 89%
IIA November 1995 49,000 99
IIB July 1996 20,000 100
---------- ---
307,000 91
Arizona Factory Shops (10)--Phoenix, Arizona................ I September 1995 217,000 98
II September 1996 109,000 93
---------- ---
326,000 96
Gulfport Factory Shops (11)--Gulfport, Mississippi.......... I November 1995 228,000 97
IIA November 1996 40,000 82
IIB November 1997 38,000 38
---------- ---
306,000 88
Buckeye Factory Shops (12)--Burbank, Ohio................... I November 1996 205,000 95
Carolina Factory Shops--Gaffney, South Carolina............. I November 1996 235,000 95
---------- ---
Total Factory Outlet Centers (13) 7,217,000 94%
---------- ---
---------- ---
</TABLE>
- ------------------------
NOTES:
* Prime Partnership will transfer its interests in this property to HGP LP
upon the consummation of the Transactions.
(1) Percentage reflects fully executed leases as of December 31, 1997 as a
percent of square feet of GLA.
(2) Prime Partnership acquired this factory outlet center on December 2, 1997
from an unrelated third party.
(3) Prime Partnership acquired this factory outlet center on October 29, 1997
from an unrelated third party.
(4) Prime Partnership owns a 2% partnership interest as the sole general
partner in Phase I of this property but is entitled to 99% of the
property's operating cash flow and net proceeds from a sale or refinancing.
An unrelated third party holds a 35% limited partnership interest and Prime
Partnership holds a 65% general partnership interest in the partnership
that owns Phase II of this property. Phase I of this mixed-use development
includes 154,000 square feet of office space and Phase II includes 5,000
square feet of office space. The total office space of 159,000 square feet
is not included in this table and such space was 78% leased as of December
31, 1997.
(5) Prime Partnership acquired this factory outlet center on February 13, 1997
from an unrelated third party.
(6) Upon consummation of the Merger Agreement, Prime Partnership intends to
sell this factory outlet center (See Note 11-"Merger Agreement" of the
Notes to Consolidated Financial Statements).
(7) On February 7, 1997, Prime Partnership purchased an additional 20% interest
from a joint venture partner, increasing Prime Partnership's ownership
interest in this property to 50%.
(8) On November 1, 1996, Prime Partnership purchased its joint venture
partner's 50% partnership interest in Grove City Factory Shops Partnership
and now owns 100% of this factory outlet center.
(9) Prime Partnership operates this property pursuant to a long-term ground
lease under which Prime Partnership receives the economic benefit of a 100%
ownership interest.
169
<PAGE>
(10) Prime Partnership owns 50% of this factory outlet center in a joint
venture partnership with an unrelated third party.
(11) The real property on which this outlet center is located is subject to a
long-term ground lease. Prime Partnership receives the economic benefit of
a 100% ownership interest.
(12) On September 2, 1997, Prime Partnership purchased its joint venture
partner's 25% partnership interest in Buckeye and now owns 100% of this
factory outlet center.
(13) Prime Partnership also owns three community centers not included in this
table containing 424,000 square feet of GLA in the aggregate that were 96%
leased as of December 31, 1997.
TENANTS
In management's view, the tenant mix is one of the most important factors in
promoting an outlet center's success. Virtually all aspects of Prime
Partnership's outlet centers, ranging from site selection to architectural
design, are planned to attract and retain a diverse mix of nationally and
internationally recognized manufacturers of upscale designer and brand-name
products. Crucial to the development of a new outlet center is having lead
tenants committed to the outlet center early in the process. In management's
view, lead tenants are manufacturers that during the development of an outlet
center attract other high-quality manufacturers to the outlet center and provide
for a well-balanced and diversified mix of tenants that will attract consumers
to the outlet center. During the year ended December 31, 1997, no group of
tenants under common control accounted for more than 5.74% of the gross revenues
of Prime Partnership or occupied more than 5.36% of the total GLA of Prime
Partnership.
As of February 28, 1998, Prime Partnership owned, or held under long-term
leases, land contiguous to its outlet centers to construct additional phases
totaling approximately 1,500,000 square feet of GLA. Prime Partnership also
holds options to purchase property adjoining its existing factory outlet centers
upon which additional expansion could be constructed. Property held for sale by
a REIT is subject to significant restrictions imposed by the Code. Consequently,
it is Prime Partnership's intention to hold its undeveloped parcels for future
development, expansion or lease, rather than for sale.
LEASE TERMS FOR OUTLET CENTERS
In general, the leases relating to Prime Partnership's outlet centers have a
term of five to seven years. Most leases provide for the payment of percentage
rents for annual sales in excess of certain thresholds. In addition, the typical
lease agreement provides for the recovery of all of a merchant's proportionate
share of actual common area maintenance ("CAM"), refuse removal, insurance, and
real estate taxes as well as a collection for advertising and promotion and an
administrative fee. CAM includes such items as common area utilities, security,
parking lot cleaning, maintenance and repair of common areas, capital
replacement reserves, landscaping, seasonal decorations, public restroom
maintenance and certain administrative expenses.
LEASE RENTALS AND OTHER TERMS FOR OUTLET CENTERS
The following table sets forth information concerning the average base
rental per square foot of leased GLA of Prime Partnership's outlet centers as of
December 31 for the years 1993 through 1997.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SQ. FT. AVERAGE % OF GLA AVERAGE BASE
PERIOD AVAILABLE LEASED RENT PER SQ. FT.
- ------------------------------------------------------------ ---------------- ------------------- -----------------
<S> <C> <C> <C>
1997........................................................ 5,048,590 91.22 14.02
1996........................................................ 3,633,606 95.10 14.10
1995........................................................ 2,513,038 94.28 13.35
1994........................................................ 1,193,259 92.95 13.60
1993........................................................ 1,193,259 92.95 13.60
</TABLE>
170
<PAGE>
Merchant leases generally provide for the payment of percentage rents for
annual sales in excess of certain threshold amounts.
LEASE EXPIRATIONS AT OUTLET CENTERS
The following table shows lease expirations for the next ten years at Prime
Partnership's 28 outlet centers, not including office space at Warehouse Row
Factory Shops (as of December 31, 1997 and assuming no lease renewals or
extensions):
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER ANNUALIZED
OF ANNUALIZED MINIMUM RENT
LEASES APPROXIMATE MINIMUM RENT OF REPRESENTED BY
YEAR EXPIRING GLA EXPIRING LEASES EXPIRING LEASES
- ------------------------------------------------------ ----------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C>
1998.................................................. 208 672,590 $ 8,676,382 8.95%
1999.................................................. 282 951,096 13,884,059 14.32
2000.................................................. 362 1,219,241 19,129,588 19.73
2001.................................................. 386 1,318,768 20,735,895 21.39
2002.................................................. 280 974,632 15,499,971 15.99
2003.................................................. 67 309,794 4,904,704 5.06
2004.................................................. 53 328,272 4,646,025 4.79
2005.................................................. 46 272,619 4,268,191 4.40
2006.................................................. 30 178,420 2,730,946 2.82
2007.................................................. 9 36,262 552,230 0.57
</TABLE>
COMMUNITY SHOPPING CENTERS
The following is a description of the three community shopping centers owned
by Prime Partnership. All of Prime Partnership's community shopping centers are
owned in fee. Prime Partnership's management believes that each of its community
shopping centers is adequately insured in accordance with industry standards.
Melrose Place is located on 1.6 acres in Knoxville, Tennessee on Old
Kingston Pike along Interstate 40 and Kingston Pike, approximately 4 miles west
of downtown Knoxville. The center opened in September 1987. The Shops at Western
Plaza is located on approximately 14 acres on Old Kingston Pike, 3.5 miles west
of downtown Knoxville and 1.2 miles east of Melrose Place. The center initially
was completed in 1957 and was substantially renovated and expanded in 1987 to
its present size. Northgate Plaza is located on 24 acres in Lombard, Illinois,
at the intersection of Interstate 355 and North Avenue, approximately 30 miles
west of downtown Chicago. The center opened in June 1992.
The following table sets forth certain summary information with respect to
each of Prime Partnership's community shopping centers:
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE LEASED AT
PROPERTY (DATE CONSTRUCTED OR RENOVATED) LOCATION INTEREST GLA DECEMBER 31, 1997
- --------------------------------------------------- ---------------- -------------- --------- ------------------------
<S> <C> <C> <C> <C>
Melrose Place (1987)............................... Knoxville, TN 100% 21,000 90%
The Shops at Western Plaza (1987)(1)............... Knoxville, TN 100% 198,000 90
Northgate Plaza (1991)(2).......................... Lombard, IL 100% 205,000 96
</TABLE>
- ------------------------
NOTES:
(1) Project was opened in 1957, substantially renovated in 1987 and acquired by
PGI in June 1993.
(2) This property occupies one of two buildings which together comprise a retail
shopping center. The other building is owned by an unaffiliated third party.
171
<PAGE>
For the year ended December 31, 1997, total revenues from Prime
Partnership's community shopping centers were $3,496,090, representing 2.71% of
Prime Partnership's total revenues for such period. For the year ended December
31, 1996 total revenues from Prime Partnership's community shopping centers were
$3,537,568, representing 4.19% of Prime Partnership's total revenues for such
period.
LEASE RENTALS AND OTHER RENTAL TERMS FOR COMMUNITY SHOPPING CENTERS.
The following table sets forth the weighted average square feet of available
GLA, average percent of GLA leased and average base rent at Prime Partnership's
community shopping centers:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SQ.
FT. OF AVAILABLE AVERAGE % OF AVERAGE BASE RENT PER
PERIOD GLA GLA LEASED OCCUPIED SQ. FT.
- ------------------------------------------------------- ------------------- -------------- -----------------------
<S> <C> <C> <C>
1997................................................... 431,889 90.45% $ 6.80
1996................................................... 433,159 93.83 7.14
1995................................................... 424,033 86.95 6.70
1994................................................... 424,033 92.10 6.32
1993................................................... 260,852 90.97 6.67
</TABLE>
LEASE EXPIRATIONS FOR PRIME PARTNERSHIP'S ENTIRE PORTFOLIO OF PRIME PROPERTIES
The following table shows lease expirations at the Prime Properties (as of
December 31, 1997 and assuming no lease renewals or extensions):
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER ANNUALIZED
OF ANNUALIZED MINIMUM RENT
LEASES APPROXIMATE MINIMUM RENT OF REPRESENTED BY
YEAR EXPIRING GLA EXPIRING LEASES EXPIRING LEASES
- ------------------------------------------------------ ----------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C>
1998.................................................. 224 724,114 $ 9,103,695 9.13%
1999.................................................. 294 997,803 14,286,096 14.33
2000.................................................. 368 1,237,744 19,337,002 19.39
2001.................................................. 391 1,323,195 20,844,262 20.90
2002.................................................. 283 994,461 15,641,250 15.68
2003.................................................. 71 325,414 5,157,311 5.17
2004.................................................. 54 330,863 4,707,224 4.72
2005.................................................. 47 282,690 4,490,357 4.50
2006.................................................. 30 178,420 2,730,946 2.74
2007.................................................. 9 36,262 552,230 0.55
</TABLE>
172
<PAGE>
HORIZON PARTNERSHIP
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of Horizon
Partnership, which includes the results of operations of McG Outlet Centers
Limited Partnership ("McArthur/Glen Partnership") from July 14, 1995, the date
of the consolidation. The selected historical financial data as of December 31,
1997 and 1996 and for each of the years ended December 31, 1997, 1996 and 1995
is derived from the audited financial statements of Horizon Partnership included
herein. Selected historical financial data as of December 31, 1995, 1994 and
1993 and for each of the years ended December 31, 1994 and 1993 is derived from
the audited financial statements of Horizon Partnership not included herein. The
following information should be read in conjunction with, and is qualified in
its entirety by, the financial statements and notes thereto of Horizon
Partnership and "Management's Discussion and Analysis of Results of Operations
and Financial Condition of Horizon Partnership" contained elsewhere in this
Joint Consent Solicitation Statement/Prospectus/Information Statement.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993(A)
----------- ----------- ----------- --------- ---------
<CAPTION>
(THOUSANDS, EXCEPT PER UNIT AMOUNTS AND
NUMBER OF PROPERTIES)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue......................................................... $ 162,463 $ 154,499 $ 93,929 $ 43,267 $ 22,247
Expenses........................................................ 156,481 124,277 66,558 26,073 19,274
Impairment and severance........................................ 7,798 65,355 -- -- --
----------- ----------- ----------- --------- ---------
Income (loss) before gain on sale of real estate, minority
interests and extraordinary charge............................ (1,816) (35,133) 27,371 17,194 2,973
Gain on sale of real estate..................................... 8 563 776 287 272
----------- ----------- ----------- --------- ---------
Income (loss) before minority interests and extraordinary
charge........................................................ (1,808) (34,570) 28,147 17,481 3,245
Minority interests.............................................. (3,211) (331) -- -- --
Extraordinary charge............................................ (3,927) (419) -- -- --
----------- ----------- ----------- --------- ---------
Net income (loss)............................................... $ (8,946) $ (35,320) $ 28,147 $ 17,481 $ 3,245
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Income (loss) per unit before extraordinary charge and gain on
sale of real estate (b)....................................... $ (0.18) $ (1.34) $ 1.47 $ 1.39 $ 0.03
Net income (loss) per unit (b).................................. (0.32) (1.34) 1.52 1.42 0.06
Distributions declared per unit (c)............................. 1.050 2.095 2.131 1.755 0.247
BALANCE SHEET DATA:
Real estate, net of accumulated depreciation.................... $ 1,051,321 $ 1,008,000 $ 1,023,745 $ 287,833 $ 176,512
Total assets.................................................... 1,115,531 1,095,221 1,059,090 300,043 218,146
Total mortgages and other debt.................................. 626,097 557,672 503,246 96,929 24,888
Total partners' capital......................................... 412,924 445,639 491,593 178,463 182,478
OTHER DATA:
Funds from operations (d) (e)................................... $ 44,926 $ 66,410 $ 47,549 $ 25,656 $ 6,860
Cash flows provided by (used in):
Operating activities.......................................... 49,778 32,442 35,719 26,713 9,557
Investing activities (e)...................................... (81,282) (96,854) (150,916) (114,330) (93,663)
Financing activities.......................................... 28,197 74,054 117,592 56,105 118,965
Total gross leasable area (square feet)......................... 9,907 9,369 8,464 3,124 2,215
Number of properties............................................ 37 37 35 13 12
</TABLE>
- ------------------------------
NOTES:
(a) The selected financial data includes: for the period up to and including
November 7, 1993, the combined financial statements of Horizon Partnership
and certain affiliated partnerships, the impact of the Horizon IPO and
related transactions as of November 8, 1993 and for the period subsequent to
November 8, 1993, the consolidated financial statements of Horizon
Partnership.
173
<PAGE>
(b) The earnings per unit amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128. See the
accompanying notes to consolidated financial statements of Horizon
Partnership. There is no difference between basic and diluted earnings per
unit.
(c) Included in 1995 is a special one-time distribution of $0.111 per unit,
declared in connection with the consolidation with McArthur/Glen.
(d) Horizon Partnership's management believes that in order to facilitate a
clear understanding of the consolidated historical operating results of
Horizon Partnership, FFO should be considered in conjunction with net income
(loss) as presented in the financial statements included in this Joint
Consent Solicitation Statement/Prospectus/Information Statement. Management
believes that FFO is an important and widely used measure of the operating
performance of REITs which provides a relevant basis for comparison to other
REITs. Therefore, FFO is presented to assist investors in analyzing the
performance of Horizon Partnership. In March 1995, NAREIT issued a
classification of its definition of FFO. Although Horizon Partnership has
adopted the NAREIT definition of FFO, Horizon Partnership cautions that the
calculation of FFO may vary from entity to entity and as such the
presentation of FFO by Horizon Partnership may not be comparable to other
similarly titled measures of other reporting companies. FFO does not
represent cash flow from operating activities in accordance with GAAP and is
not indicative of cash available to fund all of Horizon Partnership's cash
needs. FFO should not be considered as an alternative to net income or any
other GAAP measure as an indicator of performance and should not be
considered as an alternative to cash flow as a measure of liquidity or the
ability to service debt or to pay distributions. A reconciliation of income
(loss) before extraordinary charge to FFO is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income (loss) before extraordinary charge....................................... $ (5,019) $ (34,901) $ 28,147 $ 17,481
FFO Adjustments:
Depreciation and amortization................................................. 41,154 36,519 20,178 8,462
Loss on asset impairment...................................................... 7,798 65,355 -- --
Merger expenses............................................................... 1,001 -- -- --
Gain on sale of assets........................................................ (8) (563) (776) (287)
--------- --------- --------- ---------
Total FFO adjustments....................................................... 49,945 101,311 19,402 8,175
--------- --------- --------- ---------
FFO............................................................................. $ 44,926 $ 66,410 $ 47,549 $ 25,656
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1993
---------
<S> <C>
Income (loss) before extraordinary charge....................................... $ 3,245
FFO Adjustments:
Depreciation and amortization................................................. 3,887
Loss on asset impairment...................................................... --
Merger expenses............................................................... --
Gain on sale of assets........................................................ (272)
---------
Total FFO adjustments....................................................... 3,615
---------
FFO............................................................................. $ 6,860
---------
---------
</TABLE>
(e) Certain reclassifications have been made to previously reported balances in
order to provide comparability to the current year amounts. These
reclassifications have not changed previously reported results or partners'
capital.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF HORIZON PARTNERSHIP
GENERAL OVERVIEW
Horizon Partnership is engaged in the ownership, acquisition, development
and operation of outlet centers. Horizon Partnership receives rental revenue
through base rent, percentage rent and expense recoveries from tenants. Base
rent represents a minimum amount for which tenants are contractually obligated.
Percentage rent represents an amount tenants are obligated to pay as additional
rent based on a percentage of the tenant's gross sales in excess of a
"breakpoint." Expense recoveries from tenants relate to the portion of the
operating expenses for which the tenants are obligated to reimburse Horizon
Partnership, including real estate taxes, insurance, utilities and common area
maintenance charges.
Horizon Partnership has grown by developing new outlet shopping centers,
expanding existing outlet shopping centers, acquiring outlet shopping centers
and increasing rental revenue at its existing outlet shopping centers. Horizon
Partnership is a subsidiary of Horizon, a self-managed and self-administered
REIT. Horizon is the general partner of Horizon Partnership and each Horizon
Common Share is equivalent to one Horizon Partnership Unit. Horizon's assets,
which include investments in joint ventures, are owned by and substantially all
of its operations are conducted through Horizon Partnership.
At December 31, 1997, Horizon Partnership operated 37 outlet centers
containing an aggregate of 9.9 million square feet of GLA in 21 states compared
to 37 outlet centers with 9.4 million square feet of GLA in 20 states at the end
of 1996 and 35 factory outlet centers containing an aggregate of 8.5 million
square feet of GLA in nineteen states at the end of 1995. The increase in GLA
from 1996 to 1997 was approximately 428,000 square feet of GLA due to the
expansion of three outlet centers and the development of one new outlet center.
Horizon Partnership also acquired an outlet center adjacent to an existing
outlet center owned by Horizon Partnership that provided approximately an
additional 203,000 square feet. One center of approximately 161,000 square feet
was sold for approximately $4.5 million in 1997. The increase in GLA from 1995
to 1996 was approximately 905,000 square feet of additional GLA from the
expansion of eight outlet centers and the development of three new outlet
centers. The above mentioned factors increasing the GLA of Horizon Partnership's
properties are collectively referred to as the "Portfolio Expansion."
On July 14, 1995, Horizon Partnership expanded its operations by
consolidating with McArthur/Glen Partnership, an owner, operator and developer
of factory outlet centers (the "Consolidation"). At the Consolidation date,
McArthur/Glen Partnership operated 20 outlet centers with 3.9 million square
feet of GLA. See Note 3 in the accompanying consolidated financial statements
for further information.
Horizon Partnership's occupancy for stabilized properties was 92%, 89% and
95% at December 31, 1997, 1996 and 1995, respectively. Horizon Partnership's
properties are considered to be stabilized if they have been open for twelve
months or if they have reached full occupancy (considered by Horizon Partnership
to be 95% occupied).
CONSOLIDATED RESULTS OF OPERATIONS
1997 COMPARED TO 1996
The loss before minority interests and extraordinary charge was $1.8 million
in 1997 compared to loss before minority interests and extraordinary charge of
$34.6 million in 1996. The loss in 1997 resulted from a $7.8 million loss on
asset impairment and a $1.0 million charge for professional fees incurred
relating to the impending merger with Prime Partnership that, as the acquiree
under purchase accounting, is required to be expensed.
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<PAGE>
Total revenues increased $8.0 million, or 5.2%, to $162.5 million in 1997
from $154.5 million in 1996. This increase resulted principally from increased
GLA due to the Portfolio Expansion. Base rent increased $5.9 million, or 5.4%,
to $115.9 million in 1997 compared to $110.0 million in 1996. Percent rent was
$4.0 million in 1997 and $3.2 million in 1996, an increase of 26%. The increase
in base rent includes recording $3.0 million of deferred rent relating to
Horizon Partnership's New Mexico Outlet Center. In July 1997, Horizon
Partnership leased its Algodones, New Mexico outlet center to Chelsea GCA Realty
Partnership, L.P. ("Chelsea LP") for $4.0 million over a period of two years.
The $4.0 million was prepaid at closing and is non-refundable. Pursuant to its
rights under the lease, Chelsea LP gave notice in 1997 that it would terminate
the lease effective January 2, 1998, and accordingly, the remaining $3.0 million
of deferred rent was recognized in 1997.
Tenant expense recoveries increased $.2 million, or .5%, to $34.1 million in
1997 compared to $33.9 million in 1996 as a result of additional GLA from the
Portfolio Expansion offset by approximately $1.2 million of operating costs
relating to the Partnership's Dole Cannery project in Honolulu, Hawaii. As a
result, expense recoveries covered 87.5% of property operating and real estate
tax expenses in 1997 compared to 96.6% in 1996.
Other income increased $1.1 million, or 14.0%, to $8.5 million in 1997
compared to $7.4 million in 1996 principally from higher temporary tenant
income.
Property operating and real estate tax expenses increased $3.8 million, or
10.9%, to $39.0 million in 1997 from $35.1 million in 1996 principally from
increased GLA resulting from the Portfolio Expansion.
Land lease and other expense increased $10.8 million to $12.3 million in
1997 compared to $1.5 million in 1996, principally due to $8.2 million of space
lease expense, including $4.8 million of straight line expense, associated with
the Dole Cannery project and landlord marketing contributions.
General and administrative expenses increased $1.5 million, or 12.7%, to
$13.3 million in 1997 compared to $11.8 million in 1996 principally due to $1.6
million in increased professional fees and leasing costs offset by a $1.0
million decline in the provision for uncollectible accounts. As a result,
general and administrative expenses, as a percentage of total revenues,
increased to 8.2% in 1997 compared to 7.6% in 1996.
Depreciation and amortization increased $4.8 million, or 13.0%, to $42.0
million in 1997 compared to $37.2 million in 1996 principally from additional
GLA associated with the Portfolio Expansion. Interest expense increased $10.2
million, or 26.4%, to $48.9 million in 1997 compared to $38.7 million in 1996
due to increased debt levels primarily resulting from the Portfolio Expansion
and a $6.3 million decrease in capitalized interest due to decreased development
activity.
A loss on asset impairment of $6.9 million was recognized in 1997 to reduce
six properties under sales agreements, subject to certain contingencies, to an
amount equal to estimated sales proceeds less costs to dispose and to record a
$0.9 million charge for undeveloped projects that will not be pursued. At
September 30, 1997, six outlet centers were classified as held for sale
resulting from these agreements. One center was sold in November 1997 for
approximately $4.5 million. The agreements for the remaining five properties
were terminated. Management then decided to pursue the sale of only one of the
outlet centers. The remaining four outlet centers were reclassified to real
estate assets in the fourth quarter of 1997 at their fair values as of the date
of the decision not to sell.
In 1997, Horizon Partnership recorded an extraordinary charge of $3.9
million related to the early retirement of debt. The charge primarily consisted
of the write-off of unamortized debt issuance costs associated with the debt
retired.
1996 COMPARED TO 1995
The loss before minority interests and extraordinary charge was $34.6
million in 1996 compared to income before minority interests and extraordinary
charge of $28.1 million in 1995. The loss in 1996 resulted from charges and
asset write-downs aggregating $65.4 million, comprised of a $61.7 million loss
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<PAGE>
primarily for asset impairment, $2.2 million related to discontinued development
projects and $1.5 million in executive severance costs.
Total revenues increased $60.6 million, or 64.5%, to $154.5 million in 1996
from $93.9 million in 1995. Base rent increased $41.5 million, or 60.5%, to
$110.0 million in 1996 compared to $68.5 million in 1995. Percent rent was $3.2
million in 1996 and $2.4 million in 1995, an increase of 29.2%. These increases
resulted from increased GLA principally from the Portfolio Expansion and a full
year of operations of outlet centers obtained in the Consolidation, compared to
a partial year of operations in 1995.
Tenant expense recoveries increased $15.0 million, or 79.3%, to $33.9
million in 1996 compared to $18.9 million in 1995 as a result of additional GLA
from the Portfolio Expansion and the Consolidation. Expense recoveries covered
96.6% of property operating and real estate tax expenses compared to 92.3% in
1995.
Other income increased $3.4 million, or 84.5%, to $7.4 million in 1996
compared to $4.0 million in 1995 from higher lease termination income and income
related to marketing.
Property operating and real estate tax expenses have increased $14.6
million, or 71.4%, to $35.1 million in 1996 from $20.5 million in 1995
principally from increased GLA resulting from the Portfolio Expansion and the
Consolidation.
Land lease and other expense increased $0.3 million to $1.5 million in 1996
compared to $1.2 million in 1995, principally due to the straight-line lease
expense associated with the Dole Cannery project.
General and administrative expenses increased $6.8 million, or 136.7%, to
$11.8 million in 1996 compared to $5.0 million in 1995 from the inclusion of a
full year of expense in 1996 from the Consolidation, higher provisions for
uncollectible accounts receivable and increased leasing costs. Primarily as a
result of higher provisions for uncollectible accounts receivable and increased
leasing costs, general and administrative expenses, as a percentage of total
revenues, increased to 7.6% in 1996 compared to 5.3% in 1995.
Depreciation and amortization increased $16.5 million, or 80.1%, to $37.2
million in 1996 compared to $20.7 million in 1995 principally from a full year
of combined operations relating to the Consolidation and additional GLA
associated with the Portfolio Expansion. Interest expense increased $19.4
million, or 100.8%, to $38.7 million in 1996 compared to $19.3 million in 1995
due to increased debt levels primarily resulting from the Portfolio Expansion as
well as debt assumed from the Consolidation.
As a result of Horizon Partnership's review of the carrying value of its
long-lived assets, Horizon Partnership was required to recognize write-downs
totaling $61.7 million during the fourth quarter of 1996 primarily pursuant to
the provisions of Statement of Financial Accounting Standards No. 121
"IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF" as
follows:
- Cost over-runs and limited success in leasing Horizon Partnership's Dole
Cannery project in Honolulu, Hawaii required a write-down of Horizon
Partnership's investment in that project together with a reserve against a
related receivable as of December 31, 1996. Beginning in 1997, Horizon
Partnership has expensed and not capitalized leasing, interest or
operating costs incurred on the Dole Cannery project.
- The decision to market for sale two centers that, based on the expected
net proceeds, required a write-down of the carrying values of such centers
to their estimated fair value less cost to sell. One of these properties
was sold in November 1997 and the other property was reclassified to real
estate as of December 31, 1997.
- Revised occupancy expectations that indicated a permanent impairment of
value of three other centers. These centers were written-down to estimated
fair value.
In addition, fourth quarter 1996 results include charges of $2.2 million
related to development projects which will not be pursued and a $1.5 million
provision for executive severance costs.
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<PAGE>
Income (loss) in 1996 before minority interests and extraordinary charge,
excluding the $65.4 million in charges and write-downs, improved $2.6 million in
1996 compared to 1995. The improvement resulted principally from increased GLA
due to the Consolidation and the Portfolio Expansion.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, Horizon Partnership, through wholly-owned subsidiaries
("Borrower"), entered into a $300.6 million credit facility with Lehman Brothers
Realty Corporation ("Lender"). The initial loan (the "Initial Loan") of $250.6
million included an initial funding at closing of $212.1 million and a
reservation of financing in the amount of $38.5 million for the acquisition of a
specified property (the "Additional Loan"). The Borrower may borrow an
additional $50.0 million in increments of no less than $10.0 million each,
subject to the satisfaction of certain conditions, including predefined debt
service coverage ratios (the "Second Loan" and collectively with the "Initial
Loan," including the "Additional Loan," the "Loan"). Subsequent to the Initial
Loan, the Borrower borrowed the entire $38.5 million of the Additional Loan for
the acquisition of the specified property and $11.0 million of the Second Loan.
While the Borrower has additional availability under the Second Loan, additional
borrowings may not be available due to the financial ratios Horizon Partnership
is required to maintain. The Borrower repaid $7.7 million of the Loan in
connection with property sales and refinancing. Interest on the Loan is payable
at the following rates: (i) 1.75% over the London interbank offering rate
("LIBOR") for the Initial Loan, and (ii) 2.25% over LIBOR for the Second Loan or
(iii) if the Loan is converted to a prime rate loan under certain circumstances
at the Lender's discretion, the prime rate plus .75% with respect to the Initial
Loan and plus 1.25% with respect to the Second Loan. The maturity date of the
Loan is July 1, 1999, unless otherwise extended pursuant to the terms of the
Loan. The net proceeds of the Initial Loan were primarily used to retire Horizon
Partnership's aggregate outstanding balances under the following: (i) a
revolving credit facility with a subsidiary of First Chicago NBD Corporation and
other banks, (ii) construction financing facilities with Canadian Imperial Bank
of Commerce, (iii) four mortgage notes payable and (iv) one revolving credit
facility. Horizon Partnership recorded a $3.9 million extraordinary charge
comprised primarily of unamortized debt issuance costs associated with the debt
retired. The Loan is guaranteed by Horizon Partnership and is secured by a pool
of 16 properties transferred to Borrower. The Loan requires Horizon Partnership
to maintain certain financial ratios and restricts the amount of distributions
that can be made.
Additionally, Horizon Partnership has an unsecured revolving credit facility
that expires in August 1998 for $4.0 million with a Michigan bank for working
capital requirements, which was completely outstanding as of December 31, 1997.
Interest on borrowings under this facility is charged at the prime rate and the
facility is recourse to Horizon Partnership.
In 1996, Horizon Partnership formed a venture (the "Venture") with a pension
fund (the "Fund") advised by Heitman Capital Management. Horizon Partnership
contributed a 325,000 square foot center in the Finger Lakes region of New York
in 1996 and a 67,000 square foot expansion in 1997 to the Venture. In exchange
for the contribution, Horizon Partnership received $34.9 million and $7.6
million in cash in 1996 and 1997, respectively, and a 50% interest in the
Venture. The Fund contributed, concurrent with Horizon Partnership's
contribution of property, $34.9 million and $7.6 million in cash in 1996 and
1997, respectively, in return for a $38.2 million preferred equity position that
earns a 9.6% return on the outstanding balance and a 50% ownership in the
Venture. The Fund's entire equity position upon election of the Fund, is
convertible into 2.2 million Horizon Common Shares, which represents an exercise
price of $19.63 per share (the approximate market price of a Horizon Common
Share on the date of issuance). Should Horizon issue such shares, Horizon
Partnership would be required to issue Horizon Partnership Units to Horizon on a
one-for-one basis. Horizon Partnership manages and leases the property. The
accompanying financial statements consolidate the financial position and results
of operations of the Venture and the interest of the Fund has been reflected as
a component of minority interests.
In 1997, Horizon Partnership issued 0.3 million units to Horizon related to
the Dividend Reinvestment Plan ("DRIP") for an aggregate price of $5.9 million.
The contribution of the net proceeds to
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<PAGE>
Horizon Partnership from the foregoing sales of units were used to reduce
amounts outstanding under revolving credit facilities. Horizon discontinued
further stock issuances under the DRIP based on the current market price of
Horizon's Common Shares.
During 1998, Horizon Partnership has no plans to expand its outlet centers.
However, Horizon Partnership plans to spend approximately $19.0 million for
tenant allowances and capital improvements to its outlet centers in 1998.
Horizon Partnership plans to fund this expansion with existing cash balances,
cash flow from operations and proceeds from the sale of assets.
Horizon Partnership expects to meet its short-term liquidity requirements
generally through working capital and cash flows from operations. Horizon
Partnership expects to meet its long-term requirements, such as tenant
allowances for new leases and capital improvements, through additional
borrowings of long-term debt and the potential offering of equity securities in
the private or public capital markets. As a result of Horizon Partnership's
leverage and the covenants related to its debt, Horizon Partnership's ability to
obtain additional financing sources is limited. There can be no assurances that
Horizon Partnership will be able to successfully obtain such funding sources or,
if obtained, on favorable terms.
Total tenant retail sales at Horizon Partnership outlet centers increased in
1997 compared to 1996. Tenant sales, on a comparative store basis, increased
approximately 3.1% in 1997 compared to 1996, comparable to the trend in the
industry. Lower sales by certain tenants may however have an adverse effect on
tenant plans for new store openings. It is Horizon Partnership's practice to
achieve minimum pre-leasing levels prior to commencing construction activities.
Horizon Partnership's results of operations are significantly dependent on the
overall health of the retail industry. Should declines in general retail
industry conditions continue to slow tenant leasing commitments, Horizon
Partnership may delay construction of certain development and expansion projects
pending the attainment of minimum pre-leasing levels. Such a delay may adversely
affect Horizon Partnership's ability to capitalize and defer a portion of its
direct leasing costs to the extent that Horizon Partnership does not reduce such
overhead costs.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of Horizon
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Horizon Partnership does not believe that the impact of the recognition of
the year 2000 by its information and operating technology systems will have a
material adverse effect on Horizon Partnership's financial condition and results
of operations. The majority of any necessary system changes will be upgraded in
the normal course of business. Horizon Partnership has initiated formal
communications with all of its significant suppliers to determine the extent to
which Horizon Partnership's interface systems are vulnerable to those third
parties' failure to remediate their own year 2000 issues. There can be no
guarantee that the systems of other companies, on which Horizon Partnership's
systems rely, will be timely converted and would not have an adverse effect on
Horizon Partnership's systems.
FUNDS FROM OPERATIONS
Management of Horizon Partnership believes that in order to facilitate a
clear understanding of the consolidated historical operating results of Horizon
Partnership, FFO should be considered in conjunction with net income (loss) as
presented in the financial statements included in this Joint Consent
Solicitation Statement/Prospectus/Information Statement. Management believes
that FFO is an important and widely used measure of the operating performance of
REITs which provides a relevant basis for comparison to other REITs. Therefore,
FFO is presented to assist investors in analyzing the performance of Horizon
Partnership. In March 1995, NAREIT issued a clarification of its definition of
FFO. Although Horizon
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Partnership has adopted the NAREIT definition of FFO, Horizon Partnership
cautions that the calculation of FFO may vary from entity to entity and as such
the presentation of FFO by Horizon Partnership may not be comparable to other
similarly titled measures of other reporting companies. FFO does not represent
cash flow from operating activities in accordance with GAAP and is not
indicative of cash available to fund all of Horizon Partnership's cash needs.
FFO should not be considered as an alternative to net income or any other GAAP
measure as an indicator of performance and should not be considered as an
alternative to cash flow as a measure of liquidity or the ability to service
debt or to pay dividends. FFO in 1997 decreased $21.5 million, or 32.4%, to
$44.9 million compared to $66.4 million in 1996. The decline was principally due
to the costs associated with the Dole Cannery project, and increased general and
administrative and interest costs. FFO increased $18.9 million, or 39.7%, to
$66.4 million in 1996 compared to $47.5 million in 1995. The increase in 1996
was due to a full year of operations of outlet centers obtained in the
Consolidation compared to a partial year of operations in 1995.
INFLATION
Horizon Partnership's leases with the majority of its tenants require the
tenants to reimburse Horizon Partnership for most operating expenses and
increases in common area maintenance expenses, which reduces Horizon
Partnership's exposure to increases in costs and operating expenses resulting
from inflation.
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BUSINESS OF HORIZON PARTNERSHIP
GENERAL
Horizon Partnership is one of the largest owners, operators and developers
of outlet centers in the United States based on total GLA, number of tenants and
total revenue. At December 31, 1997, Horizon Partnership owned and operated 37
outlet centers (including one power center) containing an aggregate of
approximately 9.9 million square feet of GLA located in 21 states.
The Horizon Properties are held by, and all of Horizon's operations are
conducted through, Horizon Partnership and its subsidiaries. Horizon is the
general partner of Horizon Partnership and, as of December 31, 1997, owned
approximately 85.1% of Horizon Partnership Units.
BUSINESS DEVELOPMENTS
In December 1997, Horizon Partnership acquired a 202,795 square foot outlet
center adjacent to its existing center in Gilroy, California for $38.5 million,
which was financed in its entirety by Horizon Partnership's primary lender.
On April 1, 1998, Horizon and Horizon Partnership consummated the C&C
Contribution Agreement which provided for the contribution of Horizon's
interests in the Dole Cannery Center and Lake Elsinore Center to Castle & Cooke.
See "The Transactions--Parties to the Transactions--Castle & Cooke."
Results of operations for 1997 include a charge for asset impairment of $7.8
million. At September 30, 1997, four outlet centers were reclassified by Horizon
Partnership as held for sale, in addition to the two classified as held for sale
at December 31, 1996. This reclassification was made as a result of sales
agreements to sell, subject to certain contingencies, all but one of these
outlet centers. The loss on asset impairment was recorded to reduce the carrying
value of these outlet centers to an amount equal to the estimated sales proceeds
less costs to dispose. In November 1997, one property sold for $4.5 million. The
remaining sale agreements were subsequently terminated. It was management's
decision to then pursue the sale of only one of the outlet centers classified as
held for sale. The remaining four outlet centers were reclassified to real
estate assets during the fourth quarter of 1997 at their fair values as of the
date of the decision not to sell.
BUSINESS STRATEGY
Horizon Partnership's business strategy consists primarily of increasing its
focus on the leasing of existing outlet centers, reducing general and
administrative expenses and limiting new development to the expansion of certain
selected existing outlet centers where Horizon Partnership anticipates high
demand for additional retail space. While Horizon Partnership may engage in new
developments or acquisitions, it will do so only in limited circumstances with
compelling business rationale. In addition, Horizon Partnership is also
attempting to divest itself of one of its centers, and may also divest itself of
additional centers.
SEASONALITY. Horizon Partnership's revenues are primarily derived from
long-term leases with five to ten year terms. Accordingly, Horizon Partnership's
revenues are not significantly affected by seasonal factors. Horizon Partnership
does, however, generate a small amount of additional revenue, primarily from
temporary tenant income, in the fourth quarter resulting from the holiday
season. Revenues in the fourth quarter of 1997 also include $3.0 million from
the acceleration of revenue from a two year lease of its New
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<PAGE>
Mexico outlet center that was terminated early. Revenues for each quarter of
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL 1997 FISCAL 1996
- --------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
March 31............................................................. $ 38,756 $ 37,004
June 30.............................................................. 38,761 37,215
September 30......................................................... 39,782 38,651
December 31.......................................................... 45,164 41,629
</TABLE>
FINANCING. In 1997, Horizon Partnership financed its operations, expansions
and development with undistributed cash flow, bank or other borrowings from
institutional lenders and the issuance of equity securities. As of December 31,
1997, Horizon Partnership had aggregate commitments under existing revolving
lines of credit of $4.0 million. While Horizon Partnership has additional
availability under its loan agreements with its lenders, additional borrowings
are effectively limited by the financial ratios Horizon Partnership is required
to maintain. As of December 31, 1997, Horizon Partnership had a debt to total
market capitalization (the aggregate of the market value of Horizon Common
Shares and its long-term debt) ratio of approximately 67%.
Horizon Partnership's general financing strategy has been not to incur
additional debt if such additional debt would cause its ratio of debt to total
market capitalization to exceed 40%, however, Horizon Partnership may incur
additional debt if the total consolidated debt of Horizon Partnership does not
exceed 55% of the then fair market value of the real estate owned by Horizon
Partnership. Due primarily to the decline in the market price of Horizon Common
Shares from the time the debt was incurred, Horizon Partnership's debt to total
market capitalization at December 31, 1997 exceeded 40%; however, Horizon
Partnership does not believe that its total consolidated debt exceeded 55% of
the current market value of the real estate owned by Horizon Partnership at
December 31, 1997. Horizon Partnership may from time to time re-evaluate and
modify its debt policies in light of then current economic conditions, relative
costs of debt and equity capital, the market value of its properties, growth and
acquisition opportunities and other factors. The governing instruments of
Horizon Partnership do not contain any limitations on the amount of indebtedness
Horizon Partnership may incur.
Any additional debt financing, including additional lines of credit, may be
secured by mortgages on its properties. Such mortgages may be recourse or
non-recourse and/or cross-collateralized and/or may contain cross-default
provisions. Horizon Partnership does not have a policy limiting the number of
mortgages that may be placed on, or the amount of indebtedness that may be
secured by, any particular property, but mortgage financing instruments usually
limit additional indebtedness on such properties.
COMPETITION
Horizon Partnership's outlet centers compete for customers primarily with
outlet centers built and operated by other developers, traditional shopping
malls and "off-price" retailers. Horizon Partnership believes that the location
of the other outlet centers near its centers generally is not harmful to its
business since a concentration of value retail stores tends to create a shopping
destination. Horizon Partnership carefully considers the degree of existing and
planned competition in a proposed area before deciding to build or acquire a new
center or expand an existing center.
Horizon Partnership's outlet centers compete to a limited extent with
various full- and off-price retailers in the highly fragmented retailing
industry. However, Horizon Partnership believes that the majority of its
customers visit outlet centers because they are intent on buying first-quality,
name brand goods at discounted prices. Traditional full- and off-price retailers
are often unable to provide such a variety of products at attractive prices.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following supplements the discussion of Horizon Partnership's primary
strategy as set forth elsewhere herein. Horizon Partnership's policies with
respect to those activities and the matters discussed below have been determined
by the Horizon Board of Directors, the sole general partner of Horizon
Partnership, and may be amended or revised from time to time at the discretion
of such Board of Directors without a vote of the Horizon Common Shareholders or
Horizon Partnership Unitholders.
INVESTMENT POLICIES. Horizon Partnership may expand existing properties,
develop new properties, purchase or lease income-producing properties for
long-term investment, expand and improve the properties it owns or sell such
properties, in whole or in part, when circumstances warrant. Horizon Partnership
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 Horizon Partnership.
While Horizon Partnership has emphasized equity real estate investments, it
may, in its discretion, invest in mortgages and other real estate interests.
Horizon Partnership has not previously invested in mortgages and it does not
presently intend to invest to a significant extent in mortgages or deeds of
trust, but it may invest in participating or convertible mortgages if it
concludes that it may benefit from the cash flow or any appreciation in the
value of the subject property.
Subject to the percentage of ownership limitations and gross income test
which must be satisfied to qualify as a REIT, Horizon may also invest in
securities of concerns engaged in real estate activities or in securities of
other issuers. Horizon Partnership does not intend to invest in the securities
of any other issuer for the purpose of exercising control; however, Horizon
Partnership may in the future acquire all or substantially all of the securities
or assets of other REITs, management companies or similar entities where such
investments would be consistent with Horizon Partnership's investment policies.
In any event, Horizon Partnership does not intend that its investments in
securities would require Horizon Partnership to register as an investment
company under the Investment Company Act of 1940, and Horizon Partnership would
divest securities before any such registration would be required
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
Horizon Partnership may, but does not presently intend to, make investments
other than as previously described. Horizon Partnership has authority to offer
its Horizon Partnership Units in exchange for property and to repurchase or
otherwise reacquire Horizon Partnership Units and may engage in such activities
in the future. During the last four years, Horizon Partnership has not engaged
in trading, underwriting or agency distribution or resale of securities of other
issuers and does not intend to do so. At all times, Horizon Partnership intends
to make investments in such a manner as to be consistent with the requirements
of the Code for Horizon to qualify as a REIT unless, because of changed
circumstances, the Board of Directors of Horizon determines that it is no longer
in the best interests of Horizon to qualify as a REIT.
ENVIRONMENTAL MATTERS
Under various federal, state and local 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 presence of toxic or hazardous substances can, under
certain circumstances, also result in claims for personal injury and property
damage. The presence of such substances may adversely affect the owner's ability
to sell such real estate or to borrow using such real estate as collateral. Such
costs or liabilities may exceed the value of such real estate. In addition,
persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal remediation of such
substances at the disposal or
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<PAGE>
treatment facility, whether or not such facility is owned by such person. In
connection with its ownership and operation of the Horizon Properties, Horizon
Partnership may be potentially liable for the costs described above. However,
Horizon Partnership has not been notified by any governmental authority of any
non-compliance, liability or other claim in connection with any of the Horizon
Properties. Horizon Partnership is not aware of any other environmental
condition with respect to any of the Horizon Properties that it believes would
have a material adverse effect on Horizon Partnership's business, assets,
results of operations, or competitive conditions nor does Horizon Partnership
believe that compliance with federal, state or local environmental laws and
regulations will have a material adverse effect on the capital expenditures,
earnings or competitive position of Horizon Partnership. It is Horizon
Partnership's policy to obtain Phase I environmental studies before acquiring
properties.
INSURANCE
Management believes that each of the Horizon Properties is covered by
adequate fire, flood, property and, in the case of the Gilroy, Pismo Beach,
Tracy and Tulare centers in California, the Burlington center in Washington and
the Laughlin center in Nevada, earthquake insurance provided by reputable
companies and with commercially reasonable deductibles and limits.
EMPLOYEES
As of December 31, 1997, Horizon and Horizon Partnership had 438 full-time
employees. Horizon Partnership believes that this staffing will be sufficient to
manage Horizon Partnership and its 37 outlet centers. Horizon Partnership
believes that its relations with its employees are good.
MANAGEMENT
The executive officers of Horizon, the sole general partner of Horizon
Partnership, and their ages and positions as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- ----------------------------------------------------------------
<S> <C> <C>
James S. Wassel 47 Chief Executive Officer, President and Director
Paul Comarato 46 Vice President of Operations/Asset Management
James S. Harris 49 Vice President of Retail Strategies
Stephen J. Moore 44 Senior Vice President of Marketing and Communications
Thomas A. Rumptz 37 Vice President of Real Estate
</TABLE>
JAMES S. WASSEL. Mr. Wassel joined Horizon as President in April 1997 and
has served as President and Chief Executive Officer of Horizon since he was made
CEO in June 1997. From June 1994 to April 1997, Mr. Wassel served as Senior Vice
President of Asset Management with Crescent Real Estate Equities of Fort Worth,
Texas ("Crescent"), where he oversaw asset management, strategic planning and
implementation of value enhancement programs for Crescent's 30 million square
foot portfolio of commercial real estate. From November 1990 to January 1993,
Mr. Wassel was a partner and Director of Asset Management with Trammell Crow
Realty Advisors of Dallas, Texas ("Trammell Crow"). While with Trammell Crow,
Mr. Wassel oversaw the disposition of $250 million in assets, the redevelopment
of other portfolio properties and was responsible for the asset management of a
portfolio of over $3.0 billion in assets. In addition, Mr. Wassel also served as
President of Trammell Crow Real Estate Investors, a REIT, where he oversaw the
revitalization of that company's under-performing industrial and office
properties. From September 1987 to October 1990, Mr. Wassel served as
Partner/Director of Asset Management with Jones Lang Wootton Realty Advisors of
New York, where he oversaw the asset management and administration of a $1.0
billion portfolio of diversified assets on behalf of public and corporate
pension funds and served as President and Chief Operating Officer of JLW
Management Group. Earlier in his career, Mr. Wassel served as a Vice President
with The Rouse Company of Columbia, Maryland ("Rouse"), where he directed
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<PAGE>
the management of Rouse's centers in the Northeast United States and oversaw
development and re-merchandising efforts at Rouse's South Street Seaport (New
York), Faneuil Hall (Boston), Willowbrook Mall (Wayne, New Jersey) and Paramus
Park Mall (Paramus, New Jersey) properties.
PAUL COMARATO. Mr. Comarato has served as Vice President of Operations of
Horizon since August 1997 and oversees all aspects of property level operations,
tenant construction and legal, business and strategic planning. From June 1994
to July 1997, Mr. Comarato held a similar position managing East Coast
Operations for Chelsea GCA Realty, where he managed nearly two million square
feet of GLA, including Chelsea's flagship center in Woodbury, New York and
oversaw the opening of that company's two most recent developments. From June
1990 to May 1994, Mr. Comarato served as General Manager at Wilmorite's Freehold
Raceway Mall in Freehold, New Jersey. Prior to his employment by Wilmorite, Mr.
Comarato served as General Manager of Paramus Park Mall in Paramus, New Jersey
and Willowbrook Mall in Wayne, New Jersey, both owned by The Rouse Company.
JAMES S. HARRIS. Mr. Harris currently serves as Vice President--Retail
Strategies of Horizon. Mr. Harris oversees the strategic merchandising efforts
of Horizon. Mr. Harris joined Horizon in July 1995 in conjunction with Horizon's
merger with and assimilation of McArthur/Glen, where Mr. Harris served as Vice
President from November 1990 until he was appointed Chief Operating Officer in
July 1993. Prior to his employment by McArthur/Glen, Mr. Harris spent six year
managing and leasing regional shopping centers to the Taubman Company of
Bloomfield Hills, Michigan.
STEPHEN J. MOORE. Mr. Moore has served as Vice President of Marketing and
Communications of Horizon since May 1997 and oversees all aspects of corporate
and property level marketing, advertising and public relations. From April 1994
to April 1997, Mr. Moore served as Director of the Commercial Division of The
Becker Group in Baltimore, Maryland. From April 1979 to March 1993, Mr. Moore
was with The Rouse Company, where he served as Group Director of Sales and
Marketing and directed all aspects of Marketing and Strategic Planning for
Rouse's East Coast properties in the United States and properties in Canada.
THOMAS A. RUMPTZ. Mr. Rumptz currently serves as Vice President of Real
Estate of Horizon, and oversees the expansion of existing centers as well as new
development and residual land sales. In addition, Mr. Rumptz has overseen the
management of joint venture investments and development relationships for
Horizon. During his eight year tenure with Horizon, Mr. Rumptz has served as
Vice President of Finance, Director of Real Estate, Senior Acquisitions Analyst
and Controller. Prior to his employment by Horizon, Mr. Rumptz served as Manager
of Investment Real Estate with Foremost Insurance of Grand Rapids, Michigan and
Business Manager at Robert Grooter Development Company, a Grand Rapids, Michigan
based developer of commercial and light industrial facilities, where he oversaw
leasing, accounting and operations.
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<PAGE>
THE HORIZON PARTNERSHIP PROPERTIES
PROPERTIES
As of December 31, 1997, Horizon Partnership's portfolio consisted of the
following properties: (i) 37 outlet centers located in California, Colorado,
Florida, Georgia, Hawaii, Indiana, Kentucky, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, Nevada, New Mexico, New York, Ohio, Pennsylvania, Texas,
Virginia, Washington and Wisconsin with an average size of approximately 267,800
square feet of GLA, aggregating approximately 9.9 million square feet of GLA;
and (ii) an aggregate of approximately 346 acres of outlots, retail pads and
expansion pads located adjacent to or near certain of Horizon Partnership's
existing outlet centers.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR OF
OPENING/
MOST TOTAL PERCENTAGE
RECENT APPROXIMATE GLA
EXPANSION/ GLA AS OF LEASED
NAME AND LOCATION OF NO. OF 12/31/97 AS OF
CENTER PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
Bellport Outlet Center(1)* 1992/1997 291,248 79.5% Anne Klein, Bass, Corning/
Patchogue, New York 3 Phases Revere, Dress Barn, Gap,
Jockey, Jones New York, Liz
Claiborne, London Fog,
Maidenform, Nike, Nine West,
OshKosh B'Gosh, Reebok, Van
Heusen, Vanity Fair
Outlets at Birch Run 1986/1996 720,983 97.3% American Eagle, Ann Taylor,
Birch Run, Michigan 18 Phases BOSE, Dansk, Eddie Bauer,
Espirt, Etienne Aigner, Fila,
Gap, Guess?, J. Crew, Lenox,
Levi's, Liz Claiborne,
Mikasa, Nautica, Nike, Nine
West, NordicTrack, Noritake,
OshKosh B'Gosh, Polo/Ralph
Lauren, Reebok, Sony,
Spiegel, Springmaid-Wamsutta,
Tommy Hilfiger, Van Heusen,
Vanity Fair, WestPoint
Stevens
Burlington Outlet Center 1989/1993 174,105 98.7% Bass, Bugle Boy, Fila, Guess?,
Burlington, Washington 3 Phases J. Crew, Jones New York, Liz
Claiborne, Madenform, Mikasa,
Tommy Hilfiger, Van Heusen
Calhoun Outlet Center 1992/1995 254,270 87.7% Dress Barn, J. Crew, Jones New
Calhoun, Georgia 2 Phases York, Liz Claiborne, London
Fog, Mikasa, Nike, Nine West,
OshKosh B'Gosh, Springmaid-
Wamsutta, Van Heusen
</TABLE>
186
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL PERCENTAGE
RECENT APPROXIMATE GLA
EXPANSION/ GLA AS OF LEASED
NAME AND LOCATION OF NO. OF 12/31/97 AS OF
CENTER PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
<S> <C> <C> <C> <C>
Conroe Outlet Center 1992/1994 281,436 92.4% Bass, Bugle Boy, Carter's
Conroe, Texas 3 Phases Childrenswear,
Corning/Revere, Elisabeth,
Etienne Aigner, Fila, Guess?,
Jockey, Levi's, Liz
Claiborne, Mikasa, Nike, Nine
West, OshKosh B'Gosh,
Springmaid-Wamsutta, Van
Heusen
Dry Ridge Outlet Center* 1991/1994 117,980 71.3% Guess?, Jones New York, Liz
Dry Ridge, Kentucky 2 Phases Claiborne, Mikasa, Nike, Nine
West, Van Heusen, Westport
Ltd.
Horizon Outlet Center-- 1989/1995 298,068 92.3% American Eagle, Ann Taylor,
Edinburgh 2 Phases Bugle Boy, Corning/Revere,
Edinburgh, Indiana Dansk, Eddie Bauer, Esprit,
Florsheim, Jockey, Lenox,
Levi's, Nautica, OshKosh
B'Gosh, Tommy Hilfiger,
Spiegel, Van Heusen
Finger Lakes Outlet 1995/1997 391,746 98.2% Bass, BOSE, Brooks Brothers,
Center(2) 3 Phases Bugle Boy, Calvin Klein,
Waterloo, New York Coach, Dockers, Esprit,
Etienne Aigner, Fila,
Florsheim, Gap, J. Crew,
Jockey, Jones New York,
Levi's, Liz Claiborne, London
Fog, Mikasa, Nautica, Nine
West, OshKosh B'Gosh,
Polo/Ralph Lauren, Reebok,
Springmaid-Wamsutta, Van
Heusen, Vanity Fair,
Waterford Wedgwood
Horizon Outlet Center-- 1985/1994 229,029 93.3% Ann Taylor, Bass, Bugle Boy,
Fremont 3 Phases Coach, Corning/Revere,
Fremont, Indiana Florsheim, Jockey, Jones New
York, Levi's, London Fog,
Mikasa, Nautica, OshKosh
B'Gosh, Polo/Ralph Lauren,
Reebok, Tommy Hilfiger, Van
Heusen
</TABLE>
187
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL PERCENTAGE
RECENT APPROXIMATE GLA
EXPANSION/ GLA AS OF LEASED
NAME AND LOCATION OF NO. OF 12/31/97 AS OF
CENTER PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
<S> <C> <C> <C> <C>
Outlets at Gilroy 1990/1995 576,699 97.1% Ann Taylor, Bass, BOSE, Brooks
Gilroy, California 5 Phases Brothers, Esprit, Etienne
Aigner, Eddie Bauer,
Florsheim, Gap, Guess?, J.
Crew, Jones New York, Lenox,
Levi's, Liz Claiborne, London
Fog, Mikasa, Nike,
NordicTrack, Noritake,
OshKosh B'Gosh, Reebok, Reed
& Barton, Springmaid-
Wamsutta, Timberland, Van
Heusen, Vanity Fair
Southwest Outlet Center 1989/1995 359,255 98.7% American Eagle, Corning/Revere,
at Hillsboro 3 Phases Eddie Bauer, Etienne Aigner,
Hillsboro, Texas Fila, Florsheim, Gap, Guess,
J. Crew, Jockey, Jones New
York, Levi's, Liz Claiborne,
Mikasa, Nike, Nine West,
OshKosh B'Gosh, Reebok,
Springmaid-Wamsutta, Van
Heusen
Horizon Outlet Center-- 1988/1990 185,769 72.8% Bass, Bugle Boy, Carter's
Holland* 2 Phases Childrenswear, Casual Corner,
Holland, Michigan Dress Barn, Eddie Bauer,
Florsheim, Jockey, Oneida,
Reebok, S&K Menswear, Van
Heusen
The Dole Cannery(3) 1996 254,999 40.5% Big Dog Sportswear, California
Honolulu, Hawaii 4 Phases Luggage, Dockers,
Leathermode, Levi's, 'Van's
Jeffersonville Outlet 1993/1994 314,102 82.3% Anne Klein, BD Baggies, Bass,
Center 3 Phases Big Dog Sportswear, Corning/
Jeffersonville, Ohio Revere, Dress Barn, Etienne
Aigner, Everything
Rubbermaid, Genuine Article,
Jones New York, Linen Barn,
Liz Claiborne, Maidenform,
Mikasa, Reebok, Spiegel, Van
Heusen
</TABLE>
188
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL PERCENTAGE
RECENT APPROXIMATE GLA
EXPANSION/ GLA AS OF LEASED
NAME AND LOCATION OF NO. OF 12/31/97 AS OF
CENTER PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
<S> <C> <C> <C> <C>
Lakeside Marketplace 1988/1991 268,736 97.0% Anne Klein, Bass, Brooks
Kenosha, Wisconsin 4 Phases Brothers, Dansk, Etienne
Aigner, Fila, Gap, Genuine
Article, J. Crew, Jones New
York, Liz Claiborne, London
Fog, Maidenform, Mikasa,
Nike, NordicTrack, Noritake,
Polo/Ralph Lauren, Reebok,
Timberland, Van Heusen,
Woolrich
Lake Elsinore Outlet 1991/1995 368,785 90.9% Bass, Bugle Boy,
Center(3) 4 Phases Corning/Revere, Esprit,
Lake Elsinore, California Etienne Aigner, Florsheim,
Jockey, Jones New York,
Levi's, Liz Claiborne, London
Fog, Maidenform, Mikasa,
Nike, Nine West, NordicTrack,
OshKosh B'Gosh, Reebok Sony,
Van Heusen, Vanity Fair
Horizon Outlet Center-- 1996 258,312 79.2% Bass, Big Dog Sportswear, Bugle
Laughlin* Boy, Corning/Revere, Dress
Laughlin, Nevada Barn, Levi's, Linen Barn,
Maidenform, Mikasa, OshKosh
B'Gosh, Polo/Ralph Lauren,
Reebok, Van Heusen
Berkshire Outlet Village 1997 224,363 99.2% Anne Klein, Coach, Dockers,
Lee, Massachusetts Etienne Aigner, Fila, Gap,
Guess?, J. Crew, Johnston &
Murphy, Jones New York,
Levi's, Liz Claiborne,
Mikasa, Nautica, Polo/Ralph
Lauren, Reebok, Tommy
Hilfiger, Waterford Wedgewood
Medford Outlet Center* 1991/1995 188,060 80.3% American Eagle, Bass, Bugle
Medford, Minnesota 2 Phases Boy, Casual Corner,
Corning/Revere, Dress Barn,
Etienne Aigner, Guess?,
Levi's, Liz Claiborne,
Mikasa, Nike, Van Heusen
</TABLE>
189
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL PERCENTAGE
RECENT APPROXIMATE GLA
EXPANSION/ GLA AS OF LEASED
NAME AND LOCATION OF NO. OF 12/31/97 AS OF
CENTER PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
<S> <C> <C> <C> <C>
Lighthouse Place 1987/1997 490,915 98.1% American Eagle, Ann Taylor,
Michigan City, Indiana 7 Phases Anne Klein, Bass, Big Dog
Sportswear, Brooks Brothers,
Coach, Corning/Revere, Crate
& Barrel, Eddie Bauer,
Esprit, Etienne Aigner, Gap,
Guess?, J. Crew, Jockey,
Jones New York, Lenox,
Levi's, Liz Claiborne, London
Fog, Mikasa, Nautica, Nine
West, NordicTrack, OshKosh
B'Gosh, Polo/Ralph Lauren,
Reebok, Spiegel, Timberland,
Tommy Hilfiger, Van Heusen
Horizon Outlet Center-- 1987/1989 230,139 87.3% Bass, Bugle Boy, Carter's
Monroe* 2 Phases Childrenswear, Casual Corner,
Monroe, Michigan Corning/Revere, Dress Barn,
Hit or Miss, Levi's, Mikasa,
Nike, Van Heusen, WestPoint
Stevens
Lakeshore Marketplace* 1995 360,592 74.3% Barnes & Noble, Ben Franklin,
Norton Shores, Michigan Di's Hallmark, Dunham's
Sporting Goods, Elder-
Beerman, Great Party, Old
Navy, TJ Maxx, Toys "R" Us
Horizon Outlet Center-- 1989/1991 259,443 85.4% Bass, Bugle Boy, Dansk, Eddie
Oshkosh 2 Phases Bauer, Florsheim, Jockey,
Oshkosh, Wisconsin Jones New York, Lands' End,
Lenox, Levi's, London Fog,
Nautica, OshKosh B'Gosh,
Polo/Ralph Lauren, Tommy
Hilfiger, Van Heusen
Perryville Outlet Center 1990 148,134 93.9% Bass, Dan River, Elisabeth,
Perryville, Maryland Etienne Aigner, Florsheim,
Jones New York, Liz
Claiborne, Mikasa, Nike, Van
Heusen
Pismo Beach Outlet Center 1994 147,576 98.0% Anne Klein, Bass, Big Dog
Pismo Beach, California Sportswear, Florsheim,
Jockey, Jones New York,
Levi's, London Fog,
Maidenform, Mikasa, Nine
West, Tommy Hilfiger, Van
Heusen
</TABLE>
190
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL PERCENTAGE
RECENT APPROXIMATE GLA
EXPANSION/ GLA AS OF LEASED
NAME AND LOCATION OF NO. OF 12/31/97 AS OF
CENTER PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
<S> <C> <C> <C> <C>
Chesapeake Village at 1989/1993 220,415 100.0% Big Dog Sportswear, Brooks
Queenstown 5 Phases Brothers, Corning/Revere,
Queenstown, Maryland Dockers, Etienne Aigner,
Guess?, Jones New York,
Lenox, Levi's, Liz Claiborne,
Nike, Nine West, Springmaid-
Wamsutta, St. John Knits, Van
Heusen, Vanity Fair
Sealy Outlet Center* 1995/1996 191,865 90.1% Bass, Bugle Boy, Dress Barn,
Sealy, Texas 2 Phases Florsheim, J. Crew, Jockey,
Jones New York, Liz
Claiborne, Mikasa, Nine West,
OshKosh B'Gosh, Reebok,
Spiegel, Springmaid-Wamsutta,
Van Heusen
Silverthorne Factory 1988/1993 257,470 92.9% American Eagle, Anne Klein,
Stores 3 Phases Bass, Big Dog Sportswear,
Silverthorne, Colorado Dansk, Eddie Bauer, Fila,
Gap, Genuine Article, J.
Crew, Jones New York, Liz
Claiborne, London Fog,
Maidenform, Mikasa, Nike,
Nine West, Tommy Hilfiger,
Van Heusen
Horizon Outlet Center-- 1990 199,962 80.0% Bass, Brooks Brothers, Bugle
Somerset* Boy, Casual Corner,
Somerset, Pennsylvania Corning/Revere, Dress Barn,
Jones New York, Levi's,
Mikasa, Polo/Ralph Lauren,
S&K Menswear, Van Heusen
Tracy Outlet Center 1994 153,000 94.5% Anne Klein, Big Dog Sportswear,
Tracy, California Casual Corner,
Corning/Revere, Fila, Jones
New York, Levi's,
Leathermode, Liz Claiborne,
Mikasa, Nine West, OshKosh
B'Gosh, Reebok, Sony
Horizon Outlet Center-- 1990/1996 147,455 71.5% Bass, Bugle Boy, Carter's
Traverse City* 2 Phases Childrenswear,
Traverse City, Michigan Corning/Revere, Dansk,
Levi's, London Fog, S&K
Menswear, Van Heusen
</TABLE>
191
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL PERCENTAGE
RECENT APPROXIMATE GLA
EXPANSION/ GLA AS OF LEASED
NAME AND LOCATION OF NO. OF 12/31/97 AS OF
CENTER PHASES (SQ. FT.) 12/31/97 CERTAIN TENANTS
<S> <C> <C> <C> <C>
Horizon Outlet Center-- 1995 139,433 83.7% Bass, Big Dog Sportswear,
Tulare* Corning/Revere, Jones New
Tulare, California York, Linen Barn, Maidenform,
Mikasa, Polo/Ralph Lauren,
Reebok, Van Heusen
Horizon Outlet Center-- 1994/1995 323,463 94.4% Ann Taylor, Anne Klein, Big Dog
Vero Beach 2 Phases Sportswear, BOSE, Bugle Boy,
Vero Beach, Florida Dansk, Etienne Aigner,
Jockey, Jones New York,
Levi's, Liz Claiborne, London
Fog, Mikasa, Nautica, Nine
West, Polo/Ralph Lauren,
Reebok, Reed & Barton,
Spiegel, Springmaid-Wamsutta,
Timberland, Van Heusen
Warrenton Outlet Center* 1993/1995 200,363 81.7% Bass, Corning/Revere, Jockey,
Warrenton, Missouri 2 Phases Jones New York, Levi's, Linen
Barn, Liz Claiborne, Mikasa,
Nike, Nine West, Van Heusen
Berkeley Commons Outlet 1988/1995 274,565 100.0% American Eagle, Anne Klein,
Center 4 Phases Bass, BOSE, Brooks Brothers,
Williamsburg, Virginia Coach, Eddie Bauer, Etienne
Aigner, Guess?, J. Crew,
Jones New York, Liz
Claiborne, Lladro, Mikasa,
Nautica, Nike, Nine West,
NordicTrack, OshKosh B'Gosh,
Reebok, Timberland, Tommy
Hilfiger, Van Heusen,
Waterford Wedgewood
Horizon Outlet Center 1992/1994 249,208 92.6% American Eagle, Big Dog
Woodbury 3 Phases Sportswear, Bugle Boy, Casual
Woodbury, Minnesota Corner, Corning/Revere, Eddie
Bauer, Fila, Levi's, Reebok,
Spiegel, Van Heusen,
WestPoint Stevens
New Mexico Outlet 1993 155,170 --(4)
Center(4)* 1 Phase
Algodones, New Mexico
TOTAL HORIZON PORTFOLIO 9,907,113 89.4 %
</TABLE>
192
<PAGE>
- ------------------------
NOTES:
* Horizon Partnership will transfer its interests in this property to HGP LP
upon the consummation of the Transactions.
(1) Owned by a partnership in which the Company has an interest.
(2) Owned by a joint venture with an institutional investor.
(3) Horizon's interests in this property were transferred to Horizon/C&C LLC
pursuant to the C&C Contribution Agreement. See "The Transactions--Parties
to the Transactions--Castle & Cooke."
(4) As of January 31, 1998, the center was unoccupied and held for sale. See
Note 3 to the Consolidated Financial Statements.
EXECUTIVE OFFICES
Horizon Partnership owns its 35,000 square foot executive offices in Norton
Shores, Michigan.
STATE INFORMATION
The following table indicates, as of December 31, 1997, certain information
regarding the outlet centers presented by state.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NUMBER OF TOTAL GLA PERCENTAGE OF GLA LEASED ON OCCUPIED
STATE PROPERTIES (SQ. FT.) TOTAL GLA DECEMBER 31, 1997 BASE RENT
- -------------------------------------- --------------- ---------- --------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
California............................ 5 1,385,493 14.0% 93.9% $ 22,706,178
Colorado.............................. 1 257,470 2.6 92.9 3,937,864
Florida............................... 1 323,463 3.3 94.4 4,125,131
Georgia............................... 1 254,270 2.6 87.7 2,852,791
Hawaii................................ 1 254,999 2.6 40.5 723,616
Indiana............................... 3 1,018,012 10.3 95.3 12,549,876
Kentucky.............................. 1 117,980 1.2 71.3 545,725
Maryland.............................. 2 368,549 3.7 97.6 5,059,763
Massachusetts......................... 1 224,363 2.3 99.2 3,745,012
Michigan.............................. 5 1,644,938 16.6 85.8 15,353,883
Minnesota............................. 2 437,268 4.4 87.3 4,221,059
Missouri.............................. 1 200,363 2.0 81.7 2,026,827
Nevada................................ 1 258,312 2.6 79.2 3,016,854
New Mexico............................ 1 155,170 1.5 -- --
New York.............................. 2 682,994 6.9 90.2 9,069,950
Ohio.................................. 1 314,012 3.2 82.3 3,035,163
Pennsylvania.......................... 1 199,962 2.0 80.0 1,363,240
Texas................................. 3 832,556 8.4 94.6 10,226,495
Virginia.............................. 1 274,565 2.8 100.0 4,730,477
Washington............................ 1 174,105 1.7 98.7 2,192,176
Wisconsin............................. 2 528,179 5.3 91.3 6,466,519
--
---------- ----- ----- --------------
Total............................... 37 9,907,113 100.0% 89.4% $ 117,948,599
--
--
---------- ----- ----- --------------
---------- ----- ----- --------------
</TABLE>
UNDEVELOPED PARCELS
As of December 31, 1997, Horizon Partnership owned undeveloped parcels
aggregating approximately 346 acres of outlots, retail pads and expansion pads
located near certain of Horizon Partnership's outlet
193
<PAGE>
centers. Horizon Partnership intends to pursue an aggressive marketing program
to lease, develop or sell the parcels owned by it. However, the sale of property
by a REIT is subject to significant restrictions imposed by the Code.
Accordingly, such restrictions may limit the number, size and timing of such
sales.
TENANTS
GENERAL. Horizon Partnership's portfolio features a diverse mix of tenants.
Horizon Partnership's tenants are typically the retailing outlet of large
publicly traded manufacturers. Substantially all of the leases require tenants
to pay their pro rata share of all property operating expenses and real estate
taxes.
The following table sets forth certain information with respect to each
tenant which individually accounts for more than 2% of Horizon Partnership's
total base rental revenues or total occupied GLA for the year ended December 31,
1997 and to all other tenants as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OCCUPIED TOTAL ANNUAL PERCENTAGE OF BASE RENTAL
TENANT OF STORES GLA (SF) BASE RENT OCCUPIED GLA INCOME
- ---------------------------------------------- ----------- ---------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Phillips-Van Heusen Retail Division........... 123 576,174 $ 8,142,269 6.7% 6.6%
Spiegel, Inc.................................. 18 283,477 3,000,148 3.3 2.4
LCI Holdings, Inc............................. 31 271,413 2,821,250 3.2 2.3
Dress Barn, Inc............................... 34 220,942 3,320,674 2.6 2.7
Sara Lee Corporation.......................... 65 214,043 2,971,922 2.5 2.4
Mikasa, Inc................................... 27 208,647 2,543,044 2.4 2.1
Brown Retail Group, Inc....................... 46 204,706 3,041,900 2.4 2.5
Melru Corporation............................. 59 182,090 2,979,331 2.1 2.4
Reebok International Ltd...................... 21 176,086 2,193,448 2.0 1.8
Other......................................... 1,664 6,253,792 91,468,013 72.8 74.8
</TABLE>
TENANT LEASES. During 1997, leases for approximately 621,000 square feet of
GLA in Horizon Partnership's outlet centers came up for renewal. Of this amount,
approximately 487,000 renewed at an average rental rate of $15.10, representing
an 8.4% increase from 1996 rental rates. In addition to renewals, in 1997,
Horizon Partnership entered into new leases totaling 875,000 square feet of GLA
at an average base rental rate of $14.70 per square foot with an average base
term of 5.0 years. Horizon Partnership's average tenant space is approximately
4,000 square feet of GLA. As of December 31, 1997, executed leases at Horizon
Partnership's outlet centers had an average base rent of $14.99 per square foot.
The following table sets forth, as of December 31, 1997, tenant lease
expirations for the next ten years at Horizon Partnership's outlet centers
(assuming that none of the tenants exercises any renewal option):
<TABLE>
<CAPTION>
APPROXIMATE GLA
YEAR ENDING DECEMBER 31, # OF LEASES (SQ. FT.) ANNUAL BASE RENT
- ------------------------------------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
1998....................................... 266 805,340 $ 11,237,577
1999....................................... 319 1,056,049 16,302,012
2000....................................... 425 1,433,374 22,213,053
2001....................................... 367 1,361,989 21,489,277
2002....................................... 365 1,390,871 21,658,273
2003....................................... 96 517,018 7,161,875
2004....................................... 71 379,366 5,452,987
2005....................................... 54 421,502 4,825,259
2006....................................... 41 412,316 4,122,149
2007....................................... 25 183,164 2,153,703
</TABLE>
194
<PAGE>
MORTGAGE DEBT
The following table sets forth, as of December 31, 1997, certain information
regarding the mortgages currently encumbering Horizon Partnership's outlet
centers.
<TABLE>
<CAPTION>
12/31/97 ESTIMATED BALLOON
ANNUAL PRINCIPAL ANNUAL DEBT MATURITY PAYMENT AT
PROPERTY INTEREST RATE BALANCE SERVICE DATE MATURITY
- --------------------------------- ----------------- -------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Perryville, MD................... 8.625 % $ 9,741,064 $ 976,400 Nov-05 8,223,900
Bellport, NY..................... 10.25 10,891,034 1,284,000 Jun-18
Edinburgh, IN.................... 9.50 6,985,835 754,900 Jun-01 6,619,300
Edinburgh, IN.................... 9.50 10,212,077 1,088,800 May-01 9,748,900
Birch Run, MI.................... 9.50 22,363,938 2,411,400 Jun-02 20,797,500
Birch Run, MI.................... 9.50 4,861,727 524,200 Jun-02 4,521,200
Birch Run, MI.................... 9.50 17,502,221 1,887,200 Jun-02 16,276,300
Birch Run, MI.................... 9.50 10,471,570 1,111,344 June-01 10,003,600
Williamsburg, VA................. 8.75 14,004,323 1,633,100 Nov-00 12,698,700
Williamsburg, VA................. 8.25 9,759,024 1,022,500 Oct-00 9,090,600
Vero Beach, FL................... 7.875 26,798,254 2,528,900 Nov-05 22,284,000
Woodbury, MN..................... 7.875 17,865,503 1,685,900 Nov-05 14,856,000
Conroe, TX....................... 9.40 6,794,610 794,200 May-02 5,966,900
Conroe, TX....................... 9.40 1,900,601 222,100 May-02 1,669,100
Conroe, TX....................... 9.40 8,695,210 1,016,300 May-02 7,636,000
Jeffersonville, OH............... 9.40 7,459,827 871,900 May-02 6,551,000
Jeffersonville, OH............... 9.40 9,645,511 1,127,400 May-02 8,470,500
Jeffersonville, OH............... 9.40 2,185,684 255,500 May-02 1,919,400
First Horizon.................... 8.57 63,761,603 6,319,700 Mar-06 54,458,700
Burlington, WA
Fremont, IN
Kenosha, WI
Oshkosh, WI
Second Horizon................... 9.06 98,668,991 9,639,400 Oct-06 90,933,800
Hillsboro, TX
Lake Elsinore, CA
Pismo Beach, CA
Queenstown, MD
Tracy, CA
Third Horizon.................... LIBOR + 1.75 244,195,696 8,109,500 Jul-99 244,195,696
Calhoun, GA
Dry Ridge, KY
Gilroy, CA
Holland, MI
Laughlin, NV
Lee, MA
Medford, MN
Michigan City, IN
Monroe, MI
Norton Shores, MI
Sealy, TX
Silverthorne, CO
Somerset, PA
Traverse City, MI
Tulare, CA
Warrenton, MO
Third Horizon.................... LIBOR + 2.25 9,724,304 200,800 Jul-99 9,724,304
Other............................ 6.90-10.0 7,259,783 883,000 Aug-00-Dec-02 3,159,431
-------------- ------------- -----------------
$ 621,748,380 $ 46,348,400 $ 569,804,831
-------------- ------------- -----------------
-------------- ------------- -----------------
</TABLE>
195
<PAGE>
TAXES
At December 31, 1997, Horizon Partnership had an aggregate cost basis of
$860.0 million in its real estate assets for federal income tax purposes.
Depreciation for income tax purposes is calculated using the straight line
method over the estimated useful lives of the assets, which for buildings placed
in service prior to May 13, 1993 is 31.5 years (resulting in a rate of 3.2% per
year) and buildings placed in service after May 13, 1993 is 39 years (resulting
in a rate of 2.6% per year).
Horizon Partnership's aggregate real estate tax obligation during the year
ended December 31, 1997 was approximately $13.3 million. Estimated aggregate
1998 real estate taxes, taking into account planned expansions, are
approximately $14.4 million.
196
<PAGE>
POLICIES OF NEW PRIME
WITH RESPECT TO CERTAIN ACTIVITIES
The following section sets forth the policies expected to be implemented by
New Prime upon the effectiveness of the Transactions with respect to certain
matters. These policies may be amended or revised from time to time at the
discretion of the New Prime Board of Directors without a vote of the
stockholders of New Prime.
INVESTMENT OBJECTIVES AND POLICIES
New Prime's investment objectives will be to provide regular quarterly cash
dividends to its stockholders and achieve long-term capital appreciation through
increases in cash flow of the New Prime Properties. New Prime will seek to
accomplish these objectives through the ownership and the enhanced operation of
the New Prime Properties, the selective development and acquisition of
additional retail properties, particularly outlet centers, and, where
appropriate, renovations and expansions of these properties. New Prime will seek
opportunities to develop factory outlet centers throughout the United States and
abroad. All of New Prime's investment activities will be conducted through Prime
Partnership, the Prime Finance Corporations, the partnerships of New Prime which
hold New Prime Properties (collectively, the "New Prime Partnerships") and its
subsidiaries, although New Prime also may hold temporary cash investments from
time to time pending investment or distribution to stockholders. New Prime's
investments will not be restricted to any geographic area or any specific type
of property. New Prime will not have any limit on the amount or percentage of
assets invested in any property.
New Prime will be able to purchase or lease New Prime Properties for
long-term investment, expand and improve New Prime Properties owned at the time
of the Transactions, or sell such New Prime Properties, in whole or in part,
when circumstances warrant. New Prime will also be able to participate with
other entities in property ownership, through partnerships or other types of
co-ownership arrangements. Equity investments may be subject to existing
mortgage financing and other indebtedness which will have priority over the
equity interest of New Prime.
While New Prime's investment policy will emphasize equity real estate
investments, it may, in its discretion, invest in mortgages, stock of other real
estate investment trusts and other real estate interests. New Prime will not
plan on investing in the securities of other issuers except in connection with
New Prime's acquisitions of indirect interests in New Prime Properties (normally
through partnership interests in special purpose partnerships owning title to
New Prime Properties) and investments in short-term income producing investments
such as overnight repurchase agreements and 30-day commercial paper. Any such
investments in the securities of other issuers will be subject to the percentage
of ownership limitations and gross income tests necessary for REIT
qualification. In any event, New Prime will not intend for its investment in
securities to require it to register as an "investment company" under the
Investment Company Act of 1940, and New Prime will intend to divest securities
before any such registration would be required.
DISTRIBUTION AND DIVIDEND POLICY
New Prime's dividend policy with respect to New Prime Series A Preferred
Shares, New Prime Series B Preferred Shares, New Prime Series C Preferred Shares
and New Prime Common Shares will be to continue to pay $2.625, $2.125, $1.18 and
$1.18 per annum per share, respectively, or such greater amount as may be
required by the New Prime Charter. Distributions and dividends will be
determined by the New Prime Board of Directors and will be dependent on a number
of factors, including continuing favorable operations at the New Prime
Properties. Prime's current policy is to pay the same amount of dividends on the
underlying units of Prime Partnership as are paid on the respective shares of
Prime. No assurance will be given that distributions or dividends will continue
to be paid or as to the amount of such distributions or dividends.
197
<PAGE>
FINANCING POLICIES
New Prime will have a policy of not incurring debt if at such time it would
result in a ratio of debt-to-total market capitalization of more than 60%. Such
policy will allow New Prime to incur more debt as a ratio of its total market
capitalization. The organizational documents of New Prime, however, will not
limit the amount or percentage of indebtedness that New Prime may incur. New
Prime may from time to time modify its debt policy in light of then current
economic conditions, relative costs of debt and equity capital, the market
values of its New Prime Properties, general conditions in the market for debt
and equity securities, fluctuations in the fair market prices of New Prime
Common Shares, growth and acquisition opportunities and other factors.
Accordingly, New Prime will be able to increase or decrease its debt-to-total
market capitalization ratio above or below the limit described above. If the New
Prime Board of Directors determines that additional funding is required, New
Prime may be authorized to 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 taxable income), or a combination of
these methods.
In the event that the New Prime Board of Directors determines to raise
additional equity capital, it will have the authority, without stockholder
approval (except for the issuance of New Prime Preferred Shares senior to or on
parity with New Prime Series A Preferred Shares or senior to New Prime Series B
Preferred Shares or New Prime Series C Preferred Shares) to issue additional
shares of New Prime Common Shares or Preferred Shares of New Prime in any manner
and on such terms and for such consideration it deems appropriate, including in
exchange for property. Existing stockholders would have no preemptive right to
purchase shares issued in any offering and any such offering might cause a
dilution of a stockholder's investment in New Prime.
Any additional borrowings will be made through Prime Partnership, the Prime
Finance Corporations, New Prime Property Partnerships or any additional New
Prime Property Partnership, although New Prime also may incur indebtedness which
may be re-loaned to Prime Partnership. Indebtedness incurred by New Prime may be
in the form of bank borrowings, secured and unsecured, and publicly and
privately placed debt instruments. Indebtedness to be incurred by Prime
Partnership, the Prime Finance Corporations, New Prime Property Partnerships or
any additional New Prime Property Partnership may be in the form of purchase
money obligations to the sellers of New Prime Properties, publicly or privately
placed debt instruments, financing from banks, institutional investors or other
lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by Prime Partnership, the
Prime Finance Corporations, New Prime Property Partnerships or any new property
partnership. Such indebtedness may be recourse to all or any part of the
property of New Prime, Prime Partnership, the Prime Finance Corporations, New
Prime Property Partnership or any new property partnership, or may be limited to
the particular property to which the indebtedness relates. The proceeds from any
borrowings by New Prime, Prime Partnership, the Prime Finance Corporations, any
New Prime Property Partnership or any new property partnership may be used for
the payment of distributions, for working capital, to refinance existing
indebtedness or to finance acquisitions, expansions or development of
additioinal New Prime Properties; provided that New Prime will not be able to
borrow to pay distributions to stockholders except through Prime Partnership.
CONFLICT OF INTEREST POLICIES
New Prime will adopt certain policies and enter into various agreements
designed to reduce conflicts of interest involving the owners and management of
New Prime.
Michael W. Reschke, the Chairman of the Board of New Prime and the principal
stockholder of PGI, will continue to devote a considerable portion of his time
to the management of PGI's continuing commercial real estate operations provided
he is able to perform duties customary to his position as Chairman of the Board
of Prime, including overseeing the affairs and proceedings of such board. Mr.
Reschke and PGI have agreed that, so long as PGI and/or its affiliates own a 5%
or greater economic
198
<PAGE>
interest in New Prime or Mr. Reschke is Chairman of the Board of New Prime,
neither Mr. Reschke nor PGI (including its affiliates) will develop or acquire
any interest in any retail property that is within the primary business of New
Prime as determined from time to time by a majority vote of the independent
directors of New Prime. Excluded from the foregoing restrictions are all
properties in which PGI had an interest prior to the Prime IPO, any retail
projects developed or acquired by PGI in Spain and PGI's or Mr. Reschke's
ownership of less than 5% of any class of securities listed on a national
securities exchange. In addition, Michael W. Reschke and PGI may, subject to
certain limitations, (i) provide mortgage financing or other debt financing
(including in the form of preferred equity positions) to any person which is
engaged in the primary business of Prime and (ii) own equity interests in, and
engage in the management of, HGP. For so long as Mr. Reschke serves as an
executive officer or director of HGP, HGP will be prohibited from acquiring or
developing any factory outlet center that is within a 50 mile radius of any
factory outlet center owned or operated by New Prime.
Messrs. Rosenthal and Carpenter have entered into employment agreements that
contain noncompetition provisions designed to reduce potential conflicts of
interest. These provisions prohibit Messrs. Rosenthal and Carpenter from
engaging directly or indirectly in the primary business of Prime (as described
above) during the period each is employed with New Prime and for an additional
24-month period following any termination of such employment either by New Prime
for cause or by the officer voluntarily.
New Prime will form the Independent Directors Committee to consider and take
such actions and make such approvals as are appropriate to reduce or eliminate
any potential or apparent conflict of interest which may arise in connection
with any proposed action or transaction involving New Prime.
As holders of Prime Partnership Common Units, the limited partners of Prime
Partnership may suffer different and more adverse tax consequences than New
Prime upon the sale or refinancing of certain of the New Prime Properties that
were contributed to Prime in connection with the Prime IPO and therefore the
limited partners of Prime Partnership and New Prime may have different
objectives regarding the appropriate pricing and timing of any sale or
refinancing of certain of the New Prime Properties. The decision to proceed with
any such sale or refinancing will be made by the New Prime Board of Directors.
The Prime Partnership Agreement will provide that New Prime has no obligation to
consider the separate interests of the limited partners of Prime Partnership,
including tax consequences to limited partners, in deciding whether to sell a
property.
In addition, pursuant to Maryland law (the jurisdiction under which New
Prime will be incorporated) and the bylaws of New Prime, each of the directors
will be obligated to offer to New Prime any opportunity which comes to such
director and which New Prime could reasonably be expected to have an interest in
pursuing. In addition, under Maryland law, any contract or transaction between
New Prime and any director or any entity in which the director has a material
financial interest will be voidable unless (a) it is approved after disclosure
of the interest, by an affirmative vote of a majority of disinterested directors
or by the affirmative vote of a majority of the votes cast by disinterested
stockholders, or (b) it is fair and reasonable to New Prime.
WORKING CAPITAL RESERVES
New Prime will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts the Executive Committee of the New Prime Board
of Directors determines to be adequate to meet normal contingencies in
connection with the operation of New Prime's business.
NEW PRIME'S RELATIONSHIP WITH HGP
Neither New Prime nor Prime Partnership is required or intends to provide
assistance or services to HGP other than as required pursuant to the terms of
the Prime Guarantee. In order to assist HGP to obtain financing, Prime
Partnership has agreed to guarantee $10,000,000 in indebtedness under the HGP
199
<PAGE>
Credit Facility. The Prime Guarantee will terminate if HGP raises at least
$50,000,000 in equity and uses no less than $50,000,000 of such proceeds to
repay outstanding principal under the HGP Credit Facility pursuant to the Prime
Guarantee. HGP will be required to pay Prime Partnership an annual fee equal to
4.0% of the aggregate amount of HGP's obligations subject to such Prime
Guarantee. See "Horizon Group Properties, L.P.--HGP's Management's Discussion
and Financial Analysis of HGP LP--Liquidity and Capital Resources."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
New Prime will have the authority to offer its shares or other equity or
debt securities in exchange for property and to repurchase or otherwise
reacquire its shares or any other securities. Similarly, New Prime may offer
additional interests in Prime Partnership that are exchangeable into New Prime
Common Shares or, at New Prime's option, cash in exchange for property. New
Prime also may make loans to Prime Partnership. New Prime will expect to issue
New Prime Common Shares to holders of interests in Prime Partnership upon
exchange thereof, subject to certain restrictions and limitations. Any such
election by New Prime with respect to Prime Partnership Common Units held by
PGI, Messrs. Rosenthal and Carpenter or any other officer or director of New
Prime or certain other parties will be made with the approval of the independent
directors. New Prime will have no formal policy with respect to loans to other
persons. New Prime will expect to make loans to its employees from time to time
in the ordinary course of its business which either singly or in the aggregate,
will not be material to New Prime. New Prime will not intend to engage in
trading, underwriting or agency distribution or sale of securities of other
issuers. At all times, New Prime will intend to make investments in such manner
as to be consistent with the requirements of the Code for New Prime to continue
to qualify as a REIT unless, because of changing circumstances or changes in the
Code (or in Treasury Regulations), the New Prime Board of Directors with the
consent of the holders of the majority of the votes entitled to be cast on such
matter, determine that it is no longer in the best interests of New Prime to
continue to be qualified as a REIT.
LIQUIDITY AND CAPITAL RESOURCES OF NEW PRIME FOLLOWING THE TRANSACTIONS
PLANNED DEVELOPMENT
Management believes that there is sufficient demand for continued
development of new factory outlet centers and expansions of certain existing
factory outlet centers. New Prime expects to open approximately 751,000 square
feet of GLA during 1998 including two new factory outlet centers currently under
construction. At December 31, 1997, the budgeted remaining capital expenditures
for 1998 planned developments aggregated approximately $78.2 million, while
anticipated capital expenditures related to the completion of expansions of
existing factory outlet centers opened during 1997 (aggregating 224,000 square
feet of GLA) approximated $5.2 million.
Management believes that New Prime has sufficient capital and capital
commitments to fund the remaining capital expenditures associated with its 1997
and 1998 development activities. These funding requirements are expected to be
met, in large part, with the proceeds from various loan facilities, including
the financing of certain unencumbered properties (See "--Debt Transactions"). If
adequate financing for such development and expansion is not available, New
Prime may not be able to develop new centers or expand existing centers at
currently planned levels.
New Prime currently plans to open one new factory outlet center and several
expansions in 1999 that are expected to contain approximately 775,000 square
feet of GLA, in the aggregate, and have a total expected development cost of
approximately $98.0 million. New Prime expects to fund the development cost of
these projects from (i) certain line of credit facilities, (ii) joint venture
partners, (iii) retained cash flow from operations, (iv) construction loans, and
(v) the potential sale of common or preferred equity in the public or private
capital markets. As of December 31, 1997, there were no material commitments
with regard to the construction of the new factory outlet centers and expansions
scheduled to open in 1999.
200
<PAGE>
There can be no assurance that New Prime will be successful in obtaining the
required amount of equity
capital or debt financing for the 1999 planned openings or that the terms of
such capital raising activities will be as favorable as New Prime has
experienced in prior periods.
NOMURA LOAN FACILITIES
New Prime has obtained a loan commitment from Nomura Asset Capital
Corporation to provide $305.0 million of debt financing under various debt
facilities (collectively, the "Nomura Loan Facilities").
The $305.0 million loan commitment to New Prime contemplates (i) a $180.0
million nonrecourse permanent loan (the "Permanent Loan"), (ii) an $85.0 million
full recourse bridge loan (the "Bridge Loan"), and (iii) a $40.0 million full
recourse unsecured corporate line of credit (the "Unsecured Corporate Line").
The Permanent Loan will (i) be collateralized by first mortgages on four factory
outlet centers, (ii) bear a fixed rate of interest equal to the yield on the
10-year U.S. Treasury plus 1.50%, and (iii) require monthly principal and
interest payments pursuant to a 27-year amortization schedule. The Bridge Loan
will (i) be collateralized by first mortgages on six factory outlet centers,
(ii) bear a variable rate of interest equal to 30-day LIBOR plus 1.25%, (iii)
mature in three years, and (iv) require monthly interest-only payments. The
Unsecured Corporate Line will (i) bear a variable rate of interest equal to
30-day LIBOR plus 1.75%, (ii) mature in three years, and (iii) require monthly
interest-only payments.
The proceeds from the Permanent Loan, the Bridge Loan, and the Unsecured
Corporate Line will be used (i) to repay $144.7 million of debt outstanding,
(ii) for the payment of loan fees and closing costs of approximately $2.2
million, (iii) for the purchase of Horizon's joint venture partner's minority
interest in the Finger Lakes Center for $46.1 million, (iv) for the payment of
the merger transaction costs of approximately $18.7 million, (v) for the payment
of the Prime Special Distribution and Prime Partnership Special Distribution of
$21.8 million, (vi) for development and acquisition activities, and (vii) for
general corporate purposes.
DEBT REPAYMENTS AND PREFERRED STOCK DIVIDENDS
New Prime's aggregate indebtedness was $1.1 billion at December 31, 1997. At
December 31, 1997, such indebtedness had a weighted average maturity of 7.0
years and bore interest at a weighted average interest rate of 7.8% per annum.
At December 31, 1997, $575.1 million, or 52.5%, of such indebtedness bore
interest at fixed rates and $520.7 million, or 47.5%, of such indebtedness,
including $28.3 million of tax-exempt bonds, bore interest at variable rates. Of
the variable rate indebtedness outstanding at December 31, 1997, $356.0 million
is scheduled to convert to a fixed rate of 7.782% in November 1998 for the
remaining five-year term of such indebtedness.
At December 31, 1997, New Prime held interest rate protection contracts on
$28.3 million of its floating rate tax-exempt indebtedness which expire in 1999
and approximately $356.0 million of other floating rate indebtedness which
expire in November 1998 (or approximately 73.8% of its total floating rate
indebtedness). In addition, New Prime held additional interest rate protection
contracts on $43.9 million (of which $22.0 million expires in July 1998 and
$21.9 million expires in April 1999) of the $356.0 million floating rate
indebtedness to further reduce New Prime's exposure to increases in interest
rates.
New Prime's ratio of debt to total market capitalization at December 31,
1997 (defined as total long-term debt divided by the sum of: (a) the aggregate
market value of the outstanding shares of New Prime Common Shares, assuming the
full exchange of Prime Partnership Common Units, Prime Partnership Series C
Preferred Units and New Prime Series C Preferred Shares into New Prime Common
Shares; (b) the aggregate market value of the outstanding New Prime Series B
Preferred Shares; (c) the aggregate liquidation preference of the New Prime
Series A Preferred Shares at $25.00 per share; and (d) the total long-term debt
of New Prime) was 50.5%.
201
<PAGE>
New Prime is obligated to repay $19.6 million and $58.1 million of mortgage
indebtedness during 1998 and 1999, respectively. Annualized cumulative dividends
on New Prime Senior Preferred Shares, New Prime Series B Preferred Shares, and
New Prime Series C Preferred Securities outstanding as of December 31, 1997 are
$6.0 million, $16.6 million, and $5.1 million, respectively. These dividends are
paid quarterly, in arrears.
SHORT-TERM AND LONG-TERM LIQUIDITY REQUIREMENTS
New Prime anticipates that cash flow from operations, together with cash
available from the Nomura Loan Facilities will be sufficient to satisfy its debt
service obligations, expected distribution and dividend requirements and
operating cash needs for the next year. New Prime expects to meet its long-term
liquidity requirements for the funding of property development, property
acquisitions and other non-recurring capital improvements from (i) certain line
of credit facilities (including the Nomura Loan Facilities), (ii) retained cash
flow from operations, (iii) construction loans, and (iv) the potential sale of
common or preferred equity in the public or private capital markets.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of New Prime's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
New Prime does not believe that the impact of the recognition of the year
2000 by its information and operating technology systems will have a material
adverse effect on New Prime's financial condition and results of operations. The
majority of any necessary system changes will be upgraded in the normal course
of business. New Prime has initiated formal communications with all of its
significant suppliers to determine the extent to which New Prime's interface
systems are vulnerable to those third parties' failure to remediate their own
year 2000 issues. There can be no guarantee that the systems of other companies,
on which New Prime's systems rely, will be timely converted and would not have
an adverse effect on New Prime's systems.
202
<PAGE>
MANAGEMENT AND OPERATION OF NEW PRIME
AFTER THE TRANSACTIONS
GENERAL
The New Prime Board of Directors will consist of the following persons:
Michael W. Reschke, Abraham Rosenthal, William H. Carpenter, Jr., Glenn D.
Reschke, Terence C. Golden, Kenneth A. Randall, James R. Thompson, Marvin S.
Traub, Sharon Sharp, Norman Perlmutter, Robert D. Perlmutter and William P.
Dickey. The Board of Directors of New Prime will be divided into three equally
numbered classes serving staggered three-year terms. One class will serve as
directors until the 1999 annual meeting of shareholders, one class will serve as
directors until the 2000 annual meeting of shareholders, and one class will
serve as directors until the 2001 annual meeting of shareholders.
Senior management of New Prime will be drawn from the present management of
Prime. See "Interests of Certain Persons in the Transactions."
After the Transactions, management and control of Prime Partnership will be
vested in New Prime, which will serve as its sole general partner.
The Merger Agreement also contains provisions relating to, among other
things, employee benefits and indemnification and liability coverage of former
directors and officers of Horizon after the Transactions. See "Interests of
Certain Persons in the Transactions."
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, positions and, as of December 31,
1997, ages of the executive officers and directors of New Prime.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---------------------------- ---------------------------------------------------------------------------- ---------
<S> <C> <C>
Michael W. Reschke Chairman of the Board, Director (term expires 2000) 42
Abraham Rosenthal Chief Executive Officer, Director (term expires 1999) 48
William H. Carpenter, Jr. President, Chief Operating Officer, Director (term expires 2001) 46
Glenn D. Reschke Executive Vice President--Development and Acquisitions, Director (term
expires 2000) 46
David G. Phillips Executive Vice President--Operations and Marketing 36
Robert P. Mulreaney Executive Vice President--Chief Financial Officer and Treasurer 39
C. Alan Schroeder Executive Vice President--General Counsel and Secretary 40
R. Bruce Armiger Senior Vice President--Development and Construction Management Services 52
Steven S. Gothelf Senior Vice President--Finance 37
Steven M. McGhee Senior Vice President--Operations 43
John S. Mastin Senior Vice President--Leasing 51
Anya T. Harris Senior Vice President--Marketing and Communications 31
Terence C. Golden Director (term expires 2000) 53
Kenneth A. Randall Director (term expires 2001) 70
James R. Thompson Director (term expires 1999) 61
Marvin S. Traub Director (term expires 1999) 72
Sharon Sharp Director (term expires 2001) 58
Norman Perlmutter Director (term expires 2001) 63
</TABLE>
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<TABLE>
<S> <C> <C>
Robert D. Perlmutter Director (term expires 1999) 36
William P. Dickey Director (term expires 2000) 54
</TABLE>
The following is a biographical summary as of December 31, 1997 of the
experience of the executive officers and directors of New Prime.
MICHAEL W. RESCHKE. Michael W. Reschke has been the Chairman of the Board
of Directors of Prime since Prime's inception. Mr. Reschke founded PGI in 1981
and, since that time, has acted as PGI's Chairman, Chief Executive Officer, and
President. For the last seventeen years, Mr. Reschke has directed and managed
the development, finance, construction, leasing, marketing, acquisition,
renovation, and property management activities of PGI. Mr. Reschke is Chairman
of the Board of Brookdale Living Communities, Inc. and Prime Group Realty Trust
and a member of the Board of Directors of Prime Residential, Inc., Ambassador
Apartments, Inc. and HGP. Mr. Reschke received a Juris Doctorate degree (summa
cum laude) from the University of Illinois after having received a B.A. degree
(summa cum laude) in Accounting from Northern Illinois University. Mr. Reschke
is licensed to practice law in the State of Illinois and is a certified public
accountant. Mr. Reschke is a member of the Chairman's Roundtable and the
Executive Committee of the National Realty Committee, as well as a full member
of the Urban Land Institute. Mr. Reschke is the brother of Glenn D. Reschke, an
executive officer and director of New Prime.
ABRAHAM ROSENTHAL. Abraham Rosenthal has been the Chief Executive Officer
and a Director of Prime since Prime's inception. Mr. Rosenthal joined PGI in
1988, serving as Vice President, Senior Vice President and, immediately prior to
joining Prime, as Executive Vice President. Mr Rosenthal's responsibilites with
Prime include strategic planning, investor relations, capital markets,
financing, site selection, site planning and building design, and new business
development for Prime. Mr. Rosenthal has been involved in retail design and
development for the past 20 years. Prior to joining PGI, Mr. Rosenthal was Vice
President--Design and Construction of Cordish/Embry and Associates. Mr.
Rosenthal received a Bachelor of Architecture degree from the University of
Maryland School of Architecture, is a registered architect in the State of
Maryland and is certified by the National Council of Architectural Registration
Board. Mr. Rosenthal is a full member of the Urban Land Institute and the
International Council of Shopping Centers the National Realty Committee and
NAREIT. Mr. Rosenthal is on the executive committee of the Baltimore Museum of
Art and chairs the organization's Development, Marketing and Finance Committee.
Mr. Rosenthal is also a member of the Maryland/Israel Development Center and is
on the board and a member of the executive committee for Baltimore's Downtown
Partnership. Mr. Rosenthal was the recipent of the 1995 Entrepreneur of the Year
Award for Maryland Real Estate.
WILLIAM H. CARPENTER, JR. William H. Carpenter, Jr. has been President,
Chief Operating Officer and a Director of Prime since Prime's inception. Mr.
Carpenter joined PGI in 1989, serving as Senior Vice President and, immediately
prior to joining Prime, as Executive Vice President. Mr Carpenter's
responsibilities with Prime include leasing, marketing, operations and
management, development, and construction for Prime's retail projects. Prior to
joining PGI, Mr. Carpenter was President of D.I. Realty, Inc. (a division of
Design International) from 1988 to 1989 and in such capacity managed all aspects
of retail leasing and development for D.I. Realty, Inc., including property
management, construction, and merchant coordination. Mr. Carpenter previously
was senior regional leasing director with The Rouse Company and a partner with
Cordish/Embry and Associates in Baltimore, Maryland. In these positions, Mr.
Carpenter directed the development and leasing of a number of major urban
projects in cooperation with city governments. Over the last 23 years, Mr.
Carpenter has been involved in over 57 major urban, suburban and specialty
projects throughout the United States. Mr. Carpenter attended the University of
Baltimore and is a member of the International Council of Shopping Centers, a
member of Developers of Outlet Centers and a full member of the Urban Land
Institute. Mr. Carpenter sits on the Board and Executive Committee of the
Baltimore Symphony Orchestra and also sits on the International Counsel of
Shopping Centers/Value Retail News Executive Committee. Mr. Carpenter was the
recipient of the 1995 Entrepreneur of the Year Award for Maryland Real Estate.
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GLENN D. RESCHKE. Glenn D. Reschke is Executive Vice President of
Development and Acquisitions and a Director of Prime, where he is responsible
for site selection, design and construction for Prime's new retail projects, as
well as the acquisition of existing outlet centers nationwide. Mr. Reschke
joined PGI in 1983 and, since that time, served as Vice President, Senior Vice
President and Executive Vice President of PGI, and was, responsible for PGI's
multi-family, senior housing, single family and land development divisions.
Prior to that, Mr. Reschke was the Director of the EPA's Automotive Emission
Testing Laboratory in Ann Arbor, Michigan where he managed the nation's
automotive emission certification and fuel economy testing programs for the
Federal Government. Mr. Reschke received a Masters in Business Administration
from Eastern Michigan University with a specialization in finance after
receiving a Bachelor of Science degree with honors in Chemical Engineering from
Rose Hulman Institute of Technology in Terre Haute, Indiana. Mr. Reschke is the
brother of Michael W. Reschke, New Prime's Chairman of the Board.
DAVID G. PHILLIPS. David G. Phillips is Executive Vice
President--Operations and Marketing of Prime. Mr. Phillips joined PGI in 1989
and served as Vice President, Senior Vice President and Executive Vice
President--Leasing. Mr. Phillips' responsibilities with Prime include the
management and supervision of Prime's operations, marketing and advertising
efforts for all of Prime's outlet centers. Prior to joining PGI, Mr. Phillips
was a leasing representative at D.I. Realty, Inc., leasing a variety of retail
projects including outlet centers and traditional specialty malls. Prior to
joining D.I. Realty, Inc., Mr. Phillips owned and operatered Bowdain Street
Contracting in Boston, Massachusetts. Mr. Phillips received a Masters of Science
in Real Estate Development at Johns Hopkins University and received a Bachelor
of Science degree in Business Administration from the University of Vermont. Mr.
Phillips is a member of the International Council of Shopping Centers with a
Certified Leasing Specialist designation and the Urban Land Institute.
ROBERT P. MULREANEY. Robert P. Mulreaney is Executive Vice President--Chief
Financial Officer and Treasurer of Prime. Mr. Mulreaney joined Prime in 1994.
Mr. Mulreaney's responsibilities with Prime include capital market activities,
corporate budgeting, financial reporting, investor relations, accounting,
taxation, treasury and management information systems. Prior to joining Prime,
Mr. Mulreaney was associated for 14 years with Ernst & Young LLP, where he
specialized in accounting and consulting issues related to real estate and
financial institutions. Mr. Mulreaney received a Bachelor of Business
Administration in Accounting in 1980 from Marshall University. Mr. Mulreaney is
a member of the American Institute of Certified Public Accountants, the Maryland
Association of Certified Public Accountants and the West Virginia Society of
Certified Public Accountants.
C. ALAN SCHROEDER. C. Alan Schroeder is Executive Vice President--General
Counsel and Secretary of Prime. He has been General Counsel since 1994. From
1990 to 1994, Mr. Schroeder was an Assistant General Counsel of PGI, responsible
for legal matters relating to the retail division. Prior to joining PGI, Mr.
Schroeder was associated with Hopkins & Sutter, a Chicago, Illinois based law
firm. Mr. Schroeder received a Juris Doctorate degree from The University of
Chicago Law School and an A.B. degree from Bowdoin College in Brunswick, Maine.
Mr. Schroeder is licensed to practice law in Illinois.
R. BRUCE ARMIGER. R. Bruce Armiger is Senior Vice President--Development
and Construction Management Services of Prime. Mr. Armiger's responsibilities
with Prime include supervision of project development and construction for all
of Prime's outlet centers. Mr. Armiger joined PGI in 1992, and since that time,
acted as Vice President of the Retail Division of PGI. Prior to joining PGI, Mr.
Armiger was Vice President and Director of Construction and Engineering of The
Rouse Company for a period of 15 years. At The Rouse Company, Mr. Armiger was
responsible for all of the construction activities of the company consisting of
over 5 million square feet of GLA during his tenure. Mr. Armiger has a Bachelor
of Arts degree and Masters of Business Administration from Loyola College,
Baltimore, Maryland.
STEVEN S. GOTHELF. Steven Gothelf is Senior Vice President--Finance of
Prime. Mr. Gothelf joined PGI in 1990 and, since that time, served as Vice
President of Asset and Development Management.
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Mr. Gothelf's responsibilities with Prime include financing, capital market
activities, and the review and analysis of potential outlet center acquisitions.
For two years prior to joining PGI, Mr. Gothelf was Vice President of Finance
and Administration of Clarion Development Inc. Before joining Clarion
Development Inc., Mr. Gothelf was a Market Maker for financial futures at the
Chicago Board of Trade and prior to that was a Manager of Real Estate Tax and
Consulting for KPMG Peat Marwick LLP. Mr. Gothelf received his B.S. degree in
Accounting from the University of Illinois and is a certified public accountant.
STEVEN M. MCGHEE. Steven McGhee is Senior Vice President--Operations of
Prime. Mr. McGhee has been affiliated with PGI since October 1989, most recently
as Vice President and Director of Operations. Prior to joining PGI, Mr. McGhee
was General Manager for CBL and Associates for two years where he marketed and
managed a portfolio of 1,500,000 square feet of retail properties. Prior to
serving in such position, Mr. McGhee spent fifteen years with the Melville
Corporation, a specialty retail chain where he was eventually responsible for
the operations of approximately 140 stores nationwide. Mr. McGhee attended the
University of Tennessee majoring in Business Administration. Mr. McGhee is a
member of the International Council of Shopping Centers (ICSC), Value Retail
News and Building Owners and Managers Association (BOMA) and is an honorary
Editorial board member for Specialty Retail Report. Mr. McGhee received
designation as a CSM (certified shopping center manager) from the ICSC in
October 1995.
JOHN S. MASTIN. John S. Mastin is Senior Vice President--Leasing of Prime.
Mr. Mastin's responsibilities with Prime include supervision of leasing and
merchandising for all of Prime's outlet centers. Mr. Mastin joined Prime in June
of 1996. Prior to joining Prime, Mr. Mastin spent twenty-four years with The
Rouse Company. At The Rouse Company, Mr. Mastin began his career as a Junior
Leasing Representative and was promoted up to Vice President and Assistant
Director of Leasing. Mr. Mastin led the leasing effort for The Rouse Company
with numerous regional malls as well as inner-city festival market places to
include Bayside in Miami, Florida, and the redevelopment of Underground Atlanta
in Atlanta, Georgia. Mr. Mastin was involved in the releasing and
remerchandising effort for the operating properties division of The Rouse
Company. Prior to The Rouse Company, Mr. Mastin was a Naval Aviator for four
years. Mr. Mastin received his Bachelor of Arts in English from Niagara
University. Mr. Mastin is a member of the International Council of Shopping
Centers (ICSC).
ANYA T. HARRIS. Anya T. Harris is Senior Vice President, Marketing and
Communications of Prime. Ms. Harris began her tenure at Prime in September 1994
as Director of Public Relations, responsible for media relations and community
outreach programs for Prime's various outlet centers nationwide. In her present
position, Ms. Harris oversees all aspects of Prime's center marketing, public
relations and corporate communications programs in order to increase Prime's
marketing power and reach in terms of advertising, company indentity and media
relations. Prior to joining Prime, Ms. Harris served as Senior Account Executive
for Trahan, Burden & Charles, Inc., an advertising and public relations firm in
Baltimore. In this capacity, Ms. Harris managed advertising, public relations
and marketing campaigns for numerous clients, including Prime. Formerly, she was
Senior Account Executive for New York-based Edelman Public Relations. Ms. Harris
received her Bachelor of Arts in Political Science and Sociology from Goucher
College in Baltimore.
TERENCE C. GOLDEN. Terence C. Golden, a Director of Prime since the Prime
IPO, has been Chief Executive Officer and President of Host Marriott
Corporation, Bethesda, Maryland since September 1995 as well as Chairman of the
Board of Bailey Realty Corporation (BRC) in Washington, D.C. since 1991. Prior
to forming BRC, Mr. Golden held the position of Chief Financial Officer of The
Oliver Carr Company from 1989 to 1991. From 1985 to 1988, Mr. Golden was
appointed by President Reagan and confirmed by the U.S. Senate to the office of
Administrator of General Services Administration. From 1984 through 1985, Mr.
Golden was Assistant Secretary at the U.S. Department of Treasury. Mr. Golden
was one of the founding partners of Trammell Crow Residential Companies and was
its Managing Partner from 1976 through 1984. Mr. Golden also serves as a
director of D.R. Horton, Inc. and Cousins Properties,
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Inc. Mr. Golden received an M.B.A. degree from Harvard Business School (1970),
an M.S. degree in Nuclear Engineering at the Massachusetts Institute of
Technology (1967), and a B.S. degree in Mechanical Engineering from the
University of Notre Dame (1966).
KENNETH A. RANDALL. Kenneth A. Randall, a Director of Prime since the Prime
IPO, was the Chairman of ICL Inc. from 1980 to 1982, Vice Chairman of Northeast
Bancorp, Inc. from 1977 to 1987, the Chairman and Chief Executive Officer of
United Virginia Bankshares Incorporated from 1970 to 1976 and the Chairman of
the FDIC from 1965 to 1970. Mr. Randall was President and Chief Executive
Officer of The Conference Board, Inc. from 1976 to 1982. Mr. Randall currently
serves on the Board of Directors of Dominion Resources, Inc., Dominion Energy,
Inc., Enron/Dominion Cogen, Inc., Lumbermans Mutual Casualty Company, American
Motorist Insurance Company, and American Manufacturers Mutual Insurance Company.
Mr. Randall also serves as trustee of the principal Oppenheimer mutual funds.
Mr. Randall attended Weber State University and received a B.A. degree and an
M.S. degree from Brigham Young University.
GOVERNOR JAMES R. THOMPSON. James R. Thompson, a Director of Prime since
the Prime IPO, is the Chairman of the law firm of Winston & Strawn and has been
a partner with the firm since 1991. Prior to joining Winston & Strawn, Governor
Thompson served as the Governor of Illinois from 1977-1991. Governor Thompson
serves on the Board of Directors of FMC Corporation, the Chicago Board of Trade,
Jefferson Smurfit Group plc, Pechiney International, Wackenhut Corrections
Corporation, Union Pacific Resources Company, Prime Group Realty Trust and
Hollinger International, Inc. Governor Thompson received his Juris Doctorate
degree from the Northwestern University Law School.
MARVIN S. TRAUB. Marvin S. Traub, a Director of Prime since the Prime IPO,
has been President of Marvin Traub Associates, Inc. since 1992. In addition, Mr.
Traub joined Financo, Inc. in 1994 as Senior Advisor. Prior to establishing
Marvin Traub Associates, Inc., Mr. Traub was Chairman of Bloomingdales from
1978-1992 and was Vice Chairman of Federated Department Stores from 1988-1992.
Mr. Traub was a director and Chairman of the Executive Committee of The Conran
Stores, Inc. The Conran Stores, Inc. filed a petition for protection under U.S.
bankruptcy laws on January 10, 1994. Mr. Traub received an M.B.A. degree (with
distinction) from Harvard Business School after receiving a B.A. degree (magna
cum laude) from Harvard University.
SHARON SHARP. Sharon Sharp, a director of Prime since November 1997,
currently is a director of the Public Gaming Research Institute ("PGRI"), where
she serves as publisher of Public Gaming International, the leading magazine of
the worldwide lottery industry; and manages their international career placement
service specializing in lottery and gaming personnel. Prior to joining PGRI, Ms.
Sharp served as director of the Illinois and California Lotteries from
1987-1993. Ms. Sharp attended Holy Cross Central School of Nursing, and received
an A.A.S. in Journalism from Harper College.
NORMAN PERLMUTTER. Mr. Perlmutter has been, and continues to serve as, the
Chairman of the Board of Directors of Horizon since February 8, 1997. Since 1966
Mr. Perlmutter has served as Chairman of the Board and Chief Executive Officer
of Heitman Financial Ltd., one of the largest full service real estate companies
and real estate investment managers for employee benefit plans in the U.S. Mr.
Perlmutter is also a director of Chris-Craft Industries, Inc., Heitman/PRA
Securities Advisors, Inc., United Television, Inc. and HGP. Mr. Perlmutter
previously served on the boards of United Asset Management Corporation and
Warner Communications. He holds a B.S. degree from the University of Illinois.
ROBERT D. PERLMUTTER. Since 1990, Mr. Perlmutter has been President and
Chief Executive Officer of Heitman Retail Properties, a subsidiary of Heitman
Properties, Ltd., which as asset manager, is listed by Shopping Center World as
the fourth largest owner of regional mall shopping centers in the United States.
Mr. Perlmutter is a member of the International Council of Shopping Centers
(ICSC), the Illinois ICSC Committee and NAREIT. Mr. Perlmutter received a
Bachelor of Science degree from the University of Colorado in Boulder. Mr.
Perlmutter is the son of Norman Perlmutter.
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WILLIAM P. DICKEY. Mr. Dickey is the owner and President of the Dermot
Company, Inc., a California real estate investment and advisory firm. Prior to
forming the Dermot Company, Inc. in October 1991, Mr. Dickey was a Managing
Director at The First Boston Corporation, a New York investment banking firm
(now CS First Boston) from February 1986 to November 1990. Prior to joining
First Boston, Mr. Dickey was a partner with the New York law firm of Cravath,
Swaine & Moore from May 1980 to February 1986. From 1964 to 1970, Mr. Dickey was
an officer in the U.S. Air Force and during that time served tours in the
Philippines and Vietnam as an intelligence officer, and at the U.S. Air Force
Academy as an instructor. Mr. Dickey is a Trustee of the Retail Property Trust,
an institutionally-owned REIT with investments in regional shopping centers. Mr.
Dickey is a Director of Price Enterprises, Inc., Mezzanine Capital Property
Investors, Inc. and Kilroy Realty Corporation. Mr. Dickey holds a J.D. degree
from Columbia Law School, an M.A. degree in International Affairs from
Georgetown University, and a B.S. degree from the U.S. Air Force Academy.
COMMITTEES OF THE NEW PRIME BOARD OF DIRECTORS
There will be four standing committees of the New Prime Board of Directors:
the Audit Committee, the Executive Committee, the Executive Compensation and
Stock Incentive Plan Committee and the Independent Directors Committee, which
are described further below.
AUDIT COMMITTEE. The functions of the Audit Committee, which will be
comprised of Messrs. Golden and Randall, will include making recommendations
concerning the engagement of independent public accountants, reviewing with the
independent accountants the plans and results of the audit engagement, approving
professional services provided by the independent public accountants, reviewing
the independence of the independent public accountants, considering the range of
audit and non-audit fees, and reviewing the adequacy of New Prime's internal
accounting controls.
EXECUTIVE COMMITTEE. The Executive Committee will be comprised of Messrs.
M. Reschke, Rosenthal and Carpenter and will be granted certain authority to
acquire and dispose of real property and the power to authorize, on behalf of
the New Prime Board of Directors, the execution of certain contracts and
agreements, including those related to certain borrowings by New Prime. The
Executive Committee will meet monthly (or more frequently if necessary) and all
actions by the committee will be reported at the next meeting of the New Prime
Board of Directors.
EXECUTIVE COMPENSATION AND STOCK INCENTIVE PLAN COMMITTEE. The Executive
Compensation and Stock Incentive Plan Committee will be comprised of Messrs.
Golden and Randall and Ms. Sharp and will have the responsibility for
determining the compensation for New Prime's executive officers and implementing
and administering New Prime's Stock Option Plans.
COMPENSATION COMMITTEE. The Compensation Committee will be comprised of
Messrs. Golden, Randall and Traub and Governor Thompson and Ms. Sharp and will
have the responsibility for determining the compensation for New Prime's
employees.
INDEPENDENT DIRECTORS COMMITTEE. The Independent Directors Committee will
be comprised of Messrs. Golden, Randall and Traub and Governor Thompson and Ms.
Sharp and will have the responsibility to (i) consider and approve any proposed
action or transaction involving New Prime and PGI; (ii) consider and take such
actions and make such approvals and recommendations as are required to be
considered, taken or made by New Prime's independent directors under either the
Prime Partnership Agreement or corporate governance documents relating to New
Prime, or otherwise; and (iii) consider and take such actions and make such
approvals as are appropriate to reduce or eliminate any potential or apparent
conflict of interest which may arise in connection with any proposed action or
transaction involving New Prime.
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COMPENSATION OF DIRECTORS
Directors who are not employees of New Prime or affiliated with PGI or New
Prime will receive a fee for their services as directors. Such persons will
receive annual compensation of $35,000 plus a fee of $1,000 for attendance in
person at each meeting of the New Prime Board of Directors, a fee of $500 for
participating by telephone in each substantial meeting of the New Prime Board of
Directors or of any committee of the New Prime Board of Directors, a fee of $500
for attending any meeting of any committee of the New Prime Board of Directors,
and an annual fee of $1,000 for each committee on which such member serves. Such
persons also will receive reimbursement of all travel and lodging expenses
related to their attendance at both board and committee meetings. In the event
the Prime Retail, Inc. Nonemployee Director Stock Plan is approved by Prime
shareholders, each nonemployee director who has served on the New Prime Board of
Directors for at least three months will receive an automatic grant of options
to purchase 10,000 Prime Common Shares.
HEADQUARTERS
After consummation of the Transactions, the headquarters of New Prime shall
be 100 East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202, the
current headquarters of Prime.
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DESCRIPTION OF THE CAPITAL STOCK OF NEW PRIME
THE FOLLOWING SUMMARY OF THE TERMS OF NEW PRIME SERIES A PREFERRED SHARES,
NEW PRIME SERIES B PREFERRED SHARES, NEW PRIME SERIES C PREFERRED SHARES AND NEW
PRIME COMMON SHARES DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PERTINENT SECTIONS OF THE NEW PRIME CHARTER, WHICH
IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT CONSENT
SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT IS A PART. THE TERMS OF
THE NEW PRIME EXCESS SHARES RELATED TO NEW PRIME SERIES A PREFERRED SHARES, NEW
PRIME SERIES B PREFERRED SHARES, NEW PRIME SERIES C PREFERRED SHARES AND NEW
PRIME COMMON SHARES ARE SET FORTH UNDER "--RESTRICTIONS ON OWNERSHIP AND
TRANSFER."
New Prime is incorporated in the State of Maryland. Rights of stockholders
are governed by the MGCL and by the New Prime Charter and New Prime Bylaws.
AUTHORIZED SHARES
The total number of shares of all classes of stock that New Prime shall have
authority to issue is 262,815,000 consisting of (i) 150,000,000 New Prime Common
Shares, (ii) 24,315,000 shares of preferred stock, $0.01 par value per share, of
New Prime (the "New Prime Preferred Shares"), of which certain shares shall be
designated as New Prime Series A Preferred Shares, New Prime Series B Preferred
Shares and New Prime Series C Preferred Shares and (iii) 88,500,000 shares of
excess stock, $0.01 par value per share, of New Prime (the "New Prime Excess
Shares"), of which certain shares shall be designated New Prime Excess Common
Shares (the "New Prime Excess Common Shares"), New Prime Excess Series A
Preferred Shares (the "New Prime Excess Series A Preferred Shares"), New Prime
Excess Series B Preferred Shares (the "New Prime Excess Series B Preferred
Shares") and New Prime Excess Preferred Shares (the "New Prime Excess Preferred
Shares").
The New Prime Board of Directors has the authority to issue additional
shares of New Prime Preferred Shares in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series without further vote or action by
the stockholders, subject to the rights of the holders of New Prime Series A
Preferred Shares, New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares. The New Prime Board of Directors could authorize the issuance
of New Prime Preferred Shares with terms and conditions which could have the
effect of discouraging a takeover or other transaction which holders of some, or
a majority, of New Prime Common Shares might believe to be in their interests or
in which holders of some, or a majority, of New Prime Common Shares might
receive a premium for their shares over the then market price of such shares. As
of the date hereof, New Prime has no plans to issue any New Prime Preferred
Shares other than New Prime Series A Preferred Shares, New Prime Series B
Preferred Shares and New Prime Series C Preferred Shares.
NEW PRIME SERIES A PREFERRED SHARES
DISTRIBUTIONS
Subject to the preferential rights of any series of New Prime Preferred
Shares ranking senior as to distributions to New Prime Series A Preferred Shares
and to the provisions of the New Prime Charter regarding New Prime Excess
Shares, holders of New Prime Series A Preferred Shares are entitled to receive,
when and as declared by the New Prime Board of Directors, out of funds legally
available for the payment of distributions, cumulative preferential cash
distributions in an amount per share of New Prime Series A Preferred Shares
equal to $2.625 per annum.
Distributions with respect to New Prime Series A Preferred Shares are
cumulative from the date of original issuance and are payable quarterly in
arrears on the fifteenth day of each May, August, November, and February, or, if
such day is not a business day, on the next succeeding business day (each, a
"New
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Prime Series A Preferred Distribution Payment Date"). Such distribution and any
distribution payable on New Prime Series A Preferred Shares for any partial
distribution period are computed on the basis of a 360-day year consisting of
twelve 30-day months. Distributions payable on New Prime Series A Preferred
Shares for each full distribution period are computed by dividing the annual
distribution rate by four. Distributions are payable to holders of record as
they appear in the stock records of New Prime at the close of business on the
applicable record date, which is the first day of the calendar month in which
the applicable New Prime Series A Preferred Distribution Payment Date falls or
such other date designated by the New Prime Board of Directors for the payment
of distributions that is no more than thirty (30) nor less than ten (10) days
prior to such New Prime Series A Preferred Distribution Payment Date (each, a
"New Prime Series A Preferred Distribution Record Date").
No distributions on New Prime Series A Preferred Shares will be declared by
the New Prime Board of Directors or paid or set apart for payment by New Prime
at such time as, and to the extent that, the terms and provisions of any
agreement of New Prime, including any agreement relating to its indebtedness, or
any provisions of the New Prime Charter relating to any series of New Prime
Preferred Shares ranking senior to New Prime Series A Preferred Shares as to
distributions, prohibit such declaration, payment or setting apart for payment
or provide that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration or
payment would be restricted or prohibited by law. Notwithstanding the foregoing,
distributions on New Prime Series A Preferred Shares accrue whether or not New
Prime has earnings, whether or not there are funds legally available for the
payment of such distributions and whether or not such distributions are
declared. Holders of New Prime Series A Preferred Shares are not entitled to any
distributions in excess of full cumulative distributions as described above.
If any New Prime Series A Preferred Shares are outstanding, no full
distributions will be declared or paid or set apart for payment on the capital
stock of New Prime of any other series ranking, as to distributions, on a parity
with or junior to New Prime Series A Preferred Shares for any period unless full
cumulative distributions have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such payment
on New Prime Series A Preferred Shares for all past distribution periods and the
then current distribution period. When distributions are not paid in full (or a
sum sufficient for such full payment is not so set apart) upon New Prime Series
A Preferred Shares and the shares of any other series of New Prime Preferred
Shares ranking on a parity as to distributions with New Prime Series A Preferred
Shares, all distributions declared upon New Prime Series A Preferred Shares and
any other series of New Prime Preferred Shares ranking on a parity as to
distributions with New Prime Series A Preferred Shares will be declared pro rata
so that the amount of distributions declared per share on New Prime Series A
Preferred Shares and such other series of New Prime Preferred Shares will in all
cases bear to each other the same ratio that accrued and unpaid distributions
per share on New Prime Series A Preferred Shares and such other series of New
Prime Preferred Shares bear to each other. No interest, or sum of money in lieu
of interest, is payable in respect of any distribution payment or payments on
New Prime Series A Preferred Shares which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative distributions on New Prime Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past distribution periods and the
then current distribution period, no distributions (other than distributions
payable in New Prime Common Shares or other capital stock ranking junior to New
Prime Series A Preferred Shares as to distributions and upon liquidation,
dissolution or winding up) will be declared or paid or set aside for payment,
and no other distribution will be declared or made, upon New Prime Common Shares
or any other capital stock of New Prime ranking junior to or on a parity with
New Prime Series A Preferred Shares as to distributions, nor will any New Prime
Common Shares or any other capital stock of New Prime ranking junior to or on a
parity with New Prime Series A Preferred Shares as to distributions or upon
liquidation, dissolution or winding up be redeemed, purchased or otherwise
acquired for any consideration (or any moneys be paid to or made available for a
sinking fund for the redemption of any shares of any such stock) by New Prime
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(except by conversion into or exchange for other capital stock of New Prime
ranking junior to New Prime Series A Preferred Shares as to distributions and
upon liquidation, dissolution or winding up).
Any distribution payment made on New Prime Series A Preferred Shares is
first credited against the earliest accrued but unpaid distribution due with
respect to such New Prime Series A Preferred Shares which remains payable.
If, for any taxable year, New Prime elects to designate as "capital gain
distributions" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the distributions (within the meaning of the Code) paid or
made available for the year to holders of all classes of stock (the "Total
Distributions"), then the portion of the Capital Gains Amount that will be
allocable to the holders of New Prime Series A Preferred Shares will be the
Capital Gains Amount multiplied by a fraction, the numerator of which shall be
the total distributions (within the meaning of the Code) paid or made available
to the holders of New Prime Series A Preferred Shares for the year and the
denominator of which shall be the Total Distributions.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of New Prime,
subject to the prior rights of any series of capital stock ranking senior to New
Prime Series A Preferred Shares, the holders of New Prime Series A Preferred
Shares will be entitled to be paid out of the assets of New Prime legally
available for distribution to its stockholders a liquidation preference equal to
the sum of $25.00 per share plus an amount equal to any accrued and unpaid
distributions thereon (whether or not earned or declared) to the date of payment
(the "New Prime Series A Preferred Liquidation Preference Amount"), before any
distribution of assets is made to holders of New Prime Series B Preferred
Shares, New Prime Common Shares or any other capital stock that ranks junior to
New Prime Series A Preferred Shares as to liquidation rights. After payment of
the full amount of the liquidating distributions to which they are entitled, the
holders of New Prime Series A Preferred Shares will have no right or claim to
any of the remaining assets of New Prime.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of New Prime are
insufficient to pay the New Prime Series A Preferred Liquidation Preference
Amount on all outstanding New Prime Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of New Prime ranking on a parity with New Prime Series A Preferred
Shares in the distribution of assets upon liquidation, dissolution or winding
up, then the holders of New Prime Series A Preferred Shares and all other such
classes or series of capital stock will share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.
If liquidating distributions have been made in full to all holders of New
Prime Series A Preferred Shares, the remaining assets of New Prime will be
distributed among the holders of any other classes or series of capital stock
ranking junior to New Prime Series A Preferred Shares upon liquidation,
dissolution or winding up, according to their respective rights and preferences
and in each case according to their respective number of shares.
The consolidation or merger of New Prime with or into any other corporation,
or the sale, lease, transfer or conveyance of all or substantially all of the
property or business of New Prime, will not be deemed to constitute a
liquidation, dissolution or winding up of New Prime for these purposes.
REDEMPTION
New Prime Series A Preferred Shares will not be redeemable at the option of
New Prime prior to March 31, 1999. On and after March 31, 1999, New Prime Series
A Preferred Shares may be redeemed for cash at the option of New Prime, in whole
or in part, initially at a redemption price of $26.75 per share and thereafter
at prices declining ratably to $25.00 per share on and after March 31, 2004,
plus in each case
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accrued and unpaid distributions, if any, to the redemption date. New Prime
Series A Preferred Shares have no stated maturity and will not be entitled to
the benefit of any sinking fund.
VOTING RIGHTS
Holders of New Prime Series A Preferred Shares do not have any voting
rights, except as set forth below or as otherwise from time to time required by
law. Subject to the provisions in the New Prime Charter regarding New Prime
Excess Shares, in any matter in which New Prime Series A Preferred Shares may
vote, including any action by written consent, each New Prime Series A Preferred
Share is entitled to one vote. The holders of each New Prime Series A Preferred
Share may separately designate a proxy for the vote to which that New Prime
Series A Preferred Share is entitled.
Whenever distributions on any of the New Prime Series A Preferred Shares
have been in arrears for six or more consecutive quarterly periods, the holders
of such New Prime Series A Preferred Shares (voting separately as a class with
all other series of New Prime Preferred Shares (including New Prime Series B
Preferred Shares) upon which rights to vote on such matter with New Prime Series
A Preferred Shares have been conferred and are then exercisable) will be
entitled to vote for the election of two additional directors of New Prime at a
special meeting called by the holders of record of at least 10% of New Prime
Series A Preferred Shares and such other New Prime Preferred Shares, if any
(unless such request is received less than 90 days before the date fixed for the
next annual or special meeting of the stockholders) or at the next annual
meeting of stockholders, and at each subsequent annual meeting until all
distributions accumulated on such New Prime Series A Preferred Shares for the
past distribution periods and the then current distribution period have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment. In such event, the entire New Prime Board of Directors will be
increased by two directors. Each of such two directors will be elected to serve
until the earlier of (i) the election and qualification of such director's
successor or (ii) payment of the distribution arrearage for New Prime Series A
Preferred Shares.
So long as New Prime Series A Preferred Shares remain outstanding, New Prime
will not, without the affirmative vote or consent of the holders of at least
two-thirds of New Prime Series A Preferred Shares outstanding at the time, given
in person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (i) authorize or create or increase the authorized or
issued amount of, any class or series of capital stock ranking senior to or on a
parity with New Prime Series A Preferred Shares with respect to payment of
distributions or the distribution of assets upon liquidation, dissolution or
winding up or New Prime Excess Series A Preferred Shares with respect to
distributions upon liquidation, dissolution or winding up, or reclassify any
authorized capital stock of New Prime into any such shares, or create, authorize
or issue any obligation or security convertible into or evidencing the right to
purchase any such shares; or (ii) amend, alter or repeal the provisions of the
New Prime Charter, whether by merger, consolidation or otherwise, so as to
materially and adversely affect any right, preference, privilege or voting power
of New Prime Series A Preferred Shares or the holders thereof; PROVIDED,
HOWEVER, that any increase in the amount of the authorized New Prime Preferred
Shares or the creation or issuance of any other series of New Prime Preferred
Shares, or any increase in the amount of authorized New Prime Series B Preferred
Shares or any other series of New Prime Preferred Shares, in each case ranking
junior to New Prime Series A Preferred Shares with respect to payment of
distributions or the distribution of assets upon liquidation, dissolution or
winding up, will not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers. In addition, so long as any shares of
New Prime Series A Preferred Shares remain outstanding, New Prime will not
terminate New Prime's status as a REIT without the affirmative vote or consent
of the holders of at least a majority of New Prime Series A Preferred Shares,
New Prime Series B Preferred Shares, New Prime Series C Preferred Shares and New
Prime Common Shares outstanding at the time, voting together as a single class,
given in person or by proxy, either in writing or at a meeting.
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The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required is
effected, all outstanding New Prime Series A Preferred Shares have been redeemed
or called for redemption upon proper notice and sufficient funds have been
deposited in trust to effect such redemption.
RANK
New Prime Series A Preferred Shares, with respect to distribution rights and
distributions upon liquidation, dissolution, and winding up, rank (i) senior to
New Prime Common Shares, all other shares of New Prime Common Shares of New
Prime of all classes and series, all classes of New Prime Excess Shares (other
than New Prime Excess Series A Preferred Shares, as to which New Prime Series A
Preferred Shares are senior only as to distributions), New Prime Series B
Preferred Shares, New Prime Series C Preferred Shares and shares of all other
series of capital stock issued by New Prime other than any series of capital
stock the terms of which specifically provide that the capital stock of such
series rank senior to or on a parity with such New Prime Series A Preferred
Shares with respect to distribution rights or distributions upon liquidation,
dissolution, or winding up of New Prime; (ii) on a parity with New Prime Excess
Series A Preferred Shares (upon liquidation, dissolution and winding up) and the
shares of all other capital stock issued by New Prime the terms of which
specifically provide that the shares rank on a parity with New Prime Series A
Preferred Shares with respect to distributions upon liquidation, dissolution, or
winding up of New Prime (the issuance of which must have been approved by a vote
of at least a majority of the outstanding New Prime Series A Preferred Shares);
and (iii) junior to all other capital stock issued by New Prime the terms of
which specifically provide that the shares rank senior to New Prime Series A
Preferred Shares with respect to dividends and distributions upon liquidation,
dissolution, or winding up of New Prime (the issuance of which must have been
approved by a vote of at least a majority of the outstanding New Prime Series A
Preferred Shares).
TRANSFER AGENT
The transfer agent for New Prime Series A Preferred Shares is American Stock
Transfer & Trust Company.
LISTING
The New Prime Series A Preferred Shares will be listed on the NYSE under the
trading symbol "PRT pra."
NEW PRIME SERIES B PREFERRED SHARES
DISTRIBUTIONS
Subject to the preferential rights of New Prime Series A Preferred Shares
and any other series of New Prime Preferred Shares ranking senior as to
distributions to New Prime Series B Preferred Shares and to the provisions of
the New Prime Charter regarding New Prime Excess Shares, holders of New Prime
Series B Preferred Shares are entitled to receive, when and as declared by the
New Prime Board of Directors, out of funds legally available for the payment of
distributions and dividends, cumulative preferential cash distributions in an
amount per New Prime Series B Preferred Share equal to the greater of (i) $2.125
per annum or (ii) the distributions (determined on each of the quarterly New
Prime Series B Preferred Distribution Payment Dates referred to below) on the
number of New Prime Common Shares (or fraction thereof) into which New Prime
Series B Preferred Shares are convertible on or after March 31, 1997. The amount
referred to in clause (ii) above will equal the number of shares of New Prime
Common Shares, or fraction thereof, into which New Prime Series B Preferred
Shares are convertible on or after March 31, 1997, multiplied by the quarterly
distribution declared or paid with respect to a New Prime Common Share on or
most recently prior to the applicable New Prime Series B Preferred Distribution
Payment Date.
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Distributions with respect to New Prime Series B Preferred Shares are
cumulative from the date of original issuance and are payable quarterly in
arrears on the fifteenth day of each May, August, November, and February, or, if
such day is not a business day, on the next succeeding business day (each, a
"New Prime Series B Preferred Distribution Payment Date"). Such distribution and
any distribution payable on New Prime Series B Preferred Shares for any partial
distribution period are computed on the basis of a 360-day year consisting of
twelve 30-day months. Distributions payable on New Prime Series B Preferred
Shares for each full distribution period are computed by dividing the annual
distribution rate by four. Distributions are payable to holders of record as
they appear in the stock records of New Prime at the close of business on the
applicable record date, which is the first day of the calendar month in which
the applicable New Prime Series B Preferred Distribution Payment Date falls or
such other date designated by the New Prime Board of Directors for the payment
of distributions that is no more than thirty (30) nor less than ten (10) days
prior to such New Prime Series B Preferred Distribution Payment Date (each, a
"New Prime Series B Preferred Distribution Record Date").
No distributions on New Prime Series B Preferred Shares will be declared by
the New Prime Board of Directors or paid or set apart for payment by New Prime
at such time as, and to the extent that, the terms and provisions of any
agreement of New Prime, including any agreement relating to its indebtedness, or
any provisions of the New Prime Charter relating to any series of New Prime
Preferred Shares ranking senior to New Prime Series B Preferred Shares as to
distributions (including New Prime Series A Preferred Shares), prohibit such
declaration, payment or setting apart for payment or provide that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment would be
restricted or prohibited by law. Notwithstanding the foregoing, distributions on
New Prime Series B Preferred Shares accrue whether or not New Prime has
earnings, whether or not there are funds legally available for the payment of
such distributions and whether or not such distributions are declared. Holders
of New Prime Series B Preferred Shares will not be entitled to any distributions
in excess of full cumulative distributions as described above.
If any New Prime Series B Preferred Shares are outstanding, no full
distributions will be declared or paid or set apart for payment on the capital
stock of New Prime of any other series ranking, as to distributions, on a parity
with or junior to New Prime Series B Preferred Shares for any period unless full
cumulative distributions have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such payment
on New Prime Series B Preferred Shares for all past distribution periods and the
then current distribution period. When distributions are not paid in full (or a
sum sufficient for such full payment is not so set apart) upon New Prime Series
B Preferred Shares and the shares of any other series of New Prime Preferred
Shares ranking on a parity as to distributions with New Prime Series B Preferred
Shares, all distributions declared upon New Prime Series B Preferred Shares and
any other series of New Prime Preferred Shares ranking on a parity as to
distributions with New Prime Series B Preferred Shares will be declared pro rata
so that the amount of distributions declared per share on New Prime Series B
Preferred Shares and such other series of New Prime Preferred Shares will in all
cases bear to each other the same ratio that accrued and unpaid distributions
per share on New Prime Series B Preferred Shares and such other series of New
Prime Preferred Shares bear to each other. No interest, or sum of money in lieu
of interest, is payable in respect of any distribution payment or payments on
New Prime Series B Preferred Shares which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative distributions on New Prime Series B Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past distribution periods and the
then current distribution period, no distributions (other than distributions
payable in New Prime Common Shares or other capital stock ranking junior to New
Prime Series B Preferred Shares as to distributions and upon liquidation,
dissolution or winding up) will be declared or paid or set aside for payment,
and no other distribution will be declared or made, upon New Prime Common Shares
or any other capital stock of New Prime ranking junior to or on a parity with
New Prime Series B Preferred Shares as to distributions, nor will any New Prime
Common Shares or any other capital stock of New Prime ranking junior to or on a
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parity with New Prime Series B Preferred Shares as to distributions or upon
liquidation, dissolution or winding up be redeemed, purchased or otherwise
acquired for any consideration (or any moneys be paid to or made available for a
sinking fund for the redemption of any shares of any such stock) by New Prime
(except by conversion into or exchange for other capital stock of New Prime
ranking junior to New Prime Series B Preferred Shares as to distributions and
upon liquidation, dissolution and winding up).
Any distribution payment made on New Prime Series B Preferred Shares is
first credited against the earliest accrued but unpaid distribution due with
respect to such New Prime Series B Preferred Shares which remains payable.
If, for any taxable year, New Prime elects to designate the Capital Gains
Amount of the Total Distributions, then the portion of the Capital Gains Amount
that will be allocable to the holders of New Prime Series B Preferred Shares
will be the Capital Gains Amount multiplied by a fraction, the numerator of
which shall be the total distributions (within the meaning of the Code) paid or
made available to the holders of New Prime Series B Preferred Shares for the
year and the denominator of which shall be the Total Distributions.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of New Prime,
subject to the prior rights of any series of capital stock ranking senior to New
Prime Series B Preferred Shares, the holders of New Prime Series B Preferred
Shares will be entitled to be paid out of the assets of New Prime legally
available for distribution to its stockholders a liquidation preference equal to
the sum of $25.00 per share plus an amount equal to any accrued and unpaid
distributions thereon (whether or not earned or declared) to the date of payment
(the "New Prime Series B Preferred Liquidation Preference Amount"), before any
distribution of assets is made to holders of New Prime Common Shares or any
other capital stock that ranks junior to New Prime Series B Preferred Shares as
to liquidation rights. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of New Prime Series B
Preferred Shares will have no right or claim to any of the remaining assets of
New Prime.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of New Prime are
insufficient to pay the New Prime Series B Preferred Liquidation Preference
Amount on all outstanding New Prime Series B Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of New Prime ranking on a parity with New Prime Series B Preferred
Shares in the distribution of assets upon liquidation, dissolution or winding
up, then the holders of New Prime Series B Preferred Shares and all other such
classes or series of capital stock will share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.
If liquidating distributions have been made in full to all holders of New
Prime Series B Preferred Shares, the remaining assets of New Prime will be
distributed among the holders of any other classes or series of capital stock
ranking junior to New Prime Series B Preferred Shares upon liquidation,
dissolution or winding up, according to their respective rights and preferences
and in each case according to their respective number of shares.
The consolidation or merger of New Prime with or into any other corporation,
or the sale, lease, transfer or conveyance of all or substantially all of the
property or business of New Prime, will not be deemed to constitute a
liquidation, dissolution or winding up of New Prime for these purposes.
REDEMPTION
New Prime Series B Preferred Shares will not be redeemable at the option of
New Prime prior to March 31, 1999. On and after March 31, 1999, New Prime Series
B Preferred Shares may be redeemed for cash at the option of New Prime, in whole
or in part, initially at a redemption price of $27.125 per share and thereafter
at prices declining ratably to $25.00 per share on and after March 31, 2004,
plus in each case
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accrued and unpaid distributions, if any, to the redemption date. New Prime
Series B Preferred Shares have no stated maturity and will not be entitled to
the benefit of any sinking fund.
VOTING RIGHTS
Holders of New Prime Series B Preferred Shares do not have any voting
rights, except as set forth below or as otherwise from time to time required by
law. Subject to the provisions in the New Prime Charter regarding New Prime
Excess Shares, in any matter in which New Prime Series B Preferred Shares may
vote, including any action by written consent, each New Prime Series B Preferred
Share is entitled to one vote. The holders of each New Prime Series B Preferred
Share may separately designate a proxy for the vote to which that New Prime
Series B Preferred Share is entitled.
Whenever distributions on any New Prime Series B Preferred Shares have been
in arrears for six or more consecutive quarterly periods, the holders of such
New Prime Series B Preferred Shares (voting separately as a class with all other
series of New Prime Preferred Shares (including New Prime Series A Preferred
Shares) upon which rights to vote on such matter with New Prime Series B
Preferred Shares have been conferred and are then exercisable) will be entitled
to vote for the election of two additional directors of New Prime at a special
meeting called by the holders of record of at least 10% of New Prime Series B
Preferred Shares and such other New Prime Preferred Shares, if any (unless such
request is received less than 90 days before the date fixed for the next annual
or special meeting of the stockholders) or at the next annual meeting of
stockholders, and at each subsequent annual meeting until all distributions
accumulated on such New Prime Series B Preferred Shares for the past
distribution periods and the then current distribution period have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. In such event, the entire New Prime Board of Directors will be
increased by two directors. Each of such two directors will be elected to serve
until the earlier of (i) the election and qualification of such director's
successor or (ii) payment of the distribution arrearage for New Prime Series B
Preferred Shares.
So long as any New Prime Series B Preferred Shares remain outstanding, New
Prime will not, without the affirmative vote or consent of the holders of at
least two-thirds of the New Prime Series B Preferred Shares outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class), (i) authorize or create, or increase the
authorized or issued amount of, any class or series of capital stock ranking
senior to New Prime Series B Preferred Shares with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up, or New Prime Excess Series B Preferred Shares with respect to distributions
upon liquidation, dissolution or winding up or reclassify any authorized capital
stock of New Prime into any such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the New Prime
Charter, whether by merger, consolidation or otherwise, so as to materially and
adversely affect any right, preference, privilege or voting power of New Prime
Series B Preferred Shares or the holders thereof; PROVIDED, HOWEVER, that any
increase in the amount of the authorized New Prime Preferred Shares or the
creation or issuance of any other series of New Prime Preferred Shares, or any
increase in the amount of authorized New Prime Series B Preferred Shares or any
other series of New Prime Preferred Shares, in each case ranking on a parity
with or junior to New Prime Series B Preferred Shares with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up, will not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers. In addition, so long as any New Prime
Series B Preferred Shares remain outstanding, New Prime will not terminate New
Prime's status as a REIT without the affirmative vote or consent of the holders
of at least a majority of New Prime Series A Preferred Shares, New Prime Series
B Preferred Shares, New Prime Series C Preferred Shares and New Prime Common
Shares outstanding at the time, voting together as a single class, given in
person or by proxy, either in writing or at a meeting.
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The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required is
effected, all outstanding shares of New Prime Series B Preferred Shares have
been redeemed or called for redemption upon proper notice and sufficient funds
have been deposited in trust to effect such redemption.
CONVERSION
Subject to the exceptions described under "--Restrictions on Ownership and
Transfer," holders of New Prime Series B Preferred Shares have the right, as
provided in the New Prime Charter, except in the case of New Prime Series B
Preferred Shares called for redemption, to convert all or any of the New Prime
Series B Preferred Shares (based upon the New Prime Series B Preferred
Liquidation Preference Amount determined immediately following the most recent
New Prime Series B Preferred Distribution Payment Date) into New Prime Common
Shares at the conversion price of $20.90 per New Prime Common Share, subject to
adjustment upon the occurrence of certain events, as described below. The
conversion price of $20.90 represents 110% of the price to the public of Prime
Common Shares issued in the Prime IPO. In the case of New Prime Series B
Preferred Shares called for redemption, conversion rights will expire at the
close of business on the third business day immediately preceding the date fixed
for redemption.
New Prime Series B Preferred Shares will be deemed to have been converted
immediately prior to the close of business on the date such shares are
surrendered for conversion and notice of election to convert the same is
received by New Prime. Upon conversion, no adjustment or prepayment will be made
for distributions or dividends, but if any holder surrenders New Prime Series B
Preferred Shares for conversion after the close of business on a New Prime
Series B Preferred Distribution Record Date and prior to the opening of business
on the related New Prime Series B Preferred Distribution Payment Date, then,
notwithstanding such conversion, the distribution or dividend payable on such
New Prime Series B Preferred Distribution Payment Date will be paid on such New
Prime Series B Preferred Distribution Payment Date to the registered holder of
such shares on such New Prime Series B Preferred Distribution Record Date. New
Prime Series B Preferred Shares surrendered for conversion during the period
from the close of business on a New Prime Series B Preferred Distribution Record
Date to New Prime Series B Preferred Distribution Payment Date must also pay the
amount of the distribution or dividend which is payable. No fractional New Prime
Common Shares will be issued upon conversion and, if the conversion results in a
fractional interest, an amount will be paid in cash equal to the value of such
fractional interest based on the market price of New Prime Common Shares on the
last trading day prior to the date of conversion.
The number of New Prime Common Shares or other assets issuable upon
conversion and the conversion price are subject to adjustment upon the
occurrence of the following events: (i) the issuance of New Prime Common Shares
as a dividend or distribution on New Prime Common Shares; (ii) the subdivision,
combination or reclassification of the outstanding New Prime Common Shares,
(iii) the issuance to all holders of New Prime Common Shares of rights or
warrants to subscribe for or purchase New Prime Common Shares (or securities
convertible into New Prime Common Shares) at a price per share less than the
then current market price per share, as determined in accordance with the
provisions of the New Prime Charter; (iv) the distribution to all holders of New
Prime Common Shares of evidences of indebtedness or assets (including
securities, but excluding ordinary cash distributions, as defined below, and
those distributions, rights or warrants referred to above); and (v) the
distribution to all holders of New Prime Common Shares of rights or warrants to
subscribe for securities (other than those referred to in clause (iii) above).
The adjustments to be made in each such event are set forth in the New Prime
Charter. In the event of a distribution of evidence of indebtedness or other
assets (as described in clause (iv)) or a distribution to all holders of New
Prime Common Shares of rights to subscribe for additional shares of New Prime's
capital stock (other than those referred to in clause (iii) above), New Prime
may, instead of making an adjustment of the conversion price, make proper
provision so that each holder who converts such shares
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will be entitled to receive upon such conversion, in addition to New Prime
Common Shares, an appropriate number of such rights, warrants, evidences of
indebtedness or other assets. No adjustment will be made for ordinary cash
distributions (defined as distributions to holders of New Prime Common Shares in
an amount not exceeding Prime Partnership's accumulated FFO since the Prime IPO,
after deducting dividends or other distributions (i) paid in respect of all
classes of capital stock of New Prime and Prime Partnership Common Units held by
persons other than New Prime or (ii) accrued in respect of New Prime Series B
Preferred Shares, New Prime Series A Preferred Shares and any other New Prime
Preferred Shares New Prime ranking on a parity with or senior to New Prime
Series B Preferred Shares as to distributions). In addition, no adjustment of
the conversion price will be made until cumulative adjustments amount to one
percent or more of the conversion price as last adjusted. Any adjustments not so
required to be made will be carried forward and taken into account in subsequent
adjustments.
Whenever the number of New Prime Common Shares or other assets issuable upon
conversion and the conversion price are adjusted as herein provided, New Prime
(i) will promptly make available at the office of the transfer agent a statement
describing in reasonable detail such adjustment, and (ii) will cause to be
mailed by first class mail, postage prepaid, as soon as practicable, to each
holder of record of New Prime Series B Preferred Shares, a notice stating that
certain adjustments have been made and stating the adjusted conversion price.
In the event of any capital reorganization or reclassification of the
capital stock of New Prime, or consolidation or merger of New Prime with another
corporation, or the sale, transfer or lease of all or substantially all of its
assets to another corporation, is effected in such a way that holders of New
Prime Common Shares will be entitled to receive stock, securities or other
assets with respect to or in exchange for New Prime Common Shares, then, as a
condition of such reorganization, reclassification, consolidation, merger, sale,
transfer or lease, the holder of New Prime Series B Preferred Shares shall have
the right immediately to convert such share into the kind and amount of stock,
securities or other assets which the holders of such shares would have owned or
been entitled to receive immediately after the transaction if such holders had
converted such shares immediately before the effective date of the transaction,
subject to further adjustment upon the occurrence of the events described above.
RANK
New Prime Series B Preferred Shares, with respect to dividend rights and
distributions upon liquidation, dissolution, and winding up, rank (i) senior to
New Prime Common Shares, all other New Prime Common Shares, all classes of New
Prime Excess Shares (other than New Prime Excess Series A Preferred Shares and
New Prime Excess Series B Preferred Shares, as to which New Prime Series B
Preferred Shares are senior only as to distributions), and shares of all other
series of capital stock issued by New Prime other than any series of capital
stock the terms of which specifically provide that the capital stock of such
series rank senior to or on a parity with such New Prime Series B Preferred
Shares with respect to dividend rights or distributions upon liquidation,
dissolution, or winding up of New Prime; (ii) on a parity with New Prime Excess
Series B Preferred Shares (upon liquidation, dissolution and winding up) and the
shares of all other capital stock issued by New Prime the terms of which
specifically provide that the shares rank on a parity with New Prime Series B
Preferred Shares with respect to dividends and distributions upon liquidation,
dissolution, or winding up of New Prime or make no specific provision as to
their ranking; and (iii) junior to New Prime Series A Preferred Shares, New
Prime Excess Series A Preferred Shares (only upon liquidation, dissolution or
winding up) and all other capital stock issued by New Prime the terms of which
specifically provide that the shares rank senior to New Prime Series B Preferred
Shares with respect to dividends and distributions upon liquidation,
dissolution, or winding up of New Prime (the issuance of which must have been
approved by a vote of at least a majority of the outstanding New Prime Series B
Preferred Shares).
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TRANSFER AGENT
The transfer agent and registrar for New Prime Series B Preferred Shares is
American Stock Transfer & Trust Company.
LISTING
The New Prime Series B Preferred Shares will be listed on the NYSE under the
trading symbol "PRT prb."
NEW PRIME SERIES C PREFERRED SHARES
DISTRIBUTIONS
Subject to the preferential rights of New Prime Series A Preferred Shares,
New Prime Series B Preferred Shares and any other New Prime Preferred Shares
that rank senior in the payment of distributions to New Prime Series C Preferred
Shares, the holders of New Prime Series C Preferred Shares shall be entitled to
receive, when, as and if declared by the New Prime Board of Directors, out of
funds legally available for the payment of distributions, cumulative
preferential distributions payable in cash in an amount per share equal to the
greater of (i) the rate of $1.18 per annum per share or (ii) the regular cash
distributions (determined on each New Prime Series C Preferred Distribution
Payment Date referred to below) on New Prime Common Shares, or portion thereof,
into which a New Prime Series C Preferred Share is convertible. The
distributions referred to in clause (ii) of the preceding sentence shall equal
the number of New Prime Common Shares, or portion thereof, into which a share of
New Prime Series C Preferred Shares will be convertible on or after the New
Prime Series C Conversion Date, multiplied by the most current quarterly
distribution on a share of New Prime Common Shares on or before the applicable
New Prime Series C Preferred Distribution Payment Date. If New Prime pays a
regular cash distribution on New Prime Common Shares with respect to a New Prime
Series C Preferred Dividend Period after the date on which the New Prime Series
C Preferred Distribution Payment Date is declared and the distribution
calculated with respect to such New Prime Series C Preferred Distribution Period
is greater than the distribution previously declared on New Prime Series C
Preferred Shares with respect to such New Prime Series C Preferred Distribution
Period, New Prime shall pay an additional distribution to the holders of New
Prime Series C Preferred Shares on the date on which the distribution on New
Prime Common Shares is paid, in an amount equal to the difference between (y)
the distribution calculated pursuant to clause (ii) above and (z) the amount of
distributions previously declared on New Prime Series C Preferred Shares with
respect to such New Prime Series C Preferred Distribution Period.
Distributions with respect to New Prime Series C Preferred Shares are
cumulative from the date of original issuance and begin to accrue from the first
day of the applicable New Prime Series C Preferred Distribution Period (each, a
"New Prime Series C Preferred Distribution Payment Date"), whether or not in any
New Prime Series C Preferred Distribution Period or Periods there shall be funds
of New Prime legally available for the payment of such distributions, and shall
be payable quarterly, when, as and if declared by the New Prime Board of
Directors, in arrears on New Prime Series C Preferred Distribution Payment
Dates. Each such distribution shall be payable in arrears to the holders of
record of New Prime Series C Preferred Shares as they appear in the records of
New Prime at the close of business on such record dates, not less than 10 nor
more than 50 days preceding such New Prime Series C Preferred Distribution
Payment Dates thereof, as shall be fixed by the New Prime Board of Directors.
Accrued and unpaid distributions for any past New Prime Series C Distribution
Periods may be declared and paid at any time and for such interim periods,
without reference to any regular New Prime Series C Distribution Payment Date,
to holders of record on such date, not less than 10 nor more than 50 days
preceding the payment date thereof, as may be fixed by the New Prime Board of
Directors. Any distribution payment made on New Prime Series C Preferred Shares
shall first be credited against the earliest accrued but unpaid distribution due
with respect to New Prime Series C Preferred Shares which remains payable.
Distributions payable on New Prime Series C Preferred Shares for each full
distribution period are computed by dividing the annual distribution rate by
four. The initial New Prime Series C Preferred Distribution Period for any New
Prime Series C Preferred Shares will include a partial distribution for the
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period from the applicable initial issue date until the last day of the calendar
quarter immediately following such initial issue date. The amount of
distributions payable for such period, or any other period shorter than a full
New Prime Series C Preferred Distribution Period, on the Series C New Prime
Preferred Shares shall be computed by dividing the number of days in such period
by 365. Holders of New Prime Series C Preferred Shares shall not be entitled to
any distributions, whether payable in cash, property or shares, in excess of
cumulative distributions, as herein provided, on New Prime Series C Preferred
Shares. No interest, or sum of money in lieu of interest, shall be payable in
respect of any distribution payment or payments on New Prime Series C Preferred
Shares which may be in arrears.
So long as any New Prime Series C Preferred Shares are outstanding, no
distributions, except as described in the immediately following sentence, shall
be declared or paid or set apart for payment on any class or series ranking on a
parity as to distributions with New Prime Series C Preferred Shares for any
period unless full cumulative distributions have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on New Prime Series C Preferred Shares for all New Prime
Series C Preferred Distribution Periods terminating on or prior to the New Prime
Series C Preferred Distribution Payment Date on such class or series of ranking
on a parity to New Prime Series C Preferred Shares. When distributions are not
paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all distributions declared upon New Prime Series C Preferred Shares
and all distributions declared upon any other class or series ranking on a
parity to New Prime Series C Preferred Shares shall be declared ratably in
proportion to the respective amounts of distributions accumulated and unpaid on
New Prime Series C Preferred Shares and accumulated and unpaid on such other
shares.
So long as any New Prime Series C Preferred Shares are outstanding, no
distributions (other than distributions paid solely in shares of, or options,
warrants or rights to subscribe for or purchase shares of, fully junior shares
shall be declared or paid or set apart for payment or other distribution shall
be declared or made or set apart for payment upon junior shares, nor shall any
junior shares be redeemed, purchased or otherwise acquired (other than a
redemption, purchase or other acquisition of New Prime Common Shares made for
purposes of an employee incentive or benefit plan of New Prime or any
subsidiary) for any consideration (or any moneys be paid to or made available
for a sinking fund for the redemption of any junior shares) by New Prime,
directly or indirectly (except by conversion into or exchange for fully junior
shares), unless in each case (i) the full cumulative distributions on all
outstanding New Prime Series C Preferred Shares and any other shares ranking, as
to distributions, on a parity with or junior to New Prime Series C Preferred
Shares shall have been or contemporaneously are declared and paid or declared
and set apart for payment for all past New Prime Series C Preferred Distribution
Periods with respect to New Prime Series C Preferred Shares and all past New
Prime Series C Preferred Distribution Periods with respect to such parity shares
and (ii) sufficient funds shall have been or contemporaneously are declared and
paid or declared and set apart for the payment of the distribution for the
current New Prime Series C Preferred Distribution Period with respect to New
Prime Series C Preferred Shares and the current distribution period with respect
to such parity shares.
No distributions on New Prime Series C Preferred Shares shall be declared by
the New Prime Board of Directors or paid or set apart for payment by New Prime
at such time as the terms and provisions of any agreement of New Prime,
including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of New Prime,
whether voluntary or involuntary, subject to the prior preferences and other
rights of any series of capital stock ranking senior to New Prime Series C
Preferred Shares upon liquidation, distribution or winding up of New Prime
(including New Prime Series A Preferred Shares and New Prime Series B Preferred
Shares) before any payment or distribution of the assets of New Prime (whether
capital or surplus) shall be made to or set apart for the holders of junior
shares, the holders of New Prime Series C Preferred Shares shall be entitled to
receive
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Thirteen Dollars and Seventy-Five Cents ($13.75) (the "New Prime Series C
Preferred Liquidation Preference Amount") per share of New Prime Series C
Preferred Shares plus an amount equal to all distributions (whether or not
earned or declared) accrued and unpaid thereon to the date of final distribution
to such holders; but such holders shall not be entitled to any further payment;
provided, that the distribution payable with respect to the New Prime Series C
Preferred Distribution Period containing the date of final distribution shall be
equal to the greater of (i) the rate of $1.18 per annum per share or (ii) the
regular cash distributions on New Prime Common Shares, or portion thereof, into
which a New Prime Series C Preferred Share is convertible for the preceding New
Prime Series C Preferred Distribution Period. If, upon any liquidation,
dissolution or winding up of New Prime, the assets of New Prime, or proceeds
thereof, distributable among the holders of New Prime Series C Preferred Shares
shall be insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any other shares of any class or series ranking, as to
distributions, on a parity with or junior to New Prime Series C Preferred
Shares, then such assets, or the proceeds thereof, shall be distributed among
the holders of New Prime Series C Preferred Shares and any such other parity
shares ratably in accordance with the respective amounts that would be payable
on such New Prime Series C Preferred Shares and any such other parity shares if
all amounts payable thereon were paid in full. A consolidation or merger of New
Prime with one or more corporations, real estate investment trusts or other
entities, (ii) a sale, lease or conveyance of all or substantially all of New
Prime's property or business or (iii) a statutory share exchange shall not be
deemed to be a liquidation, dissolution or winding up, voluntary or involuntary,
of New Prime.
Subject to the rights of the holders of shares of any series or class or
classes of shares of capital stock ranking on a parity with or prior to New
Prime Series C Preferred Shares upon liquidation, dissolution or winding up,
upon any liquidation, dissolution or winding up of New Prime, after payment
shall have been made in full to the holders of New Prime Series C Preferred
Shares, the holders of New Prime Series C Preferred Shares shall have no other
claim to the remaining assets of New Prime and any other series or class or
classes of junior shares shall, subject to the respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the holders of New Prime Series C Preferred
Shares shall not be entitled to share therein.
REDEMPTION
New Prime Series C Preferred Shares will not be redeemable by New Prime
prior to August 8, 2007. On and after August 8, 2007, New Prime, at its option,
may redeem New Prime Series C Preferred Shares, in whole at any time or from
time to time in part out of funds legally available therefor at a redemption
price payable in cash equal to 100% of the New Prime Series C Preferred
Liquidation Preference Amount per share of New Prime Series C Preferred Shares
(plus all accumulated, accrued and unpaid distributions as provided below). New
Prime Series C Preferred Shares have no stated maturity and will not be entitled
to the benefit of any sinking fund.
VOTING
Holders of New Prime Series C Preferred Shares do not have any voting
rights, except as set forth below or as otherwise from time to time required by
law.
Whenever (i) distributions on any New Prime Series C Preferred Shares have
been in arrears for two consecutive quarters or any series or class of shares on
a parity as to dividends or distributions have been in arrears, whether or not
earned or declared, or (ii) for two consecutive quarters, New Prime fails to pay
distributions on New Prime Common Shares in an amount per share at least equal
to $0.25 (subject to adjustment), the number of directors then constituting the
New Prime Board of Directors shall be increased by one (unless the then current
New Prime Board of Directors consists of more than 10 directors in which case it
shall be increased by two) and the holders of New Prime Series C Preferred
Shares, together with the holders of shares of every other series or class of
shares on a parity as to dividends or distributions with New Prime Series C
Preferred Shares (any such other series, the "New Prime Voting Preferred
Shares"), voting as a single class regardless of series, shall be entitled to
elect the one or two additional directors to serve on the New Prime Board of
Directors at any annual meeting of stockholders or special meeting held in place
thereof, or at a special meeting of the holders of New Prime Series C
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Preferred Shares and New Prime Voting Preferred Shares. Each of such two
directors will be elected to serve until the earlier of (i) the election and
qualification of such director's successor or (ii) payment of the distribution
arrearage for New Prime Series C Preferred Shares and New Prime Voting Preferred
Shares.
So long as any New Prime Series C Preferred Shares are outstanding, in
addition to any other vote or consent of shareholders required by law or by the
New Prime Charter, the affirmative vote of at least two-thirds of the votes
entitled to be cast by the holders of New Prime Series C Preferred Shares given
in person or by proxy, either in writing without a meeting or by vote at any
meeting called for the purpose, shall be necessary for effecting or validating:
(i) any amendment, alteration or repeal of any of the provisions of the New
Prime Charter or the New Prime Bylaws that materially and adversely affects the
voting powers, rights or preferences of the holders of New Prime Series C
Preferred Shares; provided, however, that the amendment of the provisions of the
New Prime Charter so as to authorize or create or to increase the authorized
amount of, any shares junior to or on a parity with New Prime Series C Preferred
Shares as to distributions, shall not be deemed to materially adversely affect
the voting powers, rights or preferences of the holders of New Prime Series C
Preferred Shares; (ii) a share exchange that affects New Prime Series C
Preferred Shares, a consolidation with or merger of New Prime into another
entity, or a consolidation with or merger of another entity into New Prime,
unless in each such case each share of New Prime Series C Preferred Shares (a)
shall remain outstanding without a material and adverse change to its terms and
rights or (b) shall be converted into or exchanged for convertible preferred
shares of the surviving entity having preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions, qualifications and
terms or conditions of redemption thereof identical to that of a share of New
Prime Series C Preferred Shares (except for changes that do not materially and
adversely affect the holders of New Prime Series C Preferred Shares); or (iii)
the authorization, reclassification or creation of, or the increase in the
authorized amount of, any shares of any class or any security convertible into
shares of any class ranking prior to New Prime Series C Preferred Shares in the
distribution of assets on any liquidation, dissolution or winding up of New
Prime or in the payment of distributions; provided, however, that no such vote
of the holders of New Prime Series C Preferred Shares shall be required (x) for
New Prime in order to sell up to 57,000,000 (before deducting underwriting
discounts or commissions) of its New Prime Series B Preferred Shares at a price
equal to or greater than $22 per share (before deducting underwriting discounts
or commissions) as long as no modification has been made to the New Prime
Charter affecting the rights or privileges of such New Prime Series B Preferred
Shares, or (y) if, at or prior to the time when such amendment, alteration or
repeal is to take effect, or when the issuance of any such prior shares or
convertible security is to be made, as the case may be, provision is made for
the redemption of all New Prime Series C Preferred Shares at the time
outstanding to the extent such redemption is authorized by the New Prime
Charter.
Each share of New Prime Series C Preferred Shares shall have one (1) vote
per share, except that when any other series of Preferred Shares shall have the
right to vote with New Prime Series C Preferred Shares as a single class on any
matter, then New Prime Series C Preferred Shares and such other series shall
have with respect to such matters one (1) vote per $13.75 (or in some cases
less) of stated liquidation preference. Except as otherwise required by
applicable law or as set forth herein, New Prime Series C Preferred Shares shall
not have any relative, participating, optional or other special voting rights
and powers other than as set forth herein, and the consent of the holders
thereof shall not be required for the taking of any action by New Prime.
CONVERSION
Subject to certain exceptions as set forth in the New Prime Charter, holders
of New Prime Series C Preferred Shares shall have the right, as provided in the
New Prime Charter, exercisable upon the earliest to occur of (i) August 8, 1998,
(ii) the first day on which a "change of control" occurs (as defined in the New
Prime Charter), (iii) the occurrence of a "REIT Termination Event" (as defined
in the New Prime Charter), or (iv) such date as determined by New Prime (the
"New Prime Series C Conversion Date") to convert all or a portion of such shares
into the number of fully paid and non-assessable New Prime Common Shares
obtained by dividing the aggregate liquidation preference of such shares
(inclusive of accrued but unpaid distributions) by the Series C Conversion Price
(as in effect at the time) by
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surrendering such shares to be converted. The initial conversion price of the
New Prime Series C Preferred Shares is equal to $13.75 which represents the
initial purchase price of such shares. In the case of New Prime Series C
Preferred Shares called for redemption, conversion rights will expire at the
close of business on the fifth business day immediately preceding the date fixed
for redemption.
In order to exercise the conversion right, the holder of each New Prime
Series C Preferred Share to be converted shall surrender the certificate
representing such share, duly endorsed or assigned to New Prime or in blank, at
the office of the transfer agent, accompanied by written notice to New Prime
that the holder thereof irrevocably elects to convert such New Prime Series C
Preferred Shares. Unless the shares issuable on conversion are to be issued in
the same name as the name in which such New Prime Series C Preferred Share is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to New Prime, duly executed by the
holder or such holder's duly authorized attorney and an amount sufficient to pay
any transfer or similar tax (or evidence reasonably satisfactory to New Prime
demonstrating that such taxes have been paid).
Holders of New Prime Series C Preferred Shares at the close of business on a
distribution payment record date shall be entitled to receive the distribution
payable on such shares on the corresponding New Prime Series C Preferred
Distribution Payment Date notwithstanding the conversion thereof following such
distribution payment record date and prior to such New Prime Series C Preferred
Distribution Payment Date. However, New Prime Series C Preferred Shares
surrendered for conversion during the period between the close of business on
any distribution payment record date and the opening of business on the
corresponding New Prime Series C Preferred Distribution Payment Date (except
shares converted after the issuance of notice of redemption with respect to a
"call date" (as defined in the New Prime Charter) during such period, such New
Prime Series C Preferred Shares being entitled to such distribution on New Prime
Series C Preferred Distribution Payment Date) must be accompanied by payment of
an amount equal to the distribution payable on such shares on such New Prime
Series C Preferred Distribution Payment Date. A holder of New Prime Series C
Preferred Shares on a distribution payment record date who (or whose transferee)
tenders any such shares for conversion into New Prime Common Shares on the
corresponding New Prime Series C Preferred Distribution Payment Date will
receive the distribution payable by New Prime on such New Prime Series C
Preferred Shares on such date, and the converting holder need not include
payment of the amount of such distribution upon surrender of New Prime Series C
Preferred Shares for conversion. Except as provided above, New Prime shall make
no payment or allowance for unpaid distributions, whether or not in arrears, on
converted shares or for distributions on New Prime Common Shares issued upon
such conversion.
As promptly as practicable after the surrender of certificates for New Prime
Series C Preferred Shares as aforesaid, New Prime shall issue and shall deliver
at such office to such holder, or on his or her written order, a certificate or
certificates for the number of full New Prime Common Shares issuable upon the
conversion of such shares in accordance the New Prime Charter, and any
fractional interest in respect of a New Prime Common Share arising upon such
conversion shall be settled as provided below.
Each conversion shall be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for New Prime Series
C Preferred Shares shall have been surrendered and such notice shall have been
received by New Prime as aforesaid (and if applicable, payment of an amount
equal to the distribution payable on such shares shall have been received by New
Prime as described above), and the person or persons in whose name or names any
certificate or certificates for New Prime Common Shares shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby at such time on such date and such conversion
shall be at the New Prime Series C Conversion Price in effect at such time on
such date unless the share transfer books of New Prime shall be closed on that
date, in which event such person or persons shall be deemed to have become such
holder or holders of record at the close of business on the next succeeding day
on which such share transfer books are open, but such conversion shall be at the
New Prime Series C Conversion Price in effect on the date on which such shares
shall have been surrendered and such notice received by New Prime.
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No fractional shares or scrip representing fractions of New Prime Common
Shares shall be issued upon conversion of New Prime Series C Preferred Shares.
Instead of any fractional interest in a share of New Prime Common Shares that
would otherwise be deliverable upon the conversion of a share of New Prime
Series C Preferred Shares, New Prime shall pay to the holder of such share an
amount in cash based upon the current market price of New Prime Common Shares on
the trading day immediately preceding the date of conversion. If more than one
share shall be surrendered for conversion at one time by the same holder, the
number of full New Prime Common Shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of New Prime Series C Preferred
Shares so surrendered.
The number of New Prime Series C Preferred Shares or other assets issuable
upon conversion and the conversion price are subject to adjustment upon the
occurrence of, among other things, the following events: (i) the issuance of New
Prime Common Shares as a distribution on New Prime Common Shares; (ii) the
subdivision, combination or reclassification of the outstanding New Prime Common
Shares, (iii) the issuance to all holders of New Prime Common Shares of rights
or warrants to subscribe for or purchase New Prime Common Shares (or securities
convertible into New Prime Common Shares) at a price per share less than the
then current market price per share, as determined in accordance with the
provisions of the New Prime Charter; (iv) the distribution to all holders of New
Prime Common Shares of evidences of indebtedness or assets (including
securities, but excluding ordinary cash distributions, as defined below, and
those dividends, distributions, rights or warrants referred to above); and (v)
the distribution to all holders of New Prime Common Shares of rights or warrants
to subscribe for securities (other than those referred to in clause (iii)
above).
In the event of any capital reorganization or reclassification of the
capital stock of New Prime, or consolidation or merger of New Prime with another
corporation, or the sale, transfer or lease of all or substantially all of its
assets to another corporation, is effected in such a way that holders of New
Prime Common Shares will be entitled to receive stock, securities or other
assets with respect to or in exchange for New Prime Common Shares, then, as a
condition of such reorganization, reclassification, consolidation, merger, sale,
transfer or lease, the holder of New Prime Series C Preferred Shares shall have
the right immediately to convert such share into the kind and amount of stock,
securities or other assets which the holders of such shares would have owned or
been entitled to receive immediately after the transaction if such holders had
converted such shares immediately before the effective date of the transaction,
subject to further adjustment upon the occurrence of the events described above.
FIXED CHARGE COVERAGE; LIMITATION ON ISSUANCE OF ADDITIONAL NEW PRIME
PREFERRED SHARES AND INDEBTEDNESS
Without the written consent of the holders of two-thirds of the issued and
outstanding New Prime Series C Preferred Shares and New Prime Series C Preferred
Units, collectively, none of New Prime, Prime Partnership, or any of their
subsidiaries may issue any additional preferred securities of any such entity or
incur any indebtedness (other than trade payables or accrued expenses incurred
in the ordinary course of business) if, immediately following such issuance and
after giving effect to such issuance and the application of the net proceeds
therefrom, such entity would be reasonably expected to not satisfy one or both
of the following ratios: (i) total debt and liquidation value of non-convertible
New Prime Preferred Shares to total market capitalization of less than .65 to
1.0, or (ii) consolidated EBITDA to consolidated fixed charges of at least 1.4
to 1.0. In the event that New Prime fails to satisfy one or both of the above
tests for two consecutive quarters, the holders of New Prime Series C Preferred
Shares and New Prime Series C Preferred Units shall have the right to require
that New Prime, to the extent that New Prime shall have funds legally available
therefor, repurchase any or all of each holder's New Prime Series C Preferred
Shares and New Prime Series C Preferred Units at a repurchase price payable in
cash in an amount equal to 100% of the liquidation preference thereof, plus
accrued and unpaid distributions whether or not declared, if any (the
"Repurchase Payment"), to the date of repurchase or the date payment is made
available (the "Repurchase Date"), pursuant to the offer described below (the
"Repurchase Offer").
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Within 15 days following the second consecutive quarter that New Prime fails
to satisfy one or both of the tests set forth above, New Prime shall mail by
first class mail or overnight courier a notice to all holders of New Prime
Series C Preferred Shares and New Prime Series C Preferred Units stating (i)
that New Prime failed to satisfy one or both of the tests (naming the test(s)
failed), (ii) that the holders of New Prime Series C Preferred Shares and New
Prime Series C Preferred Units have the right to require New Prime to repurchase
any or all New Prime Series C Preferred Shares and New Prime Series C Preferred
Units then held by such holder in cash, (iii) the date of repurchase (which
shall be a business day, no earlier than 120 days and no later than 150 days
from the date such notice is mailed, or such later date as may be necessary to
comply with the requirements of the Exchange Act), (iv) the repurchase price for
the repurchase and (v) the instructions determined by New Prime, consistent with
this subsection, that the holder must follow in order to have its New Prime
Series C Preferred Shares and New Prime Series C Preferred Units repurchased.
On the Repurchase Date, New Prime will, to the extent lawful, accept for
payment New Prime Series C Preferred Shares and New Prime Series C Preferred
Units or portions thereof tendered pursuant to the Repurchase Offer and promptly
mail by first class mail or overnight courier or by wire transfer of immediately
available funds to the holder of New Prime Series C Preferred Shares and New
Prime Series C Preferred Units, as directed by such holder, payment in an amount
equal to the Repurchase Payment in respect of all New Prime Series C Preferred
Shares and New Prime Series C Preferred Units or portions thereof so tendered.
Notwithstanding anything else herein, to the extent they are applicable to
any Repurchase Offer, New Prime will comply with any federal and state
securities laws, rules and regulations and all time periods and requirements
shall be adjusted accordingly.
RANKING
Any class or series of shares of capital stock of New Prime shall be deemed
to rank: (a) prior to New Prime Series C Preferred Shares, as to the payment of
dividends and as to distribution of assets upon liquidation, dissolution or
winding up, if the holders of such class or series shall be entitled to the
receipt of distributions or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority to the
holders of New Prime Series C Preferred Shares; (b) on a parity with New Prime
Series C Preferred Shares, as to the payment of distributions and as to
distribution of assets upon liquidation, dissolution or winding up, whether or
not the distribution rates, distribution payment dates or redemption or
liquidation prices per share thereof shall be different from those of New Prime
Series C Preferred Shares, if the holders of such class or series and New Prime
Series C Preferred Shares shall be entitled to the receipt of dividends and of
amounts distributable upon liquidation, dissolution or winding up in proportion
to their respective amounts of accrued and unpaid distributions per share or
liquidation preferences, without preference or priority one over the other; (c)
junior to New Prime Series C Preferred Shares, as to the payment of dividends or
as to the distribution of assets upon liquidation, dissolution or winding up, if
such class or series shall be junior shares; and (d) junior to New Prime Series
C Preferred Shares, as to the payment of dividends and as to the distribution of
assets upon liquidation, dissolution or winding up, if such class or series
shall be junior shares.
TRANSFER AGENT
The transfer agent and registrar for New Prime Series C Preferred Shares is
New Prime.
NEW PRIME COMMON SHARES
All of the New Prime Common Shares offered hereby are duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other shares
or series of shares and to the provisions of the New Prime Charter regarding New
Prime Preferred Shares, including New Prime Series A Preferred
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Shares, New Prime Series B Preferred Shares, New Prime Series C Preferred Shares
and New Prime Excess Shares, holders of New Prime Common Shares are entitled to
receive distributions on such shares if, as and when authorized and declared by
the New Prime Board of Directors out of assets legally available therefor and to
share ratably in the assets of New Prime legally available for distribution to
the stockholders in the event of the liquidation, dissolution or winding-up of
New Prime after payment of, or adequate provision for, all known debts and
liabilities of New Prime. New Prime intends to continue to pay quarterly
distributions. Subject to the payment in full of all current and any accumulated
distributions in respect of Prime Partnership Series A Preferred Units, Prime
Partnership Series B Preferred Units and New Prime Series C Preferred Shares, up
to $0.295 will be distributed quarterly by Prime Partnership in respect of Prime
Partnership Common Units held by the Prime Partnership limited partners. Any
further amounts distributed in such quarter will be distributed ratably among
all holders of Prime Partnership Common Units. If Prime Partnership has not
distributed to New Prime the amount specified above in any quarter, then the
deficit will accumulate and be distributable on a preferential basis in
subsequent quarters. Distributions not paid on Prime Partnership Common Units
held by Prime Partnership limited partners for any quarter will not accumulate.
Distributions in respect of Prime Partnership Common Units will be made pro rata
to the holders thereof.
New Prime Series B Preferred Shares are entitled to payment of distributions
and dividends at the rate declared on New Prime Common Shares if such rate is
greater than the stated distribution rate on New Prime Series B Preferred
Shares. Accordingly, at such time as the distribution or dividend rate on New
Prime Common Shares is greater than the stated rate on New Prime Series B
Preferred Shares, holders of New Prime Series B Preferred Shares will be
entitled to participate in any further growth of FFO together with the holders
of New Prime Common Shares.
New Prime will not terminate New Prime's status as a REIT without the
affirmative vote or consent of the holders of at least a majority of the shares
of New Prime Series A Preferred Shares, New Prime Series B Preferred Shares and
New Prime Common Shares outstanding at the time, voting together as a single
class, given in person or by proxy, either in writing or at a meeting.
Subject to the provisions of the New Prime Charter regarding New Prime
Excess Shares, New Prime Series A Preferred Shares, New Prime Series B Preferred
Shares and New Prime Series C Preferred Shares, each outstanding New Prime
Common Share entitles the holder to one vote on all matters submitted to a vote
of stockholders, including the election of directors and, except as otherwise
required by law or except as provided with respect to any other class or series
of shares, the holders of such shares will possess exclusive voting power. There
is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding New Prime Common Shares can elect all
of the directors then standing for election and the holders of the remaining
shares will not be able to elect any directors.
Holders of New Prime Common Shares have no conversion, sinking fund,
redemption rights or preemptive rights to subscribe for any securities of New
Prime.
Subject to the provisions of the New Prime Charter regarding New Prime
Excess Shares, shares of a particular class of issued New Prime Common Shares
have equal dividend, distribution, liquidation and other rights, and have no
preference, appraisal or exchange rights.
The transfer agent and registrar for New Prime Common Shares is American
Stock Transfer & Trust Company.
The New Prime Common Shares will be listed on the NYSE under the trading
symbol "PRT."
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The New Prime Charter contains certain restrictions on the number of shares
of capital stock, defined to include all classes of capital stock that New Prime
shall have authority to issue, including New Prime Series A Preferred Shares,
New Prime Series B Preferred Shares, New Prime Preferred Shares and New
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Prime Common Shares, that shareholders may own. For New Prime to continue to
qualify as a REIT under the Code, not more than 50% in value of its outstanding
capital stock may be owned, directly or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain tax-exempt entities other than, in general, qualified
domestic pension funds) at any time during the last half of a taxable year
(other than the first taxable year for which the election to be taxed as a REIT
has been made). The capital stock also 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. Because New Prime intends to
continue to qualify as a REIT, the New Prime Charter contains restrictions on
the ownership and transfer of capital stock.
Subject to certain exceptions specified in the New Prime Charter, no holder
may own, either directly or constructively under the applicable attribution
rules of the Code, more than 9.9% of the outstanding New Prime Common Shares
(the "New Prime Common Ownership Limit"). The New Prime Common Ownership Limit
will not apply, however, to holders of New Prime Common Shares who acquire New
Prime Common Shares in excess of the New Prime Common Ownership Limit solely by
reason of the conversion of New Prime Series B Preferred Shares owned by such
holder into New Prime Common Shares; PROVIDED, HOWEVER, that no such holder may
own an interest in any tenant under any lease of real property owned, in whole
or in part, directly or indirectly by New Prime, which exceeds, in the case of a
tenant that is a corporation, 9.9% of the total voting stock of such tenant or
9.9% of the total number of shares of all classes of stock of such tenant, or,
in the case of a tenant that is not a corporation, a 9.9% interest in the assets
or net profits of such tenant.
Subject to certain exceptions specified in the New Prime Charter, no holder
may acquire, either directly or constructively under the applicable attribution
rules of the Code, or beneficially own New Prime Series B Preferred Shares if,
as a result of such acquisition or beneficial ownership, such holder
beneficially owns shares of capital stock (including all classes) of New Prime
in excess of 9.9% of the value of New Prime's outstanding capital stock (the
"New Prime Series B Preferred Ownership Limit"). There are no restrictions on
the ability of a holder of New Prime Series B Preferred Shares to convert such
shares into New Prime Common Shares even if, as a result of such conversion, the
holder will own New Prime Common Shares in excess of the New Prime Common
Ownership Limit. However, no person may acquire or own shares of New Prime
Series B Preferred Shares or New Prime Common Shares to the extent that the
aggregate of New Prime Common Shares owned by such holder and New Prime Common
Shares that would be issued to such holder upon conversion of all New Prime
Series B Preferred Shares then owned by such holder, assuming that all of the
outstanding New Prime Series B Preferred Shares were converted into New Prime
Common Shares at such time, exceeds 9.9% of the total New Prime Common Shares on
a fully diluted basis (taking into account New Prime Common Shares actually
outstanding and New Prime Common Shares that would be issued if all of the
outstanding New Prime Series B Preferred Shares were converted into New Prime
Common Shares, but without regard to New Prime Common Shares issuable in
exchange for New Prime Common Units).
Subject to certain exceptions specified in the New Prime Charter, no holder
may own, either directly or constructively under the applicable attribution
rules of the Code, more than 10.0% of the outstanding New Prime Series A
Preferred Shares, and no holder that owns an interest in any tenant under any
lease of real property owned, in whole or in part, directly or indirectly by New
Prime, which exceeds, in the case of a tenant that is a corporation, 9.9% of the
total voting stock of such tenant or 9.9% of the total number of shares of all
classes of stock of such tenant, or in the case of a tenant that is not a
corporation, a 9.9% interest in the assets or net profits of such tenant, may
own, directly or constructively under the applicable attribution rules of the
Code, more than 9.9% of the outstanding New Prime Series A Preferred Shares (the
"New Prime Series A Preferred Ownership Limit"). The New Prime Series A
Preferred Ownership Limit does not apply, however, to holders who acquired New
Prime Series A Preferred Shares in excess of the New Prime Series A Preferred
Ownership Limit directly from FBR in connection with the Prime IPO ("Initial New
Prime Series A Preferred Holders"), provided, however, that (i) such holder may
not own an
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interest in any tenant under any lease of real property owned, in whole or in
part, directly or indirectly by New Prime, which exceeds, in the case of a
tenant that is a corporation, 9.9% of the total voting stock of such tenant or
9.9% of the total number of shares of all classes of stock of such tenant, or,
in the case of a tenant that is not a corporation, a 9.9% interest in the assets
or net profits of such tenant and (ii) such holder's ownership of New Prime
Series A Preferred Shares does not cause any "individual" (within the meaning of
the Code) to beneficially or constructively own New Prime Series A Preferred
Shares in excess of the Series A Preferred Ownership Limit. Initial New Prime
Series A Preferred Holders will not be able to acquire additional New Prime
Series A Preferred Shares in excess of the New Prime Series A Preferred
Ownership Limit.
Notwithstanding any of the foregoing ownership limits, no holder may own or
acquire, either directly or constructively under the applicable attribution
rules of the Code, any shares of any class of New Prime's capital stock if such
ownership or acquisition (i) would cause more than 50% in value of New Prime's
outstanding stock to be owned, either directly or constructively under the
applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds), (ii) would result in New Prime's
shares being beneficially owned by less than 100 persons (determined without
reference to any rules of attribution), or (iii) would otherwise result in New
Prime failing to qualify as a REIT.
The New Prime Board of Directors may, subject to the receipt of certain
representations as required by the New Prime Charter and a ruling from the IRS
or an opinion of counsel satisfactory to it, waive the ownership restrictions
with respect to a holder if such waiver will not jeopardize New Prime's status
as a REIT. In addition, under the New Prime Charter, certain parties will not be
subject to the New Prime Common Ownership Limit in the event such parties (i)
deliver to New Prime either a ruling from the IRS or an opinion from nationally
recognized tax counsel that such ownership will result in no individual (as
defined in the Code) beneficially or constructively owning in excess of 9.9% of
the outstanding New Prime Common Shares and (ii) represent to New Prime that it
does not and will not own more than a 9.9% interest in any tenant of New Prime.
If any shareholder purports to transfer capital stock to a person and either
the transfer would result in New Prime failing to qualify as a REIT, or such
transfer would cause the transferee to hold capital stock in excess of an
applicable ownership restriction, the purported transfer shall be null and void,
the intended transferee will acquire no rights or economic interest in the
capital stock, and the stockholder will be deemed to have transferred the
capital stock to New Prime in exchange for New Prime Excess Shares of the same
class or classes as were purportedly transferred, which New Prime Excess Shares
will be deemed to be held by New Prime as trustee of a trust for the exclusive
benefit of the person or persons to whom the shares can be transferred without
violating the ownership restrictions. In addition, if any person owns, either
directly or under the applicable attribution rules of the Code, shares of
capital stock in excess of an applicable ownership restriction, such person will
be deemed to have exchanged the shares of capital stock that cause the
applicable ownership restriction to be exceeded for an equal number of New Prime
Excess Shares of the appropriate class, which will be deemed to be held by New
Prime as trustee of a trust for the exclusive benefit of the person or persons
to whom the shares can be transferred without violating the ownership
restrictions. A person who holds or transfers shares such that shares of capital
stock shall have been deemed to be exchanged for New Prime Excess Shares will
not be entitled to vote New Prime Excess Shares and will not be entitled to
receive any dividends or distributions (any dividend or distribution paid on
shares of capital stock prior to the discovery by New Prime that such shares
have been exchanged for New Prime Excess Shares shall be repaid to New Prime
upon demand, and any dividend or distribution declared but unpaid shall be
rescinded). Such person shall have the right to designate a transferee of such
New Prime Excess Shares so long as consideration received for designating such
transferee does not exceed a price (the "Limitation Price") that is equal to the
lesser of (i) in the case of a deemed exchange for New Prime Excess Shares
resulting from a transfer, the price paid for the shares in such transfer or, in
the case of a deemed exchange for New Prime Excess Shares resulting from some
other event, the fair
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market value, on the date of the deemed exchange, of the shares deemed
exchanged, or (ii) the fair market value of the shares for which such New Prime
Excess Shares will be deemed to be exchanged on the date of the designation of
the transferee (or, in the case of a purchase by New Prime, on the date New
Prime accepts the offer to sell). For these purposes, fair market value on a
given date is determined by reference to the average closing price for the five
preceding days. New Prime Excess Shares so transferred will automatically be
deemed reexchanged for the appropriate shares of capital stock. In addition, New
Prime will have the right to purchase New Prime Excess Shares for a period of 90
days at a price equal to the Limitation Price.
An automatic redemption will occur to prevent any violation of the New Prime
Series B Preferred Ownership Limit that would not have occurred but for a
conversion of New Prime Series B Preferred Shares, or a redemption or open
market purchase of New Prime Series B Preferred Shares by New Prime (each a
"Company Induced Event"). In the event of any such automatic redemption, the
redemption price of each share of New Prime Series B Preferred Shares redeemed
will be (x) if a purported acquisition of New Prime Series B Preferred Shares in
which full value was paid for such New Prime Series B Preferred Shares caused
the redemption, the price per share paid for New Prime Series B Preferred
Shares, or (y) if the transaction that resulted in the redemption was not an
acquisition in which the full value was paid for such New Prime Series B
Preferred Shares (e.g., a gift or Company Induced Event relating to stock held
by others), a price per share equal to the market price on the date of the
purported transfer that resulted in the redemption. Any dividend or other
distribution paid to a holder of redeemed New Prime Series B Preferred Shares
(prior to the discovery by New Prime that such shares have been automatically
redeemed by New Prime as described above) will be required to be repaid to New
Prime upon demand. An automatic redemption also will occur with respect to New
Prime Series A Preferred Shares under similar circumstances as those described
above. The New Prime Board of Directors shall have authority at any time to
waive the requirements that New Prime Excess Shares be issued or deemed
outstanding in accordance with the provisions of the New Prime Charter or that
New Prime redeem New Prime Series B Preferred Shares or New Prime Series A
Preferred Shares as a result of a Company Induced Event if the issuance of such
New Prime Excess Shares or the fact that such New Prime Excess Shares is deemed
to be outstanding, or any such redemption would in the opinion of nationally
recognized tax counsel jeopardize the status of New Prime as a REIT for federal
income tax purposes.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decisions, statute, rule or regulation, then the intended
transferee of any New Prime Excess Shares may be deemed, at the option of New
Prime, to have acted as an agent on behalf of New Prime in acquiring such New
Prime Excess Shares and to hold such New Prime Excess Shares on behalf of New
Prime.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or regulations thereunder) of the issued and outstanding New Prime Series A
Preferred Shares, New Prime Series B Preferred Shares or New Prime Common Shares
must file a written notice with New Prime containing the information specified
in the New Prime Charter no later than January 30 of each year. Furthermore,
each stockholder shall upon demand be required to disclose to New Prime in
writing such information as New Prime may request in order to determine the
effect of such shareholder's direct, indirect and constructive ownership of such
capital stock on New Prime's status as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of New Prime without the consent of the New Prime Board
of Directors, and consequently, stockholders may be unable to realize a premium
for their shares over the then prevailing market price which is customarily
associated with such acquisitions.
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COMPARISON OF RIGHTS OF SHAREHOLDERS
The following discussion summarizes certain signifcant differences between
the rights of the shareholders under the MBCA, the Horizon Articles and the
Horizon Bylaws and the MGCL, the New Prime Charter and the New Prime Bylaws.
PRIME SHAREHOLDERS AND NEW PRIME SHAREHOLDERS
The New Prime Charter and New Prime Bylaws will be substantially similar to
the Prime Charter and Prime Bylaws except as follows: (1) the Prime Charter
authorizes 75,000,000 Prime Common Shares and the New Prime Charter authorizes
150,000,000 New Prime Common Shares, (2) the Prime Charter authorizes 51,000,000
Excess Shares and the New Prime Charter authorizes 88,500,000 New Prime Excess
Shares, (3) to authorize, create or increase the authorized or issued amount of
any class or series of capital stock ranking senior to or on a parity with the
Prime Series A Preferred Shares or amend, alter or repeal the provisions of the
Prime Charter so as to materially and adversely affect any right, preference,
privilege or voting power of such shares requires the vote of the holders of a
majority of such shares, voting separately as a class, while the New Prime
Charter requires, with respect to any similar authorization or amendment
relating to the New Prime Series A Preferred Shares, the vote of the holders of
two-thirds of such shares and (4) the Prime Charter provides that to authorize,
create or increase the authorized or issued amount of any class or series of
capital stock ranking senior to the Prime Series B Preferred Shares or amend,
alter or repeal the provisions of the Prime Charter so as to materially and
adversely affect any right, preference, privilege or voting power of such shares
requires the vote of the holders of a majority of such shares, voting separately
as a class, while the New Prime Charter requires, with respect to any similar
authorization or amendment relating to the New Prime Series B Preferred Shares,
the vote of the holders of two-thirds of such shares.
AUTHORIZED AND ISSUED SHARES
The Horizon Articles authorize the issuance of 60,000,000 Horizon Common
Shares. The designation of authorized Horizon Common Shares as of February 1,
1998, was as follows: (i) 47,000,000 Horizon Common Shares, of which 24,066,635
were issued and outstanding; (ii) 3,000,000 Horizon preferred shares, none of
which were issued and outstanding; and (iii) 10,000,000 excess Horizon Common
Shares, none of which were issued and outstanding.
The New Prime Charter authorizes the issuance of 150,000,000 New Prime
Common Shares. The designation of authorized New Prime Common Shares as of
February 1, 1998, was as follows: (i) 150,000,000 New Prime Common Shares,
27,294,951 of which were issued and outstanding; (ii) 24,315,000 New Prime
Preferred Shares, (a) 2,300,000 of which were issued and outstanding New Prime
Series A Preferred Shares, (b) 2,981,800 of which were issued and outstanding
New Prime Series B Preferred Shares, and (c) 727,273 of which were issued and
outstanding New Prime Series C Preferred Shares; and (iii) 88,500,000 shares of
New Prime Excess Stock, none of which were issued or outstanding.
AMENDMENT TO ARTICLES AND BYLAWS
The Horizon Articles provide that Horizon may amend, alter, change or repeal
any provision of the Horizon Articles with the approval of the record holders of
a majority of the outstanding Horizon Common Shares, except that, Horizon shall
not have any right, power or authority to amend, alter, change or repeal any of
the provisions of the Horizon Articles relating to the characteristics of the
excess shares of Horizon Common Shares (each, a "Horizon Excess Share"), the
restrictions on ownership and transfer of Horizon Common Shares, restrictions on
related party transactions, the election and removal of directors,
indemnification by Horizon, liability of Horizon's directors, amendments of the
Horizon Articles, merger, consolidation, dissolution, the sale of substantially
all of Horizon's assets, restrictions on business combinations, and legends and
certificates evidencing Horizon Common Shares, unless such action is first
approved
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by the affirmative vote of the record holders of at least two-thirds of the
outstanding Horizon Common Shares entitled to vote thereon voting at a meeting
Horizon Shareholders duly called for the purpose of considering the approval of
such action.
Under the New Prime Charter, the affirmative vote of a majority of the
aggregate number of votes entitled to be cast generally in the election of
directors is required to amend, alter or repeal any provision contained in the
New Prime Charter upon (i) adoption by the New Prime Board of Directors of a
resolution recommending such amendment, alteration or repeal, and (ii)
presentation by the New Prime Board of Directors to the stockholders of a
resolution at an annual or special meeting, except that, subject to the voting
rights of the New Prime Series A Preferred Shareholders, the New Prime Series B
Preferred Shareholders and the New Prime Series C Preferred Shareholders, which
the affirmative vote of the holders of two-thirds of the aggregate number of
votes then entitled to be cast generally in election of directors, shall be
required to amend Sections 4.10.3(b), 6.3 and 6.5 and Article X.
The Horizon Articles provide that the Horizon Bylaws may be altered or
repealed and made by the affirmative vote of the holders of at least two-thirds
of the combined voting power of all the shares of all classes of capital stock
of Horizon then entitled to vote generally in the election of directors or by
the affirmative vote of a majority of the members of the Horizon Board of
Directors then in office.
The New Prime Charter provides that no amendment, alteration, change or
repeal of any provision of the New Prime Bylaws relating to the amendment or
repeal of the New Prime Bylaws shall be effected without the vote of two-thirds
of the aggregate number of votes then entitled to be cast generally in the
election of at least two-thirds of the combined voting power of all the shares
of all classes of capital stock of New Prime then entitled to vote generally in
the election of directors. Accordingly, the same vote of stockholders is
required to amend the Horizon Bylaws as the New Prime Bylaws, but a higher vote
of the directors is required to amend certain sections of the Horizon Bylaws
than the New Prime Bylaws.
VOTING RIGHTS
The MBCA, the Horizon Articles and the Horizon Bylaws provide that if an
action, other than the election of directors, is to be taken by a vote of the
shareholders, it shall be authorized by a majority of the votes cast by the
holders of shares entitled to vote thereon, unless a greater vote is required by
the MBCA, the Horizon Articles or the Horizon Bylaws. The Horizon Articles
provide that directors of Horizon are required to be elected by a plurality of
the votes cast at an election. Horizon Shareholders do not have the right to
take action without a meeting except by unanimous written consent.
Except as provided in the MGCL or New Prime Charter, a majority of the
holders of New Prime Series B Preferred Shares outstanding is required to: (i)
authorize, create or increase the authorized or issued amount of any class or
series of capital stock ranking on a parity with the New Prime Series B
Preferred Shares as to distributions or upon liquidation, dissolution or winding
up or the excess shares of New Prime Series B Preferred Shares upon liquidation,
dissolution or winding up or reclassify any authorized capital stock into any
senior stock or parity stock or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any senior stock
or parity stock; or (ii) amend, alter or repeal the provisions of the New Prime
Charter; provided that the rights, preferences, privileges or voting powers of
the New Prime Series B Preferred Shareholders are not materially and adversely
affected.
Whenever distributions payable on New Prime Series B Preferred Shares shall
be in arrears for six or more consecutive quarterly periods, then the New Prime
Series B Preferred Shareholders shall be entitled to elect two additional
directors at the next annual or special meeting of the shareholders.
The right of New Prime Series B Preferred Shareholders to elect directors
may be exercised until all distributions to which New Prime Series B Preferred
Shareholders shall have been entitled for previous distribution periods and the
current distribution period shall have been paid in full or declared.
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At any time when the voting right shall become exercisable in the New Prime
Series B Preferred Shareholders, and if such right shall not already have been
initially exercised, a proper officer of New Prime shall, upon the written
request of holders of record of at least ten percent (10%) of the New Prime
Series B Preferred Shareholders, and of any other series of preferred stock
entitled to vote on such matter then outstanding, addressed to the Secretary of
New Prime, call a special meeting of New Prime Series B Preferred Shareholders.
Such meeting shall be held at the earliest practicable date upon the notice
required for annual meetings of stockholders at the place for holding annual
meetings of stockholders of New Prime or, if none, at a place designated by the
Secretary of New Prime. If such meeting shall not be called by the proper
officers of New Prime within thirty (30) days after the personal service of such
written request upon the Secretary of New Prime, or within thirty (30) days
after mailing the same within the United States, by registered mail, addressed
to the Secretary of New Prime at its principal office, then the holders of
record of at least ten percent (10%) of the New Prime Series B Preferred Shares,
and of any other series of preferred shares entitled to vote on such matter then
outstanding, may designate in writing a New Prime Series B Preferred Shareholder
or such other preferred stock to call such meeting at the expense of New Prime.
No such special meeting shall be called if any such request is received less
than 90 days before the date fixed for the next ensuing annual or special
meeting of shareholders.
If any director so elected by the New Prime Series B Preferred Shareholders
shall cease to serve as a director before such director's terms shall expire,
the New Prime Series B Preferred Shareholders then outstanding may, at a special
meeting of the holders called as provided above, elect a successor to hold
office for the unexpired term of the director whose place shall be vacant.
If, at any time when the New Prime Series B Preferred Shareholders are
entitled to elect directors pursuant to the foregoing provisions, the holder of
any one or more additional series of New Prime Series B Preferred Shares are
entitled to elect directors by reason of any default or event specified in the
New Prime Charter, as in effect at the time, or the articles supplementary for
such series, and if the terms for such other additional series so permit, then
the voting rights of the two or more series then entitled to vote shall be
combined (with each series having a number of votes proportional to the
aggregate liquidation preference of its outstanding shares). In such case, the
New Prime Series B Preferred Shareholders and of all such other series then
entitled so to vote, voting as a class, shall elect such directors. If the
holders of any such other series have elected such directors prior to the
happening of the default or event permitting the New Prime Series B Preferred
Shareholders to elect directors, or prior to a written request for the holding
of a special meeting being received by the Secretary of New Prime as elsewhere
required, then a new election shall be held with all such other series of
preferred shares and New Prime Series B Preferred Shares voting together as a
single class for such directors, resulting in the termination of the term of
such previously elected directors upon the election of such new directors. If
the holders of any such other series are entitled to elect in excess of two
directors, New Prime Series B Preferred Shares shall not participate in the
election of more than two such directors, and those directors whose terms first
expire shall be deemed to be the directors elected by the New Prime Series B
Preferred Shareholders; provided that, if at the expiration of such terms of New
Prime Series B Preferred Shareholders are entitled to vote in the election of
directors, then the Secretary of New Prime shall call a meeting to be held at or
prior to the time of expiration of the expiring terms referred to above.
The holders of record of New Prime Series B Preferred Shares, then
outstanding, shall be entitled to vote, together with any other class or series
of shares entitled to vote, then outstanding, on any resolution presented by the
New Prime Board of Directors.
In any matter in which the New Prime Series B Preferred Shares may vote,
including any action by written consent, each New Prime Series B Preferred Share
shall be entitled to one (1) vote. Except as required by the MGCL, holders of
New Prime Excess Series B Preferred Shares shall not be entitled to vote on any
matters.
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Except as required by law, the foregoing voting provisions shall not apply
if, at or prior to the time when the act with respect to which such vote would
otherwise be required shall be effected, all outstanding New Prime Series B
Preferred Shares shall have been redeemed or shall have been called for
redemption upon proper notice and sufficient funds shall have been deposited in
trust to effect such redemption.
Except as provided in the MGCL or New Prime Charter, each New Prime Common
Shareholder shall be entitled to notice of and the right to vote at any meeting
of the shareholders of New Prime. The holders of New Prime Excess Shares shall
not be entitled to vote or any matters.
The New Prime Charter will provide for its amendment in substantially the
same manner as the Prime Charter.
SPECIAL MEETINGS
The Horizon Bylaws provide that special meetings of the Horizon Shareholders
may be called by the Horizon Board of Directors pursuant to a resolution adopted
by a majority of the members of the Horizon Board of Directors then in office or
by the Chairman of the Horizon Board of Directors, the Co-Chairman of the
Horizon Board of Directors, the President or the Secretary upon the receipt by
Horizon of a written demand duly executed by shareholders of record of not less
than twenty-five percent (25%) of all of the outstanding shares of Horizon
entitled to vote at such meeting.
The New Prime Charter provides that special meetings of shareholders may be
called only by the New Prime Board of Directors and shall be called by the
Chairman of the New Prime Board of Directors or the Secretary at the request in
writing of the New Prime Board of Directors. Except as may otherwise be provided
in the New Prime Charter, special meetings of the shareholders shall also be
called by the Secretary upon the request in writing of the holders of shares
entitled to cast twenty-five percent (25%) or more of all the votes entitled to
be cast at the meeting. Such a request shall state the purpose or purposes of
the proposed meeting and the shareholders who make the request shall pay the
reasonably estimated cost of preparing and mailing of the notice of the meeting
prior to its being sent, pursuant to a resolution adopted by a majority of the
members of the New Prime Board of Directors then in office.
BOARDS OF DIRECTORS
NUMBER OF DIRECTORS. Horizon's Bylaws provide that the number of directors
of Horizon which constitute the Horizon Board of Directors will be nine (9). No
amendment to the Horizon Bylaws can increase the number of directors by fifty
percent (50%) or more in any 12-month period without the unanimous approval of
the members of the Horizon Board of Directors then in office. The Horizon
directors are divided into three classes, designated Class I, Class II and Class
III, with each class to be as nearly equal in number as possible. At each annual
meeting of shareholders, beginning with the 1996 annual meeting, successors to
each class of directors whose terms expire at that annual meeting, will be
elected for a term expiring at the third succeeding annual meeting of
shareholders after their election. The Horizon Articles provide that the Horizon
Board of Directors will take such action as it may deem necessary or appropriate
from time to time such that at least a majority of the directors of Horizon
shall be "Independent". An individual will be deemed to be "Independent" under
the Horizon Articles if such individual is not an affiliate of Horizon and is
not an employee of Horizon or of any affiliate of Horizon.
The New Prime Charter provides that the number of directors of New Prime
shall consist of that number of members determined by the New Prime Board of
Directors, but in no event less than three (3). The term of office of a
directors shall not be affected by any decrease in the authorized number of
directors. The New Prime Board of Directors shall be classified, with respect to
the time for which they severally hold office, into three (3) classes as nearly
equal in number as possible.
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GENERAL
REMOVAL. The Horizon Articles and Bylaws provide that any director may be
removed only for cause and only by the vote of a majority of the voting power of
all shares of capital stock of Horizon then entitled to vote generally in the
election of directors, voting together as a single class, at a special meeting
of the shareholders of Horizon called for the purpose of removing such director.
The New Prime Charter provides that any director may be removed for cause by
the affirmative vote of two-thirds of the aggregate number of votes entitled to
be cast generally in the election of directors. Accordingly, the Horizon
Articles and Horizon Bylaws require a lower vote than the New Prime Charter and
New Prime Bylaws to remove a director for cause.
VACANCIES. The Horizon Articles and Horizon Bylaws provide that vacancies
on the Horizon Board of Directors that result for any reason shall only be
filled by the Horizon Board of Directors by the affirmative vote of a majority
of the directors then in office.
The New Prime Charter and New Prime Bylaws provide that vacancies shall be
filled by the majority vote of the New Prime Board of Directors, and any
vacancies on the New Prime Board of Directors resulting from death, resignation,
removal or other causes shall be filled by the affirmative vote of a majority of
the remaining directors then in office even if less than a quorum of the New
Prime Board of Directors, or, if applicable by a sole remaining director. Any
director elected in accordance with the preceding sentence shall hold office
until the next New Prime annual meeting.
SHAREHOLDER INSPECTION RIGHTS
The Horizon Articles provide that the Horizon Board of Directors is
expressly authorized to determine whether and to what extent and at what times
and places, and under what conditions and regulations, the accounts and books of
Horizon will be open to inspection of Horizon Shareholders. Except as so
determined, Horizon Shareholders do not have any rights to inspect any account,
book or document of Horizon other than such rights as may be conferred by the
MBCA. The MBCA provides that any shareholder of record, in person or by attorney
or other agent, has a right during the usual hours of business to inspect for
any proper purpose Horizon's stock ledger, a list of its shareholders, and its
other books and records, if the shareholder gives Horizon written demand
describing with reasonable particularity his or her purpose and the records he
or she desires to inspect, and the records sought are directly connected with
the purpose.
The New Prime Charter is silent with respect to shareholder inspection
rights. The MGCL provides that any shareholder, holder of a voting trust
certificate in a corporation, or his agent may inspect and copy during usual
business hours any of the following documents: (i) bylaws; (ii) minutes of the
proceedings of shareholders; (iii) annual statements of affairs; and (iv) voting
trust agreements on file at the corporations principal office.
The MGCL also provides that one or more persons who together are and for at
least six months have been stockholders of record or holders of voting trust
certificates of at least five percent (5%) of the outstanding stock of any class
of a corporation may: (i) in person or by agent, on written request, inspect and
copy during usual business hours New Prime's books of account and New Prime's
stock ledger; (ii) present to any officer or resident agent of New Prime a
written request for a statement of its affairs; and (iii) New Prime does not
maintain the original or a duplicate stock ledger at its principal office,
present to any officer or resident agent of the corporation a written request
for a list of its shareholders.
MERGERS, CONSOLIDATIONS, DISSOLUTION AND SALE OF SUBSTANTIALLY ALL ASSETS
The Horizon Articles require any action to merge or consolidate with or into
any other corporation, to dissolve and liquidate, or to sell or transfer all or
substantially all of Horizon's assets to be approved by the affirmative vote of
the record holders of at least two-thirds of Horizon Common Shares entitled to
vote
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thereon voting at a meeting of Horizon Shareholders duly called for such
purpose. Notwithstanding the above, the Horizon Articles also provide that
Horizon has the right, power and authority to cause the organization of an
entity, to either merge or consolidate Horizon with or into such entity or sell
all or substantially all of Horizon's assets to such entity and to dissolve and
liquidate Horizon if such action is first approved by the affirmative vote of
the record holders of a majority of Horizon Common Shares entitled to vote
thereon at a meeting of Horizon Shareholders duly called for such purpose, and
such action results in the continuation of Horizon's business and activities by
such entity in substantially the same manner as such business and activities
were previously conducted by Horizon.
The New Prime Charter does not discuss mergers, consolidations, dissolution
and sales of assets. The MGCL requires that a consolidation, merger, share
exchange or transfer of assets be approved by the shareholders of New Prime by
the affirmative vote of two-thirds of all the votes entitled to be cast on the
matter. A share exchange need be approved by a Maryland successor only by the
New Prime Board of Directors and by any other action required by its charter. A
transfer of assets need be approved by a Maryland transferee corporation only by
the New Prime Board of Directors and by any other action required by its
charter. A merger need be approved by a Maryland successor corporation only by a
majority of the entire New Prime Board of Directors if, (i) the merger does not
reclassify or change its outstanding stock or otherwise amend its charter and
the number of its shares of stock to be issued or delivered in the merger is not
more than 20 percent (20%) of the number of its shares of the same class or
series outstanding immediately before the merger becomes effective; or (ii)
there is no stock outstanding or subscribed for and entitled to vote on the
merger.
RESTRICTIONS ON THE OWNERSHIP TRANSFER OR THE ISSUANCE OF SHARES
For Horizon to qualify as a REIT for all years after the first taxable year
in which it elects to be taxed as such (i) not more than 50% in number or value
of its outstanding stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code) during the last half of a taxable year, and
(ii) the stock 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. The Horizon Articles impose restrictions on transfer and
ownership of its stock in order to meet these requirements.
The Horizon Articles generally prohibit any shareholder from having
beneficial ownership, either directly or by virtue of the Code's applicable
attribution rules, of more than 7% in value of the Company's outstanding shares
ownership limit. Subject to certain limitations, the directors may increase the
ownership limit from time to time. Certain persons including Mr. Kerr, Mr. Glen,
Ms. McArthur and their respective affiliates have been designated "Existing
Holders," and the directors may designate additional persons as "Existing
Holders" from time to time. An Existing Holder is not subject to the ownership
limit. Instead, the Horizon Articles establish rules for determining the maximum
percentage of outstanding stock, in number or value, of which any particular
Existing Holder may have beneficial ownership, either directly or by virtue of
the Code's applicable attribution rules, at any particular time (the "Existing
Holder Limit"). The Existing Holder Limit applicable to Mr. Kerr, his family and
affiliates will be 21.9%. The Existing Holder Limit applicable to Mr. Glen, Ms.
McArthur and their respective families and affiliates as well as any transferee
receiving stock in excess of the ownership limit from an Existing Holder in a
private transaction is the percentage of the outstanding stock owned by the
transferee at the time such transferee becomes an Existing Holder, but no more
than the highest percentage, in value, of stock which could be owned by such
holder without creating the possibility that five or fewer persons could
beneficially own 49.9%, in value, of the outstanding stock.
The ownership restrictions contained in the Horizon Articles (i) prohibit
any person who is not an Existing Holder from having beneficial ownership of
Horizon Common Shares, either directly or by virtue of the applicable
attribution rules, in excess of the ownership limit, (ii) prohibit any Existing
Holder from having beneficial ownership of Horizon Common Shares, either
directly or by virtue of the applicable attribution rules, in excess of the
applicable Existing Holder Limit, (iii) prohibit Horizon Common Shares
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from being owned by less than 100 persons, and (iv) prohibit Horizon from being
"closely held" within the meaning of Section 856(h) of the Code (collectively,
"Horizon Ownership Restrictions"). If the Horizon Ownership Restrictions are
violated by a sale or transfer, such sale or transfer is void AB INITIO unless
Horizon determines such sale or transfer will not jeopardize Horizon's status as
a REIT or agrees to increase the applicable ownership limit or Existing Holder
Limit, but in no event will such limits be increased if such increase would
create the possibility that five or fewer persons could own more than 49.9% of
the outstanding shares. Any person who purports to transfer or proposes to
transfer shares in violation of the Horizon Ownership Restrictions is required
to immediately give written notice to Horizon of such event or proposed event in
order for Horizon to determine the effect of such event or proposed event on
Horizon's status as a REIT.
In the absence of appropriate safeguards, certain events could result in a
violation of the Horizon Ownership Restrictions ("Triggering Events"). Thus, the
Horizon Articles provide that, upon the occurrence of a Triggering Event,
certain shares of Horizon Common Shares or Horizon Preferred Shares may
automatically be converted into Horizon Excess Shares. All Horizon Excess Shares
will be deemed to be owned by Horizon as trustee for the exclusive benefit of
the person to whom they are ultimately transferred, and the person who would
otherwise be the owner of the shares converted into such Horizon Excess Shares
shall have no rights in such Horizon Excess Shares other than the right, subject
to certain limitations, to designate the person to whom such Horizon Excess
Shares is to be transferred. All Horizon Excess Shares shall be deemed to have
been offered for sale to Horizon or its designee at a price per share equal to
the lesser of (i) the price in the transaction that results in the exchange of
Horizon Common Shares into such Horizon Excess Shares, or (ii) the Fair Market
Value (which is defined in the Horizon Articles by reference to the average
closing sale price of Horizon Common Shares as reported on the NYSE) for the
five trading days immediately prior to the date upon which Horizon or its
designee accepts such offer. Unless and until any Horizon Excess Shares shall
have been so transferred or redeemed, such Horizon Excess Shares shall remain
Horizon Excess Shares, and shall not confer upon any person any voting rights,
dividend rights or other distribution rights. Limitations are imposed on the
amount of consideration which a person may receive for designating the third
party to whom Horizon Excess Shares is to be transferred. Any person who engages
in a Triggering Event is required to immediately give written notice of such
event to Horizon.
All certificates representing shares of Horizon Common Shares will bear a
legend referring to the Horizon Ownership Restrictions.
All persons who have beneficial ownership, directly or by virtue of the
attribution provisions of the Code, of more than 2.5% of the outstanding Horizon
Common Shares are required to file an affidavit with Horizon containing the
information specified in the Horizon Articles within 30 days after January 1 of
each year. In addition, each shareholder shall upon demand be required to
disclose to Horizon such information as the Horizon Board of Directors deems
necessary to comply with the provisions of the Code applicable to a real estate
investment trust or to comply with the requirements of any taxing authority or
government agency.
The Horizon Ownership Restrictions will not automatically be removed from
the Horizon Articles even if the real estate investment trust provisions of the
code are changed so as to no longer contain any ownership concentration
limitation or if the ownership concentration limitation is increased. Except as
otherwise described above, any change in the Horizon Ownership Restrictions
would require an amendment to the Horizon Articles. Such an amendment to the
Horizon Articles would require the affirmative vote of holders owning not less
than two-thirds of the Horizon Common Shares then outstanding and entitled to
vote thereon. In addition to preserving Horizon's status as a REIT, the Horizon
Ownership Restrictions may have the effect of precluding an acquisition of
control of Horizon without the approval of the directors.
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The Horizon Articles contain ownership restrictions, provisions with respect
to the conversion of certain shares into Horizon Common Shares, provisions with
respect to a legend and disclosure of ownership which are substantially the same
as those set forth in the Horizon Articles, except Mr. Glen and his family and
affiliates are not designated as Existing Holders and a transferee from an
Existing Holder in a public offering could become an Existing Holder.
No person shall acquire any New Prime Common Shares if, as a result of such
acquisition, the outstanding shares of the New Prime Common Shares would be
owned by beneficially and not of record by less than one hundred (100) persons
determined without reference to any rules of attribution. No person shall
acquire or beneficially own any New Prime Common Shares if, as a result of such
acquisition or beneficial ownership, New Prime would be "closely held" within
the meaning of Section 856(h) of the Code. No person shall acquire or
beneficially own any New Prime Common Shares if, as a result of such acquisition
or beneficial ownership, New Prime would fail to qualify as a REIT including,
but not limited to a transfer or other event that would result in New Prime
owning an interest in a tenant that is described in Section 856 of the Code if
the income derived by New Prime from such tenant would cause New Prime to fail
to satisfy any of the gross income requirements of Section 856(c) of the Code.
No person other than a conversion holder shall acquire or beneficially own
any New Prime Common Shares if, as the result of such acquisition or beneficial
ownership, such person shall beneficially own New Prime Common Shares in excess
of the common stock ownership limit.
No conversion holder shall acquire or beneficially own any additional New
Prime Common Shares to the extent that as a result of such acquisition or
beneficial ownership the aggregate of the New Prime Common Shares beneficially
owned by such New Prime Common Shareholder that would be issued to such holder
upon conversion of all the New Prime Series B Preferred Shares then beneficially
owned by such holder, assuming that all the outstanding shares of New Prime
Series B Preferred Shares were converted into New Prime Common Shares at such
time would exceed 9.9% of the total shares of New Prime Common Shares that would
be outstanding assuming the conversion of all of the outstanding shares of New
Prime Series B Preferred Shares but without giving effect to the exchange of New
Prime Common Units for New Prime Common Shares.
Any transfer of New Prime Common Shares that, if effective, would result in
a violation of any of the restrictions in the New Prime Charter shall be void AB
INITIO as to the transfer of that number of New Prime Common Shares that would
cause the violation of the applicable restriction, and the intended transferee
shall acquire no rights in such excess number of New Prime Common Shares.
Any transfer of New Prime Common Shares or other event that, if effective,
would result in (i) New Prime being "closely held" within the meaning of Section
856(h) of the Code; (ii) the outstanding New Prime Common Shares being
beneficially owned by less than one hundred (100) persons determined without
reference to any rules of attribution, or (iii) New Prime otherwise failing to
qualify as a REIT, including, but not limited to, a transfer or other event that
would result in New Prime owning (directly or constructively, an interest in a
tenant that is described in Section 856(d)(2)(B) of the Code of the income
derived by New Prime from such tenant would cause New Prime to fail to satisfy
any of the gross income requirements of Section 856(c) of the Code, shall be
void AB INITIO as to the transfer of that number of New Prime Common Shares
(rounding up to the nearest whole share) or other event that would cause New
Prime to be "closely held" within the meaning of Section 856(h) of the Code,
would result in the outstanding New Prime Common Shares being beneficially owned
by less than one hundred (100) persons determined without reference to any rules
of attribution, or would otherwise result in New Prime failing to qualify as a
REIT, and the intended transferee shall acquire or the beneficial owner shall
retain, as the case may be, no rights in such shares.
It is expressly intended that the restrictions on ownership and transfer
described herein shall apply to the exchange rights provided in the Prime
Partnership Agreement. Notwithstanding any of the provisions of the Prime
Partnership Agreement to the contrary, a partner of Prime Partnership shall not
be entitled to
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effect an exchange of an interest in the Prime Partnership into New Prime Common
Shares if the beneficial ownership of such New Prime Common Shares would be
prohibited under the New Prime Charter.
If the New Prime Board of Directors or any duly authorized committee thereof
shall at any time determine in good faith that a transfer or other event has
taken place that results in a violation of the sale of transfer of New Prime
Common Shares or that a person intends to acquire or has attempted to acquire
beneficial ownership of any New Prime Common Shares in violation of the sale of
transfer of New Prime Common Shares, the New Prime Board of Directors or a
committee thereof shall take such action as it or they deem advisable to refuse
to give effect to or to prevent such transfer or other event.
New Prime Excess Shares shall not be transferrable. A purported record
transferee or, in the case of New Prime Excess Shares resulting from an event
other than a transfer, a purported record holder, may freely designate a
beneficiary of its interest in the trust (representing the number of shares of
New Prime Excess Shares held by the trust attributable to the purported transfer
or other event that resulted in the issuance of such New Prime Excess Shares, if
(i) the New Prime Excess Shares held in the trust would not be New Prime Excess
Shares in the hands of such beneficiary; and (ii) the purported beneficial
transferee or, in the case of New Prime Excess Shares resulting from an event
other than a transfer, the purported beneficial holder, does not receive
consideration for the designation of such beneficiary that reflects a price per
share for such New Prime Excess Shares that exceeds the "New Prime Excess Shares
Limitation Price."
No person shall acquire any New Prime Series B Preferred Shares if, as the
result of such acquisition, such person shall beneficially own New Prime Series
B Preferred Shares in excess of the New Prime Series B Preferred Share ownership
limit; and (ii) no person may acquire or beneficially own New Prime Series B
Preferred Shares to the extent that as a result of such acquisition or
beneficial ownership the aggregate of New Prime Common Shares beneficially owned
by such holder and the New Prime Common Shares that would be issued to such
holder upon conversion of all the New Prime Series B Preferred Shares then
beneficially owned by such holder, assuming that all of the outstanding New
Prime Series B Preferred Shares were converted into New Prime Common Shares at
such time, would exceed 9.9% of the total New Prime Common Shares that would be
outstanding, assuming all of the outstanding New Prime Series B Preferred Shares
were converted into New Prime Common Shares and without giving effect to the
exchange of any units for New Prime Shares.
If the New Prime Board of Directors or any duly authorized committee thereof
shall at any time determine in good faith that a transfer or other event has
taken place that results in a violation of any the restrictions in the New Prime
Charter or that a person intends to acquire or has attempted to acquire
beneficial ownership of any New Prime Series B Preferred Shares in violation of
any of the restrictions in the New Prime Charter, the New Prime Board of
Directors or a committee thereof shall take such action as it or they deem
advisable.
Any person who acquires or attempts or intends to acquire New Prime Series B
Preferred Shares in violation of any of the restrictions in the New Prime
Charter or any person who is a transferee in a transfer or is otherwise affected
by an event other than a transfer that results in the issuance of New Prime
Excess Series B Preferred Shares, shall immediately give written notice to New
Prime of such transfer or other event and shall provide to New Prime such other
information New Prime may request in order to determine the effect, if any, of
such transfer of attempted, intended or purported transfer or other event on New
Prime's status as a REIT.
Every beneficial owner of more than 5% or such lower percentage as required
by the Code and the regulations promulgated thereunder of the outstanding New
Prime Series B Preferred Shares shall, within 30 days after December 31 of each
year, give written notice to New Prime stating the name and address of such
beneficial owner, the number of shares of New Prime Series B Preferred Shares
and other shares of the capital stock of New Prime beneficially owned, and a
description of the manner in which shares are
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held. Each such beneficial owner shall provide to New Prime such additional
information as New Prime may request an order to determine the effect, if any,
of such beneficial ownership on New Prime's status as a REIT and to ensure
compliance with the New Prime Series B Preferred Share ownership limit, and each
person who is a beneficial owner of New Prime Series B Preferred Shares and each
person, including the stockholder of record, who is holding New Prime Series B
Preferred Shares for a beneficial owner shall provide to New Prime such
information that New Prime may request, in good faith, in order to determine New
Prime's status as a REIT.
New Prime Excess Series B Preferred Shares shall not be transferrable. A
purported record transferee or, in the case of New Prime Excess Series B
Preferred Shares resulting from an event other than a transfer, a purported
record holder, may freely designate a beneficiary of its interest in the trust,
representing the number of shares of New Prime Excess Series B Preferred Shares
held by the trust attributable to the purported transfer or other event that
resulted in the issuance of such New Prime Excess Series B Preferred Shares, if
(i) the New Prime Excess Series B Preferred Shares held in the trust would not
be New Prime Excess Series B Preferred Shares in the hands of such beneficiary,
and (ii) the purported beneficial transferee or, in the case of New Prime Excess
Series B Preferred Shares resulting from an event other than a transfer, the
purported beneficial holder, does not receive consideration for the designation
of such beneficiary that reflects a price per share for such New Prime Excess
Series B Preferred Shares that exceeds the "New Prime Series B Preferred Shares
Limitation Price."
APPRAISAL OR DISSENTER'S RIGHTS
Neither the MCBA nor the MGCL provide appraisal rights for shares listed on
a national securities exchange. Accordingly, shareholders of Horizon and
shareholders of New Prime have the same appraisal rights under the Horizon
Articles and Horizon Bylaws as they have under the New Prime Charter and the New
Prime Bylaws, respectively.
ADVANCE NOTICE PROVISION FOR SHAREHOLDER NOMINATION AND SHAREHOLDER PROPOSALS
The Horizon Bylaws establish an advance notice procedure for shareholders to
make nominations of candidates for election as directors or to bring other
business before an annual meeting of shareholders of Horizon (the "Shareholder
Notice Procedure").
The Shareholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Horizon Board of Directors, or by a
shareholder who has given timely written notice containing specified information
to the Secretary of Horizon prior to the meeting at which directors are to be
elected, will be eligible for election as directors of Horizon, and (ii) at an
annual meeting only such business may be conducted as has been brought before
the meeting by, or at the direction of, the Horizon Board of Directors or by a
shareholder who has given timely written notice to the Secretary of Horizon of
such shareholder's intention to bring such business before the meeting. Except
for shareholder proposals submitted in accordance with the federal proxy rules
as to which the requirement specified therein shall control, notice of
shareholder nominations or business to be conducted at a meeting must be
received by Horizon not less than 60 days nor more than 90 days prior to the
first anniversary of the previous year's annual meeting if the notice is to be
submitted at an annual meeting, or not later than 10 days following the day on
which notice of the date of a special meeting was given if the notice is to be
submitted at a special meeting.
Neither the New Prime Charter nor the New Prime Bylaws specifically provide
for a shareholder notice procedure for shareholder nominations or shareholder
proposals.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
The MBCA provides a safe harbor for certain transactions between a
corporation and one or more of its directors or officers. Such a transaction
with a conflicting interest may not be set aside, enjoined or give
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rise to damages in a proceeding by a shareholder or by or in the right of the
corporation if the person interested in the transaction establishes any of the
following: (i) the transaction is fair to the corporation at the time entered
into, (ii) the material facts of the transaction and the directors or officers'
interests were disclosed or known to the board, a committee of the board, or the
independent director or directors, and the board, committee or independent
director or directors authorize, approve or ratify the transaction, or (iii) the
material facts of the transaction and the directors or officers' interests were
disclosed or known to the shareholders entitled to vote and they authorized,
approved or ratified the transaction. For purposes of this provision, a
transaction is authorized, approved or ratified if it received the affirmative
vote of the majority of the directors on the board or committee who had no
interest in the transaction, though less than a quorum, or all independent
directors who had no interest in the transaction, or have received the majority
of votes cast by the holders of shares who did not have an interest in the
transaction.
The Horizon Articles provide that the Horizon Board of Directors has no
authority to cause Horizon to enter into any agreement or transaction with
Jeffrey A. Kerr or any of his affiliates or Alan Glen or any of his affiliates,
unless such agreement or transaction is approved by the affirmative vote of a
majority of the directors of Horizon who are Independent.
The MGCL provides that a contract or other transaction between a corporation
and any of its directors or between a corporation and any other corporation,
firm, or other entity in which any of its director(s) is a director or has a
material financial interest is not void or voidable solely because; (i) the
common directorship or interest; (ii) the presence of the director at the
meeting of the board or a committee of the board which authorizes, approves, or
ratifies the contract or transaction; or the counting of the vote of the
director for the authorization, approval or ratification of the contract or
transaction.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND THE NEW PRIME CHARTER AND BYLAWS
THE FOLLOWING PARAGRAPHS SUMMARIZE CERTAIN PROVISIONS OF THE MGCL, THE NEW
PRIME CHARTER AND NEW PRIME BYLAWS. THE SUMMARY DOES NOT PURPORT TO BE COMPLETE
AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MGCL, THE
NEW PRIME CHARTER AND NEW PRIME BYLAWS FOR COMPLETE INFORMATION.
CLASSIFICATION OF THE NEW PRIME BOARD OF DIRECTORS
The New Prime Bylaws provide that the number of directors of New Prime may
be established by the New Prime Board of Directors but in no case shall be less
than three directors. Subject to the right of the holders of New Prime Series A
Preferred Shares, New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares to elect directors under certain circumstances, any vacancy
will be filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors will be filled by a
majority of the entire New Prime Board of Directors. Pursuant to the terms of
the New Prime Charter, the directors are divided into three classes. One class
will hold office for a term expiring at the annual meeting of stockholders to be
held in 1999, another class will hold office for a term expiring at the annual
meeting of stockholders to be held in 2000 and another class will hold office
for a term expiring at the annual meeting of stockholders to be held in 2001. As
the term of each class expires, directors in that class will be elected for a
term of three years and until their successors are duly elected and qualified.
New Prime believes that classification of the New Prime Board of Directors will
help to assure the continuity and stability of New Prime's business strategies
and policies as determined by the New Prime Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of New Prime, even though such an attempt might be beneficial to
New Prime and its stockholders. At least two annual meetings of stockholders,
instead of one, will generally be required to effect a change in a majority of
the New Prime Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of New Prime Common Shares will have no right to cumulative voting for
the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of New Prime Common Shares will be able to elect all
of the successors of the class of directors whose term expires at that meeting.
REMOVAL OF DIRECTORS
Subject to the right of the holders of New Prime Series A Preferred Shares,
New Prime Series B Preferred Shares and New Prime Series C Preferred Shares to
elect directors under certain circumstances, the New Prime Charter provides that
a director may be removed only for cause and only by the affirmative vote of at
least two-thirds of the aggregate number of votes then entitled to be cast
generally in the election of directors. This provision, when coupled with the
provision in the New Prime Bylaws authorizing the New Prime Board of Directors
to fill directorships, precludes stockholders from removing incumbent directors
except upon an affirmative vote and filling the vacancies created by such
removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares after the date on which the corporation had 100 or
more beneficial owners of its stock or an affiliate of the corporation which was
the beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then outstanding stock of the corporation, at any time within the
two-year period immediately prior to the date in question, and after the date on
which the corporation had 100 or
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more beneficial owners of its stock (an "Interested Stockholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder became an Interested Stockholder. Thereafter,
any such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation and (b) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the corporation becomes
subject to the "business combination" statute or the Interested Stockholder
becomes an Interested Stockholder. The New Prime Board of Directors has exempted
from these provisions of the MGCL any business combination involving the
issuance of New Prime Common Shares to PGI and certain other entities, or any of
their respective affiliates, upon the exchange of Prime Partnership Common Units
acquired by such entities in connection with the Prime IPO.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control shares acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock 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 directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
of all voting power. Control Shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained stockholder
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 and
delivery of an "acquiring person statement"), may compel the board of directors
to call a special meeting of stockholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is made,
the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the Control Shares (except those for which voting rights have previously
been approved) 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 by the acquiror or of any meeting of stockholders at which the
voting rights of such shares were considered and not approved. If voting rights
for Control Shares are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the New Prime Charter or
New Prime Bylaws.
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The New Prime Charter contains a provision exempting from the control shares
acquisition statute any and all acquisitions by any person of New Prime's shares
of capital stock. There can be no assurance that such provision will not be
amended or eliminated at any point in the future.
The business combination statute and, if the foregoing exemption in the New
Prime Charter is rescinded, the control share acquisition statute could have the
effect of discouraging offers to acquire New Prime and of increasing the
difficulty of consummating any such offer.
AMENDMENT TO THE NEW PRIME CHARTER
The New Prime Charter, with certain limited exceptions, may be amended by
the affirmative vote of the holders of not less than a majority of the aggregate
number of votes then entitled to be cast generally in the election of directors.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The New Prime Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the New Prime Board of
Directors and the proposal of business to be considered by stockholders may be
made only (i) pursuant to New Prime's notice of the meeting, (ii) by the New
Prime Board of Directors, or (iii) by a stockholder who is entitled to vote at
the meeting and has complied with the advance notice procedures set forth in the
New Prime Charter, with respect to the election of directors by the holders of
New Prime Series A Preferred Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares in certain circumstances, or the New Prime
Bylaws, and (b) with respect to special meetings of stockholders, only the
business specified in New Prime's notice of meeting may be brought before the
meeting of stockholders, and nominations of persons for election to the New
Prime Board of Directors may be made only (i) pursuant to New Prime's notice of
the meeting, (ii) by the New Prime Board of Directors, or (iii) provided that
the New Prime Board of Directors has determined that directors shall be elected
at such meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Charter, with
respect to the election of directors by the holders of New Prime Series A
Preferred Shares, New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares in certain circumstances, or the New Prime Bylaws.
The provisions in the New Prime Charter on classification of the New Prime
Board of Directors and removal of directors, the business combination statute
and, if the applicable provision in the New Prime Charter is revoked, control
shares acquisition provisions of the MGCL, and the advance notice provisions of
the New Prime Bylaws could have the effect of discouraging a takeover or other
transaction in which holders of some, or a majority, of New Prime Common Shares
might receive a premium for their shares over the then prevailing market price
or which such holders might believe to be otherwise in their best interests.
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PRIME PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE SECOND AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF PRIME PARTNERSHIP (THE "PRIME PARTNERSHIP AGREEMENT") IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PRIME PARTNERSHIP AGREEMENT, THE
FULL TEXT OF WHICH IS ATTACHED AS APPENDIX F.
FORMATION
Prime Partnership was formed on March 22, 1994 as a limited partnership
under the DRUPLA with Prime as the sole general partner. Upon consummation of
the Partnership Merger, the limited partnership agreement of Prime Partnership
will be amended and restated and the unitholders of Horizon will be admitted as
limited partners of Prime Partnership. Following the consummation of the
Transactions, New Prime will be the sole general partner of Prime Partnership.
CAPITALIZATION
Pursuant to the Prime Partnership Agreement, Prime Partnership has
designated Prime Partnership Common Units and Prime Partnership Preferred Units
("Prime Partnership Preferred Units"). In addition, the Prime Partnership
Agreement has designated the following classes of Prime Partnership Preferred
Units: (i) Series A preferred units of Prime Partnership (each, a "Prime
Partnership Series A Preferred Unit"), (ii) Prime Partnership Series B Preferred
Units and (iii) Prime Partnership Series C Preferred Units.
MANAGEMENT
The Prime Partnership Agreement generally provides that New Prime, as the
sole general partner of Prime Partnership, has full, exclusive and complete
responsibility and discretion in the management and control of Prime
Partnership. The limited partners of Prime Partnership (the "Prime Partnership
Limited Partners") have no authority to transact business for, or participate in
the management activities or decisions of, Prime Partnership. However, any
decision for Prime Partnership to make certain amendments to the Prime
Partnership Agreement, to take title to any property other than in the name of
Prime Partnership, or to dissolve prior to December 31, 2050 (which is the
expiration of Prime Partnership's term) or prior to the occurrence of certain
liquidating events would require the consent of a majority in interest of Prime
Partnership Common Units. Prime Partnership Limited Partners have no right to
remove New Prime as general partner of Prime Partnership.
TRANSFERABILITY OF INTERESTS
The Prime Partnership Agreement provides that New Prime may not voluntarily
withdraw from Prime Partnership, or transfer or assign its interest in Prime
Partnership, without the unanimous consent of Prime Partnership Limited
Partners. Prime Partnership Limited Partners may transfer their interests in
Prime Partnership to a transferee subject to certain conditions, including that
such transferee assumes all obligations of the transferor Prime Partnership
Limited Partner and provided further that such transfer does not cause a
termination of Prime Partnership for federal income tax purposes, may not
reasonably cause Prime Partnership to be treated as other than a partnership for
federal income tax purposes or as a publicly traded partnership under Code
Section 7704 and may not reasonably cause New Prime to cease to comply with
requirements under the Code for qualification as a REIT.
ADDITIONAL FUNDS
The Prime Partnership Agreement provides that if Prime Partnership requires
additional funds at any time or from time to time in excess of funds available
to Prime Partnership from operations or prior capital contributions, New Prime
may borrow such funds and lend the funds to Prime Partnership on the same terms
and conditions as are applicable to New Prime's borrowing of such funds. The
Prime Partnership Agreement further provides that in the event New Prime issues
additional shares of capital stock, New Prime shall be required to contribute to
Prime Partnership as an additional capital contribution any net
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proceeds from such issuance in exchange for additional partnership interests
with preferences and rights corresponding to the capital stock so issued.
REGISTRATION RIGHTS
For a description of certain registration rights to be held by Prime
Partnership Limited Partners and certain of their affiliates, see "The Corporate
Merger--Registration Rights Agreement."
TAX MATTERS
The taxable income or taxable loss of Prime Partnership generally has and
will continue to be allocated to New Prime and Prime Partnership Limited
Partners in accordance with the distribution priority among the holders of Prime
Partnership Preferred Units and Prime Partnership Common Units and in compliance
with the provisions of Sections 704(b) and 704(c) of the Code and the
regulations promulgated thereunder.
Pursuant to the Prime Partnership Agreement, New Prime has been and will
continue to be the "tax matters partner" of Prime Partnership and, as such, has
had, and will continue to have, the authority to generally control any contest
involving the taxable income or loss of Prime Partnership, including how the
taxable income or taxable loss of Prime Partnership is allocated to the Prime
Partnership Limited Partners. Further, New Prime will have the authority to make
tax elections under the Code on behalf of Prime Partnership.
OPERATIONS
The Prime Partnership Agreement requires that Prime Partnership be operated
in a manner that will enable New Prime to satisfy the requirements for being
classified as a REIT and to avoid any federal income tax liability. Pursuant to
the Prime Partnership Agreement, Prime Partnership also will assume and pay when
due, or reimburse New Prime for payment of, all administrative and operating
expenses of any partnership or other entity in which Prime Partnership, directly
or indirectly, is or becomes a partner or other equity participant and which is
formed for the purpose of acquiring, developing or owning a property or a
proposed property (the "Prime Property Partnerships"), will distribute cash to
New Prime to enable New Prime to pay all of the costs and expenses relating to
the operations of New Prime to the extent New Prime does not otherwise have
sufficient funds to satisfy such costs and expenses. Prime Partnership will
indemnify New Prime, as its general partner, for liabilities incurred in
connection with debt financing for Prime Partnership or as general partner of
Prime Partnership.
DISTRIBUTIONS
The Prime Partnership Agreement sets forth the manner in which the net cash
flow of Prime Partnership (which includes operating revenues and proceeds from
sales or refinancings less certain expenditures) will be distributed with
respect to Prime Partnership Preferred Units and Prime Partnership Common Units.
PRIME PARTNERSHIP SERIES A PREFERRED UNITS. Pursuant to the Prime
Partnership Agreement, each Prime Partnership Series A Preferred Unit held by
New Prime entitles it to receive a cash distribution in an amount equal to the
distribution declared or paid in respect of a New Prime Series A Preferred Share
prior to the payment by Prime Partnership of any distributions in respect of
Prime Partnership Series B Preferred Units, Prime Partnership Series C Preferred
Units and Prime Partnership Common Units.
PRIME PARTNERSHIP SERIES B PREFERRED UNITS. Each Prime Partnership Series B
Preferred Unit held by New Prime entitles it to receive, prior to the payment by
Prime Partnership of distributions with respect to Prime Partnership Series C
Preferred Units and Prime Partnership Common Units, a cash distribution in an
amount equal to the distribution or distribution declared or paid in respect of
a New Prime Series B Preferred Share.
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PRIME PARTNERSHIP SERIES C PREFERRED UNITS. Each Prime Partnership Series C
Preferred Unit entitles the holder thereof to receive, prior to the payment by
Prime Partnership of distributions with respect to Prime Partnership Common
Units, a cash distribution in an amount equal to the distribution or
distribution declared or paid in respect of a New Prime Series C Preferred
Share.
PRIME PARTNERSHIP COMMON UNITS. The Prime Partnership Common Units entitle
the holders thereof to receive a cash distribution in an amount equal to the
balance of any net cash flow of Prime Partnership after payment of the
distributions to the holders of Prime Partnership Series A Preferred Units,
Prime Partnership Series B Preferred Units and Prime Partnership Series C
Preferred Units, as set forth above.
PRIME PARTNERSHIP LIMITED PARTNER EXCHANGE AND REDEMPTION RIGHTS
PRIME PARTNERSHIP SERIES A PREFERRED UNITS. The holders of Prime
Partnership Series A Preferred Units have no exchange or mandatory redemption
rights.
PRIME PARTNERSHIP SERIES B PREFERRED UNITS. The holders of Prime
Partnership Series B Preferred Units have no exchange or mandatory redemption
rights.
PRIME PARTNERSHIP SERIES C PREFERRED UNITS. Subject to certain conditions,
each Prime Partnership Series C Preferred Unit held by a Prime Partnership
Limited Partner may be exchanged for one New Prime Series C Preferred Share
(subject to adjustment) or, at the option of such Prime Partnership Limited
Partner, one New Prime Common Share (subject to adjustment). The Prime
Partnership Series C Preferred Units may not be exchanged until August 8, 1998
(or, if earlier, on the first day a "change of control" or a "REIT termination
event" occurs (each as defined in the Prime Partnership Agreement)) and from
time to time thereafter. Such Prime Partnership Series C Preferred Units may not
be exchanged for New Prime Series C Preferred Shares or New Prime Common Shares,
as the case may be, unless Prime Partnership receives an opinion of counsel
reasonably satisfactory to New Prime that, upon such exchange, Prime Partnership
would not cease to qualify as a partnership for federal income taxes. The
holders of Prime Partnership Series C Preferred Units have no mandatory
redemption rights. However, in the event Prime Partnership incurs indebtedness
that causes its fixed charge coverage ratio to exceed certain levels prescribed
in the Prime Partnership Agreement or Prime Partnership fails to make required
distributions in respect of the Prime Partnership Series C Preferred Units for
two consecutive quarters, then Prime Partnership will be required, to the extent
permitted by its debt instruments, to make an offer to purchase all outstanding
Prime Partnership Series C Preferred Units of a price per unit equal to $13.75,
plus accrued and unpaid distributions thereon.
PRIME PARTNERSHIP COMMON UNITS. Subject to certain conditions, each Prime
Partnership Common Unit held by a Prime Partnership Limited Partner may be
exchanged for one New Prime Common Share (subject to adjustment) or, at the
option of New Prime, cash equal to the fair market value of a New Prime Common
Share at the time of exchange. Such Prime Partnership Common Units may not be
exchanged for New Prime Common Shares unless Prime Partnership receives an
opinion of counsel reasonably satisfactory to New Prime that, upon such
exchange, Prime Partnership would not cease to qualify as a partnership for
federal income taxes. The holders of Prime Partnership Common Units have no
mandatory redemption rights.
CONVERSION
If holders of New Prime Series B Preferred Shares or New Prime Series C
Preferred Shares exercise their rights under the New Prime Charter to convert
their shares to New Prime Common Stock, in whole or in part, then simultaneously
with such conversion, an equal number of Prime Partnership Series B Preferred
Units or Prime Partnership Series C Preferred Units, as the case may be, shall
be automatically converted into a number of Prime Partnership Common Units as
set forth in the Prime Partnership Agreement.
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OPTIONAL REDEMPTION BY NEW PRIME
The holders of New Prime Preferred Shares have no mandatory redemption
rights. However, such shares may be redeemed at the option of New Prime, in its
capacity as the sole general partner of Prime Partnership. If at any time New
Prime Preferred Shares are redeemed by New Prime pursuant to the New Prime
Charter or otherwise purchased by New Prime, Prime Partnership shall redeem an
equal number of Prime Partnership Preferred Units of the same series by payment
to New Prime of the redemption amount set forth in the Prime Partnership
Agreement with respect to such series of New Prime Preferred Shares.
On and after March 31, 1999, Prime Partnership, at the option of New Prime,
may redeem the Prime Partnership Series B Preferred Units, in whole or in part,
at a price equal to the redemption amount set forth in the Prime Partnership
Agreement with respect to such units.
On and after August 8, 2007, Prime Partnership, at the option of New Prime,
may redeem the Prime Partnership Series C Preferred Units, in whole or in part,
at a price equal to the redemption amount set forth in the Prime Partnership
Agreement with respect to such units.
INDEMNIFICATION
The Prime Partnership Agreement provides for indemnification solely out of
the assets of Prime Partnership of the partners and their affiliates for losses
incurred because of the operations of Prime Partnership unless (i) the partner
or other person acted or failed to act due to bad faith or through active and
deliberate dishonesty, (ii) actually received an improper personal benefit, or
(iii) in the case of any criminal proceeding, the partner or other person had
reasonable cause to believe that the action or omission was unlawful.
New Prime, as general partner of Prime Partnership, is indemnified by Prime
Partnership from any loss incurred by New Prime as general partner by reason of
(i) the incurrence of indebtedness in compliance with the Prime Partnership
Agreement or indebtedness of Prime Partnership that is guaranteed by New Prime
as general partner or (ii) vicarious liability by reason of its status as
general partner.
Prime Partnership Limited Partners expressly acknowledge that New Prime, as
general partner, is acting on behalf of Prime Partnership and New Prime's
shareholders, collectively, that New Prime is under no obligation to consider
the separate interests of the Prime Partnership Limited Partners (including,
without limitation, the tax consequences to the Prime Partnership Limited
Partners or their assignees) in deciding whether to cause Prime Partnership to
take (or decline to take) any actions and that New Prime shall not be liable for
monetary damages for losses sustained, liabilities incurred or benefits not
derived by the Prime Partnership Limited Partners in connection with such
decisions; provided that New Prime has acted in good faith.
DUTIES AND CONFLICTS
The Prime Partnership Agreement provides that all business activities of New
Prime, including all activities pertaining to the acquisition and operation of
New Prime's outlet centers, must be conducted through Prime Partnership. The
Prime Partnership Agreement prohibits New Prime from borrowing for the purpose
of making a distribution to shareholders except if it arranges such borrowing
through Prime Partnership.
TERM
Prime Partnership will continue in full force and effect until December 31,
2050, unless sooner dissolved and terminated upon the dissolution, bankruptcy,
insolvency or termination of New Prime (unless the Prime Partnership Limited
Partners elect to continue Prime Partnership), the election of New Prime with
the consent of a majority in interest of Prime Partnership Common Units, the
sale or other disposition of all or substantially all the assets of Prime
Partnership or by operation of law.
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VOTING
The consent of partners owning a majority in interest of Prime Partnership
Common Units in the aggregate is required (i) to take title to any personal or
real property, other than in the name of Prime Partnership, a Prime Property
Partnership or pursuant to certain provisions in the Prime Partnership
Agreement, (ii) to dissolve Prime Partnership prior to the occurrence of any
"liquidating event" (as defined in the Prime Partnership Agreement) or (iii) for
the matters discussed under "--Amendment" below.
AMENDMENT
Generally, amendments to the Prime Partnership Agreement may be proposed by
the general partner and must be approved by at least a majority of the general
partner's board of directors who are not affiliates of any of the limited
partners and with the consent of partners owning a majority in interest of Prime
Partnership Common Units. Certain amendments that would materially and adversely
alter the rights, preferences and terms of the Prime Partnership Common Units
held by the limited partners would require the consent of limited partners
holding a majority in interest of the Prime Partnership Common Units. Certain
amendments that would materially and adversely alter the rights, preferences and
terms of the Prime Partnership Series B Preferred Units or Prime Partnership
Series C Preferred Units held by limited partners or increase the authorized
amount of partnership interests that rank prior to the Prime Partnership Series
B Preferred Units or Prime Partnership Series C Preferred Units in the
distribution of assets or the payment of distributions would require the consent
of limited partners holding two-thirds of the Prime Partnership Series B
Preferred Units or Prime Partnership Series C Preferred Units, as the case may
be.
BOOKS AND REPORTS
New Prime is required to keep the books and records of Prime Partnership at
the offices of Prime Partnership, and each partner has the right, subject to
certain limitations, to have access to and inspect such books and records of
account.
New Prime will furnish to each limited partner promptly upon receipt of the
same but in no event later than April 1 of each year, copies of audited
financial statements prepared on a consolidated basis for Prime Partnership and
each Prime Property Partnership.
The general partner will use reasonable efforts to furnish to each limited
partner by March 1 of each fiscal year the tax information reasonably required
by the limited partners for federal income tax reporting purposes for the
preceding year. The general partner is authorized to withhold from otherwise
distributable net cash flow any tax that the general partner determines that
Prime Partnership is required to withhold or pay with respect to any amount
distributable or allocable to any partner.
POWER OF ATTORNEY
Pursuant to the terms of the Prime Partnership Agreement, each limited
partner and each assignee will appoint and empower the general partner, any
liquidator and the authorized officers and attorneys-in-fact of each, as such
limited partner's or assignees's true and lawful agent and attorney-in-fact to
make, execute, acknowledge, deliver, publish and file, in the appropriate public
offices, various certificates, documents and other instruments (including,
without limitation, the Prime Partnership Agreement and the certificate of
limited partnership of Prime Partnership and all amendments or restatements
thereof) that the general partner deems appropriate or necessary to effectuate
the terms or intent of the Prime Partnership Agreement. The Prime Partnership
Agreement provides that such power of attorney is irrevocable, will survive the
involuntary withdrawal of any limited partner and the transfer of all or any
portion of such limited partner's or assignee's Prime Partnership Units and will
extend to such limited partner's or assignee's heirs, successors, assigns and
personal representatives.
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COMPARISON OF RIGHTS OF THE UNITHOLDERS
At the Effective Time, holders of Horizon Partnership Units will become
holders of Prime Partnership Common Units. The rights of Prime Partnership's
limited partners are presently governed by DRULPA and the Prime Partnership
Agreement. The rights of Horizon Limited Partners are presently governed by
DRULPA and the Horizon Partnership Agreement. Upon approval of the Transactions
by the holders of Prime Partnership Common Units and Horizon Partnership Units
and at the Effective Time, the Prime Partnership Agreement will remain in full
force and effect. Upon exchange of Horizon Partnership Units for Prime
Partnership Common Units, the rights of the former holders of Horizon
Partnership Units will be governed by DRULPA and the Prime Partnership
Agreement.
The following discussion summarizes certain significant differences between
the rights of holders of limited partnership interests of Horizon Partnership
and Prime Partnership as a result of the Transactions. This summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Horizon Partnership Agreement and the Prime Partnership
Agreement.
ISSUANCE OF OTHER UNITS
The Prime Partnership Agreement authorizes Prime, as general partner, to
cause Prime Partnership to issue additional partnership interests in the form of
common units for any Prime Partnership purpose, from time to time for
consideration not less than the fair value thereof, and as Prime shall establish
in each case in its sole discretion without any approval from any limited
partner.
Under the Horizon Partnership Agreement, Horizon as general partner is
authorized in its sole discretion to issue additional limited partnership
interests in the form of partnership units, for any purpose at any time or from
time to time, to any Horizon partner or other entity or individual or entity
(other than the general partner). Horizon shall be authorized in its sole
discretion to create and issue one or more classes of other units for any
Horizon Partnership purpose at any time or from time to time, to any partner or
person, in accordance with the Horizon Partnership Agreement. Horizon
Partnership shall issue additional units as follows: (i) shares to Horizon upon
the issuance by Horizon of additional Horizon Common Shares (other than in
exchange for Horizon Partnership Units) and the contribution of the net proceeds
from such additional issuance as a capital contribution to Horizon Partnership,
however, Horizon may issue shares of Horizon Common Shares in connection with
share option plans, or dividend reinvestment plans without receiving any
proceeds and that the issuance of such Horizon Common Shares will nonetheless
entitle Horizon to additional Horizon Partnership Units under this section, (ii)
shares to the partners that hold preference units that are convertible into
Horizon Partnership Units, upon the exercise of such conversion in accordance
with the terms and conditions of the preference unit term sheet or other
securities, (iii) shares to partners holding Horizon Partnership Units if and to
the extent of each such partner's participation in any reinvestment program,
(iv) preference units to Horizon upon the issuance by Horizon of securities
other than Horizon Common Shares and the contribution of the net proceeds
thereof as a capital contribution to Horizon Partnership and (v) in all other
cases, Horizon Partnership Units and/or preference units, as determined by
Horizon as general partner, in its discretion, to existing or newly-admitted
partners, in exchange for the contribution by a partner of additional capital
contributions to Horizon Partnership.
UNIT OPTION PLAN
Under the Prime Partnership Agreement, if any incentive options granted in
connection with the Prime Stock Incentive Plan are exercised, Prime shall
contribute to the capital of Prime Partnership an amount equal to the exercise
price paid to Prime and Prime shall receive common units corresponding to the
number of shares of Prime Common Shares delivered by Prime to the exercising
party multiplied by the exchange factor.
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The Horizon Partnership Agreement provides that Horizon as general partner
may cause Horizon Partnership to adopt one or more Horizon Partnership Unit
option or incentive plans pursuant to which officers, directors and/or employees
of Horizon Partnership or Horizon may acquire Horizon Partnership Units.
INDEMNIFICATION
Pursuant to the Prime Partnership Agreement, Prime Partnership shall
indemnify and hold harmless Prime from any loss, damage, claim or liability,
including, but not limited to, reasonable attorneys' fees and expenses incurred
by Prime by reason of (i) any indebtedness incurred by Prime or any indebtedness
of Prime Partnership or any subsidiary thereof that is guaranteed by Prime or
(ii) vicarious liability by reason of Prime's status as general partner of Prime
Partnership. The partners agree that in the event Prime Partnership becomes a
debtor in a bankruptcy proceeding under a plan of reorganization, any funds
distributable to Prime and any funds distributable to the limited partners under
such plan of reorganization, after discharging claims against Prime from such
funds, will be distributed to the limited partners and the stockholders of Prime
among the various classes of partnership units.
Pursuant to the Horizon Partnership Agreement, Horizon Partnership shall
indemnify Horizon, any director, officer or employer of Horizon or Horizon
Partnership or any person (including any affiliate) designated as an agent by
Horizon in its reasonable discretion (each an "Indemnified Party") from and
against any and all losses, claims, damages, liabilities, expenses (including
reasonable attorneys' fees), judgments, fines, settlements and any other amounts
arising out of or in connection with any claims, demands, actions, suits or
proceedings (civil, criminal or administrative) relating to or resulting
(directly or indirectly) from the operations of Horizon Partnership, in which
such indemnified party becomes involved, or reasonably believes may become
involved, to the fullest extent permitted under DRULPA.
FINANCIAL STATEMENTS AND REPORTS
The Prime Partnership Agreement provides that Prime shall cause to be
submitted to the limited partners promptly upon receipt of the same from the
accountants and in no event later than April 1 of each year, copies of Audited
Financial Statements prepared on a consolidated basis for Prime Partnership,
together with the reports thereon and all supplementary schedules and
information prepared by the accountants. Prime Partnership also shall cause to
be prepared such reports and/or information as are necessary for Prime to
determine its qualification as a REIT and its compliance with REIT requirements.
The Horizon Partnership Agreement provides that Horizon shall maintain at
the office of Horizon Partnership full and accurate books of Horizon Partnership
showing all transactions, assets and liabilities, financial condition, names and
current addresses of partners and all other records necessary for recording
Horizon Partnership's business and affairs. All partners and their duly
authorized representatives shall have the right to inspect and copy any or all
of Horizon Partnership's books and records, including books and records
necessary to enable a partner to defend any tax audit or related proceeding,
during reasonable hours upon three(3) business days notice to Horizon. Within
one hundred twenty (120) days after the end of each fiscal year, as of the close
of such fiscal year Horizon shall provide an annual report containing audited
financial statements of Horizon Partnership or of Horizon, if such statements
are prepared on a consolidated basis with Horizon, presented in accordance with
GAAP by independent accountants.
MERGERS
DRULPA provides that limited partnerships may enter into mergers,
consolidations or similar transactions with other limited partnerships or
business entities.
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TRANSFER OR PLEDGE OF UNITS
Pursuant to the Prime Partnership Agreement, limited partners of Prime
Partnership shall have the right to transfer all or any portion of its common
units to any person or entity as long as such person or entity does not lack the
legal right, power or capacity to own a partnership interest; (i) in violation
of applicable security and other laws; (ii) of any component portion of a Prime
Partnership Common Unit, such as the capital account, or rights to Net Cash
Flow, separate and apart from all other components of a partnership unit; (iii)
if such transfer would cause the general partners to cease to comply with the
REIT requirements; (iv) if such transfer would cause a termination of the
partnership for federal income tax purposes; (v) if New Prime reasonably
determines that such transfer may not cause Prime Partnership to be treated as a
publicly traded partnership as provided in Code Section 7704 or cause Prime
Partnership to cease to be classified as a partnership for federal income tax
purposes; (vi) if such transfer would cause the partnership to become, with
respect to any employee benefit plan subject to Title 1 of ERISA, a "party-in-
interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as
defined in Section 4975(c) of the Code); (vii) if such transfer would, in the
opinion of counsel to Prime Partnership, cause any portion of the assets of the
partnership to constitute assets of any employee benefit plan pursuant to
Department of Labor Section 2510.3-101 of the Treasury Regulations; and (viii)
to any lender, a lender to Prime Partnership or any person who is related
(within the meaning of Section 1.752-4(b) of the Treasury Regulations) to any
lender to Prime Partnership whose loan constitutes a "nonrecourse liability"
(within the meaning of Section 1.752-1(a)(2) of the Treasury Regulations)
without the consent of Prime, in its sole and absolute discretion, unless Prime
Partnership's basis in the property or any partner's basis would not be reduced
as a result of such transfer.
Pursuant to the Horizon Partnership Agreement, limited partners of Horizon
Partnership may not, without the consent of Horizon, as general partner,
transfer all or any portion of its partnership interests. Except a limited
partner may, without consent of the general partner, transfer all or any portion
of his partnership interests to: (i) a parent, parent-in-law, spouse, natural or
adopted descendant or descendants, spouse of such a descendant, brother, sister,
nephew, niece, brother-in-law, sister-in-law or children-in-law, step-child or
step-grandchild, a corporation or other entity controlled by a limited partner
or a person or persons named in (i) above; (ii) such limited partner's estate or
one or more trusts for the benefit of a limited partner or a person or persons
named in (i) above, for estate and/or gift tax purposes, (iii) an organization
described in Section 501(c)(3) of the Code; (iv) a "qualified institutional
buyer" within the meaning of Rule 144A promulgated under the Securities Act; (v)
another limited partner; or (vi) if the limited partner is an entity, its
beneficial owners.
REDEMPTION/EXCHANGE OF UNITS
Under the Prime Partnership Agreement, if at any time Prime's preferred
shares are to be redeemed pursuant to the Prime Charter or purchased by Prime,
Prime Partnership shall redeem an equal number of preferred units by payment to
Prime of the preferred unit redemption amount or purchase price to be paid by
Prime immediately prior to or concurrently with such redemption or purchase. If
at any time shares of Prime's preferred stock are to be redeemed, Prime
Partnership shall redeem an equal number of preferred units by payment of the
preferred unit redemption amount or purchase price paid by Prime.
Under the Prime Partnership Agreement, Prime Common Unitholders may exchange
all or any portion of their Prime Partnership Common Units for Prime Common
Shares on a one-for-one basis, or, at the election of Prime, an amount of cash
equal to the value of such Prime Common Shares.
On and after August 8, 2007, Prime Partnership, at the option of Prime, may
redeem the Prime Partnership Series C Preferred Units, in whole or in part at
any time or from time to time at a redemption
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price for each Prime Partnership Series C Preferred Unit, payable in cash, in an
amount equal to the Prime Partnership Series C Preferred Unit redemption amount.
Under the Horizon Partnership Agreement, subject to the restrictions set
forth below, Horizon Common Unitholders may exchange all or any portion of their
Horizon Common Units for Horizon Common Shares on a one-for-one basis, or, at
the election of Horizon, an amount of cash equal to the value of such Horizon
Common Shares. The Horizon Partnership Agreement provides that any limited
partner holding 100,000 or more registrable securities or equivalent securities
shall be entitled to redeem the partnership units held by such limited partner
only during the 30-day period immediately following the filing with the
Commission by Horizon of its annual report on Form 10-K or quarterly reports on
Form 10-Q, or during such additional periods as Horizon Partnership may
otherwise permit (each, a "Window Period"), unless such limited partner agrees
in writing that, except during a Window Period, it will not engage in an offer,
sale, contract to sell or otherwise dispose of any REIT shares acquired by such
holder in such redemption during any period commencing fourteen (14) days prior
to the effective date of an underwriting agreement executed by the general
partner pertaining to an under written public offering of REIT Shares and ending
at the commence of the next Window Period.
AMENDMENTS
The Prime Partnership Agreement may not be amended, except by a written
instrument signed by Prime (and approved on behalf of Prime by at least a
majority of its directors who are not affiliates of any of the limited partners)
and by a majority-in-interest of the partners; provided, however, that any
amendment which materially an adversely alters the rights, preferences and terms
of the common units held by the limited partners relative to those of the common
units held by the general partner shall require the consent of limited partners
holding a majority-in-interest of the common units held by limited partners;
and, provided, further, that so long as any Prime Partnership Series C Preferred
Units are held by limited partners, the consent of limited partners holding at
least 66 2/3% of the Prime Partnership Series C Preferred Units shall be
necessary for effecting: (i) any amendment that materially and adversely affects
the voting powers, rights or preferences of the Prime Partnership Series C
Preferred Unitholders except that any amendment to authorize or create or to
increase the authorized amount of, any partnership interests that are not senior
in any respect to the Prime Partnership Series C Preferred Units or are on a
parity with the Prime Partnership Series C Preferred Units shall not be deemed
to materially and adversely affect the voting powers, rights or preferences of
the holders of Prime Partnership Series C Preferred Units; or (ii) the
authorization, reclassification or creation of, or the increase in the
authorized amount of, any partnership interests of any class ranking prior to
the Prime Partnership Series C Preferred Units in the distribution of assets on
any liquidation, dissolution or winding up of the partnership or in the payment
of dividends; provided, however, that no such consent of the holders of Prime
Partnership Series C Preferred Units shall be required (a) for the issuance of
additional convertible preferred units to the general partner in connection with
the general partner's issuance and sale of up to $57 million (before deducting
underwriting discounts or commissions) of its Prime Series B Preferred Shares at
a price equal to or greater than $22 per share (before deducting underwriting
discounts or commissions) as long as no modification has been made to the New
Prime Charter from the date hereof affecting the rights or privileges of such
convertible preferred units, or (b) if, at or prior to the time when such
amendment, alteration or repeal is to take effect, or when the issuance of any
such prior units or convertible security is to be make as the case may be,
provision is made for the redemption of all Prime Partnership Series C Preferred
Units at the time outstanding to the extent such redemption is authorized by the
Prime Partnership Agreement.
The Horizon Partnership Agreement, may be amended by Horizon except for
certain restrictions, without consent of any limited partner; to (i) add to the
representations, duties or obligations of the general partner or surrender any
right of power granted to the general partner herein; (ii) cure any
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ambiguity, correct or supplement any provision herein which may be inconsistent
with any other provision herein or make any other provision with respect to
matters or questions arising hereunder which will not be inconsistent with any
other provision hereof; (iii) reflect the admission, substitution, termination
or withdrawal of partner in accordance with the Horizon Partnership Agreement;
(iv) satisfy any requirements, conditions or guidelines contained in any order,
directive, opinion ruling or regulation of a federal or state agency or
contained in federal or state law; (v) reflect the issuance of other units; (vi)
amend the provisions of the Horizon Partnership Agreement that protect the
qualification of Horizon as a REIT if such provisions are no longer necessary
because a change in applicable law, a ruling of the IRS, or if the general
partner has determined to cease qualifying as a REIT.
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HORIZON GROUP PROPERTIES, L.P.
GENERAL
Upon consummation of the Transactions, HGP will be a self-administered and
self-managed REIT that will conduct its operation through HGP LP. HGP LP's
portfolio will consist of 14 factory outlet centers and one power center located
in 12 states containing an aggregate of approximately 3,092,000 square feet of
GLA. As of December 31, 1997, the HGP Properties (excluding the New Mexico
Center) were 80.1% leased. HGP LP's factory outlet centers feature a variety of
manufacturers of widely recognized, traditional brand name merchandise such as
Bass, Van Heusen, Corning/Revere, Carter's Childrenware, Big Dog Sportswear,
OshKosh B'Gosh, Jones New York, London Fog, Levi's, Jockey, J. Crew,
Springmaid-Wamsutta, Nike, Bugle Boy, Polo/Ralph Lauren, Reebok, The Gap, Liz
Claiborne, Nautica and Mikasa, as well as value or traditional retailers such as
Dress Barn, Linen Barn and Casual Corner.
HGP will control HGP LP as its sole general partner and the owner of 81.4%
of the partnership interests therein. Units of partnership interest in HGP LP
are exchangeable for HGP Common Shares on a one-for-one basis. HGP will be
dependent upon the distributions or other payments from HGP LP in order to meet
its financial obligations. HGP is a Maryland corporation that was incorporated
on January 21, 1998 and expects to commence operations as a publicly traded
company upon consummation of the Transactions. HGP's executive offices will be
located at 5000 Hakes Drive, Norton Shores, Michigan 49441.
HGP currently intends to elect to be treated as a REIT for federal income
tax purposes and to operate in the manner required to maintain its REIT status.
For a general discussion of these requirements, see "HGP LP Risk
Factors--Ownership Limit Necessary to Maintain REIT Qualification", "HGP LP Risk
Factors--Effect of REIT Distribution Requirements" and "Federal Income Tax
Consequences-- Qualification of HGP as a REIT."
BUSINESS STRATEGY
HGP LP's management plans to create and maximize shareholder value by
concentrating on remerchandising and increasing the occupancy levels at its
existing centers, enhancing the operating performance of its properties through
intensive property management and selectively expanding its centers in response
to tenant demand and changes in local market conditions. HGP LP will also
explore selective opportunities to acquire and reposition underperforming
properties that offer significant potential for cash flow growth and capital
appreciation. The following is a brief description of HGP LP's current business
strategy and philosophy.
REMERCHANDISING AND LEASING EXISTING CENTERS. Before the consummation of
the Transactions, the HGP Properties operated almost exclusively in the factory
outlet sector. After consummation of the Transactions, HGP LP will consider
alternate retail and entertainment concepts for each of its properties. HGP LP
intends to pursue a remerchandising strategy which will focus on attracting new
tenants to its portfolio to offer a wider range of merchandise and amenities
that complement its existing tenant base. For example, HGP LP's management
believes that the Laughlin, Nevada Center, which has been an outlet
center since its inception, has substantially greater potential serving a
broader range of retail and service needs of the nearly 4,500,000 tourists
visiting its market annually.
ACTIVE PROPERTY MANAGEMENT. HGP LP's management believes that HGP LP's
operating performance can be improved by increasing focus on asset management.
HGP LP's asset management team, which includes professionals experienced in
development, leasing, marketing, finance and property management, will
continually evaluate potential opportunities at its existing centers for capital
improvements and renovation that increase property values and offer attractive
investment returns. HGP LP also will closely monitor each center's sales,
occupancy and overall performance.
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TARGETED LOCAL MARKETING. Historically, Horizon Partnership has employed a
centralized marketing strategy that has included national and regional
promotions. HGP LP believes that its existing properties can benefit from
marketing and advertising programs that are specifically targeted to local
customers. To implement this strategy, HGP LP intends to hire on-site marketing
managers to develop retail marketing programs designed to highlight each
center's merchandising strengths.
EXPANSION OF EXISTING CENTERS. HGP LP's philosophy is to expand or improve
its existing centers only in response to tenant demand for additional retail
space. For example, HGP LP may, among other things, construct tenant build-outs
and redesign or reconfigure retail space for tenants. HGP LP believes that
selective expansion will allow it to take advantage of management's development
experience and tenant demand and relationships. Management has no plans at
present to expand any of the HGP Properties.
ALTERNATIVE USES FOR EXISTING CENTERS. A strategy for each existing center
will be formulated following an evaluation of property operations, market
potential, and real estate considerations. The selected strategy may involve
continuation as a factory outlet center, the addition of traditional retail
tenants, alternative uses, or some combination thereof. Alternative uses for an
existing property will be considered only when HGP LP management believes that a
non-retail use will generate higher returns, relative to the returns available
from factory outlet and traditional retail strategies for HGP's securityholders.
ACQUISITION OF UNDERPERFORMING PROPERTIES. In addition to seeking to
improve the performance of its existing properties, HGP LP will pursue
opportunities to acquire underperforming properties that offer the potential for
significantly higher cash flow through strategic repositioning. HGP LP intends
to focus its acquisition activities on retail properties, including both factory
outlet centers and more traditional retail sites, that may be purchased at
prices well below estimated replacement cost and generate returns in excess of
HGP LP's weighted cost of capital after taking into account estimated
repositioning costs, including expenses associated with capital improvements,
renovation and tenant turnover. HGP LP's ability to complete such acquisitions
will be subject to its ability to obtain adequate financing from third party
sources.
POSSIBLE SALE OF PROPERTIES. Management plans to evaluate all of HGP LP's
properties on a regular basis in accordance with its business objectives. In the
future HGP LP may dispose of certain of the HGP Properties in order to obtain
higher returns through alternative investments. At present, HGP LP has not
entered into any agreements or arrangements with respect to the sale or
disposition of any of the HGP Properties.
HGP LP DISTRIBUTION POLICY
Unless required to maintain HGP's status as a REIT under the Code, HGP LP
does not currently contemplate paying distributions on HGP LP Common Units.
Earnings from the operations of HGP LP are currently expected to be used by HGP
LP to support its ongoing business and make payments on its outstanding
indebtedness, including the HGP Credit Facility. The terms of the HGP Credit
Facility require that HGP LP's available cash flow from operations be used first
to pay interest payments due on such credit facility before being distributed to
securityholders. After making any payments required under the HGP Credit
Facility, HGP, as sole general partner of HGP LP, may determine in its
discretion to pay distributions on HGP LP Common Units in the future, and any
such determination will be dependent upon HGP LP's results of operations,
financial condition, contractual restrictions, REIT qualification requirements
and other factors deemed relevant at that time by HGP. See "HGP LP Risk
Factors-- Absence of Distributions."
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HGP LP CAPITALIZATION
The following table sets forth the capitalization of HGP LP as of December
31, 1997 on an historical basis and as adjusted to give effect to the
Transactions. The information set forth in the table should be read in
conjunction with the HGP LP financial statements and notes thereto, the HGP LP
pro forma financial information and notes thereto and "--HGP LP Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources" included elsewhere in this Joint
Consent Solicitation Statement/Prospectus/Information Statement.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Mortgages and other debt................................................................. $ 146,846 $ 127,387
Predecessor owners' capital.............................................................. 83,162 --
Partners' capital........................................................................ -- 40,565
---------- -----------
Total capitalization..................................................................... $ 230,008 $ 167,952
---------- -----------
---------- -----------
</TABLE>
HORIZON GROUP PROPERTIES, L.P. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of HGP LP.
The information set forth below should be read in conjunction with "Pro Forma
Condensed Financial Statements," "--HGP LP Management's Discussion and Analysis
of Results of Operations and Financial Condition" and the historical financial
statements and notes thereto included elsewhere in this Joint Consent
Solicitation Statement/Prospectus/Information Statement. The combined statement
of operations data set forth below for each of the four years ended December 31,
1997 and the combined balance sheet data at December 31, 1997, 1996 and 1995 are
derived from audited combined financial statements. The audited financial
statements of HGP LP as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997 are included elsewhere in this Joint
Consent Solicitation Statement/Prospectus/ Information Statement. The HGP LP
selected financial data should be read in conjunction with those financial
statements and the notes thereto. The combined operating data for the year ended
December 31, 1993 and the combined balance sheet data at December 31, 1994 and
1993 are derived from unaudited combined financial statements not included in
this Joint Consent Solicitation Statement/Prospectus/ Information Statement.
HGP LP's historical financial information has been derived from the
operations and historical basis of 13 of Horizon Partnership's 35 outlet centers
(including one power center) that will be contributed to HGP LP by Horizon
Partnership in connection with the Transactions. As historically HGP LP was not
a separate legal entity with its own capital structure, per unit data for net
income and distributions have not been presented. The historical financial
information may not be indicative of HGP LP's future performance and does not
necessarily reflect what the financial position and results of operations of HGP
LP would have been had HGP LP operated as a separate, stand-alone entity during
the periods presented. The selected financial data set forth below does not
include the operating results or financial position of the Prime
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Transferred Properties. See "HGP LP Risk Factors--Limited Relevance of
Historical Financial Information."
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenue......................................................... $ 32,543 $ 29,992 $ 16,507 $ 9,832 $ 6,765
Expenses........................................................ 35,890 24,049 12,711 6,165 5,929
Impairment (1).................................................. 6,949 24,631 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before gain on sale of real estate and
extraordinary charge.......................................... (10,296) (18,688) 3,796 3,667 836
Gain on sale of real estate..................................... -- 73 3 -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary charge....................... (10,296) (18,615) 3,799 3,667 836
Extraordinary charge............................................ (808) (155) -- -- --
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ (11,104) $ (18,770) $ 3,799 $ 3,667 $ 836
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Balance Sheet Data:
Real estate, net of accumulated depreciation.................... $ 213,190 $ 211,957 $ 214,839 $ 49,520 $ 48,656
Total assets.................................................... 237,336 249,660 224,182 52,147 57,366
Debt allocated from Horizon Partnership......................... 146,846 132,513 105,138 13,151 10,635
Net assets...................................................... 83,162 107,360 105,248 36,419 44,213
Other Data:
FFO (2)......................................................... $ 6,016 $ 11,544 $ 7,468 $ 5,625 $ 2,137
Cash flows provided by (used in):
Operating activities.......................................... 8,325 (4,990) 9,575 5,362 2,369
Investing activities.......................................... (9,793) (37,870) (72,303) (3,093) (18,752)
Financing activities.......................................... 557 46,175 63,314 (8,677) 23,386
Total gross leasable area (square feet)......................... 2,370 2,592 2,061 652 452
</TABLE>
- ------------------------------
NOTES:
(1) In 1997, represents a $6.0 million charge to reduce the carrying value of
four centers subject to a sales agreement to their estimated sales value
less costs to dispose and a $0.9 million impairment charge related to
development projects that will not be pursued. In addition, the impairment
expense includes a $1.8 million charge related to development projects,
which will not be pursued. In 1996,represents a $22.8 million charge to
reduce the carrying value of four centers that resulted from management's
effort to market one center for sale and revised occupancy estimates on
three centers that indicated a permanent impairment in their value. See Note
4--"Impairment" in the Notes to Combined Financial Statements for HGP LP.
(2) HGP LP's management believes that in order to facilitate a clear
understanding of the combined historical operating results of HGP LP, FFO
should be considered in conjunction with net income (loss) as presented in
the financial statements included in this Joint Consent Solicitation
Statement/Prospectus/Information Statement. Management believes that FFO is
an important and widely used measure of the operating performance of REITs
which provides a relevant basis for comparison to other REITs. Therefore,
FFO is presented to assist investors in analyzing HGP LP. In March 1995,
NAREIT issued a clarification of its definition of FFO. Although HGP LP has
adopted the NAREIT definition of FFO, HGP LP cautions that the calculation
of FFO may vary from entity to entity and as such the presentation of FFO by
HGP LP may not be comparable to other similarly titled measures of other
reporting companies. FFO does not represent cash flow from operating
activities in accordance with GAAP and is not indicative of cash available
to fund all of HGP LP's cash needs. FFO should not be considered as an
alternative to net income or any other GAAP measure as an indicator of
performance and should not be considered as an alternative to cash flow as a
measure of liquidity or the ability to service debt or to pay dividends. A
reconciliation of income (loss) before extraordinary charge to FFO is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) before extraordinary charge.............. $ (10,296) $ (18,615) $ 3,799 $ 3,666 $ 836
FFO ADJUSTMENTS
Depreciation and amortization........................ 9,363 5,601 3,672 1,959 1,301
Impairment charges................................... 6,949 24,631 -- -- --
Gain on sale of assets............................... -- (73) (3) -- --
---------- ---------- --------- --------- ---------
Total FFO adjustments.............................. 16,312 30,159 3,669 1,959 1,301
---------- ---------- --------- --------- ---------
FFO.................................................... $ 6,016 $ 11,544 $ 7,468 $ 5,625 $ 2,137
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
</TABLE>
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HGP LP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "--HORIZON
GROUP PROPERTIES, L.P. SELECTED FINANCIAL DATA" AND HGP LP COMBINED FINANCIAL
STATEMENTS AND NOTES THERETO, EACH APPEARING ELSEWHERE IN THIS JOINT CONSENT
SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT. HISTORICAL RESULTS AS
SET FORTH HEREIN ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS FROM
OPERATIONS.
OVERVIEW
HGP LP's historical financial information has been derived from the
operations and historical basis of 13 of Horizon Partnership's 35 centers that
will be contributed to HGP LP as a result of the Transactions. The combined
financial statements of HGP LP are not currently those of a separate legal
entity. Accordingly, the combined financial statements of HGP LP have been
derived from the historical results of operations and historical basis of the
assets and liabilities of such operations. Due to the fact that HGP LP was not
historically operated as a separate component of Horizon Partnership, but in an
integrated manner with the remaining net assets of Horizon Partnership, HGP LP
is not insulated from the obligations and commitments of Horizon Partnership. In
addition, the historical results of operations and financial condition of HGP LP
have been presented as the net assets that were managed by Horizon Partnership
because HGP LP did not have separate employees or business practices from
Horizon Partnership.
As set forth in the financial information included herein, debt, interest
and general and administrative expenses of HGP LP are allocations of Horizon
Partnership's balances. The balance sheet of HGP LP includes an allocation of
the aggregate debt balance of Horizon Partnership (which has historically been
secured by a pool of Horizon Partnership assets) based upon the proportionate
use of debt proceeds by the HGP LP Properties for development and expansion
compared to the Horizon Partnership Properties. The allocation was made in this
manner because management believes it best represents the use of funds borrowed
during the periods as presented and because allocating debt in this manner
results in the statements of operations reflecting the interest cost of doing
business. Financing costs were allocated based upon the same proportionate
ratio. Interest expense has been estimated based upon the aforementioned
proportionate debt balances and the weighted average interest rates incurred by
Horizon Partnership on its debt balances.
General and administrative corporate overhead of Horizon Partnership has
been allocated to HGP LP based upon the ratio of GLA of the HGP LP Properties
compared to the Horizon Partnership Properties. This allocation of Horizon
Partnership's corporate overhead expense may not reflect HGP LP's actual general
corporate overhead expense as a separate entity. Cash and cash equivalents have
been included in the combined financial statements of HGP LP based upon the
respective periods' ratio of GLA of HGP LP's portfolio compared to Horizon
Partnership's total historical portfolio.
Horizon Partnership's management believes the assumptions underlying HGP
LP's financial statements to be reasonable. However, the financial information
included herein may not necessarily reflect the results of operations, financial
position and cash flows of HGP LP in the future or what results of operations,
financial position and cash flows would have been had HGP LP been a separate
stand-alone entity during the periods presented.
Horizon Partnership has grown by developing new factory outlet centers,
expanding existing factory outlet centers, acquiring factory outlet centers and
increasing rental revenue at its existing factory outlet centers. On July 14,
1995, Horizon Partnership expanded its operations by merging with McArthur/Glen,
an owner, operator and developer of factory outlet centers. Six of the factory
outlet centers included in
HGP LP were acquired as a result of this merger. See Note 3 in the accompanying
combined financial statements of HGP LP for further information. The above
mentioned factors and the resulting increase in the total GLA contained in HGP
LP's properties are collectively referred to as the "Portfolio Expansion."
HGP LP receives rental revenue through base rent, percentage rent and
expense recoveries from tenants. Base rent represents a minimum amount for which
tenants are contractually obligated. Percentage rent represents an amount
tenants are obligated to pay as additional rent based on a percentage of the
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tenant's gross sales in excess of a "breakpoint." Expense recoveries from
tenants relate to the portion of the operating expenses for which the tenants
are obligated to reimburse HGP LP, including real estate taxes, insurance,
utilities and common area maintenance charges.
COMBINED RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Loss before extraordinary charge was $10.3 million in 1997 compared to loss
before extraordinary charge of $18.6 million in 1996. Included in the net loss
for 1997 is a $0.8 million extraordinary charge resulting from an early
prepayment of debt. Horizon Partnership refinanced its outstanding short-term
debt during the second quarter of 1997 and the extraordinary charge represents
HGP LP's proportionate share of Horizon Partnership's expense.
Total revenues increased 8.5% to $32.5 million in 1997 from $30.0 million in
1996. Base rent increased $2.9 million, or 14.6%, for the year ended December
31, 1997 compared to the corresponding period in 1996 primarily due to $3.0
million of prepaid rent on the Algodones, New Mexico property that was
recognized in 1997 due to the early termination of the lease. Percentage rent
increased in the same period due to higher tenant sales. Decreases in expense
recoveries from tenants in 1997 compared to 1996 resulted principally from lower
average occupancy. For the year ended December 31, 1997 and 1996, expense
recoveries covered 77.4% and 91.7% of property operating and real estate tax
expenses, respectively.
Other income increased in 1997 compared to the prior year from higher
temporary tenant income.
Property operating and real estate tax expenses have increased as a result
of the Portfolio Expansion. General and administrative expense increased from
$2.3 million in 1996 to $2.8 million in the corresponding period in 1997
primarily due to $0.4 million in increased professional fees and a larger
percentage of overhead costs that were expensed as a result of lower development
activity. As a result, general and administrative expenses, as a percentage of
total revenues, increased to 8.6% in 1997 compared to 7.6% in 1996.
Depreciation and amortization increased $4.3 million or 71.2% during 1997
when compared to 1996. Interest expense increased $4.8 million or 72.1% between
the comparable periods. The increases are primarily a result of the inclusion of
interest and depreciation expense associated with HGP LP's outlet center in
Laughlin, Nevada after it reached stabilization in July 1997.
In 1997, Horizon Partnership's management entered into an agreement, subject
to certain contingencies, to sell four outlet centers that have been included in
the net assets of HGP LP for $17.0 million. A charge for asset impairment of
$6.0 million was recorded in the results of operations of HGP LP in the year
ended December 31, 1997 to reduce the carrying value of these outlet centers to
their estimated fair values less cost to dispose. Subsequently, the sales
agreement was terminated and management decided to then pursue the sale of only
one of the properties, the New Mexico Outlet Center. The remaining three
properties were reclassified to real estate assets at their fair values as of
the date of the decision not to sell. In addition, the 1997 expense included a
$0.9 million impairment charge related to development projects, which will not
be pursued.
1996 COMPARED TO 1995
The loss before extraordinary charge was $18.6 million in 1996 compared to
income before extraordinary charge of $3.8 million in 1995. The net loss in 1996
resulted primarily from a $24.6 million charge for asset impairment. Loss in
1996 before extraordinary charge, excluding the $24.6 million write-down,
improved $2.2 million, or 58.4%, in 1996 compared to 1995. The improvement
resulted principally from the Portfolio Expansion.
Total revenues increased $13.5 million, or 81.7% to $30.0 million for the
year ended December 31, 1996 compared to the prior year. Base rents increased
$8.4 million, or 71.0%, in 1996 compared to 1995.
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These increases resulted from increased GLA due to the Portfolio Expansion.
Tenant expense recoveries increased $3.9 million, or 104.7%, in 1996 compared to
1995 as a result of additional leased space. For the twelve months ended
December 31, 1996, expense recoveries covered 91.7% of property operating and
real estate tax expenses, compared to 96.8% in 1995.
Other income increased in 1996 compared to 1995 from higher lease
termination income and income related to marketing.
Property operating and real estate tax expenses increased $4.5 million, or
116.1%, as a result of the Portfolio Expansion. General and administrative
expenses increased $1.3 million in 1996, or 140.9%, compared to 1995 resulting
from the inclusion of a full year of additional expense in 1996 resulting from
the merger of Horizon Partnership with McArthur/Glen Partnership and increased
leasing costs. As a result, general and administrative expenses, as a percentage
of total revenues, increased to 7.6% in 1996 compared to 5.7% in 1995.
Depreciation and amortization increased $1.5 million, or 34.6%, to $6.0
million during 1996 when compared to 1995. Interest expense increased $3.6
million or 118.2% to $6.7 million during 1996 when compared to 1995. These
increases were due to the Portfolio Expansion.
The charge for impairment in 1996 resulted from Horizon Partnership 's
review of the carrying value of its long-lived assets. The financial statements
of HGP LP reflect write-downs totaling $22.8 million in 1996 primarily pursuant
to the provisions of SFAS No. 121 "IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-
LIVED ASSETS TO BE DISPOSED OF" as follows:
- The decision to market for sale one center that, based on the expected net
proceeds, required a write-down of the carrying value of such center to
its estimated fair value less cost to sell. This property was reclassified
to real estate as of December 31, 1997.
- Revised occupancy expectations that indicated a permanent impairment of
value of three other centers. These centers were written-down to estimated
fair value.
In addition, 1996 results reflect a charge of $1.8 million related to HGP
LP's development projects which will not be pursued.
LIQUIDITY AND CAPITAL RESOURCES
The combined financial statements of HGP LP are not currently those of a
separate legal entity, and have been derived from the historical results of
operations and historical basis of the assets and liabilities of Horizon.
Because HGP LP was historically not operated as a separate entity of Horizon
Partnership, but in an integrated manner with the net assets of Horizon
Partnership, HGP LP is not insulated from the obligations and commitments of
Horizon Partnership. HGP LP's liquidity and capital resources set forth in the
financial information herein represent amounts allocated from Horizon
Partnership as the majority of the properties comprising HGP LP's assets were
dependent on Horizon Partnership to fund cash flow requirements that could not
be satisfied by cash flows from operations.
Debt allocated from Horizon Partnership as of December 31, 1997 and 1996
reflects an allocation of debt from Horizon Partnership that is based upon the
proportionate use of debt proceeds by HGP LP's portfolio of properties for
development and expansion compared to Horizon Partnership's total portfolio. The
allocation was made in this manner because management believes it best
represents the use of funds borrowed during the period as presented and because
allocating the debt in this manner results in the Statements of Operations
reflecting the interest cost of doing business. The net proceeds from borrowings
from Horizon Partnership were $14.3 million and $27.4 million for the years
ended December 31, 1997 and 1996, respectively. The net proceeds from borrowings
from Horizon Partnership for the years ended December 31, 1997 and 1996 were
primarily used for the Portfolio Expansion. In 1995, the increase in borrowings
from Horizon included an allocation of $53.5 million associated with the six
outlet centers obtained from McArthur/Glen.
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<PAGE>
Net contributions (distributions) from (to) Horizon Partnership represent
the net amounts advanced from and repaid to Horizon Partnership that were
necessary to fund development or were excess cash flows remitted back to Horizon
Partnership. For the years ended December 31, 1997, 1996 and 1995, net
contributions (distributions) were $(13.1) million, $20.9 million and $25.5
million, respectively.
Cash flows from operations were $8.3 million for the year ended December 31,
1997, an increase of $13.3 million compared to the corresponding 1996 period.
The increase is due to a $4.0 million prepayment on a master lease of the
Algodones, New Mexico outlet center (see Note 8 to the accompanying Notes to
Combined Financial Statements) and decreased advances to HGP LP's joint venture.
In 1996, cash flows used in operations were $5.0 million, a $14.6 million
decrease primarily resulting from advances to HGP LP's joint venture.
Nomura has entered into a commitment letter pursuant to which Nomura will
provide a credit facility (the "HGP Credit Facility") to the entities which will
own the HGP Properties. The aggregate principal amount of the HGP Credit
Facility will be determined based on various factors, including the historical
cash flows of the HGP Properties. HGP presently anticipates that the HGP Credit
Facility will provide for initial borrowings of $120,000,000. The HGP Credit
Facility will be fully and unconditionally guaranteed by HGP and HGP LP. The HGP
Credit Facility will have a term of three years and will bear interest at the
30-day LIBOR Rate (as defined in the HGP Credit Facility) plus 1.90% per annum.
The HGP Credit Facility will be cross collateralized by mortgages on each of the
HGP Properties as well as a security interest in substantially all the other
assets of HGP and its affiliates. The HGP Credit Facility requires monthly
payments of interest. In addition, the HGP Credit Facility requires principal
payments totaling $1.5 million, $1.5 million and $2.0 million during the first,
second and third years, respectively, following the Closing Date, payable in
equal monthly installments. The HGP Credit Facility will mature on the third
anniversary of the Closing Date. The HGP Credit Facility has a prepayment
penalty of 1% of amounts repaid during the first loan year and 2% of amounts
repaid in the second and third loan years. The HGP Credit Facility contains
restrictions on the ability of HGP and HGP LP to incur additional indebtedness,
and under certain circumstances, requires the interest rate of the HGP Credit
Facility to be hedged to a fixed rate. All of the proceeds from the HGP Credit
Facility will be used to repay debt outstanding.
Prime Partnership has agreed to guarantee $10.0 million of indebtedness
under the HGP Credit Facility. Pursuant to such guarantee, HGP will be obligated
to pay to Prime Partnership a fee equal to 4.0% per annum of the aggregate
amount of obligations subject to such guarantee. The guarantee will terminate if
HGP raises at least $50.0 million in capital contributions and uses at least
$50.0 million of the proceeds from such capital contributions to repay the HGP
Credit Facility.
HGP LP expects to meet its short-term liquidity requirements generally
through its working capital and cash flow provided by operating activities. HGP
LP expects to meet its long-term liquidity requirements such as tenant
allowances for new leases and capital improvements through a combination of its
working capital, the issuance of long-term debt and/or the potential offering of
additional equity securities in the private or public capital markets.
Subsequent to the Transactions, HGP LP will have approximately $130 million of
outstanding debt. As a result of HGP LP's leverage and the covenants related to
the debt, HGP LP's ability to obtain additional financing sources will be
limited. There can be no assurance that HGP LP will be able to successfully
obtain funding from such sources. Furthermore, HGP LP's business plan calls for
the repositioning of certain of the HGP Properties, which will require HGP LP to
obtain additional capital. See "Risk Factors--Lack of Working Capital."
Horizon elected to be taxed as a REIT under the Code commencing with the
taxable year ending December 31, 1994. Accordingly, no tax expense has been
allocated from Horizon Partnership to HGP LP. In order to qualify as a REIT for
federal income tax purposes, Horizon is required to pay dividends to its
shareholders of at least 95% of its REIT taxable income in addition to
satisfying other requirements.
On a going forward basis, HGP intends to elect to be taxed as a REIT and
make distributions to its shareholders only to the extent necessary to comply
with the requirements of the Code. There can be no assurance that HGP will
generate taxable income, or pay distributions in the forseeable future. However,
262
<PAGE>
the payment of any dividends by HGP would necessitate HGP LP making an
equivalent distribution to its unitholders, including HGP. HGP LP also intends
to retain such amounts as it considers necessary from time to time for the
acquisition or development of new properties as suitable opportunities arise,
for the expansion and renovation of its existing factory outlet centers, and for
the retirement of debt.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of HGP LP's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
HGP LP does not believe that the impact of the recognition of the year 2000
by its information and operating technology systems will have a material adverse
effect on HGP LP's financial condition and results of operations. The majority
of any necessary system changes will be upgraded in the normal course of
business. HGP LP has initiated formal communications with all of its significant
suppliers to determine the extent to which HGP LP's interface systems are
vulnerable to those third parties' failure to remediate their own year 2000
issues. There can be no guarantee that the systems of other companies, on which
HGP LP's systems rely, will be timely converted and would not have an adverse
effect on HGP LP's systems.
FUNDS FROM OPERATIONS
HGP LP's management believes that to facilitate a clear understanding of the
consolidated historical operating results of HGP LP, FFO should be considered in
conjunction with net income (loss) as presented in the financial statements
included in this Joint Consent Solicitation Statement/Prospectus/Information
Statement. Management believes that FFO is an important and widely used measure
of the operating performance of REITs which provides a relevant basis for
comparison to other REITs. Therefore, FFO is presented to assist investors in
analyzing the performance of HGP LP. In March 1995, NAREIT issued a
clarification of its definition of FFO. Although HGP LP has adopted the NAREIT
definition of FFO, HGP LP cautions that the calculation of FFO may vary from
entity to entity and as such the presentation of FFO by HGP LP may not be
comparable to other similarly titled measures of other reporting companies. FFO
does not represent cash flow from operating activities in accordance with GAAP
and is not indicative of cash available to fund all of HGP LP's cash needs. FFO
should not be considered as an alternative to net income or any other GAAP
measure as an indicator of performance and should not be considered as an
alternative to cash flow as a measure of liquidity or the ability to service
debt or to pay dividends.
FFO included herein may not necessarily reflect the FFO of HGP LP in future
projects or what FFO would have been had HGP LP been a separate stand-alone
entity during the periods presented. FFO decreased $5.5 million, or 47.9%, to
$6.0 million in the year ended December 31, 1997 compared to the year ended
December 31, 1996. The decrease is primarily due to increased interest expense
on the Laughlin, Nevada property and declining occupancy in 1997 as compared to
1996. FFO in 1996 increased $4.1 million, or 54.6%, to $11.5 million compared to
1995. FFO increased $1.8 million, or 32.8%, to $7.5 million in 1995 compared to
1994. These increases resulted from the Portfolio Expansion.
INFLATION
HGP LP's leases with the majority of its tenants require the tenants to
reimburse HGP LP for most operating expenses and increases in common area
maintenance expenses, which reduces HGP LP's exposure to increases in costs and
operating expenses resulting from inflation.
263
<PAGE>
PROPERTIES
The following table presents information regarding the HGP Properties:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR OF
OPENING/
MOST TOTAL
RECENT APPROXIMATE PERCENTAGE
EXPANSION/ GLA AS OF GLA LEASED
NO. OF 12/31/97 AS OF CERTAIN TENANTS AS OF
NAME AND LOCATION OF CENTER PHASES (SQ. FT.) 12/31/97 12/31/97
Bellport Outlet Center 1992/1997 291,248 79.5% Bass, Carter's
Patchogue, New York(1) 3 Phases Childrenswear, Dress Barn,
The Gap, Liz Claiborne,
London Fog, Nike, OshKosh
B'Gosh, Pendleton, Reebok,
Springmaid-Wamsutta, Van
Heusen, Vanity Fair
Dry Ridge Outlet Center 1991/1994 117,980 71.3% Bass, Dress Barn, Guess?,
Dry Ridge, Kentucky 2 Phases Jones New York, Liz
Claiborne, Mikasa, Nike,
Nine West, Van Heusen,
Westport
Horizon Outlet Center-- 1988/1990 185,769 72.8% Bass, Bugle Boy, Carter's
Holland 2 Phases Childrenswear, Casual
Holland, Michigan Corner, Dress Barn, Eddie
Bauer, Florsheim, Hush
Puppies, Oneida,
Pfaltzgraff, Reebok, Van
Heusen
Horizon Outlet Center-- 1996 258,312 79.2% Big Dog Sportswear, Carter's
Laughlin 1 Phase Childrenswear, Corning/
Laughlin, Nevada Revere, Dress Barn, Linen
Barn, Mikasa, OshKosh
B'Gosh, Polo/Ralph Lauren,
Reebok
Horizon Outlet Center-- 1987/1989 230,139 87.3% Bass, Bugle Boy, Carter's
Monroe 2 Phases Childrenswear, Casual
Monroe, Michigan Corner, Corning/Revere,
Dress Barn, Hit or Miss,
Levi's, Mikasa, Nike,
WestPoint Stevens
Horizon Outlet Center-- 1990 199,962 80.0% Bass, Brooks Brothers,
Somerset 1 Phase Casual Corner,
Somerset, Pennsylvania Corning/Revere, Dress
Barn, Evan Picone, Jones
New York, Levi's, Mikasa,
Polo/Ralph Lauren, Van
Heusen
</TABLE>
264
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL
RECENT APPROXIMATE PERCENTAGE
EXPANSION/ GLA AS OF GLA LEASED
NO. OF 12/31/97 AS OF CERTAIN TENANTS AS OF
NAME AND LOCATION OF CENTER PHASES (SQ. FT.) 12/31/97 12/31/97
<S> <C> <C> <C> <C>
Horizon Outlet Center-- 1990/1996 147,455 71.5% Bass, Carter's
Traverse City 2 Phases Childrenswear,
Traverse City, Michigan Corning/Revere, Dansk,
Hush Puppies, Lechters,
Levi's, London Fog
Horizon Outlet Center-- 1995 139,433 83.7% Bass, Big Dog Sportswear,
Tulare 1 Phase Bugle Boy, Corning/Revere,
Tulare, California Jones New York, Linen
Barn, Mikasa, OshKosh
B'Gosh, Polo/Ralph Lauren,
Reebok, Van Heusen
Indiana Factory Shops 1994/1996 234,149 85.4% Bass, Big Dog Sportswear,
Daleville, Indiana 2 Phases Bugle Boy, Carter's
Childrenswear, Casual
Corner, Corning/Revere,
London Fog, Mikasa,
OshKosh B'Gosh, Paul
Harris, Polo/Ralph Lauren,
Springmaid-Wamsutta, Van
Heusen, Westport Ltd.
Lakeshore Marketplace 1995 360,592 74.3% Barnes & Noble, Ben
Norton Shores, Michigan 1 Phase Franklin, Di's Hallmark,
(Power Center) Dunham's Sporting Goods,
Elder-Beerman, Famous
Footwear, Great Party, Old
Navy, Toys "R" Us, TJ Maxx
Medford Outlet Center 1991/1995 188,060 80.3% American Eagle, Bass, Bugle
Medford, Minnesota 2 Phases Boy, Casual Corner,
Columbia Sportswear,
Corning/Revere, County
Seat, Dress Barn, Guess?,
Levi's, Liz Claiborne,
Mikasa, Nike, Van Heusen,
Westport Woman
Nebraska Crossing Factory 1993 191,525 88.5% Bass, Boston Traders, Bugle
Shops 1 Phase Boy, Carter's
Gretna, Nebraska Childrenswear, Casual
Corner, Corning/ Revere,
Dress Barn, OshKosh
B'Gosh, Jockey, Levi's,
Mikasa, Westport Ltd.
</TABLE>
265
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
OPENING/
MOST TOTAL
RECENT APPROXIMATE PERCENTAGE
EXPANSION/ GLA AS OF GLA LEASED
NO. OF 12/31/97 AS OF CERTAIN TENANTS AS OF
NAME AND LOCATION OF CENTER PHASES (SQ. FT.) 12/31/97 12/31/97
<S> <C> <C> <C> <C>
Sealy Outlet Center 1995/1996 191,865 90.1% Bass, Bugle Boy, Casual
Sealy, Texas 2 Phases Corner, Dress Barn, J.
Crew, Jockey, Liz
Claiborne, Mikasa, Nine
West, OshKosh B'Gosh,
Reebok, Spiegel,
Springmaid-Wamsutta, Van
Heusen
Warrenton Outlet Center 1993/1995 200,363 81.7% Bass, Corning/Revere, Dress
Warrenton, Missouri 2 Phases Barn, Easy Spirit, Levi's,
Linen Barn, Liz Claiborne,
Mikasa, Naturalizer, Nike,
Nine West, Van Heusen
New Mexico Outlet Center 1993 155,170 --(2)
Algondones, New Mexico 1 Phase
</TABLE>
- ------------------------
NOTES:
(1) HGP LP has a 50% joint venture partnership interest in Phase I of this
property representing 94,940 square feet of GLA and a 45% joint venture
partnership interest in Phases II and III representing 196,308 square feet
of GLA.
(2) As of January 31, 1998, this center was unoccupied and held for sale. See
Note 8 to Notes to Combined Financial Statements of Horizon Group
Properties, L.P.
In the opinion of HGP LP's management, all of the properties described above
are adequately covered by insurance.
On a pro forma basis, no HGP Property accounted for more than 10% of the
book value or gross revenues of HGP as of or for the year ended December 31,
1997.
LEASE INFORMATION
In general, the leases relating to the HGP Properties have initial terms of
five to ten years. Most leases provide for the payment of percentage rent for
annual sales in excess of certain thresholds. In addition, HGP LP's typical
leases provide for the recovery of all of a merchant's proportionate share of
actual common area maintenance, refuse removal, insurance, and real estate taxes
as well as a collection for advertising and promotion and an administrative fee.
Common area maintenance includes such items as common area utilities, security,
parking lot cleaning, maintenance and repair of common areas, capital
replacement reserves, landscaping, seasonal decorations, public restroom
maintenance and certain administrative expenses.
266
<PAGE>
The following table shows lease expirations for the next ten years at the
HGP Properties (as of December 31, 1997 and assuming no lease renewals or
extensions):
<TABLE>
<CAPTION>
NET RENTABLE
AREA SUBJECT ANNUAL
TO EXPIRING BASE RENT % OF TOTAL
NUMBER OF LEASES REPRESENTED BY GLA OF
YEAR LEASES EXPIRING (SQ. FT.) EXPIRING LEASES EXPIRING LEASES
- ------------------------------------------------------ --------------- ------------ --------------- -----------------
<S> <C> <C> <C> <C>
1998.................................................. 82 274,350 $ 2,747,673 12.8%
1999.................................................. 90 326,502 4,029,728 15.2
2000.................................................. 86 287,513 3,946,077 13.4
2001.................................................. 79 287,399 4,121,310 13.4
2002.................................................. 56 246,054 3,077,671 11.5
2003.................................................. 19 76,463 981,969 3.6
2004.................................................. 10 59,187 868,873 2.8
2005.................................................. 12 73,719 860,247 3.4
2006.................................................. 18 178,041 1,541,521 8.3
2007.................................................. 5 56,576 502,166 2.6
</TABLE>
TENANT INFORMATION
HGP LP's factory outlet centers feature a variety of manufacturers of widely
recognized, traditional brand name merchandise. The following table sets forth
information as to HGP LP's lead tenants as of and for the nine months ended
December 31, 1997.
<TABLE>
<CAPTION>
OCCUPIED PERCENTAGE OF
NUMBER GLA BASE RENTAL PERCENTAGE OF
TENANT OF STORES (SQ. FT.) INCOME GLA OCCUPIED
- ------------------------------------------------------------ ------------- ---------- --------------- -----------------
<S> <C> <C> <C> <C>
Phillips-Van Heusen Retail Division......................... 34 168,159 7.9% 7.3%
Dress Barn, Inc............................................. 15 93,930 4.9% 4.1%
Brown Retail Group, Inc..................................... 16 77,611 3.8% 3.4%
Sara Lee Corporation........................................ 10 76,304 3.3% 3.3%
Mikasa, Inc................................................. 18 69,862 3.2% 3.0%
The William Carter Company.................................. 10 49,860 2.4% 2.2%
The U.S. Shoe Corporation................................... 12 46,568 2.3% 2.0%
Bugle Boy Industries, Inc................................... 11 64,662 2.2% 2.8%
Other Tenants............................................... 386 1,653,075 70.1% 71.9%
</TABLE>
COMPETITION
HGP LP's factory outlet centers compete for customers primarily with factory
outlet centers built and operated by other developers, traditional shopping
malls and off-price retailers. HGP LP believes that the majority of its
customers visit factory outlet centers because they are intent on buying
first-quality, name-brand goods at discounted prices. Traditional full- and off-
price retailers are often unable to provide such a variety of products at
attractive prices at a single location every day.
Numerous developers and real estate companies are engaged in the development
or ownership of factory outlet centers and other retail complexes that compete
with HGP LP in seeking tenants for its centers. Management believes that HGP LP
competes with many large national and small developers of factory outlet
centers. This results in competition for tenants to lease space in the factory
outlet centers that HGP LP and its competitors own or operate. The development
of a new, competing factory outlet center with a more convenient location or
more favorable rental terms may attract HGP LP's tenants or cause them to
renegotiate their leases at or prior to renewal.
As HGP LP seeks to implement its business plan to enhance the value of its
real estate assets by exploring alternative retail and non-retail uses, it will
compete directly with a broader array of national and regional real estate
management and development companies, many of which are large and have greater
financial resources than HGP LP.
267
<PAGE>
LEGAL PROCEEDINGS
Neither HGP LP nor any of the HGP Properties is subject to any material
litigation.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following supplements the discussion of HGP LP's primary management,
portfolio diversification, expansion and improvements, development, financing,
marketing and operations strategies set forth elsewhere in this Joint Proxy
Statement/Prospectus/Information Statement. HGP LP's policies with respect to
those activities and the matters discussed below have been determined by the HGP
Board of Directors and may be amended or revised from time to time at the
discretion of the HGP Board of Directors without a vote of the shareholders of
HGP or unitholders of HGP LP. No assurance can be given that HGP LP's investment
objectives will be attained or that the value of HGP LP will not decrease.
FINANCING. HGP LP's policy is to finance any acquisitions, expansions and
developments with the source of capital believed by management to be most
appropriate, which may include undistributed cash flow, borrowings from
institutional lenders, newly-issued equity securities, and debt securities on a
secured or unsecured basis. There can be no assurance that any such financing
will be obtained. HGP LP's debt instruments may limit its ability to pay
dividends in the future. For a description of HGP LP's initial sources of
financing, see "--HGP LP Management's Discussion and Analysis of Results of
Operations and Financial Conditions--Liquidity and Capital Resources."
Any additional debt financing, including additional lines of credit, may be
secured by mortgages on the HGP Properties. Such mortgages may be recourse or
non-recourse or cross-collateralized or may contain cross-default provisions.
HGP LP does not have a policy limiting the number of mortgages that may be
placed on, or the amount of indebtedness that may be secured by, any particular
property; however, mortgage financing instruments usually limit additional
indebtedness on the mortgaged properties.
INVESTMENT POLICIES. HGP LP may expand existing properties, develop new
properties, purchase or lease income-producing properties for long-term
investment, expand and improve the properties it owns or sell such properties,
in whole or in part, when circumstances warrant. HGP LP also may 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
HGP LP. While HGP LP intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages and other real estate interests. HGP
LP does not presently intend to invest in mortgages or deeds of trust, but it
may invest in such instruments if management concludes that HGP LP may benefit
from the cash flow or appreciation of the subject property. Subject to the
percentage of ownership limitations and gross income tests which must be
satisfied to qualify as a REIT, HGP LP also may invest in securities of concerns
engaged in real estate activities or in securities of other issuers. HGP LP does
not intend to invest in the securities of any other issuer for the purpose of
exercising control; however, HGP LP may in the future acquire all or
substantially all of the securities or assets of other REITs, management
companies or similar entities where such investments would be consistent with
HGP LP's investment policies. In any event, HGP LP does not intend that its
investments in securities would require HGP LP to register as an investment
company under the Investment Company Act of 1940, and HGP LP would divest
securities before any such registration would be required.
CERTAIN OTHER ACTIVITIES. HGP LP may make investments other than as
previously described but has no present intention to do so. HGP LP has authority
to offer HGP LP Common Units or other securities in exchange for property, to
repurchase or otherwise reacquire outstanding HGP LP Common Units or other
securities and may engage in such activities in the future. At all times HGP
intends to make investments in such a manner as to be consistent with the
requirements of the Code to qualify as a REIT unless, because of changed
circumstances, the HGP Board of Directors determines that it is no longer in the
best interests of HGP to qualify as a REIT.
268
<PAGE>
MANAGEMENT
The executive officers and directors of HGP will be, and their ages and
positions as of December 31, 1997 were, as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Gary J. Skoien............................. 43 Chairman of the Board, President, Chief
Executive Officer (term expires 2001)
David R. Tinkham........................... 42 Chief Financial Officer
Rege S. Eisaman............................ 30 Senior Vice President of Finance
John R. Terrell............................ 48 Senior Vice President of Development
Michael W. Reschke......................... 42 Director (term expires 2001)
Norman Perlmutter.......................... 63 Director (term expires 2000)
Margaret A. Gilliam........................ 59 Director (term expires 1999)
E. Thomas Thilman.......................... 56 Director (term expires 1999)
</TABLE>
GARY J. SKOIEN. Gary J. Skoien will serve as Chairman of the Board,
President, Chief Executive Officer and a Director of HGP. Prior to his
employment by HGP, Mr. Skoien served as Executive Vice President and Chief
Operating Officer of PGI since 1994 where he was responsible for managing the
industrial land development and build-to-suit divisions. Prior to this role, Mr.
Skoien served as Senior Vice President and Chief Operating Officer of the Retail
Division of PGI (currently Prime) from 1992 to 1993. In this role, he oversaw
strategic planning, development and management of the rapidly growing division.
He oversaw the development of nearly one million square feet of factory outlets
shopping centers. From 1983 to 1991, Mr. Skoien was the Executive Director of
The Illinois Capital Development Board and from 1980 to 1983, Mr. Skoien was an
Assistant to Illinois Governor James R. Thompson. Mr. Skoien is on the Boards of
Directors of the Chicagoland Chamber of Commerce and the Civic Federation. Mr.
Skoien received his A.B. CUM LAUDE from Colgate University and received his
Master of Public Policy from the University of Michigan.
DAVID R. TINKHAM. David R. Tinkham will serve as Chief Financial Officer of
RSI. For fifteen years prior to his employment with RSI, Mr. Tinkham was
responsible for capital markets access, treasury, accounting, tax, insurance,
investor relations, information technology and SEC compliance at the Chicago
Dock and Canal Trust where he served as Chief Financial Officer. Prior to
joining the Chicago Dock and Canal Trust, Mr. Tinkham was a Senior Tax
Accountant at Arthur Andersen & Co. where he directed a seven-person team in
corporate partnership and individual transaction structuring, planning and
compliance. Mr. Tinkham received his Masters of Management degree from
Northwestern University and a Bachelors of Business Administration in Accounting
from The University of Michigan. Mr. Tinkham is a member of the American
Institute of Certified Public Accountants, Economic Club of Chicago, Executives'
Club of Chicago and the Realty Club of Chicago, he is an associate member of the
Urban Land Institute and NAREIT.
REGE S. EISAMAN. Rege Eisaman will serve as Senior Vice President of
Finance of HGP. Mr. Eisaman's responsibilities with HGP will include financing,
capital markets activities, and the review and analysis of potential
acquisitions. For three years prior to joining HGP, Mr. Eisaman served as a Vice
President for Bank of America's ("BofA") Global Private Bank and BofA's Global
Capital Markets Group. From 1993 to 1995, Mr. Eisaman was a Portfolio Manager
for Investment Counselors Incorporated, and from 1991 to 1993, he was a Senior
Analyst for PGI. Mr. Eisaman received his M.B.A. from Northern Illinois
University and a B.S. SUMMA CUM LAUDE from Eastern Illinois University. Mr.
Eisaman is a Chartered Financial Analyst (CFA), a member of the Association for
Investment Management and Research (AIMR), and a member of Investment Analysts
Society of Chicago.
269
<PAGE>
JOHN R. TERRELL. John R. Terrell will serve as Senior Vice President and
Director of Development for HGP. Prior to his employment by HGP, Mr. Terrell
founded in 1988 and managed for ten years his own real estate development and
consulting firm, Terrell Associates in Boston, Massachusetts. Prior to forming
his own firm, Mr. Terrell was associated with the Prudential Property Company,
Inc. in Newark, New Jersey and Urban Investment & Development Corporation in
Chicago, Illinois. Mr. Terrell received a Bachelors of Architecture from the
University of Illinois at Chicago.
MICHAEL W. RESCHKE. Michael W. Reschke has agreed to serve as a Director of
HGP. Mr. Reschke has been the Chairman of the Board of Directors of Prime since
Prime's inception. Mr. Reschke founded PGI in 1981 and, since that time, has
acted as PGI's Chairman, Chief Executive Officer, and President. For the last
seventeen years, Mr. Reschke has directed and managed the development, finance,
construction, leasing, marketing, acquisition, renovation, and property
management activities of PGI. Mr. Reschke is Chairman of the Board of both
Brookdale Living Communities, Inc. and Prime Group Realty Trust and is a member
of the Board of Directors of Ambassador Apartments, Inc. Mr. Reschke received a
Juris Doctorate degree (summa cum laude) from the University of Illinois after
having received a B.A. degree (summa cum laude) in Accounting from Northern
Illinois University. Mr. Reschke is licensed to practice law in the State of
Illinois and is a certified public accountant. Mr. Reschke is a member of the
Chairman's Roundtable and the Executive Committee of the National Realty
Committee, as well as a full member of the Urban Land Institute.
NORMAN PERLMUTTER. Norman Perlmutter has agreed to serve as a Director of
HGP. Mr. Perlmutter has served as the Chairman of the Board of Directors of
Horizon since February 8, 1997. Since 1966 Mr. Perlmutter has served as Chairman
of the Board and Chief Executive Officer of Heitman Financial Ltd., one of the
largest full service real estate companies and real estate investment managers
for employee benefit plans in the United States. Mr. Perlmutter is also a
director of Chris-Craft Industries, Inc., Heitman/PRA Securities Advisors, Inc.,
and United Television, Inc. Mr. Perlmutter previously served on the boards of
United Asset Management Corporation and Warner Communications. He holds a B.S.
degree from the University of Illinois.
MARGARET A. GILLIAM. Margaret A. Gilliam has agreed to serve as a Director
of HGP. Ms. Gilliam is President of Gilliam & Co., which she founded in 1997.
Gilliam & Co. advises potential investors in both public and private situations,
and individual businesses on strategic initiatives. From 1975 to 1997, Ms.
Gilliam oversaw investment research in retail and soft goods industries where
her most recent title was Director - Equity Research for Credit Suisse First
Boston.
E. THOMAS THILMAN. E. Thomas Thilman has agreed to serve as a Director of
HGP. Since the founding of Thilman & Filippini in 1980, Mr. Thilman has been a
partner. Thilman & Filippini is a Chicago-based insurance brokerage and
consulting agency. Mr. Thilman received his M.B.A. from the University of
Chicago and a bachelors in Business from the University of Notre Dame. Mr.
Thilman has earned designations as a Certified Public Accountant (CPA) and a
Chartered Property Casualty Underwriter (CPCU).
COMMITTEES OF THE HGP BOARD OF DIRECTORS
There will be two standing committees of the HGP Board of Directors: the
Audit Committee and the Compensation Committee, which are described further
below.
AUDIT COMMITTEE. The functions of the Audit Committee, which will be
comprised of Mr. Thilman and Ms. Gilliam, will include making recommendations
concerning the engagement of independent public accountants, reviewing with the
independent accountants the plans and results of the audit engagement, approving
professional services provided by the independent public accountants, concerning
the independence of the independent public accountants, considering the range of
audit and non-audit fees, and reviewing the adequacy of HGP's internal
accounting controls.
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COMPENSATION COMMITTEE. The Compensation Committee will be comprised of Mr.
Thilman and Ms. Gilliam and will have the responsibility for determining the
compensation for HGP's employees.
COMPENSATION OF DIRECTORS
HGP intends to pay its directors who are not employees of HGP or affiliated
with HGP a fee for their services as directors. They will receive annual
compensation of $15,000 plus a fee of $1,000 for attendance at each meeting of
the HGP Board of Directors and $500 for attendance at each committee meeting,
and will receive reimbursement of all travel and lodging expenses related to
their attendance at both board and committee meetings. Each non-employee
director also will be eligible to receive a grant of options to purchase HGP
Common Shares under HGP's 1998 Stock Incentive Plan.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The HGP Charter contains a provision permitted under Maryland law
eliminating (with limited exceptions) each director's personal liability for
monetary damages for breach of any duty as a director. In addition, the HGP
Charter and HGP Bylaws authorize HGP to indemnify its present and former
directors and officers and to pay or reimburse expenses for such individuals in
advance of the final disposition of a proceeding to the maximum extent permitted
from time to time under Maryland law. Maryland law provides that indemnification
of a person who is a party, or threatened to be made a party, to legal
proceedings by reason of the fact that such a person is or was a trustee,
officer, employee or agent of a corporation, or is or was serving as a trustee,
officer, employee or agent of a corporation or other firm at the request of a
corporation, against expenses, judgments, fines and amounts paid in settlement,
is mandatory in certain circumstances and permissive in others, subject to
authorization by the HGP Board of Directors.
HGP intends to enter into indemnification agreements with each of HGP's
directors and certain of its executive officers. The indemnification agreements
will require, among other things, that HGP indemnify such directors and officers
to the fullest extent permitted by law, and advance to the directors and
officers all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. HGP also must indemnify and
advance all expenses incurred by directors and officers under HGP's directors'
and officers' liability insurance. Although the form of indemnification
agreement offers substantially the same scope of coverage afforded by provisions
in the HGP Charter and HGP Bylaws, it provides greater assurance to directors
and officers that indemnification will be available, because as a contract, it
cannot be unilaterally modified by the HGP Board of Directors or by the
shareholders to eliminate the rights it provides.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the HGP 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 HGP of expenses incurred or paid by a director, officer or
controlling person of HGP in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
PRINCIPAL UNITHOLDERS OF HGP LP
The following table sets forth information as of April 1, 1998 regarding the
beneficial ownership of HGP LP Common Units (i) by each beneficial owner of more
than 5.0% of HGP LP Common Units, (ii) by each director or proposed director of
HGP, (iii) by certain executive officers of HGP and (iv) by all
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directors, proposed directors and executive officers of HGP as a group after
giving effect to the Transactions. Each person named in the table has sole
voting and investment power with respect to all HGP LP Common Units shown as
beneficially owned by such person.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE OWNERSHIP OF
OWNERSHIP OF OUTSTANDING HGP COMMON
NUMBER OF UNITS OUTSTANDING HGP LP SHARES AFTER EXCHANGE
NAME BENEFICIALLY OWNED COMMON UNITS(3) OF UNITS(3)
- -------------------------------------------------- -------------------- ------------------- -----------------------
<S> <C> <C> <C>
Gary J. Skoien.................................... -- * *
David R. Tinkham.................................. -- * *
Rege S. Eisaman................................... -- * *
John R. Terrell................................... -- * *
Michael W. Reschke(1)............................. -- * *
Norman Perlmutter................................. 46,117 * *
Margaret A. Gilliam............................... -- * *
E. Thomas Thilman................................. -- * *
All directors and executive officers as a group (8
persons)........................................ -- -- --
</TABLE>
- ------------------------
NOTES:
* Less than 1.0%
(1) The business address of Michael W. Reschke is c/o The Prime Group, Inc., 77
West Wacker Drive, Suite 3900, Chicago, Illinois 60601. Information
presented includes 367,231 HGP LP Common Units owned by PGI and certain
limited partnerships affiliated with PGI. The address of PGI is 77 West
Wacker Drive, Suite 3900, Chicago, Illinois 60601. Other than 2,343 of the
HGP LP Common Units held by PGI, all of the other HGP LP Common Units held
by PGI have been pledged to certain unaffiliated third parties to secure
certain indebtedness of PGI and its affiliates (collectively, the
"Pledgees"). Unless and until the Pledgees foreclose on the pledged HGP LP
Common Units or have given notice of an event of default under the operative
pledge or loan agreement, such entities will not have the direct or indirect
power to vote or dispose of the HGP LP Common Units so pledged. The Pledgees
disclaim beneficial ownership of these pledged HGP LP Common Units.
DESCRIPTION OF CAPITAL STOCK OF HGP
HGP LP COMMON UNITS ARE EXCHANGEABLE, ON A ONE-FOR-ONE BASIS, INTO HGP
COMMON SHARES. THE FOLLOWING SUMMARY OF THE TERMS OF HGP'S STOCK DOES NOT
PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO MARYLAND LAW AND TO THE HGP CHARTER AND THE HGP BYLAWS, COPIES OF
WHICH ARE ATTACHED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT
CONSENT SOLICITATION STATEMENT/PROSPECTUS/ INFORMATION STATEMENT IS A PART.
GENERAL
The HGP Charter authorizes up to 50,000,000 HGP Common Shares. The HGP Board
of Directors may reclassify any unissued shares of stock in one or more classes
or series of stock. There are currently 1,000 HGP Common Shares issued and
outstanding. Upon completion of the Transactions and based on the number of
outstanding number of Prime Series B Preferred Shares, Prime Series C Preferred
Shares, Prime Common Shares and Horizon Common Shares as of April 15, 1998,
there will be issued and outstanding 2,770,000 HGP Common Shares. The HGP
Charter also authorizes up to 50,000,000 preferred shares and 50,000,000 shares
of excess stock.
At present, there is no established trading market for HGP Common Shares.
American Stock Transfer & Trust Company will act as transfer agent and registrar
of the HGP Common Shares. HGP intends to apply for inclusion of the HGP Common
Shares in Nasdaq.
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Under Maryland law, stockholders generally are not liable for a
corporation's debts and obligations. HGP intends to furnish to its stockholders
an annual report containing audited consolidated financial statements and an
opinion thereon expressed by an independent public accounting firm.
HGP COMMON SHARES
All HGP Common Shares to be issued in connection with the HGP Common Share
Distribution have been duly authorized, and will be fully paid, validly issued
and nonassessable. Subject to the preferential rights of any other class or
series of stock, holders of HGP Common Shares are entitled to receive dividends
on such stock if, as and when authorized and declared by the HGP Board of
Directors out of assets legally available therefor and to share ratably in the
assets of HGP legally available for distribution to its stockholders in the
event of its liquidation, dissolution or winding up after payment of or adequate
provision for all known debts and liabilities of HGP and payment of liquidation
preferences to holders of preferred stock.
Each outstanding HGP Common Share entitles the holder to one vote on all
matters submitted to a vote of stockholders, including the election of
directors, and, except as provided with respect to any other class or series of
stock, the holders of HGP Common Shares will possess exclusive voting power.
There is no cumulative voting in the election of directors, which means that,
the holders of a majority of the outstanding HGP Common Shares can elect all of
the directors then standing for election.
Holders of HGP Common Shares have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of HGP.
Under the MGCL, a Maryland corporation generally may not dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter, unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The HGP Charter
contains no such provision reducing this two-thirds approval requirement.
PREFERRED STOCK
The HGP Charter authorizes the HGP Board of Directors to issue preferred
stock in one or more series. Thus, the HGP Board of Directors could authorize
the issuance of shares of preferred stock with terms and conditions which could
have the effect of delaying, deferring or preventing a transaction or a change
in control of HGP that might involve a premium price for holders of HGP Common
Shares or otherwise be in their best interest. Currently no preferred shares
have been authorized by HGP.
CLASSIFICATION OR RECLASSIFICATION OF COMMON STOCK OR PREFERRED STOCK
The HGP Charter authorizes the HGP Board of Directors to classify or
reclassify any unissued stock by setting or changing the numbers, designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to distributions, qualifications or terms or conditions of
redemption of any of such shares.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
HGP believes that the power of the HGP Board of Directors to issue
additional authorized but unissued shares of HGP Common Shares and to reclassify
any unissued shares of HGP stock and thereafter to cause HGP to issue such
reclassified shares of stock will provide HGP 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 HGP
Common Shares, will be available for issuance without further action by HGP's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which HGP's securities may
be listed or traded. Although the HGP Board of Directors has no intention at the
present time of doing so, it could
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authorize HGP to issue a class or series that could, depending on the terms of
such class or series, delay, defer or prevent a transaction or a change of
control of HGP that might involve a premium price for holders of common stock or
otherwise be in their best interest.
LISTING AND TRADING OF HGP COMMON SHARES
HGP intends to apply for listing of the HGP Common Shares on Nasdaq.
Initially, HGP will have approximately 971 holders of record of the HGP Common
Shares. There is currently no trading market for the HGP Common Shares. Prices
at which the HGP Common Shares may trade after issuance cannot be predicted.
Until the HGP Common Shares are fully distributed and an orderly market
develops, the prices at which trading in such stock occurs may fluctuate
significantly. The prices at which the HGP Common Shares trade will be
determined by the marketplace and may be influenced by many factors, including,
among others, the depth and liquidity of the market for the HGP Common Shares,
investor perception of HGP and its businesses, HGP's dividend policy, interest
rates and general economic and market conditions.
HGP Common Shares distributed to shareholders of New Prime will be freely
transferable, except for shares received by persons who may be deemed to be
"affiliates" of HGP under the Securities Act. Persons who may be deemed
affiliates of HGP generally include individuals or entities that control, are
controlled by, or are under common control with, HGP, and may include certain
officers and directors of HGP as well as certain principal stockholders of HGP,
if any. Persons who are affiliates of HGP will be permitted to sell their HGP
Common Shares only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF CAPITAL STOCK OF HGP
See "--Certain Provisions of Maryland Law and of HGP's Charter and
Bylaws--Restrictions on the Ownership and Transfer or the Issuance of Shares."
EXECUTIVE COMPENSATION OF HGP MANAGEMENT
HGP's executive officers will not receive a salary or other cash
compensation from HGP or HGP LP for any period prior to the consummation of the
Transactions.
The following table sets forth certain information with respect to the Chief
Executive Officer and each of the other executive officers of HGP (collectively,
the "Executive Officers") whose salary is expected to exceed $100,000 on an
annualized basis during the fiscal year ending December 31, 1998, and all
executive officers as a group.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL POSITION SALARY(1)
- ---------------------------------------------------- --------------------------- ----------
<S> <C> <C>
Gary J. Skoien...................................... Chairman of the Board,
President and Chief
Executive Officer $ 225,000
David R. Tinkham.................................... Chief Financial Officer $ 140,000
Rege Eisaman........................................ Senior Vice President of
Finance $ 120,000
John R. Terrell..................................... Senior Vice President of
Development $ 150,000
All executive officers as a group (consisting of the 4 persons named above)......
$ 635,000
</TABLE>
- ------------------------
NOTE:
(1) Exclusive of bonus. HGP will also institute a cash bonus plan.
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EMPLOYMENT AGREEMENTS
HGP has entered into employment agreements with Mr. Skoien and Mr. Tinkham
commencing as of the effectiveness of the Mergers. Mr. Skoien's employment
agreement provides that he will serve as Chairman of the Board, President and
Chief Executive Officer of HGP for three years, and that he will receive cash
compensation of $225,000 per annum plus annual performance bonuses determined by
the HGP compensation committee and other employee benefits. Mr. Tinkham's
employment agreement provides that he will serve as Chief Financial Officer for
three years, and that he will receive cash compensation of $140,000 per annum
plus annual performance bonuses determined by the HGP compensation committee and
other employee benefits. Both Mr. Skoien's and Mr. Tinkham's employment
agreements provide for termination payments if the executive is terminated by
HGP without cause or by the executive for good reason, including certain
termination payments if the executive is terminated other than for cause or
resigns with good reason within 24 months following a change in control of HGP,
and gross-up payments for excess parachute payment excise taxes.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF HGP'S CHARTER AND BYLAWS
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE HGP
CHARTER AND THE HGP BYLAWS DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND TO THE HGP CHARTER
AND THE HGP BYLAWS, COPIES OF WHICH ARE ATTACHED AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS JOINT CONSENT SOLICITATION
STATEMENT/PROSPECTUS/INFORMATION STATEMENT IS A PART.
CLASSIFICATION OF THE HGP BOARD OF DIRECTORS
The HGP Bylaws provide that the number of directors of HGP may be
established by the HGP Board of Directors but may not be fewer than the minimum
number required by Maryland law, which is three, nor more than 15. The HGP Board
of Directors shall initially consist of five directors. Any vacancy on the HGP
Board of Directors shall be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining directors. A
vacancy resulting from an increase in the number of directors must be filled by
a majority of the entire HGP Board of Directors.
Pursuant to the HGP Charter, the HGP Board of Directors is divided into
three classes of directors, with each class being as nearly equal in number as
possible. The initial terms of the directors will expire at the annual meetings
of stockholders to be held in 1999, 2000 and 2001, respectively. Beginning in
1999, directors of each class will be chosen for three-year terms upon the
expiration of their current terms and each year one class of directors will be
elected by the stockholders. The members of each such class will hold office
until their successors are duly elected and qualified. HGP believes that
classification of the HGP Board of Directors will help to assure the continuity
and stability of HGP's business strategies and policies as determined by the HGP
Board of Directors. Holders of HGP Common Shares have no right to cumulative
voting in the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of HGP Common Shares are
able to elect all of the successors of the class of directors whose terms expire
at that meeting.
Classification of the HGP Board of Directors could have the effect of making
the removal of incumbent directors more time-consuming and difficult, which
could discourage a third party from making a tender offer or otherwise
attempting to obtain control of HGP, even though such an attempt might be
beneficial to HGP and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the HGP Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions.
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REMOVAL OF DIRECTORS
The HGP Charter provides that a director may be removed only for cause and
by the affirmative vote of two-thirds of the votes entitled to be cast for the
election of directors (I.E., the votes attributable to all outstanding shares of
HGP Common Shares).
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation subject to Section 3-601 et. seq. of the MGCL and (i) an Interested
Stockholder, or (ii) an affiliate of such Interested Stockholder, are prohibited
for five years after the most recent date on which the Interested Stockholder
became an Interested Stockholder unless an exemption is available. Thereafter,
any such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of voting shares of
the corporation and (b) two-thirds of the votes entitled to be cast by holders
of voting stock of the corporation other than shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be effected (unless, among other conditions, the holders of the common shares of
the corporation receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form previously
paid by the Interested Stockholder for its shares). Such provisions could have
the effect of inhibiting a change in control even if a change in control were in
the shareholders' interest. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder.
AMENDMENT TO THE CHARTER AND BYLAWS
The HGP Charter provides that HGP may amend, alter, change or repeal any
provision of the HGP Charter with the approval of the record holders of a
majority of the outstanding HGP Common Shares, except that, HGP shall not have
any right, power or authority to amend, alter, change or repeal any of the
provisions of the HGP Charter relating to the characteristics of HGP Excess
Shares (as defined herein), the restrictions on ownership and transfer of HGP
Common Shares, the election and removal of directors, indemnification by HGP,
liability of HGP's directors, amendments of the HGP Charter, unless such action
is first approved by the affirmative vote of the record holders of at least
two-thirds of the outstanding HGP Common Shares entitled to vote thereon voting
at a meeting of HGP shareholders duly called for the purpose of considering the
approval of such action.
The HGP Charter provides that the HGP Bylaws may be altered or repealed and
made by the affirmative vote of the holders of at least two-thirds of HGP Common
Shares or by the affirmative vote of a majority of the members of the HGP Board
of Directors then in office.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The HGP Charter
contains such a provision which eliminates such liability to the maximum extent
permitted by Maryland law.
The HGP Charter and HGP Bylaws (i) obligate HGP, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to any present or
former director or officer and (ii) authorize HGP, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final
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disposition of a proceeding to any individual as determined to be appropriate by
the HGP Board of Directors, the majority of stockholders entitled to vote
thereon, or special legal counsel appointed by the HGP Board of Directors.
The MGCL requires a corporation (unless its charter provides otherwise,
which the HGP Charter does not) to indemnify 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. The MGCL
permits a 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. In
addition, the MGCL requires HGP, as a condition to advancing expenses, to obtain
(a) a written affirmation by the director or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by HGP as
authorized by the HGP Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by HGP if it shall ultimately be determined
that the standard of conduct was not met.
RESTRICTIONS ON THE OWNERSHIP AND TRANSFER OR THE ISSUANCE OF SHARES
For HGP to qualify as a REIT for all years after the first taxable year in
which it elects to be taxed as such, (i) not more than 50% in number or value of
its outstanding stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code) during the last half of a taxable year, and
(ii) the stock 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. The HGP Charter imposes restrictions on transfer and
ownership of its stock in order to meet these requirements.
The HGP Charter generally prohibits any shareholder from having beneficial
ownership, either directly or by virtue of the Code's applicable attribution
rules, of more than 9.9% in value of HGP's outstanding stock (the "HGP Ownership
Limit"). Subject to certain limitations, the directors may increase the HGP
Ownership Limit from time to time.
The ownership restrictions contained in the HGP Charter (i) prohibit any
person from having beneficial ownership of HGP equity stock, either directly or
by virtue of the applicable attribution rules, in excess of the HGP Ownership
Limit, (ii) prohibit HGP stock from being owned by less than 100 persons, and
(iii) prohibit HGP from being "closely held" within the meaning of Section
856(h) of the Code (collectively, "HGP Ownership Restrictions"). If the HGP
Ownership Restrictions are violated by a sale or transfer, such sale or transfer
is void AB INITIO unless HGP determines such sale or transfer will not
jeopardize the HGP's status as a REIT or agrees to increase the applicable HGP
Ownership Limit, but in no event will such limits be increased if such increase
would create the possibility that five or fewer persons could own more than
49.9% of the outstanding shares. Any person who purports to transfer or proposes
to transfer shares in violation of the HGP Ownership Restrictions is required to
immediately give written notice to HGP of such event or proposed event in order
for HGP to determine the effect of such event or proposed event on HGP's status
as a REIT.
In the absence of appropriate safeguards, certain events could result in a
violation of the HGP Ownership Restrictions ("HGP Triggering Events"). Thus, the
HGP Charter provides that, upon the occurrence of a HGP Triggering Event,
certain HGP Common Shares may automatically be converted into HGP Excess Shares.
All HGP Excess Shares will be deemed to be owned by HGP, as a trustee for the
exclusive benefit of the person to whom they are ultimately transferred, and the
person who would
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otherwise be the owner of the shares converted into such HGP Excess Shares shall
have no rights in such shares of HGP Excess Shares other than the right, subject
to certain limitations, to designate the person to whom such HGP Excess Shares
is to be transferred. All HGP Excess Shares shall be deemed to have been offered
for sale to HGP or its designee at a price per share equal to the lesser of (i)
the price in the transaction that results in the exchange of HGP stock into such
HGP Excess Shares, or (ii) the Fair Market Value (which is defined in the HGP
Charter by reference to the average closing sale price of HGP Common Shares as
reported in Nasdaq) for the five trading days immediately prior to the date upon
which HGP or its designee accepts such offer. Unless and until any HGP Excess
Shares shall have been so transferred or redeemed, such HGP Excess Shares shall
remain HGP Excess Shares, and shall not confer upon any person any voting
rights, dividend rights or other distribution rights. Limitations are imposed on
the amount of consideration which a person may receive for designating the third
party to whom HGP Excess Shares are to be transferred. Any person who engages in
an HGP Triggering Event is required to immediately give written notice of such
event to HGP. All certificates representing HGP Common Shares will bear a legend
referring to the HGP Ownership Restrictions.
All persons who have beneficial ownership, directly or by virtue of the
attribution provisions of the Code, of more than 2.5% of outstanding HGP stock
are required to file an affidavit with HGP containing the information specified
in the HGP Charter within 30 days after January 1 of each year. In addition,
each shareholder shall upon demand be required to disclose to HGP such
information as the HGP Board of Directors deems necessary to comply with the
provisions of the Code applicable to a real estate investment trust.
The HGP Ownership Restrictions will not automatically be removed from the
HGP Charter if the real estate investment trust provisions of the Code are
changed so as to no longer contain any ownership concentration limitation or if
the ownership concentration limitation is increased. Except as otherwise
described above, any change in the HGP Ownership Restrictions would require an
amendment to the HGP Charter. Such an amendment to the HGP Charter would require
the affirmative vote of holders owning not less than two-thirds of HGP Common
Shares then outstanding and entitled to vote thereon. In addition to preserving
HGP's status as a REIT, the HGP Ownership Restrictions may have the effect or
precluding an acquisition of control of HGP without the approval of the
directors.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material United States federal
income tax consequences of the continuing ownership of HGP Shares to New Prime
Shareholders. The following discussions were prepared based on consultation with
Winston & Strawn, special counsel to Prime, and Rudnick & Wolfe, special counsel
to Horizon. In the opinion of each of Rudnick & Wolfe and Winston & Strawn, the
following discussion, to the extent it constitutes matters of law or legal
conclusions, is accurate in all material respects. Opinions of counsel are not
binding on the IRS. Thus, there can be no assurance that the IRS will agree with
the following discussion and positions described therein, or that the IRS will
not seek to challenge such positions, which challenge may be sustained by the
courts.
The tax discussion set forth below is included for general information only.
It is not intended to be, nor should it be construed to be, legal or tax advice
to any particular holder of HGP Common Shares. The following summary is based
upon current provisions of the Code, existing, temporary and final regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change (possibly on a retroactive basis). No attempt has been
made to comment on all United States federal income tax consequences that may be
relevant to particular holders of HGP Common Shares, including holders that are
subject to special tax rules such as dealers in securities, mutual funds,
insurance companies, tax-exempt entities, holders who do not hold their HGP
Common Shares as capital assets and holders that, for United States federal
income tax purposes, are non-resident alien individuals, foreign corporations,
foreign partnerships or foreign estates or trusts. Accordingly, New Prime
Shareholders are urged to consult with their own legal and tax advisors
regarding the United States federal income tax
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consequences of continuing to hold their HGP Common Shares and any other
consequences to them of such transactions under state, local and foreign tax
laws.
QUALIFICATION OF HGP AS A REIT.
GENERAL. Winston & Strawn has opined that, subsequent to the HGP Common
Share Distribution, HGP's proposed method of operation described in this Joint
Consent Solicitation Statement/Prospectus/ Information Statement and as
represented by HGP with respect to certain factual matters will enable HGP to
meet the requirements for qualification and taxation as a REIT for federal
income tax purposes. It must be emphasized that this opinion is based on various
factual assumptions relating to the organization and operation of HGP and its
subsidiaries, and is conditioned upon certain representations made by Prime, HGP
LP, HGP and Horizon as to certain relevant factual matters, including matters
related to the organization, expected operation, and assets of HGP and its
subsidiaries. HGP's qualification and taxation as a REIT depend upon HGP's
ability to meet on a continuing basis, through actual annual operating and other
results, the various requirements under the Code and described in this Joint
Consent Solicitation Statement/Prospectus/Information Statement with regard to,
among other things, the sources of its gross income, the composition of its
assets, the level of its dividends to shareholders, and the diversity of its
share ownership. Neither Winston & Strawn nor Rudnick & Wolfe will review HGP's
compliance with these requirements on a continuing basis. No assurance can be
given that the actual results of the operations of HGP and its subsidiaries, the
sources of their income, the nature of their assets, the level of HGP's
dividends to shareholders and the diversity of its share ownership for any given
taxable year will satisfy the requirements under the Code for qualification and
taxation as a REIT.
In any year in which HGP qualifies as a REIT, generally it will not be
subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to shareholders. This treatment substantially
eliminates the "double taxation" (at both the corporate and shareholder levels)
that generally results from the use of corporate investment vehicles. HGP may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gain not distributed. If HGP should fail to satisfy either the 75% or
the 95% gross income test (as discussed below), and nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will be
subject to a 100% tax on the greater of the amount by which it fails the 75% or
the 95% test, multiplied by a fraction intended to reflect its profitability.
HGP will also be subject to a 100% tax on net income derived from any
"prohibited transaction," as described below. In addition, if HGP should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior years, HGP
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. HGP may also be subject to the corporate
"alternative minimum tax," as well as tax in certain situations and on certain
transactions not presently contemplated. HGP will use the calendar year both for
federal income tax purposes and for financial reporting purposes.
In order to qualify as a REIT, HGP must meet, among others, the following
requirements:
SHARE OWNERSHIP TEST. Shares of beneficial interest of HGP must be held by
a minimum of 100 persons for at least 335 days of a taxable year that is 12
months, or during a proportionate part of a taxable year of less than 12 months.
In addition, no more than 50% in value of the shares of beneficial interest of
New Prime may be owned, directly or indirectly and by applying certain
constructive ownership rules, by five or fewer individuals during the last half
of each taxable year. Prime and Horizon believe that they have each satisfied
both of these tests, and that HGP will do so after the HGP Common Share
Distribution.
ASSET TESTS. At the close of each quarter of HGP's taxable year, HGP must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of HGP's total assets must be represented by any combination of
interests in real property, interests in mortgages on real property, shares in
other REITs, cash, cash items and certain government securities. Second,
although the remaining 25% of HGP's assets
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generally may be invested without restriction, securities in this class may not
exceed either (i) 5% of the value of HGP's total assets as to any one issuer, or
(ii) 10% of the outstanding voting securities of any one issuer. Where HGP
invests in a partnership, it will be deemed to own a proportionate share of the
partnership's assets. HGP's investment in properties through its interest in HGP
LP and other subsidiaries which are partnerships for federal income tax purposes
will constitute qualified assets for purposes of the 75% asset test.
GROSS INCOME TESTS. There are two separate percentage tests relating to the
sources of HGP's gross income which must be satisfied for each taxable year. For
purposes of these tests, where HGP invests in a partnership, HGP will be treated
as receiving its share of the income and loss of the partnership, and the gross
income of the partnership will retain the same character in the hands of HGP as
it has in the hands of the partnership.
1. THE 75% TEST. At least 75% of HGP's gross income for each taxable year
must be "qualifying income." Qualifying income generally includes (i) rents from
real property (except as modified below); (ii) interest on obligations
collateralized by mortgages on, or interests in, real property; (iii) gains from
the sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of HGP's trade or business ("dealer property"); (iv)
distributions on shares in other REITs, as well as gain from the sale of such
shares; (v) abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of a mortgage collateralized by such property ("foreclosure
property"); (vii) commitment fees received for agreeing to make loans
collateralized by mortgages on real property or to purchase or lease real
property; and (viii) certain qualified temporary investment income attributable
to the investment of new capital received by HGP in exchange for its shares
(including the securities offered hereby) during the one-year period following
the receipt of such new capital.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if HGP, or an owner of 10% or more of HGP, directly or constructively
owns 10% or more of such tenant. In addition, 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. Moreover, an amount received or accrued will not qualify as rents from
real property (or as interest income) for purposes of the 75% and 95% gross
income tests if it is based in whole or in part on the income or profits of any
person. Finally, for rents received to qualify as rents from real property, HGP
generally must not operate or manage the property or furnish or render services
to tenants, other than through an "independent contractor" from whom HGP derives
no revenue. The "independent contractor" requirement, however, does not apply to
the extent that the services provided by HGP are "usually or customarily
rendered" in connection with the rental of space for occupancy only, and are not
otherwise considered "rendered to the occupant."
HGP will provide certain services with respect to its properties and any
newly acquired properties. HGP believes, that the services provided will be
usually or customarily rendered in connection with the rental of space for
occupancy only, and therefore that the provision of such services will not cause
the rents received with respect to the HGP Properties to fail to qualify as
rents from real property for purposes of the 75% and 95% gross income tests.
2. THE 95% TEST. At least 95% of HGP's gross income for the taxable year
must be derived from the above-described qualifying income, or from dividends,
interest or gains from the sale or disposition of stock or other securities that
are not dealer property. Dividends and interest on any obligations not
collateralized by an interest in real property and any payments made on behalf
of HGP by a financial institution pursuant to a rate protection agreement will
be included as qualifying income for purposes of the 95% gross income test, but
not for purposes of the 75% test. For purposes of determining whether HGP
complies with the 75% and 95% income tests, qualifying income does not include
income from
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prohibited transactions. A "prohibited transaction" is a sale of dealer
property, excluding certain dealer property held by HGP for at least four years
and excluding foreclosure property.
HGP's investment in the HGP Properties directly and through HGP LP, in major
part will give rise to rental income qualifying under the 75% and 95% gross
income tests. Gains on sales of the HGP Properties or of HGP's interest in HGP
LP will generally qualify under the 75% and 95% gross income tests. HGP believes
that the income on HGP's other investments will not cause HGP to fail the 75% or
95% gross income test for any year, and HGP anticipates that this will continue
to be the case for HGP.
Even if HGP fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still 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: (i) HGP's failure to comply was due
to reasonable cause and not to willful neglect; (ii) HGP reports the nature and
amount of each item of its income included in the tests on a schedule attached
to its tax return; and (iii) any incorrect information on this schedule is not
due to fraud with intent to evade tax. If these relief provisions apply, HGP,
however, will still be subject to a 100% tax based upon the greater of the
amount by which it fails either the 75% or 95% gross income test for that year,
less certain adjustments.
ANNUAL DISTRIBUTION REQUIREMENTS. HGP, in order to qualify as a REIT, is
required to make dividend distributions (other than capital gain dividends) to
its shareholders each year in an amount at least equal to (A) the sum of (i) 95%
of HGP's REIT taxable income (computed without regard to the dividends paid
deduction and HGP'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. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before HGP 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 HGP does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on
the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be.
HGP intends to continue, and intends to make timely distributions sufficient
to satisfy the annual distribution requirements. In this regard, the partnership
agreement of HGP LP authorizes HGP, as general partner, to take such steps as
may be necessary to cause HGP LP to distribute to its partners an amount
sufficient to permit HGP to meet these distribution requirements. It is possible
that HGP may not have sufficient cash or other liquid assets to meet the 95%
dividend requirement, due to the payment of principal on debt or to timing
differences between the actual receipt of income and actual payment of expenses
on the one hand, and the inclusion of such income and deduction of such expenses
in computing HGP REIT taxable income on the other hand. To avoid any problem
with the 95% distribution requirement, HGP will closely monitor the relationship
between its REIT taxable income and cash flow and, if necessary, will borrow
funds (or cause HGP LP or other of its subsidiaries to borrow funds) in order to
satisfy the distribution requirement.
FAILURE TO QUALIFY. If HGP fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, HGP 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 HGP
fails to qualify will not be required and, if made, will not be deductible by
HGP. In such event, to the extent of current and accumulated earnings and
profits, all distributions to shareholders will be taxable as ordinary income,
and, subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, HGP also will be ineligible for qualification as
a REIT for the four taxable years following the year during which qualification
was lost.
TAX ASPECTS OF HGP'S INVESTMENTS IN PARTNERSHIPS.
GENERAL. HGP will hold direct interests in HGP LP. HGP believes that the
HGP LP qualifies as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. If
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HGP LP were to be treated as an association, it would be taxable as a
corporation and therefore subject to an entity-level tax on its income. In such
a situation, the character of HGP's assets and items of gross income would
change, which would preclude HGP from satisfying the asset tests and possibly
the income tests (see "--Federal Income Tax Consequences--Qualification of HGP
as a REIT--Asset Tests" and "--Gross Income Tests"), and in turn would prevent
HGP from qualifying as a REIT.
SALE OF THE PROPERTIES. HGP's share of any gain realized by HGP LP on the
sale of any dealer property generally will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "--Federal
Income Tax Consequences--Qualification of HGP as a REIT--Gross Income Tests--
The 95% Test." Under existing law, whether property is dealer property is a
question of fact that depends on all the facts and circumstances with respect to
the particular transaction. HGP LP intends to hold the HGP Properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating the HGP Properties and other
properties and to make such occasional sales of the HGP Properties as are
consistent with HGP's investment objectives. Based upon such investment
objectives, HGP believes that in general the HGP Properties should not be
considered dealer property and that the amount of income from prohibited
transactions, if any, will not be material.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS.
As long as HGP qualifies as a REIT, distributions made to HGP's taxable
domestic shareholders with respect to their shares out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for such shareholders that are corporations. There
can be no assurance, however, that HGP will have sufficient earnings and profits
to cover all distributions on any HGP Common Shares. Dividends that are
designated as capital gain dividends generally will be taxed as long-term
capital gains (to the extent that they do not exceed HGP's actual net capital
gain for the taxable year) without regard to the period for which the
shareholder has held its HGP Shares. However, corporate shareholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. On November 10, 1997, the IRS released Notice 97-64 describing
forthcoming temporary regulations that would permit a REIT to designate
different classes of capital gain dividends. Notice 97-64 serves as guidance
until such regulations are issued and applies to taxable years ending on or
after May 7, 1997. In general, under Notice 97-64, if a REIT (such as HGP)
designates a dividend as a capital gain dividend for such a taxable year, it may
further designate such dividend as a 20% rate gain distribution, an unrecaptured
Section 1250 gain distribution (subject to a 25% rate) or a 28% gain
distribution. If no designation is made regarding a capital gain dividend, it
will be regarded as a 28% rate gain distribution.
To the extent that HGP makes distributions in excess of current and
accumulated earnings and profits, these distributions are treated first as a
tax-free return of capital to the HGP Common Shareholder, reducing the tax basis
of such shareholder's securities by the amount of such distribution (but not
below zero), with distributions in excess of the shareholder's tax basis taxable
as capital gains (if the securities are held as a capital asset). In addition,
any dividend declared by HGP in October, November or December of any year and
payable to a shareholder of record on a specific date in any such month will be
treated as both paid by HGP and received by the shareholder on December 31 of
such year, provided that the dividend is actually paid by HGP during January of
the following calendar year. HGP Common Shareholders may not include in their
individual income tax returns any net operating losses or capital losses of HGP.
In general, any loss upon a sale or exchange of securities by a shareholder
who has held such securities 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 from HGP received by such shareholder are required to be
treated by such HGP Common Shareholder as long-term capital gains.
ELECTION TO RETAIN NET LONG-TERM CAPITAL GAIN.
Pursuant to the Taxpayer Relief Act of 1997 (the "Act"), for taxable years
of HGP that begin on or after January 1, 1998, HGP may elect to retain and pay
income tax on its net long-term capital gain
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attributable to such taxable year. If HGP makes this election, its shareholders
will be required to include in their income as long-term capital gain their
proportionate share of such amount so designated by HGP. A HGP Common
Shareholder will be treated as having paid his or her share of the tax paid by
HGP in respect of such amount so designated by HGP, for which such HGP
Shareholder will be entitled to a credit or refund. Additionally, each HGP
Common Shareholder's adjusted basis in its HGP Shares will be increased by the
excess of the amount so includible in income over the tax deemed paid on such
amount. HGP must pay tax on its designated long-term capital gain within 30 days
of the close of any taxable year in which it designates long-term capital gain
pursuant to this rule, and it must mail a written notice of its designation to
its shareholders within 60 days of the close of the taxable year.
TAXATION OF TAX-EXEMPT SHAREHOLDERS.
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by HGP to a HGP
Common Shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
securities with "acquisition indebtedness" within the meaning of the Code and
the securities are not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the distribution that they
receive from such a REIT as UBTI. HGP does not expect HGP to be treated, as a
pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS.
The following is a discussion of certain anticipated U.S. federal income tax
consequences of the ownership and disposition of securities applicable to
Non-U.S. Holders of such securities. The discussion is based on current law and
is for general information only. Non-U.S. Holders are urged to consult with
their own legal and tax advisors regarding the United States Federal income tax
consequences of continuing to hold their HGP Shares.
DISTRIBUTIONS FROM HGP.
1. ORDINARY DIVIDENDS. The portion of dividends received by Non-U.S.
Holders that is payable out of HGP's earnings and profits which are not
attributable to capital gains of HGP or the HGP LP and which are not effectively
connected with a U.S. trade or business of the Non-U.S. Holder will be subject
to U.S. withholding tax at the rate of 30% (unless reduced by an applicable
treaty). In general, Non-U.S. Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of securities. In cases
where the dividend income from a Non-U.S. Holder's investment in securities is
(or is treated as) effectively connected with the Non-U.S. Holder's conduct of a
U.S. trade or business, the Non-U.S. Holder generally will be subject to U.S.
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits tax
in the case of a Non-U.S. Holder that is a foreign corporation).
Non-U.S. Holders are encouraged to consult their tax advisors particularly
in light of recent changes in the United States' position regarding the
treatment of REIT investors under the U.S. Model Treaty and under certain
recently negotiated treaties.
2. NON-DIVIDEND DISTRIBUTIONS. Distributions by HGP which are not
dividends out of the earnings and profits of HGP will not be subject to U.S.
income or withholding tax. If it cannot be determined at the time a distribution
is made whether or not such distribution will be in excess of HGP's current and
accumulated earnings and profits, the entire distribution will be subject to
withholding at the rate applicable to dividends. However, the Non-U.S. Holder
may seek a refund of such amounts from the Service if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of HGP.
3. CAPITAL GAIN DIVIDENDS. Under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"), a distribution made by HGP to a Non-U.S. Holder, to
the extent attributable to gains from
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dispositions of United States Real Property Interests ("USRPIs") such as the HGP
Properties will be considered effectively connected with a U.S. trade or
business of the Non-U.S. Holder and subject to U.S. income tax at the rate
applicable to U.S. individuals or corporations, without regard to whether such
distribution is designated as a capital gain dividend. In addition, HGP will be
required to withhold tax equal to 35% of the amount of dividends to the extent
such dividends constitute gains from any USRPI. Distributions subject to FIRPTA
may also be subject to a 30% branch profits tax in the hands of a foreign
corporate shareholder that is not entitled to treaty exemption.
DISPOSITIONS OF SECURITIES. Unless securities constitute a USRPI, a sale of
securities by a Non-U.S. Holder generally will not be subject to U.S. taxation
under FIRPTA. The securities will not constitute a USRPI if HGP is a
"domestically controlled REIT." A domestically controlled REIT is a REIT in
which, at all times during a specified testing period, less than 50% in value of
its securities is held directly or indirectly by Non-U.S. Holders. HGP believes
that it will be a domestically controlled REIT, and therefore that the sale of
securities will not be subject to taxation under FIRPTA. Because the securities
will be publicly traded, however, no assurance can be given HGP will continue to
be a domestically controlled REIT. If HGP does not constitute a domestically
controlled REIT, a Non-U.S. Holder's sale of securities generally will still not
be subject to tax under FIRPTA as a sale of a USRPI provided that (i) the
securities are "regularly traded" (as defined by applicable Treasury
regulations) on an established securities market and (ii) the selling Non-U.S.
Holder held 5% or less of New Prime's outstanding securities at all times during
a specified testing period.
If gain on the sale of securities were subject to taxation under FIRPTA, the
Non-U.S. Holder would be subject to the same treatment as a U.S. shareholder
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of securities could be required to withhold 10% of the
purchase price and remit such amount to the Service. Capital gains not subject
to FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Holder
in two cases: (i) if the Non-U.S. Holder's investment in securities is
effectively connected with a U.S. trade or business conducted by such Non-U.S.
Holder, the Non-U.S. Holder will be subject to the same treatment as a U.S.
shareholder with respect to such gain, or (ii) if the Non-U.S. Holder 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, the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gain.
STATE AND LOCAL TAXES. HGP and its shareholders may be subject to state or
local taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of HGP and its
shareholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the shares of beneficial interest of HGP.
DESCRIPTION OF THE HGP LP AGREEMENT
THE FOLLOWING SUMMARY OF THE AGREEMENT OF LIMITED PARTNERSHIP OF HGP LP (THE
"HGP LP AGREEMENT") IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE HGP LP
AGREEMENT, THE FULL TEXT OF WHICH IS INCLUDED IN APPENDIX G OF THIS JOINT
CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION STATEMENT IS A PART.
FORMATION
HGP LP was formed on November 12, 1997 as a limited partnership under
DRUPLA.
CAPITALIZATION
Pursuant to the HGP LP Agreement, HGP LP has designated HGP LP Common Units
and HGP LP Preferred Units.
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MANAGEMENT
The HGP LP Agreement generally provides that HGP, as the sole general
partner of HGP LP, has full, exclusive and complete responsibility and
discretion in the management and control of HGP LP. The limited partners of HGP
LP (the "HGP LP Limited Partners") have no authority to transact business for,
or participate in the management activities or decisions of, HGP LP. However,
any decision for HGP LP to make certain amendments to the HGP LP Agreement, to
take title to any property other than in the name of HGP LP, or to dissolve
prior to December 31, 2050 (which is the expiration of HGP LP's term) or prior
to the occurrence of certain liquidating events would require the consent of a
majority in interest of HGP LP Common Units. HGP LP Limited Partners have no
right to remove HGP as general partner of HGP LP.
TRANSFERABILITY OF INTERESTS
The HGP LP Agreement provides that HGP may not voluntarily withdraw from HGP
LP, or transfer or assign its interest in HGP LP, without the unanimous consent
of HGP LP Limited Partners. HGP LP Limited Partners may transfer their interests
in HGP LP to a transferee subject to certain conditions, including that such
transferee assumes all obligations of the transferor HGP LP Limited Partner and
provided further that such transfer does not cause a termination of HGP LP for
federal income tax purposes, or may not reasonably cause HGP LP to be treated as
other than a partnership for federal income tax purposes or as a publicly traded
partnership under Code Section 7704 and may not reasonably cause HGP to cease to
comply with requirements under the Code for qualification as a REIT.
ADDITIONAL FUNDS
The HGP LP Agreement provides that if HGP LP requires additional funds at
any time or from time to time in excess of funds available to HGP LP from
operations or prior capital contributions, HGP may borrow such funds and lend
the funds to HGP LP on the same terms and conditions as are applicable to HGP's
borrowing of such funds. The HGP LP Agreement further provides that in the event
HGP issues additional shares of capital stock, HGP shall be required to
contribute to HGP LP as an additional capital contribution any net proceeds from
such issuance in exchange for additional partnership interests with preferences
and rights corresponding to the capital stock so issued.
REGISTRATION RIGHTS
For a description of certain registration rights to be held by HGP LP
Limited Partners and certain of their affiliates, see "The Corporate
Merger--Registration Rights Agreement."
TAX MATTERS
The taxable income or taxable loss of HGP LP will be allocated to HGP and
HGP LP Limited Partners in accordance with the distribution priority among the
holders of HGP LP Common Units and in compliance with the provisions of Sections
704(b) and 704(c) of the Code and the regulations promulgated thereunder.
Pursuant to the HGP LP Agreement, HGP will be the "tax matters partner" of
HGP LP and, as such, will have the authority to generally control any contest
involving the taxable income or loss of HGP LP, including how the taxable income
or taxable loss of HGP LP is allocated to the HGP LP Common Unitholders.
Further, HGP will have the authority to make tax elections under the Code on
behalf of HGP LP.
OPERATIONS
The HGP LP Agreement requires that HGP LP be operated in a manner that will
enable HGP to satisfy the requirements for being classified as a REIT and to
avoid any federal income tax liability. Pursuant to the HGP LP Agreement, HGP LP
also will assume and pay when due, or reimburse HGP for
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payment of, all administrative and operating expenses of any partnership or
other entity in which HGP LP, directly or indirectly, is or becomes a partner or
other equity participant and which is formed for the purpose of acquiring,
developing or owning a property or a proposed property (the "HGP Property
Partnerships"), will distribute cash to HGP to enable HGP to pay all of the
costs and expenses relating to the operations of HGP to the extent HGP does not
otherwise have sufficient funds to satisfy such costs and expenses. HGP LP will
indemnify HGP, as its general partner, for liabilities incurred in connection
with debt financing for HGP LP or as general partner of HGP LP.
DISTRIBUTIONS
The HGP LP Agreement sets forth the manner in which the net cash flow of HGP
LP (which includes operating revenues and proceeds from sales or refinancings
less certain expenditures) will be distributed with respect to HGP LP Preferred
Units and HGP LP Common Units. The HGP LP Common Units entitle the holders
thereof to receive a cash distribution in an amount equal to the balance of any
net cash flow of HGP LP.
HGP LP LIMITED PARTNER EXCHANGE RIGHTS
Subject to certain conditions, each HGP LP Common Unit held by an HGP LP
Limited Partner may be exchanged for one HGP Common Share (subject to
adjustment) or, at the option of HGP, cash equal to the fair market value of an
HGP Common Share at the time of exchange. Such HGP LP Common Units may not be
exchanged for HGP Common Shares unless HGP LP receives an opinion of counsel
reasonably satisfactory to HGP that, upon such exchange, HGP LP would not cease
to qualify as a partnership for federal income taxes.
INDEMNIFICATION
The HGP LP Agreement provides for indemnification solely out of the assets
of HGP LP of the partners and their affiliates for losses incurred because of
the operations of HGP LP unless (i) the partner or other person acted or failed
to act due to bad faith or through active and deliberate dishonesty, (ii)
actually received an improper personal benefit, or (iii) in the case of any
criminal proceeding, the partner or other person had reasonable cause to believe
that the action or omission was unlawful.
HGP, as general partner of HGP LP, is indemnified by HGP LP from any loss
incurred by HGP as general partner by reason of (i) the incurrence of
indebtedness in compliance with the HGP LP Agreement or indebtedness of HGP LP
that is guaranteed by HGP as general partner or (ii) vicarious liability by
reason of its status as general partner.
HGP LP Limited Partners expressly acknowledge that HGP, as general partner,
is acting on behalf of HGP LP and HGP's shareholders, collectively, that HGP is
under no obligation to consider the separate interests of the HGP LP Limited
Partners (including, without limitation, the tax consequences to the HGP LP
Limited Partners or their assignees) in deciding whether to cause HGP LP to take
(or decline to take) any actions and that HGP shall not be liable for monetary
damages for losses sustained, liabilities incurred or benefits not derived by
the HGP LP Limited Partners in connection with such decisions; provided that HGP
has acted in good faith.
DUTIES AND CONFLICTS
The HGP LP Agreement provides that all business activities of HGP, including
all activities pertaining to the acquisition and operation of HGP's outlet
centers, must be conducted through HGP LP. The HGP LP Agreement prohibits HGP
from borrowing for the purpose of making a distribution to shareholders except
if it arranges such borrowing through HGP LP.
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TERM
HGP LP will continue in full force and effect until December 31, 2050,
unless sooner dissolved and terminated upon the dissolution, bankruptcy,
insolvency or termination of HGP (unless the HGP LP Limited Partners elect to
continue HGP LP), the election of HGP with the consent of a majority in interest
of HGP LP Common Units, the sale or other disposition of all or substantially
all the assets of HGP LP or by operation of law.
VOTING
The consent of partners owning a majority in interest of HGP LP Common Units
in the aggregate is required (i) to take title to any personal or real property,
other than in the name of HGP LP, an HGP Property Partnership or pursuant to
certain provisions in the HGP LP Agreement, (ii) to dissolve HGP LP prior to the
occurrence of any "liquidating event" (as defined in the HGP LP Agreement) or
(iii) for the matters discussed under "--Amendment" below.
AMENDMENT
Generally, amendments to the HGP LP Agreement may be proposed by the general
partner and must be approved by at least a majority of the general partner's
board of directors who are not affiliates of any of the limited partners and
with the consent of partners owning a majority in interest of HGP LP Common
Units. Certain amendments that would materially and adversely alter the rights,
preferences and terms of the HGP LP Common Units held by the limited partners
would require the consent of limited partners holding a majority in interest of
the HGP LP Common Units.
BOOKS AND REPORTS
HGP is required to keep the books and records of HGP LP at the offices of
HGP LP, and each partner has the right, subject to certain limitations, to have
access to and inspect such books and records of account.
HGP will furnish to each limited partner promptly upon receipt of the same
but in no event later than April 1 of each year, copies of audited financial
statements prepared on a consolidated basis for HGP LP and each HGP Property
Partnership.
The general partner will use reasonable efforts to furnish to each limited
partner by March 1 of each fiscal year the tax information reasonably required
by the limited partners for federal income tax reporting purposes for the
preceding year. The general partner is authorized to withhold from otherwise
distributable net cash flow any tax that the general partner determines that HGP
LP is required to withhold or pay with respect to any amount distributable or
allocable to any partner.
POWER OF ATTORNEY
Pursuant to the terms of the HGP LP Agreement, each limited partner and each
assignee will appoint and empower the general partner, any liquidator and the
authorized officers and attorneys-in-fact of each, as such limited partner's or
assignees's true and lawful agent and attorney-in-fact to make, execute,
acknowledge, deliver, publish and file, in the appropriate public offices,
various certificates, documents and other instruments (including, without
limitation, the HGP LP Agreement and the certificate of limited partnership of
HGP LP and all amendments or restatements thereof) that the general partner
deems appropriate or necessary to effectuate the terms or intent of the HGP LP
Agreement. The HGP LP Agreement provides that such power of attorney is
irrevocable, will survive the involuntary withdrawal of any limited partner and
the transfer of all or any portion of such limited partner's or assignee's HGP
LP Units and will extend to such limited partner's or assignee's heirs,
successors, assigns and personal representatives.
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FEDERAL INCOME TAX CONSEQUENCES OF CONTINUING OWNERSHIP OF HGP LP COMMON UNITS
GENERAL
The following discussion summarizes the federal income tax considerations of
continuing ownership of HGP LP Common Units that are material to HGP LP Common
Unitholders (which, through the HGP LP Common Unit Distribution, will also own
the HGP LP Common Units). The following discussions were prepared based on
consultation with Winston & Strawn, special counsel to HGP LP, and Rudnick &
Wolfe, special counsel to Horizon Partnership, in connection with the
Transactions. In the opinion of Rudnick & Wolfe and Winston & Strawn, the
following discussion, to the extent it constitutes matters of law or legal
conclusions, is accurate in all material respects. Opinions of counsel are not
binding on the IRS. Thus, there can be no assurance that the IRS will agree with
the following discussion and positions described therein, or that the IRS will
not seek to challenge such positions, which challenge may be sustained by the
courts.
The information set forth below is based on the Code, final, temporary and
proposed Treasury Regulations, current administrative interpretations, and court
decisions. No assurance can be given that future legislation, Treasury
Regulations, administrative interpretations, and court decisions will not
significantly change the law, and thereby affect the accuracy of this
discussion. Any such change in law could apply retroactively.
None of Prime, Horizon, Prime Partnership, Horizon Partnership, HGP or HGP
LP intends to obtain a ruling from the IRS concerning the tax consequences of
continuing ownership of HGP LP Common Units or any of the other matters set
forth herein. The discussions in this section do not constitute tax advice to
any person.
The following summary is not intended to be comprehensive. It does not
address the state, local or foreign tax consequences of subsequent ownership of
HGP LP Common Units, nor does it discuss all aspects of federal income taxation
that may be relevant to HGP LP Common Unitholders in light of their particular
circumstances. Except where indicated, the discussion below describes general
federal income tax considerations applicable to individuals who are citizens or
residents of the United States, and therefore has limited application to
domestic corporations and persons subject to special federal income tax
treatment, such as foreign persons, tax-exempt entities, regulated investment
companies and insurance companies.
BECAUSE OF THE PARTICULAR TAX ATTRIBUTES OF PARTNERS OF PRIME PARTNERSHIP,
HORIZON PARTNERSHIP AND HGP LP, CONTINUING OWNERSHIP OF HGP LP COMMON UNITS MAY
HAVE DIFFERING TAX IMPLICATIONS FOR SUCH PARTNERS. THUS, EACH PRIME PARTNERSHIP
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS, HER OR ITS OWN TAX
ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF SUBSEQUENT OWNERSHIP OF HGP LP
COMMON UNITS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. THE FOLLOWING
DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
ENTITY CLASSIFICATION
Substantially all of HGP's investments are held indirectly through HGP LP
and other subsidiaries which are treated as partnerships for federal income tax
purposes. In general, partnerships are "pass-through" entities which are not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership.
CLASSIFICATION OF HGP LP AND HGP SUBSIDIARY PARTNERSHIPS. Interests in HGP
LP, as well as certain subsidiaries which are treated as partnerships for
federal income tax purposes (collectively, the "HGP Subsidiary Partnerships"),
involve special tax considerations, including the possibility of a challenge by
the
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IRS of HGP LP's status as a partnership (as opposed to an association taxable as
a corporation) for federal income tax purposes. If HGP LP was treated as an
association, such partnership would be taxable as a corporation and therefore be
subject to an entity-level tax on its income. In addition, a change in HGP LP's
status for tax purposes might be treated as a taxable event in which case HGP LP
Common Unitholders may incur a tax liability without any related cash
distributions.
The relevant Treasury Regulations (the "Entity Classification Regulations")
which provide that an Eligible Entity may elect to be taxed as a partnership for
federal income tax purposes. The Entity Classification Regulations apply for tax
periods beginning on or after January 1, 1997 (the "Regulations Effective
Date"). Unless it elects otherwise, an Eligible Entity in existence prior to the
Regulations Effective Date will have the same classification for federal income
tax purposes that it claimed under the Treasury Regulations in effect prior to
the Regulations Effective Date. In addition, an Eligible Entity with two or more
members and which did not exist, or did not claim a classification, prior to the
Regulations Effective Date, will be classified as a partnership for federal
income tax purposes unless it elects otherwise. HGP LP will be formed as part of
the Transactions, and so will be treated as a partnership for federal income tax
purposes. Further, each HGP Subsidiary Partnership that was in existence prior
to the Regulations Effective Date claimed classification as a partnership for
federal tax purposes. Accordingly, HGP LP and each such HGP LP Subsidiary
Partnership will be treated as a partnership for federal income tax purposes.
PUBLICLY TRADED PARTNERSHIPS. Code Section 7704 provides that publicly
traded partnerships will be taxed as corporations, unless a certain percentage
of their income consists of "qualifying income." A partnership is "a publicly
traded partnership" if interests in such partnership are either traded on an
established securities market or are "readily tradable on a secondary market (or
the substantial equivalent thereof)." Under the Treasury Regulations promulgated
under Code Section 7704, interests in a partnership are readily tradable on a
secondary market or substantial equivalent thereof if, "taking into account all
of the facts and circumstances, the partners are readily able to buy, sell, or
exchange their partnership interests in a manner that is comparable,
economically, to trading on an established securities market." Furthermore,
interests in a partnership are tradeable as such if (i) interests in the
partnership are regularly quoted by any person, such as a broker or dealer,
making a market in the interests; (ii) any person regularly makes available to
the public (including customers or subscribers) bid or offer quotes with respect
to interests in the partnership and stands ready to effect buy or sell
transactions at the quoted prices for itself or on behalf of others; (iii) the
holder of an interest in the partnership has a readily available, regular, and
ongoing opportunity to sell or exchange the interest through a public means of
obtaining or providing information of offers to buy, sell, or exchange interests
in the partnership; or (iv) prospective buyers and sellers otherwise have the
opportunity to buy, sell, or exchange interests in the partnership in a time
frame and with the regularity and continuity that is comparable to that
described in (i), (ii) or (iii).
The Treasury Regulations provide several safe harbors, which if met, a
partnership will not be treated as though its interests are readily tradeable on
a secondary market or the substantial equivalent thereof. Among these safe
harbors are the following transfers (which may apply to the conversion to HGP
Common Shares): (i) a private transfer when HGP LP does not have more than 100
partners at any time during its taxable year (HGP LP will have more than 100
partners as of the Closing); (ii) a transfer of more than 2 percent of the total
HGP LP Common Units and the total capital accounts of the HGP LP Common
Unitholders (excluding HGP LP Common Units owned by HGP LP Common Unitholders
who are related to HGP, within the meaning of Code Section 267(b) or 707(b)(1),
so long as the HGP LP Common Units owned by HGP and such related HGP LP Common
Unitholders constitute more than 10 percent of both the total HGP LP Common
Units and the total capital accounts of the partners of HGP LP); (iii) a
transfer in which the basis of the HGP LP Common Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in the
hands of the transferor or is determined under Code Section 732, which refers to
distributions (other than money) by a partnership to a partner; (iv) a transfer
at death of an HGP LP Common Unitholder (who is an individual), including
transfers from such HGP LP Common Unitholder's estate or testamentary trust; (v)
a transfer between the HGP LP Common Unitholder (who is an individual) and his
or her brother or sister (whether by whole or half
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blood), spouse, ancestor, or lineal descendant; (vi) a transfer consisting of a
distribution from an HGP LP Common Unitholder that is a retirement plan
qualified under Code Section 401(a) or an individual retirement account; (vii) a
transfer by an HGP LP Common Unitholder that is part of one transaction or a
series of related transactions in which such HGP LP Unitholder, alone or in
combination with other HGP LP Unitholders, transfer an aggregate of 50 percent
or more of the total HGP LP Common Units
and the total capital accounts of the HGP LP Unitholders (excluding HGP LP
Common Units owned by HGP LP Unitholders who are related to HGP, within the
meaning of Code Section 267(b) or 707(b)(1), so long as the HGP LP Common Units
owned by HGP and such related HGP LP Unitholders constitute more than 10 percent
of both the total HGP LP Common Units and the total capital accounts of the
partners of HGP LP); and (viii) a transfer by an HGP LP Unitholder, which
together with any transfers by any related persons (within the meaning of Code
Section 267(b) or 707(b)(1)), in one or more transactions during any 30 day
calendar period, consist of the transfer of HGP LP Common Units or rights
representing in aggregate more than 2 percent of the total HGP LP Common Units
and the total capital accounts of the HGP LP Unitholders (excluding HGP LP
Common Units owned by HGP LP Unitholders who are related to HGP, within the
meaning of Code Section 267(b) or 707(b)(1), so long as the HGP LP Common Units
owned by HGP and such related HGP LP Unitholders constitute more than 10 percent
of both the total HGP LP Common Units and the total capital accounts of the
partners of HGP LP).
Any transfer by an HGP LP Unitholder of HGP LP Common Units (including the
conversion to HGP Common Shares) will be void to the extent that HGP reasonably
determines that such transfer may cause HGP LP to be treated as a publicly
traded partnership. HGP LP Common Unitholders are strongly urged to consult
their own tax advisors to determine the extent to which these restrictions may
apply to their HGP LP Common Units.
Rudnick & Wolfe, as special counsel to the HGP LP, has given its opinion
that each of HGP LP and its subsidiaries formed as partnerships is a
partnership, and not a publicly traded partnership, taxable as a corporation,
for federal income tax purposes. Opinions of counsel are not binding on the
Internal Revenue Service ("IRS" or "Service"). Thus, there can be no assurance
that the IRS will agree with the following discussion and positions described
therein, or that the IRS will not seek to challenge such positions, which
challenge may be sustained by the courts.
Even if the HGP LP or a HGP Subsidiary Partnership were deemed to be a
publicly traded partnership, depending on circumstances at the time, it may
still avoid taxation as a corporation under Code Section 7704, based on the
nature of its income. A publicly traded partnership is not taxed as a
corporation if at least 90% of its gross income for each taxable year consists
of certain passive income, including interest, dividends, real property rents,
and gains from the sale or other disposition of real property. These are
predominantly the types of income that HGP LP expects to earn. If HGP LP
satisfied the 90% gross income test, but was classified as a publicly traded
partnership, it would not be taxed as a corporation but would be subject to
certain special rules under Code Section 469(k). In such event, an HGP LP Common
Unitholder would be unable to use losses from other passive activities against
his allocable share of HGP LP passive activity losses allocable to such HGP LP
Common Unitholder could be offset only against his allocable share of HGP LP
passive activity income or gains, and not against income or gains from other
passive activities.
If HGP LP at any time were considered a publicly traded partnership and did
not satisfy the qualifying income test, then it will be considered as having
transferred its assets at that time to a corporation, and would be taxed as a
corporation for federal income tax purposes, which would result in adverse
consequences to the HGP LP Common Unitholders and would jeopardize HGP's status
as a REIT for federal income tax purposes. This deemed transfer of assets to a
corporation may also result in the recognition of taxable income to HGP LP and
its partners, to the extent that its liabilities at that time exceeded the
adjusted tax bases of its assets, without the receipt of any cash to pay the
income tax liability resulting from such income.
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ALLOCATIONS OF PARTNERSHIP ITEMS
REQUIREMENTS UNDER CODE SECTION 704(B). Under Code Section 704(b), a
partnership's allocation of any item of income, gain, loss or deduction to a
partner will be respected for federal income tax purposes so long as it has
"substantial economic effect," or is otherwise deemed to be allocated in
accordance with the partner's "interest in the partnership." If the allocation
does not satisfy this standard, the item will be reallocated among the partners
on the basis of their respective interests in the partnership, determined by
taking into account all the facts and circumstances. Taxable income and losses
of HGP LP are generally allocated among the HGP LP Common Unitholders in
proportion to their partnership interests (based on the number of HGP LP Common
Units held by such partner). The allocations of partnership items under the HGP
LP Partnership Agreement are intended to have substantial economic effect, based
on the applicable Treasury Regulations. Notwithstanding such intention, however,
there can be no assurance that the allocations under the HGP LP Partnership
Agreement will not be challenged by the IRS or that partnership items will not
be required to be reallocated as a result of such challenge.
SALE OF THE PROPERTIES. Gain or loss recognized by HGP LP upon disposition
of an item of Horizon Contributed Property which has Built-In Gain or Built-In
Loss, respectively, remaining after prior adjustments for depreciation and other
items will be allocated to the contributing partners (which initially will be
former Horizon Partnership Unitholders) as required under Code Section 704(c)
and the Code Section 704(c) method to be elected by HGP LP. Any additional gain
or loss with respect to the HGP Properties will be allocated among all of the
HGP LP Common Unitholders in the manner provided under the HGP LP Agreement for
allocations of profits and losses, as described above.
The Treasury Regulations provide for generally three different methods for
taking into account any Built-in Gain or Built-in Loss for purposes of Code
Section 704(c). The first of these methods, the "traditional method" provides
that the tax items of income, gain, loss and deduction from a Built-in Gain or
Built-in Loss property be allocated among the partners in order to take into
account (and reduce) such Built-in Gain or Built-in Loss. However, the
traditional method fails to take into account the fact that the total tax items
of income, gain, loss or deduction in respect of a Built-in Gain or Built-in
Loss property cannot exceed the total partnership income, gain, loss or
deduction with respect to such property (the "ceiling rule"). The ceiling rule
may result in the contributing partner of the Built-in Gain or Built-in Loss
property to fail to recognize all such Built-in Gain or Built-in Loss.
In order to avoid the effect of the ceiling rule, another method is the
"traditional method with curative allocations." This method generally cures the
possible effect of the ceiling rule by allocating other partnership tax items of
income, gain, loss or deduction to make up the difference of items under the
ceiling rule.
HGP LP intends to elect the traditional method with respect to its HGP
Properties. Based on an analysis by Horizon Partnership, this election generally
has a more favorable result to pre-Partnership Merger Horizon Partnership
Unitholders than other approaches for the HGP Properties in terms of the rate of
inclusion of taxable income in respect of Code Section 704(c) gain or loss.
Although a partnership generally has this choice of Code Section 704(c)
method with respect to each property, including with respect to different items
of contributed property, the partnership must consistently apply a single method
with respect to each item of contributed property and the overall method or
combination of methods must be reasonable based upon the facts and circumstances
and underlying purposes of Code Section 704(c). Horizon Partnership believes
that the above elections with respect to the HGP Properties should be respected
as reasonable and consistent with the underlying purposes of Code Section
704(c). However, there is no assurance that the IRS will not challenge this
combination of methods. Such a challenge, if successful, could cause one or more
former Horizon Partnership Unitholders to recognize more taxable income or less
taxable loss, on an ongoing basis in respect of their HGP LP Common Units.
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HGP LP DISTRIBUTIONS
Under Code Section 731, distributions of money (and marketable securities)
by HGP LP to an HGP LP Common Unitholder generally will not be taxable to such
HGP LP Common Unitholder to the extent such distributions do not exceed the HGP
LP Common Unitholder's adjusted basis in its HGP LP Common Units immediately
before the distribution. Distributions in excess of an HGP LP Common
Unitholder's basis in his HGP LP Common Units (arising from either an actual
distribution of cash or a deemed distribution of cash resulting from a shifting
of partnership liabilities) will be considered gain recognized from the sale or
disposition of the partner's HGP LP Common Units.
DISPOSITIONS AND EXCHANGES/REDEMPTIONS OF HGP LP COMMON UNITS
DISPOSITION OF HGP LP COMMON UNITS. If an HGP LP Common Unit is sold or
otherwise disposed of, the determination of gain or loss will be based on the
difference between the amount realized and the adjusted tax basis for such HGP
LP Common Unit. Upon the sale of an HGP LP Common Unit, an HGP LP Common
Unitholder's "amount realized" will be the sum of the cash and fair market value
of other property received, plus the portion of HGP LP's liabilities allocated
to the HGP LP Common Unit sold. Upon a gift of a HGP LP Common Unit, the amount
realized will be the portion of HGP LP's liabilities allocable to such HGP LP
Common Unit. To the extent that the amount realized exceeds the adjusted basis
of the HGP LP Common Unit disposed of, the HGP LP Common Unitholder will
recognize gain. The tax liability resulting from such gain could exceed the
amount of cash received upon such disposition.
EXCHANGE/REDEMPTION OF HGP LP COMMON UNITS. Under the HGP LP Partnership
Agreement, each HGP LP Common Unit may be exchanged for one HGP Common Share or
the cash equivalent (subject to certain restrictions). An exchange of HGP LP
Common Units will constitute a sale of HGP LP Common Units by such HGP LP Common
Unitholder to HGP. Such sale will be fully taxable to the HGP LP Common
Unitholder, and such HGP LP Common Unitholder will be treated as realizing for
tax purposes an amount equal to the sum of the cash or the value of the HGP
Common Shares received in the exchange plus the amount of any HGP LP liabilities
allocable to the redeemed HGP LP Common Units at the time of the exchange.
TAX RETURNS AND OTHER TAX MATTERS AFFECTING HOLDERS OF HGP LP COMMON UNITS
HGP LP must file with the IRS an annual information return for federal
income tax purposes. HGP LP will furnish to each HGP LP Common Unitholder a
Schedule K-1 on a timely basis which sets forth the allocable share of HGP LP's
income, gains, losses, deductions and credits, if any, as well as certain other
information to be used in the HGP LP Common Unitholder's tax return. The
information return filed by HGP LP may be audited by the IRS. Adjustments (if
any) resulting from such an audit may result in adjustments to the HGP LP Common
Unitholder's tax return, and possibly may result in an audit of that return,
which would not necessarily be limited to HGP LP items.
The Code contains special procedures that specify the manner in which IRS
audit adjustments of partnership items are resolved. Partnerships generally are
treated as separate entities for purposes of federal tax audits, judicial review
of IRS adjustments and tax settlement proceedings. The tax treatment of
partnership items is determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with each partner.
The Code provides for one partner to be designated as the TMP for these
purposes. The HGP LP Partnership Agreement appoints HGP, its general partner, as
TMP. As the TMP, HGP has all the rights and obligations of the TMP under the
Code. The HGP LP Common Unitholders generally will be required to treat HGP LP
items on their federal income tax returns in a manner consistent with the
treatment of the items on the HGP LP information return. In general, that
consistency requirement will be waived if the HGP LP Common Unitholder files a
statement with the IRS identifying the inconsistency. Failure to satisfy the
consistency requirement, if not waived, will result in an adjustment to conform
the treatment of the item by the HGP LP Common Unitholder to the treatment on
the HGP LP return. Even if the consistency requirement is waived, adjustments to
the HGP LP Common Unitholder's tax liability with respect to partnership items
may result from an audit of HGP LP's or the
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HGP LP Common Unitholder's tax return. Intentional or negligent disregard of the
consistency requirement may subject an HGP LP Common Unitholder to substantial
penalties.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
PASSIVE ACTIVITY RULES. The passive activity rules of Code Section 469
generally provide that individuals, estates, trusts and certain closely held
corporations and personal service corporations may deduct losses from passive
activities (including rental activities, as well as trade or business activities
in which the taxpayer does not materially participate) only to the extent of the
taxpayer's income from passive activities. For most if not all of HGP LP
Unitholders, their distributive share of HGP LP taxable income or loss is likely
to be treated as passive activity income or loss (although HGP LP also may have
a substantial amount of portfolio income from earnings on reserves). However, if
HGP LP or any HGP Subsidiary Partnership was to be classified as a publicly
traded partnership under Code Section 469(k), any passive activity losses
arising from the publicly traded partnership that are allocable to an HGP LP
Common Unitholder could be used solely to offset passive activity gains or
income from HGP LP and could not be offset with losses from other passive
activities. See "-- Entity Classification."
OTHER LOSS LIMITATIONS. An HGP LP Common Unitholder may not deduct his
share of HGP LP losses to the extent that such losses exceed the lesser of (1)
the adjusted tax basis of his HGP LP Common Units at the end of HGP LP's taxable
year in which the loss occurs, and (2) the amount for which the HGP LP Common
Unitholder is considered "at risk" at the end of that year under Code Section
465. In general, a partner will initially be "at risk" to the extent of the cash
investment in his respective partnership interest (unless he borrowed amount on
a nonrecourse basis to acquire such interest) plus such partner's share (as
determined under Code Section 752) of such partnership's "qualified nonrecourse
financing" (within the meaning of Code Section 465(b)(6)). Losses disallowed to
an HGP LP Common Unitholder as a result of these rules can be carried forward
and may be allowable to the extent that such partner's adjusted basis or "at
risk" amount (whichever was the limiting factor) increase in a subsequent year.
The "at risk" rules apply to (a) an individual, (b) a shareholder of a
corporation that is an S corporation, and (c) a corporation if more than 50% of
the value of stock of such corporation is owned directly or indirectly by five
or fewer individuals during the last half of the taxable year.
STATE AND LOCAL TAXES
HGP LP will own properties and conduct business operations in a number of
states, and, thus, HGP LP and its partners may be subject to income tax,
withholding and tax reporting requirements in a number of jurisdictions. HGP LP
intends to provide its partners with sufficient and timely state and local
income tax information upon which they may rely in reporting and otherwise
complying with their state and local income tax obligations.
ALTERNATIVE MINIMUM TAX
The Code contains different sets of minimum tax rules applicable to
corporate and noncorporate taxpayers. The discussion below relates only to the
alternative minimum tax applicable to noncorporate taxpayers. CORPORATE
INVESTORS SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE EFFECT OF
THE CORPORATE MINIMUM TAX PROVISIONS FOLLOWING CONSUMMATION OF THE PARTNERSHIP
MERGER.
Noncorporate taxpayers are subject to an AMT to the extent the TMT exceeds
the regular income tax otherwise payable. The highest rate of tax imposed on
AMTI in computing TMT is 28%. AMTI consists of the taxpayer's taxable income, as
adjusted under Code Sections 56 and 58, plus his items of tax preference,
reduced by an exemption amount.
In computing AMTI, for all depreciable property placed in service after
December 31, 1986, an alternative cost recovery (I.E., depreciation) system is
substituted for the cost recovery system used in calculating the regular tax.
Cost recovery for most real property of the type to be owned by HGP LP is
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computed under the straight-line method over a 40-year life for purposes of
computing AMTI rather than the 31.5-year life used for most nonresidential real
property under the regular tax system. (For regular tax and AMT purposes,
different recovery periods will apply to personal property and certain real
estate parking lot improvements owned by HGP LP.)
The limitation on the deduction of passive activity losses applies to the
calculation of AMTI as well as the regular tax, although the amount of passive
activity deductions disallowed for AMTI purposes will be less than the amount
disallowed for regular tax purposes to the extent that the lower depreciation
rates used in computing AMTI depreciation produce smaller passive activity
losses.
HGP LP itself is not be subject to the alternative minimum tax, but each HGP
LP Common Unitholder is required to take into account his share of HGP LP's tax
preference items and adjustments in order to compute AMTI. Since the impact of
this tax depends on each HGP LP Common Unitholder's particular situation, HGP LP
Common Unitholders are urged to consult their own tax advisors as to the
applicability of the alternative minimum tax following the Transactions.
LEGAL MATTERS
Certain legal matters in connection with the Transactions will be passed
upon for Prime and Prime Partnership by Winston & Strawn, Chicago, Illinois. The
Honorable James R. Thompson, a partner in Winston & Strawn, is a director of
Prime and will become a director of New Prime. Certain legal matters in
connection with the Transactions will be passed upon for Horizon, Horizon
Partnership, HGP and HGP LP by Rudnick & Wolfe, Chicago, Illinois. Piper &
Marbury L.L.P., Baltimore, Maryland, will pass upon certain matters of Maryland
law relating to the Merger Agreement, the Reincorporation Articles of Merger and
the Corporate Articles of Merger under Maryland law.
EXPERTS
The consolidated financial statements of Prime, Prime Partnership, Horizon,
Horizon Partnership and the combined financial statements of HGP LP and the
statements of revenue and certain expenses of Prime Transferred Properties
appearing or incorporated by reference in this Joint Consent Solicitation
Statement/Prospectus/Information Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon also appearing
elsewhere herein or incorporated herein by reference. Such consolidated and
combined financial statements and statements of revenue and certain expenses
have been included herein or incorporated herein by reference in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
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GLOSSARY
FOR PURPOSES OF THIS JOINT CONSENT SOLICITATION STATEMENT/PROSPECTUS/INFORMATION
STATEMENT, THE FOLLOWING CAPITALIZED TERMS SHALL HAVE THE MEANING SET FORTH
BELOW:
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Acquisition Proposal.............. Any proposal or offer, that constitutes or may
reasonably be expected to lead to, or otherwise with
respect to, (i) a merger, acquisition, consolidation,
share exchange, business combination or similar
transaction, (ii) any tender offer or exchange offer for
10.0% or more of the outstanding Horizon Common Shares
or the filing of a registration statement under the
Securities Act in connection therewith, (iii) a
transaction resulting in the issuance of securities
representing 10.0% or more of the outstanding equity
securities of Horizon, (iv) the sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10.0%
or more of the assets or equity securities (including,
without limitation, partnership interests and units) of
Horizon or Horizon Partnership or (v) any public
announcements of a proposal, plan or intention to do any
of the foregoing or any agreement to engage in any of
the foregoing, other than the transactions contemplated
by the Merger Agreement.
Act............................... The Taxpayer Relief Act of 1997.
ADA............................... The Americans with Disabilities Act of 1990.
Additional Loan................... The reservation of financing in the amount of $38.5
million for the acquisition of a specified property.
Affiliates........................ Persons who control, are controlled by or are under
common control of an issuer.
Allocated Debt.................... $29,312,540 of the indebtedness outstanding under the
Securitized Financing on December 31, 1997 (subject to
adjustment for prepayments prior to closing) allocated
to the Lake Elsinore Center.
AMT............................... Alternative minimum tax.
AMTI.............................. Alternative minimum tax income.
Antitrust Division................ The Antitrust Division of the Department of Justice.
Appraisal Rights Exceptions....... Stockholders do not have appraisal rights if, among
other things, (i) such stockholder's stock is listed on
a national securities exchange or is designated as a
national market system security on an interdealer
quotation system by the National Association of
Securities Dealers, Inc. or (ii) such stockholder's
stock is that of the surviving corporation in the merger
unless (a) the merger alters the contract rights of the
stock as expressly set forth in the charter, and the
charter does not reserve the right to so alter the
rights of the stock, or (b) the stock is to be changed
or converted in whole or in part in the merger into
something other than either stock in the successor or
cash, scrip, or other rights or interests arising out of
provisions for the treatment of fractional shares of
stock in the successor.
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Assumed Liabilities............... Certain liabilities which HGP LP will assume in
connection with the Horizon Partnership Contribution.
Borrower.......................... Horizon Partnership.
Break-up Expenses................. The out-of-pocket expenses incurred in connection with
the Merger Agreement and the transactions contemplated
thereunder, and the maximum amount which Horizon
Partnership can receive without causing it to be
disqualified as a REIT under the Code, up to a maximum
of $4,500,000.
Break-up Fee...................... The amount equal to the lesser of $20,000,000 and the
maximum amount which Prime Partnership can receive
without causing Prime to be disqualified as a REIT under
the Code.
Bridge Loan....................... The $85.0 million full recourse bridge loan contemplated
by the Nomura Loan Facilities.
Buckeye........................... Buckeye Factory Shops Limited Partnership.
Built-in Gain..................... The unrealized gain generally equal to the difference
between fair market value and the adjusted tax basis of
contributed property at the time of initial
contribution.
Built-in Loss..................... The unrealized loss generally equal to the difference
between fair market value and the adjusted tax basis of
contributed property at the time of initial
contribution.
CAM............................... Common area maintenance.
Capital Gains Amount.............. Distributions that a corporation elects to designate as
capital gains distributions (within the meaning of the
Code).
Castle & Cooke.................... Castle & Cooke, Inc., a Hawaii corporation.
C&C Contribution Agreement........ The Contribution Agreement, dated as of February 1,
1998, entered into by Horizon Partnership with certain
affiliates of Castle & Cooke.
CCPI.............................. Castle & Cooke Properties, Inc., a Hawaii corporation.
Certificates...................... Certificates representing outstanding Sky Merger Common
Shares.
Chelsea........................... Chelsea GCA Realty Inc.
Chelsea LP........................ Chelsea GCA Realty Partnership, L.P.
Closing........................... The closing of the Corporate Merger.
Closing Date...................... The date to be specified by Prime and Horizon, which
will be no later than the third business day after
satisfaction or waiver of the conditions set forth in
the Merger Agreement.
Code.............................. The Internal Revenue Code of 1986, as amended.
Commission........................ The Securities and Exchange Commission.
Commitment........................ Any acquisition, exercise of an option to acquire,
exercise of an option or other right or election, or
entering into any other commitment or contractual
obligation.
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Common Share Distribution......... The distribution by New Prime of the HGP Common Shares
that it acquires as a result of the New Prime
Contribution to the record holders of New Prime Common
Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares as of the close of the
transfer books immediately following the Corporate
Merger such that each New Prime Series B Preferred Share
will entitle the holder thereof to receive approximately
1.196 times the number or portion of HGP Common Shares
distributed in respect of each New Prime Common Share
and New Prime Series C Preferred Share.
Company Induced Event............. An automatic redemption occurring to prevent any
violation of the New Prime Series B Preferred Ownership
Limit that would not have occurred but for a conversion
of New Prime Series B Preferred Shares, or a redemption
or open market purchase of New Prime Series B Preferred
Shares by New Prime.
Comparable Company................ Selected publicly traded company engaged in business
which FBR judged to be analogous to Horizon's.
Concepts.......................... Certain discount retailing concepts which Financo will
advise and assist Prime in developing.
Consolidation..................... The consolidation of Horizon Partnership with
McArthur/Glen Partnership on July 14, 1995.
Construction Mortgage Loan........ A commitment for a construction mortgage loan obtained
by Prime Partnership from a financial institution in an
amount not to exceed $20,396,000.
Contributed Assets................ The assets contributed pursuant to the Horizon
Partnership Contribution.
Contribution Agreement............ The Contribution Agreement to be entered into by and
among Horizon, Horizon Partnership, HGP, HGP LP and Sky
Merger, a copy of which is attached hereto as Appendix
C.
Control Share Acquisition......... The acquisition of Control Shares, subject to certain
exceptions.
Control Shares.................... Voting shares of stock which, if aggregated with all
other such shares of stock 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.
Corporate Articles of Merger...... Articles of merger filed by Prime and Horizon with the
Maryland Department to effectuate the Corporate Merger.
Corporate Merger.................. The merger of Prime with and into Sky Merger with the
surviving corporation being named Prime Retail, Inc.
Corporate Merger Consideration.... Prime Corporate Merger Consideration and Horizon
Corporate Merger Consideration.
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Corporate Merger Effective Time... The time the Maryland Department accepts for record the
Corporate Articles of Merger, or at such time as Prime
and Horizon will agree should be specified in the
Corporate Articles of Merger (not to exceed 30 days
after the Corporate Articles of Merger are accepted for
record by the Maryland Department).
Dealer Property................... Property held primarily for sale to customers in the
ordinary course of New Prime's trade or business.
Delaware Certificate of Merger.... Certificate of merger to be filed by Prime Partnership
and Horizon Partnership with the Delaware Secretary.
Delaware Secretary................ The Secretary of State of the State of Delaware.
Distribution Agent................ American Stock Transfer & Trust Company.
Dole Cannery Lease................ The lease of the Dole Cannery Outlet Center.
DRIP.............................. Horizon's Dividend Reinvestment Plan.
DRULPA............................ The Delaware Revised Uniform Limited Partnership Act.
EBITDA............................ Earnings Before Interest, Taxes, Depreciation and
Amortization.
Effective Date.................... March 19, 1998, the effective date of the Prime Director
Plan.
Election.......................... The recipient of a non-statutory option may satisfy tax
obligations in whole or in part by electing to have HGP
withhold HGP Common Shares having a value equal to the
amount required to be withheld under applicable income
tax laws.
Eligible Entity................... A domestic business entity not otherwise classified as a
corporation and which has at least two members which may
elect to be taxed as a partnership for federal income
tax purposes provided for in the Entity Classification
Regulations.
Employment Agreements............. Employment Agreements entered into by Prime with each of
the Prime Named Executives other than Messrs. Mulreaney
and G. Reschke.
Entity Classification
Regulations..................... Certain Regulations finalized and published by the IRS
which provide that an Eligible Entity may elect to be
taxed as a partnership for federal income tax purposes.
Exchange Act...................... The Securities Exchange Act of 1934, as amended.
Exchange Agent.................... American Stock Transfer & Trust Company.
Executive Officers................ The executive officers of HGP.
Exercise Price.................... The exercise price of the Prime Stock Options determined
by the Prime Executive Compensation and Stock Option
Committee in its sole discretion, provided that it may
not be less than Fair Market Value.
Existing Holder Limit............. The maximum percentage of outstanding stock, in number
or value, of which any particular Existing Holder may
have beneficial ownership, either directly or by virtue
of the Code's attribution rules, at any particular time.
Existing Holders.................. Certain persons designated by the Horizon Board of
Directors or HGP Board of Directors as existing holders.
FBR............................... Friedman, Billings, Ramsey & Co., Inc.
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February Contribution............. Capital contributions of $31,754,000 received by Prime
Partnership in February and March 1997 from Prime.
FFO............................... Net income (loss) (computed in accordance with GAAP),
excluding gains or losses from debt restructuring and
sales of property, plus depreciation and amortization
and after adjustments for unconsolidated investment
partnerships and joint ventures.
Financo, Inc...................... Financo, Inc., an affiliate of Marvin Traub.
FIRPTA............................ The Foreign Investment in Real Property Tax Act of 1980.
First Mortgage Loan............... A $27.0 million nonrecourse first mortgage loan provided
for in the transaction between Prime Partnership and
Nomura on February 13, 1997.
Five or Fewer Requirement......... The requirement that a corporation have no more than 50%
in value of such corporation's outstanding capital stock
owned, directly or constructively under the applicable
attribution rules of the Code, by five or fewer
individuals at any time during the last half of any
taxable year of such corporation other than the first
taxable year for which the election to be taxed as a
REIT has been made, in order for such corporation to
qualify as a REIT and thereafter maintain such
qualification.
Foreclosure Property.............. Property acquired at or in lieu of a foreclosure of a
mortgage collateralized by such property.
FTC............................... The Federal Trade Commission.
Fund.............................. Horizon Partnership's pension fund advised by Heitman
Capital Management used to form the Venture.
GAAP.............................. Generally accepted accounting principles.
GLA............................... Gross leasable area.
HGP............................... Horizon Group Properties, Inc., a Maryland corporation.
HGP Board of Directors............ The Board of Directors of HGP.
HGP Bonus Plan.................... HGP's cash bonus plan for its executive officers and for
certain other key personnel.
HGP Bylaws........................ The bylaws of HGP.
HGP Charter....................... The charter of HGP.
HGP Common Share Distribution..... The distribution by New Prime of the HGP Common Shares
that it acquires as a result of the New Prime
Contributions to the record holders of New Prime Common
Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares as of the close of the
transfer books immediately following the Corporate
Merger such that each New Prime Series B Preferred Share
will entitle the holder thereof to receive approximately
1.196 times the number or position of HGP Common Shares
distributed in respect of each New Prime Common Share
and New Prime Series C Preferred Share.
HGP Common Shares................. The shares of common stock, $0.01 par value per share,
of HGP.
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HGP Credit Facility............... The credit facility provided by Nomura in the aggregate
principal amount of up to $120,000,000 to the entities
which own the HGP Properties.
HGP Existing Holder Limit......... The maximum percentage of outstanding stock in number or
value, of which any particular Existing Holder may have
beneficial ownership.
HGP LP............................ Horizon Group Properties, L.P., a Delaware limited
partnership.
HGP LP Agreement.................. The Agreement of Limited Partnership of HGP LP.
HGP LP Common Unit Distribution... The distribution by Prime Partnership of interests in
HGP LP Common Units is declared in the Prime Partnership
Declaration of HGP LP Common Units.
HGP LP Common Unitholders......... The holders of HGP LP Common Units.
HGP LP Common Units............... The common units of HGP LP.
HGP Ownership Limit............... No shareholder may have beneficial ownership either
directly or by virtue of the Code's applicable
attribution rules of more than 9.9% in value of HGP's
outstanding stock.
HGP Ownership Restrictions........ The ownership restrictions contained in the HGP Charter
that (i) prohibit any person who is not an Existing
Holder from having beneficial ownership of HGP equity
stock, either directly or by virtue of the applicable
attribution rules, in excess of the HGP Ownership Limit,
(ii) prohibit any Existing Holder from having beneficial
ownership of equity stock, either directly or by virtue
of the applicable attribution rules, in excess of the
applicable HGP Existing Holder Limit, (iii) prohibit HGP
stock from being owned by less than 100 persons, and
(iv) prohibit HGP from being "closely held" within the
meaning of Section 856(h) of the Code.
HGP Preferred Shares.............. The preferred shares of HGP.
HGP Properties.................... All of the properties owned by HGP.
HGP Subsidiary Partnerships....... Certain subsidiaries of HGP LP which are treated as
partnerships for federal income tax purposes.
HGP Triggering Events............. Certain events that could result in a violation of the
HGP Ownership Restrictions.
Horizon........................... Horizon Group, Inc., a Michigan corporation and its
subsidiaries.
Horizon Articles.................. The Horizon Amended and Restated Articles of
Incorporation.
Horizon Board of Directors........ The Board of Directors of Horizon.
Horizon Bylaws.................... The Amended and Restated Bylaws of Horizon.
Horizon Capital Budget............ The capital budget of Horizon delivered to Prime prior
to the date of the Merger Agreement.
Horizon/C&C LLC................... Castle & Cooke Outlet Centers, LLC, a California limited
liability company.
Horizon Common Shareholders....... The holders of Horizon Common Shares.
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Horizon Common Shares............. The shares of common stock, $0.01 par value per share,
of Horizon.
Horizon Consent Period............ The period prior to the execution and delivery of the
Delaware Certificate of Merger with the Delaware
Secretary.
Horizon Contributed Properties.... The 13 of the 35 outlet centers currently operated by
Horizon Partnership which will ultimately be owned and
operated by HGP.
Horizon Corporate Merger
Consideration................... The conversion of each outstanding Horizon Common Share
(other than shares held by Horizon or any subsidiary of
Horizon) into 0.20 of a New Prime Series B Preferred
Share and 0.597 of a New Prime Common Share.
Horizon Excess Shares............. The excess shares of Horizon Common Shares as described
in the Horizon Articles.
Horizon Existing Holder Limit..... An Existing Holder is not subject to the Horizon
Ownership Limit. Instead, the Horizon Articles establish
rules for determining the maximum percentage of
outstanding stock, in number or value, of which any
particular existing holder may have beneficial
ownership, either directly or by virtue of the Code's
applicable attribution rules, at any particular time.
Horizon IPO....................... Horizon's November 8, 1993 initial public offering.
Horizon Ownership Restrictions.... The ownership restrictions contained in the Horizon
Articles that (i) prohibit any person who is not an
Existing Holder from having beneficial ownership of
Horizon Common Shares, either directly or by virtue of
the applicable attribution rules, in excess of the
Horizon Ownership Limit, (ii) prohibit any Existing
Holder from having beneficial ownership of equity stock,
either directly or by virtue of the applicable
attribution rules, in excess of the applicable Horizon
Existing Holder Limit, (iii) prohibit Horizon Common
Shares from being owned by less than 100 persons, and
(iv) prohibit Horizon from being "closely held" within
the meaning of Section 856(h) of the Code.
Horizon Partnership............... Horizon/Glen Outlet Centers Limited Partnership, a
Delaware limited partnership.
Horizon Partnership Assignees..... The assignees of Horizon Partnership Units who have not
agreed to become Horizon Partnership Limited Partners
pursuant to the Horizon Partnership Agreement.
Horizon Partnership
Contribution.................... The contribution by Horizon Partnership to HGP LP of
substantially all of the assets relating to the Horizon
Contributed Properties which will ultimately be owned
and operated by HGP and the assumption by HGP LP of
certain obligations of Horizon Partnership.
Horizon Partnership Limited
Partners........................ The persons that have agreed to become limited partners
of Horizon Partnership pursuant to the terms and
conditions of Horizon Partnership Agreement.
Horizon Partnership Unitholders... The holders of Horizon Partnership Common Units.
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Horizon Partnership Units......... The limited partnership units of Horizon Partnership.
Horizon Peer Group................ Prime, Tanger Factory Outlet Centers, Inc., Chelsea and
FAC Realty Trust, Inc.
Horizon Properties................ All of the properties owned by Horizon.
Horizon Record Date............... April 24, 1998.
Horizon Special Meeting........... The meeting of Horizon Common Shareholders to be held on
June , 1998 at 10:00 a.m.
Horizon Stock Options............. Certain options to purchase an aggregate of 1,798,266
Horizon Common Shares.
HSR Act........................... Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
Incentive Stock Options........... Options which are intended to be incentive stock options
within the meaning of Section 422 of the Code.
Indemnified Party................. Each of Horizon, any director, officer or employer of
Horizon or Horizon Partnership or any person (including
any affiliate) designated as an agent by Horizon in its
reasonable discretion, who are indemnified pursuant to
the Horizon Partnership Agreement.
Indiana Prime Transferred
Property........................ Prime's Indiana Factory Outlet Shops in Daleville,
Indiana.
Initial Horizon Partnership
Group........................... Horizon Partnership and its subsidiaries prior to giving
effect to the Horizon Partnership Contribution.
Initial Loan...................... The initial loan of $250.6 million under the $300.6
million credit facility between Horizon Partnership and
Lehman Brothers Realty Corporation.
Initial New Prime Series A
Preferred Holders............... Holders who acquired New Prime Series A Preferred Shares
in excess of the New Prime Series A Preferred Ownership
Limit directly from FBR in connection with the Prime
IPO.
Interested Stockholder............ Any person who (a) beneficially owns 10% or more of the
voting power of the corporation's shares after the date
on which the corporation had 100 or more beneficial
owners of its stock or (b) is an affiliate or associate
of the corporation and beneficially owned 10% or more of
the voting power of the corporation's shares at any time
within the two-year period immediately prior to the date
in question, and after the date on which the corporation
had 100 or more beneficial owners of its stock.
IRS............................... The Internal Revenue Service.
Junior Secured Loan............... A $3.0 million junior secured loan provided for in the
transaction between Prime Partnership and Nomura on
February 13, 1997.
Lake Elsinore Center.............. Horizon's Lake Elsinore Outlet Center in Lake Elsinore,
California.
Lake Elsinore Partnership
Interest........................ The limited partnership interest in the Second Horizon
Partnership representing the economic interest of the
Lake Elsinore Center.
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Latham Property................... Prime's Latham Factory Outlet Center.
Lehman............................ Lehman Brothers.
Lehman Loan....................... Loan Agreement by and between Third Horizon Group
Limited Partnership, a Delaware limited partnership, HGL
Outlet Associates, a Delaware general partnership, and
Lehman Brothers Realty Corporation, a Delaware
corporation, dated as of June 30, 1997.
Lender............................ Lehman Brothers Realty Corporation.
LIBOR............................. The London interbank offering rate.
Limitation Price.................. A price that is equal to the lesser of (i) in the case
of a deemed exchange for New Prime Excess Shares
resulting from a transfer, the price paid for the shares
in such transfer or, in the case of a deemed exchange
for New Prime Excess Shares resulting from some other
event, the fair market value, on the date of the deemed
exchange, of the shares deemed exchanged, or (ii) the
fair market value of the shares for which such New Prime
Excess Shares will be deemed to be exchanged on the date
of the designation of the transferee (or, in the case of
a purchase by New Prime, on the date New Prime accepts
the offer to sell).
Loan.............................. Collectively, the Second Loan and the Initial Loan.
LTM............................... Latest twelve months.
Maryland Department............... The State Department of Assessments and Taxation of the
State of Maryland.
Material Adverse Change........... A material adverse change in the business, financial
condition or results of operation taken as a whole that
have resulted or would result, individually, or in the
aggregate economic losses equal to or greater than
$50,000,000.00.
MBCA.............................. The Michigan Business Corporation Act.
McArthur/Glen..................... McArthur/Glen Realty Corp.
McArthur/Glen Partnership......... McG Outlet Centers Limited Partnerships
Meetings of Shareholders.......... The Horizon Special Meeting and the Prime Special
Meeting.
Merger Agreement.................. The Amended and Restated Agreement and Plan of Merger,
dated as of February 1, 1998, among Prime, Prime
Partnership, Horizon, Sky Merger, HGP, HGP LP and
Horizon Partnership, a copy of which is attached hereto
as Appendix A.
Mergers........................... The Partnership Merger, the Reincorporation Merger and
the Corporate Merger.
MGCL.............................. The Maryland General Corporation Law, as amended.
Michigan Department............... The Department of Commerce of the State of Michigan.
MTA............................... Marvin Traub Associates, Inc.
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Murdock Agreement................. The agreement, dated February 1, 1998, entered into by
Horizon and Prime with Mr. David H. Murdock and certain
of his affiliates, pursuant to which Mr. Murdock and his
affiliates will vote in the Horizon Common Shares in
favor of the Transactions.
NAREIT............................ National Association of Real Estate Investment Trusts.
Nasdaq............................ The Nasdaq National Market.
Nebraska/Indiana Property
Transfers....................... Prime's collective transfer of Indiana Prime Transferred
Property and Nebraska Prime Transferred Property to HGP
in exchange for cash and HGP Common Shares with an
aggregate value equal to the difference between the
amount of such cash and the fair market value of such
properties.
Nebraska Prime Transferred
Property........................ Prime's Nebraska Crossing Factory Shops in Gretna,
Nebraska.
New Mexico Center................. Horizon's New Mexico Outlet Center in Algodones, New
Mexico.
New Prime......................... The surviving Maryland corporation in the Corporate
Merger, which will be named Prime Retail, Inc.
New Prime Board of Directors...... The Board of Directors of New Prime.
New Prime Bylaws.................. The bylaws of New Prime.
New Prime Charter................. The articles of incorporation of New Prime.
New Prime Common Ownership
Limit........................... No holder may own, either directly or constructively
under the applicable attribution rules of the Code, more
than 9.9% of the outstanding New Prime Common Shares.
New Prime Common Shares........... The shares of common stock, $0.01 par value per share,
of New Prime.
New Prime Contribution............ The contribution by New Prime to HGP of the HGP LP
Common Units and any HGP Common Shares that it holds in
exchange for HGP Common Shares equal to the number of
HGP LP Common Units so contributed by.
New Prime Excess Common Shares.... The 76,342,500 shares of New Prime Excess Shares
designated as such.
New Prime Excess Preferred
Shares.......................... The 7,412,100 shares of New Prime Excess Shares
designated as such.
New Prime Excess Series A
Preferred Shares................ The 1,150,000 shares of New Prime Excess Shares
designated as such.
New Prime Excess Series B
Preferred Shares................ The 3,595,400 shares of New Prime Excess Shares
designated as such.
New Prime Excess Shares........... The shares of excess stock, $0.01 par value per share,
of New Prime.
New Prime Partnerships............ Prime Partnership, the Prime Finance Corporations and
the partnership of New Prime which hold the New Prime
Properties.
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New Prime Preferred Shares........ The shares of preferred stock, $0.01 par value per
share, of New Prime.
New Prime Properties.............. All of the properties owned by New Prime.
New Prime Series A Preferred
Distribution Payment Date....... Distributions payable quarterly in arrears on the
fifteenth day of each May, August, November, and
February, or, if such day is not a business day, on the
next succeeding business day.
New Prime Series A Preferred
Distribution Record
Date............................ The first day of the calendar month in which the
applicable New Prime Series A Preferred Distribution
Payment Date falls or such other date designated by the
New Prime Board of Directors for the payment of
distributions that is no more than thirty (30) nor less
than ten (10) days prior to such New Prime Series A
Preferred Dividend Payment Date.
New Prime Series A Preferred
Liquidation Preference Amount... Holders of New Prime Series A Preferred Shares will be
entitled to a liquidation preference equal to the sum of
$25.00 per share plus an amount equal to any accrued and
unpaid distributions thereon, subject to the prior
rights of any series of capital stock ranking senior to
New Prime Series A Preferred Shares.
New Prime Series A Preferred
Ownership Limit................. No holder may own, either directly or constructively
under the applicable attribution rules of the Code, more
than 10.0% of the outstanding New Prime Series A
Preferred Shares, and no holder that owns an interest in
any tenant under any lease of real property owned, in
whole or in part, directly or indirectly by New Prime,
which exceeds, in the case of a tenant that is a
corporation, 9.9% of the total voting stock of such
tenant or 9.9% of the total number of shares of all
classes of stock of such tenant, or in the case of a
tenant that is not a corporation, a 9.9% interest in the
assets or net profits of such tenant, may own, directly
or constructively under the applicable attribution rules
of the Code, more than 9.9% of the outstanding New Prime
Series A Preferred Shares.
New Prime Series A Preferred
Shares.......................... The shares of Series A Preferred Share, $0.01 par value
per share, of New Prime.
New Prime Series B Preferred
Distribution Payment Date....... Distributions are payable quarterly in arrears on the
fifteenth day of each May, August, November, and
February, or, if such day is not a business day, on the
next succeeding business day.
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New Prime Series B Preferred
Distribution Record Date........ The first day of the calendar month in which the
applicable New Prime Series B Preferred Distribution
Payment Date falls or such other date designated by the
New Prime Board of Directors for the payment of
distributions that is no more than thirty (30) nor less
than ten (10) days prior to such New Prime Series B
Preferred Distribution Payment Date.
New Prime Series B Preferred
Liquidation Preference Amount... Holders of New Prime Series B Preferred Shares will be
entitled to a liquidation preference equal to the sum of
$25.00 per share plus an amount equal to any accrued and
unpaid distributions thereon, subject to the prior
rights of any series of capital stock ranking senior to
New Prime Series B Preferred Shares.
New Prime Series B Preferred
Ownership Limit................. No holder may acquire, either directly or constructively
under the applicable attribution rules of the Code, or
beneficially own New Prime Series B Preferred Shares if,
as a result of such acquisition or beneficial ownership,
such holder beneficially own shares of capital stock
(including all classes) of New Prime in excess of 9.9%
of the value of New Prime's outstanding capital stock.
New Prime Series B Preferred
Shares.......................... The shares of 8.5% Series B Cumulative Participating
Convertible Preferred Share, $0.01 par value per share,
of New Prime.
New Prime Series C Conversion
Date............................ Date determined by New Prime to convert New Prime Series
C Preferred Shares to New Prime Common Shares.
New Prime Series C Preferred
Distribution Payment Date....... (i) For any distribution period with respect to which
New Prime pays on the New Prime Common Shares, the date
on which such distribution is paid, or (ii) for any
distribution period with respect to which New Prime does
not pay a distribution on the New Prime Common Shares, a
date to be set by the New Prime Board of Directors,
which date shall not be later than the thirtieth
calendar day after the end of the applicable
distribution period.
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New Prime Series C Preferred
Distribution Periods............ The quarterly distribution periods commencing on January
1, April 1, July 1 and October 1 of each year and ending
on and including the day preceding the first day of the
next succeeding distribution period with respect to any
New Prime Series C Preferred Shares (other than the
initial distribution period, which shall commence on the
initial issue date for such New Prime Series C Preferred
Shares and end on and include the last day of the
calendar quarter immediately following such initial
issue date, and other than the distribution period
during which any New Prime Series C Preferred Shares
shall be redeemed which shall end on and include the
call date with respect to the New Prime Series C
Preferred Shares being redeemed).
New Prime Series C Preferred
Liquidation Preference Amount... Holders of New Prime Series C Preferred Shares will be
entitled to a liquidation preference equal to the sum of
$13.75 per share plus an amount equal to any accrued and
unpaid distribution thereon, subject to the prior rights
of any series of capital stock ranking senior to New
Prime Series B Preferred Shares.
New Prime Series C Preferred
Shares.......................... The shares of Series C Preferred Share $0.01 par value
per share, of New Prime.
New Prime Shareholders............ Individually or collectively, any one or a combination
of the New Prime Common Shareholders, the New Prime
Series A Preferred Shareholders, the New Prime Series B
Preferred Shareholders and the New Prime Series C
Preferred Shareholders.
New Prime Shares.................. Individually or collectively, any one or a combination
of the New Prime Common Shares, the New Prime Series A
Preferred Shares, the New Prime Series B Preferred
Shares and the New Prime Series C Preferred Shares.
New Prime Stock Ownership Limit... Ownership, either directly or under the applicable
attribution rules of the Code, of New Prime Series A
Preferred Stock, New Prime Series B Preferred Stock or
New Prime Common Stock that, if effective, would result
in (i) New Prime being "closely held" within the meaning
of Section 856(H) of the Code, (ii) the outstanding
shares of the capital stock of New Prime being
beneficially owned by less than 100 Persons (determined
without reference to any rules of attribution), or (iii)
New Prime otherwise failing to qualify as a REIT.
New Prime Voting Preferred
Shares.......................... Holders of shares of every other series or class of
shares on a parity as to distributions with New Prime
Series C Preferred Shares.
Niagara........................... Prime's Niagara International Factory Outlets.
Niagara Loan...................... A $31,328,000 mortgage loan assumed by Prime Partnership
in connection with the purchase of Niagara.
NOI............................... Net Operating Income.
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Nomura............................ Nomura Asset Capital Corporation.
Nomura Loan Facilities............ Various debt facilities providing New Prime $305.0
million of debt financing from Nomura.
Nomura Securities................. Nomura Securities (Bermuda) Ltd.
Nonemployee Director.............. A member of the Prime Board of Directors who is not a
current employee of Prime.
Non-Statutory Options............. Stock options which are not intended to be incentive
stock options as defined in the Code.
Non-U.S. Holder................... Any person other than (i) a citizen or resident of the
United States, (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,
(iii) an estate, the income of which is subject to
United States federal income taxation regardless of its
source or (iv) a trust, if a court within the United
States is able to exercise primary supervision over the
administration of the trust and one or more United
States fiduciaries have the authority to control all
substantial decisions of the trust.
NYSE.............................. The New York Stock Exchange, Inc.
Original Merger Agreement......... The Agreement and Plan of Merger, dated as of November
12, 1997, among Prime, Prime Partnership, Horizon,
Horizon Partnership, Sky Merger and Sky Merger, L.P.
Participants...................... Key employees and officers, who, as determined by the
Prime Executive Compensation and Stock Incentive
Committee, provide substantial and important services to
Prime and may be granted Prime Stock Incentive Awards
under the Prime Stock Incentive Plan.
Partnership....................... Prime Partnership, and other subsidiaries which have
been treated as partnerships for federal income tax
purposes.
Partnership Merger................ The merger of Horizon Partnership into Prime Partnership
with Prime Partnership as the surviving limited
partnership.
Partnership Merger
Consideration................... The conversion of each issued and outstanding Horizon
Partnership Common Unit (other than units held by
Horizon or any Horizon Subsidiary) by the Partnership
Merger into the right to receive 0.9193 of a Prime
Partnership Common Unit.
Partnership Merger Effective
Time............................ The Partnership Merger shall be effective at such time
specified in the Delaware Certificate of Merger.
Performance Share................. A performance share Prime Stock Incentive Award granted
by the Prime Executive Compensation and Stock Option
Committee under the Prime Stock Incentive Plan.
Performance Unit.................. A performance unit Prime Stock Incentive Award granted
by the Prime Executive Compensation and Stock Option
Committee under the Prime Stock Incentive Plan.
Permanent Loan.................... The $180.0 million nonrecourse permanent loan
contemplated by the Nomura Loan Facilities.
PGI............................... The Prime Group, Inc.
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Plan.............................. The 1998 Stock Option Plan of HGP.
Port Huron Center................. The Port Huron, Michigan factory outlet center formerly
owned by Horizon.
Predecessor....................... Prime Retail Properties, the predecessor to Prime
Retail, Inc.
Prime............................. Prime Retail, Inc., a Maryland corporation, and its
subsidiaries.
Prime Acquired Properties......... The 22 of Horizon's best performing factory outlet
centers that will be added to Prime as a result of the
Transactions.
Prime Board of Directors.......... The Board of Directors of Prime.
Prime Bylaws...................... The Amended and Restated Bylaws of Prime.
Prime Charter..................... Prime's Amended and Restated Articles of Incorporation.
Prime Common Securities........... The Prime Common Shares and Prime Common Units.
Prime Common Shareholders......... The holders of Prime Common Shares.
Prime Common Shares............... The shares of common stock, $0.01 par value per share,
of Prime.
Prime Consent Period.............. The period prior to the execution and delivery of the
Delaware Certificate of Merger with the Delaware
Secretary.
Prime Corporate Merger
Consideration................... The conversion of each outstanding Prime Common Share
into one New Prime Common Share and each outstanding
Prime Series A Preferred Share, Prime Series B Preferred
Share and Prime Series C Preferred Share into one New
Prime Series A Preferred Share, one New Prime Series B
Preferred Share, and one New Prime Series C Preferred
Share, respectively.
Prime Director Plan............... The Prime Retail, Inc. Nonemployee Director Stock Plan.
Prime Director Plan Stock
Options......................... Stock options pursuant to the Prime Director Plan.
Prime Excess Series B Preferred
Shares.......................... The excess shares of Prime Series B Preferred Shares as
described in the Prime Charter.
Prime Excess Shares............... The excess shares of Prime Common Shares as described in
the Prime Charter.
Prime Finance Corporations........ Prime Services Corp, Prime Retail Finance, Inc., Prime
Retail Finance II, Inc., Prime Retail Finance IV, Inc.,
Prime Retail Finance V, Inc. and Prime Retail Stores,
Inc.
Prime Guarantee................... Prime Partnership's partial guarantee of $10,000,000 of
HGP's obligations under the HGP Credit Facility.
Prime IPO......................... Prime's March 15, 1994 initial public offering.
Prime Named Executives............ The Chairman of the Prime Board of Directors, the Chief
Executive Officer of Prime and the four other persons
who are the most highly compensated executive officers
of Prime.
Prime Partnership................. Prime Retail, LP, a Delaware limited partnership.
Prime Partnership Agreement....... The Second Amended and Restated Agreement of Limited
Partnership of Prime Partnership.
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Prime Partnership Common Unit
Equivalent...................... The 0.9193 of a Prime Partnership Common Unit into which
one Horizon Partnership Unit is exchangeable pursuant to
the terms of the Transactions.
Prime Partnership Common
Unitholders..................... Holders of Prime Partnership Common Units.
Prime Partnership Common Units.... The common units of Prime Partnership.
Prime Partnership Consenting
Unitholders..................... The holders of certain Prime Partnership Common Units
and Prime Partnership Series C Preferred Units.
Prime Partnership Convertible
Unitholders..................... Prime Partnership Series B Unitholders and Prime
Partnership Series C Unitholders.
Prime Partnership Limited
Partners........................ The limited partners of Prime Partnership.
Prime Partnership Predecessor..... Prime Retail Properties.
Prime Partnership Preferred
Units........................... The Prime Partnership preferred units designated in the
Prime Partnership Agreement.
Prime Partnership Series A
Preferred Units................. Series A preferred units of Prime Partnership.
Prime Partnership Series B
Preferred Units................. Series B preferred units of Prime Partnership.
Prime Partnership Series B
Unitholders..................... Holders of Convertible Preferred Units of Prime
Partnership.
Prime Partnership Series C
Unitholders..................... Holders of Prime Partnership Series C Preferred Units.
Prime Partnership Series C
Preferred Units................. Series C preferred units of Prime Partnership.
Prime Partnership Special
Distribution.................... The special cash distribution by Prime Partnership of
$0.60 per Prime Partnership Series B Preferred Unit and
$0.50 per Prime Partnership Series C Preferred Unit and
Prime Partnership Common Unit to the record holders of
such interests immediately prior to the Partnership
Merger.
Prime Partnership Units........... Prime Partnership Series A Preferred Units, Prime
Partnership Series B Preferred Units, Prime Partnership
Series C Preferred Units and Prime Partnership Common
Units.
Prime Partnership Unitholders..... Prime Partnership Series A Preferred Unitholders, Prime
Partnership Series B Unitholders, Prime Partnership
Series C Unitholders and Prime Partnership Common
Unitholders.
Prime Partnership Voting
Unitholders..................... The holders of certain Prime Partnership Common Units
and Prime Partnership Series C Preferred Units.
Prime Peer Group.................. Horizon, Tanger Factory Outlet Centers, Inc., Chelsea
GCA Realty, Inc. and FAC Realty Trust, Inc.
Prime Properties.................. All of the properties owned by Prime.
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Prime Property Partnerships....... Any partnership or other entity in which Prime
Partnership, directly or indirectly, is or becomes a
partner or other equity participant and which is formed
for the purpose of acquiring, developing or owning a
property or a proposed property.
Prime Record Date................. April 24, 1998.
Prime Retail Outlets of Kittery... Collectively, Prime's Tidewater Outlet Mall,
Manufacturer's Outlet Mall and Kittery Outlet Village.
Prime Series A Preferred
Shareholders.................... The holders of Prime Series A Preferred Shares.
Prime Series A Preferred Shares... The shares of 10.5% Series A Senior Cumulative Preferred
Stock, $0.01 par value per share, of Prime.
Prime Series B Preferred
Shareholders.................... The holders of Prime Series B Preferred Shares.
Prime Series B Preferred Shares... The shares of 8.5% Series B Cumulative Participating
Convertible Preferred Stock, $0.01 par value per share,
of Prime.
Prime Series C Preferred
Shareholders.................... The holders of Prime Series C Preferred Shares.
Prime Series C Preferred Shares... The shares of Series C Cumulative Convertible Redeemable
Preferred Stock, $0.01 par value per share, of Prime.
Prime Series C Securities......... The Prime Series C Preferred Shares and Prime Series C
Preferred Units.
Prime Services Corp............... Prime Retail Services, Inc., a Maryland corporation.
Prime Share Equivalent............ The 0.20 of a Prime Series B Preferred Share and 0.567
of a Prime Common Share, for which one Horizon Common
Share is exchangeable pursuant to the terms of the
Transactions.
Prime Shares...................... Individually or collectively, any one or a combination
of the Prime Common Shares, Prime Series A Preferred
Shares, Prime Series B Preferred Shares and Prime Series
C Preferred Shares.
Prime Shareholders................ Individually or collectively, any one or a combination
of the Prime Common Shareholders, Prime Series A
Preferred Shareholders, Prime Series B Preferred
Shareholders and Prime Series C Preferred Shareholders.
Prime Special Distribution........ The special cash distribution of $0.60 per Prime Series
B Preferred Share and $0.50 per Prime Series C Preferred
Share and Prime Common Share to the record holders of
such securities immediately prior to the Partnership
Merger.
Prime Special Meeting............. The meeting of Prime Shareholders to be held on June ,
1998, at 11:00 a.m.
Prime Stock Incentive Award....... The grant of incentive and non-qualified stock options,
Restricted Stock, SARs, Performance Shares and
Performance Units provided by the Prime Stock Incentive
Plan.
Prime Stock Incentive Award
Agreements...................... Award agreements setting forth the terms of the Awards.
Prime Stock Incentive Plan........ The Prime Retail, Inc. 1998 Long-Term Stock Incentive
Plan.
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Prime Stock Incentive Stock
Options......................... Incentive or non-qualified stock options to purchase
Prime Common Shares which may be granted by the Prime
Executive Compensation and Stock Incentive Committee.
Prime Stock Options............... Certain options to purchase Prime Common Shares.
Prime Transferred Properties...... The Indiana Prime Transferred Property and the Nebraska
Prime Transferred Property.
Prime Voting Shareholders......... The Prime Common Shareholders and the Prime Series C
Preferred Shareholders.
Reform Act........................ The Private Securities Litigation Reform Act of 1995.
Registration Rights Agreement..... The registration rights agreement, entered into on the
Closing Date by New Prime for the benefit of
Registration Rights Holders.
Registration Rights Holders....... Holders of New Prime Series B Preferred Shares, New
Prime Common Shares, Prime Partnership Series B
Preferred Units and Prime Partnership Common Units.
Registration Statement............ A registration statement filed by Sky Merger on Form S-4
under the Securities Act.
Regulations Effective Date........ January 1, 1997.
Reincorporation Articles of
Merger.......................... Articles of merger to be filed by Horizon and Sky Merger
with the Maryland Department to effectuate the
Reincorporation Merger.
Reincorporation Certificate of
Merger.......................... A certificate of merger between Horizon and Sky Merger
filed with the Michigan Department to effectuate the
Reincorporation Merger.
Reincorporation Merger............ The merger of Horizon into Sky Merger.
Reincorporation Merger Effective
Time............................ Immediately following the Partnership Merger Effective
Date and upon the later of (i) the issuance of the
Reincorporation Articles of Merger by the Maryland
Department, (ii) the endorsement of the Reincorporation
Certificate of Merger by the Michigan Department or
(iii) at a different time established in either the
Reincorporation Articles of Merger or the
Reincorporation Certificate of Merger, not to exceed 30
days after the Reincorporation Articles of Merger or the
Reincorporation Certificate of Merger are accepted for
record by the Maryland Department or the Michigan
Department, respectively.
REIT.............................. Real Estate Investment Trust.
Repurchase Date................... The date of repurchase or the date payment made
available.
Repurchase Offer.................. The offer by New Prime to repurchase New Prime Series C
Preferred Shares and New Prime Series C Preferred Units,
in the event that New Prime fails to satisfy one or both
of the tests set forth in the above text for two
consecutive quarters, at an amount equal to the
Repurchase Payment.
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Repurchase Payment................ A repurchase price payable in cash in an amount equal to
100% of the New Prime Series C Liquidation Preference,
plus accrued and unpaid dividends.
Restricted Stock.................. Prime Common Shares that are subject to such
restrictions as the Prime Executive Compensation and
Stock Option Committee deems appropriate, including
forfeiture conditions and restrictions against transfer
for a period specified by the Prime Executive
Compensation and Stock Option Committee.
Retained Assets................... The assets of Horizon not included in the Contributed
Assets.
Retained Liabilities.............. All liabilities related to the Retained Assets.
Retained Mortgage Loan
Deficiency...................... The excess, if any, of (i) an amount equal to
$160,000,000 less the aggregate amount of proceeds from
sales of retail outlet centers included in the
definition of Retained Assets applied between November
12, 1997 and the time of Contribution to reduce the
principal balance of mortgage loans included in the
definition of Retained Liabilities over (ii) the
aggregate unpaid principal balance of mortgage loans
included in the definition of Retained Liabilities and
outstanding at the time of Contribution.
SAR............................... Stock appreciation right.
Second Horizon Partnership........ Second Horizon Group Limited Partnership, a Delaware
limited partnership, that owns the Lake Elsinore Center.
Second Loan....................... The additional $50.0 million Horizon Partnership may
borrow, subject to the satisfaction of certain
conditions, including predefined debt service coverage
ratios.
Second Term Loan.................. The $3.0 million term loan entered into by Prime
Partnership and Nomura Securities on November 13, 1997.
Section 83(b) Election............ An election to be taxed currently under Section 83(b) of
the Code.
Section 162(m).................... Section 162(m) of the Code.
Section 708 Regulations........... Treasury Regulations under Code Section 708 (b)(1)(B).
Securities Act.................... The Securities Act of 1933, as amended.
Securitized Financing............. The securitized loan facility of Second Horizon
Partnership.
September 1997 Contribution....... The capital contribution made to Prime Partnership in
September 1997 by Prime.
September Capital Transactions.... Collectively, the September 1997 Contribution and the
initial sale under the Private Placement.
Service........................... The Internal Revenue Service.
SFAS.............................. Statement of Financial Accounting Standards.
Shareholder Notice Procedure...... An advance notice procedure established by the Horizon
Bylaws and HGP Bylaws for shareholders to make
nominations of candidates for election as directors or
to bring other business before an annual meeting of
shareholders of Horizon.
Shasta............................ Prime's Shasta Factory Stores.
Silverthorne Center............... Horizon's Silverthorne Factory Stores in Silverthorne,
Colorado.
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Sky Merger........................ Sky Merger Corp., a Maryland corporation, a wholly owned
subsidiary of Horizon.
Sky Merger Common Shares.......... The shares of common stock, $0.01 par value per share,
of Sky Merger.
Sky Merger Stock Option........... An option to acquire, on the same terms and conditions
applicable under such Horizon Stock Option, the same
number of Sky Merger Common Shares as the holder of such
Horizon Stock Option would have been entitled to receive
pursuant to the Reincorporation Merger had such holder
exercised such Horizon Stock Option in full immediately
prior to the Reincorporation Merger Effective Time at a
price per share equal to the aggregate exercise price
for the shares subject to such Horizon Stock Option
divided by the number of full Sky Merger Common Shares
deemed to be purchasable pursuant to such Horizon Stock
Option as of the Reincorporation Merger Effective Time.
Specified Event................... A merger or consolidation between Horizon and another
person, the corporate reorganization of Horizon or the
acquisition of a majority or more of the assets of
Horizon by another person.
Stock Purchase Agreement.......... The Stock Purchase Agreement entered into by Ronald
Piasecki dated November 12, 1997 relating to the voting
capital stock of each of First HGI, Inc., HGI
Perryville, Inc., MG Third Party Services Corp., HGI
Management Corp. and Second HGI, Inc., as amended as of
February 1, 1998.
Subsidiary Partnerships........... Certain subsidiaries of Prime Partnership which are
treated as partnerships for federal income tax purposes.
Superior Acquisition Proposal..... A bona fide Acquisition Proposal made by a third party
which a majority of the members of the Horizon Board of
Directors resolves in good faith to be in the best
interests of and more favorable to the Horizon
Shareholders than the Mergers and which the Horizon
Board of Directors determines is reasonably capable of
being consummated.
Tax Date.......................... The date used to calculate the amount of tax to be
withheld relating to the Election.
Term Loan......................... The $53,290,000 term loan entered into by Prime
Partnership and Nomura Securities on November 13, 1997.
TMP............................... Tax matters partner.
TMT............................... Tentative minimum tax.
Total Distributions............... Distributions paid or made available for the year to
holders of all classes of stock.
Transactions...................... The Horizon Partnership Contribution, the New Prime
Contribution, the Prime Partnership Special
Distribution, the Prime Special Distribution, the Prime
Partnership Common Unit Distribution, the Common Share
Distribution, the Prime Partnership/HGP Transfer and the
Mergers.
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Treasury Regulations.............. Final, temporary and proposed Treasury Department
regulations promulgated under the Code.
Triggering Events................. Certain events that could result in a violation of the
Horizon Ownership Restrictions.
UBTI.............................. "Unrelated business taxable income" as defined in
Section 512(a) of the Code.
Unsecured Line.................... Prime Partnership's $15.0 million unsecured line of
credit.
USRPIs............................ United States Real Property Interests.
Venture........................... A venture formed, in 1996, by Horizon Partnership with
the Fund.
Window Period..................... The 30-day period immediately following the filing with
the Commission by Horizon of its annual report on Form
10-K or during such periods as Horizon Partnership may
otherwise determine.
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INDEX TO FINANCIAL STATEMENTS
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PRIME RETAIL, L.P.
Report of Independent Auditors........................................................................... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-4
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995............... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............... F-6
Consolidated Statements of Partners' Capital (Deficit)................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
Schedule III--Real Estate and Accumulated Depreciation................................................... F-23
Notes to Schedule III.................................................................................... F-24
Pro Forma Post-Transactions (Unaudited)
Basis of Presentation to Pro Forma Consolidated Balance Sheet as of December 31, 1997.................. F-25
Pro Forma Consolidated Balance Sheet as of December 31, 1997........................................... F-26
Notes to Pro Forma Consolidated Balance Sheet.......................................................... F-27
Basis of Presentation to Pro Forma Consolidated Statements of Operations for the year ended December
31, 1997.............................................................................................. F-33
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.................... F-34
Notes to Pro Forma Consolidated Statement of Operations................................................ F-35
Pro Forma Pre-Transactions (Unaudited)
Basis of Presentation to Pro Forma Consolidated Statement of Operations for the year ended December 31,
1997.................................................................................................. F-38
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.................... F-39
Notes to Pro Forma Consolidated Statement of Operations................................................ F-40
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
Report of Independent Auditors........................................................................... F-41
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-42
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995............... F-43
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............... F-44
Consolidated Statements of Partners' Capital............................................................. F-45
Notes to Consolidated Financial Statements............................................................... F-46
Schedule III--Real Estate and Accumulated Depreciation................................................... F-58
Notes to Schedule III.................................................................................... F-60
</TABLE>
F-1
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INDEX TO FINANCIAL STATEMENTS (CONTINUED)
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HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
Pro Forma Pre-Transactions (Unaudited)
Basis of Presentation to Pro Forma Consolidated Financial Statements as of and for the year ended
December 31, 1997..................................................................................... F-61
Pro Forma Consolidated Balance Sheet as of December 31, 1997........................................... F-62
Notes to Pro Forma Consolidated Balance Sheet.......................................................... F-63
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.................... F-64
Notes to Pro Forma Consolidated Statement of Operations................................................ F-65
PRIME TRANSFERRED PROPERTIES
Report of Independent Auditors........................................................................... F-66
Statements of Revenue and Certain Expenses for the years ended December 31, 1997, 1996 and 1995.......... F-67
Notes to Statements of Revenue and Certain Expenses...................................................... F-68
HORIZON GROUP PROPERTIES, L.P.
Report of Independent Auditors........................................................................... F-69
Combined Statements of Net Assets as of December 31, 1997 and 1996....................................... F-70
Combined Statements of Operations for the years ended 1997, 1996 and 1995................................ F-71
Combined Statements of Changes in Net Assets............................................................. F-72
Combined Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................... F-73
Notes to Combined Financial Statements................................................................... F-74
Schedule III--Real Estate and Accumulated Depreciation................................................... F-82
Notes to Schedule III.................................................................................... F-83
Pro Forma Post-Transactions (Unaudited)
Basis of Presentation to Pro Forma Combined Financial Statements as of and for the year ended December
31, 1997.............................................................................................. F-84
Pro Forma Combined Balance Sheet as of December 31, 1997............................................... F-85
Notes to Pro Forma Combined Balance Sheet.............................................................. F-86
Pro Forma Combined Statement of Operations for the year ended December 31, 1997........................ F-91
Notes to Pro Forma Combined Statement of Operations.................................................... F-92
</TABLE>
F-2
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REPORT OF INDEPENDENT AUDITORS
To the Partners
Prime Retail, L.P.
We have audited the accompanying consolidated balance sheets of Prime Retail,
L.P. (the "Prime Partnership") as of December 31, 1997 and 1996 and the related
consolidated statements of operations, partners' capital (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement Schedule III, Real Estate and
Accumulated Depreciation. These financial statements and schedule are the
responsibility of Prime Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule 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 consolidated financial position of Prime Partnership
at December 31, 1997 and 1996, the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Baltimore, Maryland
January 23, 1998, except
for Note 12, as to which the date
is February 1, 1998
F-3
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PRIME RETAIL, L.P.
CONSOLIDATED BALANCE SHEETS OF PRIME PARTNERSHIP
(AMOUNTS IN THOUSANDS)
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DECEMBER 31,
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1997 1996
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ASSETS
Investment in rental property:
Land.................................................................................... $ 66,277 $ 44,731
Buildings and improvements.............................................................. 779,191 570,761
Property under development.............................................................. 53,139 20,900
Furniture and equipment................................................................. 5,911 4,359
---------- ----------
904,518 640,751
Accumulated depreciation................................................................ (82,016) (57,670)
---------- ----------
822,502 583,081
Cash and cash equivalents................................................................. 6,277 3,918
Restricted cash........................................................................... 41,736 45,127
Accounts receivable, net.................................................................. 9,745 6,096
Deferred charges, net..................................................................... 16,206 20,841
Due from affiliates, net.................................................................. 9,982 5,175
Investment in partnerships................................................................ 3,278 5,625
Other assets.............................................................................. 2,108 484
---------- ----------
Total assets............................................................................ $ 911,834 $ 670,347
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Bonds payable............................................................................. $ 32,900 $ 32,900
Notes payable............................................................................. 482,365 466,623
Accrued interest.......................................................................... 3,767 3,393
Real estate taxes payable................................................................. 4,639 2,138
Construction costs payable................................................................ 5,849 3,047
Accounts payable and other liabilities.................................................... 19,022 18,483
---------- ----------
Total liabilities....................................................................... 548,542 526,584
Minority interests........................................................................ 3,911 3,986
Partners' capital (deficit):
General partner......................................................................... 455,590 237,247
Limited partners........................................................................ (96,209) (97,470)
---------- ----------
Total partners' capital (deficit)..................................................... 359,381 139,777
---------- ----------
Total liabilities and partners' capital (deficit)....................................... $ 911,834 $ 670,347
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PRIME RETAIL, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS OF PRIME PARTNERSHIP
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
REVENUES
Base rents..................................................................... $ 78,049 $ 54,710 $ 46,368
Percentage rents............................................................... 3,277 1,987 1,520
Tenant reimbursements.......................................................... 37,519 25,254 22,283
Income from investment partnerships............................................ 103 1,239 1,729
Interest and other............................................................. 10,144 5,850 5,498
---------- ---------- ---------
Total revenues............................................................... 129,092 89,040 77,398
EXPENSES
Property operating............................................................. 29,492 20,421 17,389
Real estate taxes.............................................................. 9,417 5,288 4,977
Depreciation and amortization.................................................. 26,704 19,253 15,436
General and administrative..................................................... 4,232 3,090 2,830
Interest....................................................................... 36,122 24,532 20,821
Other charges.................................................................. 3,110 8,586 2,089
---------- ---------- ---------
Total expenses............................................................... 109,077 81,170 63,542
---------- ---------- ---------
INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM........................ 20,015 7,870 13,856
Income allocated to minority interests......................................... (189) (140) (167)
---------- ---------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........................................ 19,826 7,730 13,689
Extraordinary item - loss on early extinguishment of debt...................... (2,061) (4,280) --
---------- ---------- ---------
NET INCOME..................................................................... 17,765 3,450 13,689
Income allocated to preferred unitholders...................................... 12,995 14,236 20,944
---------- ---------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON UNITS................................... $ 4,770 $ (10,786) $ (7,255)
---------- ---------- ---------
---------- ---------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON UNITS:
General partner.............................................................. $ 3,305 $ (5,193) $ (1,724)
Limited partners............................................................. 1,465 (5,593) (5,531)
---------- ---------- ---------
Total...................................................................... $ 4,770 $ (10,786) $ 7,255)
---------- ---------- ---------
---------- ---------- ---------
EARNINGS (LOSS) PER COMMON UNIT:
General partner (including $0.07 and $0.25 net loss per unit from
extraordinary item in 1997 and 1996, respectively)......................... $ 0.17 $ (0.63) $ (0.60)
---------- ---------- ---------
---------- ---------- ---------
Limited partners (including $0.07 and $0.25 net loss per unit from
extraordinary item in 1997 and 1996, respectively)......................... $ 0.17 $ (0.63) $ (0.60)
---------- ---------- ---------
---------- ---------- ---------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
General partner.............................................................. 19,189 8,221 2,875
Limited partners............................................................. 8,505 8,855 9,221
---------- ---------- ---------
Total...................................................................... 27,694 17,076 12,096
---------- ---------- ---------
---------- ---------- ---------
DISTRIBUTIONS PER COMMON UNIT:
General partner.............................................................. $ 1.180 $ 1.325 $ 1.180
---------- ---------- ---------
---------- ---------- ---------
Limited partners............................................................. $ 1.180 $ 1.036 $ 0.660
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PRIME RETAIL, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS OF PRIME PARTNERSHIP
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................................................... $ 17,765 $ 3,450 $ 13,689
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to minority interests......................................... 189 140 167
Extraordinary loss for early extinguishment of debt............................ 2,061 4,280 --
Write-off of financing costs related to early extinguishment of debt, net...... -- 6,131 --
Depreciation................................................................... 25,044 17,465 13,714
Amortization of deferred financing costs and interest rate protection
contracts.................................................................... 3,742 3,724 4,524
Amortization of leasing commissions............................................ 1,660 1,788 1,722
Equity earnings in excess of cash distributions from joint ventures............ -- (365) (1,281)
Provision for uncollectible accounts receivable................................ 970 710 346
Gain on sale of land........................................................... (904) -- (106)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable................................... (4,619) 1,945 (2,941)
(Increase) decrease in other assets.......................................... 2,264 (3,219) 72
Increase in other liabilities................................................ 2,956 9,393 5,994
Increase in accrued interest................................................. 374 359 1,059
(Increase) decrease in due from affiliates, net.............................. (4,807) (3,556) 313
--------- --------- ---------
Net cash provided by operating activities...................................... 46,695 42,245 37,272
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of land................................................................. (667) (953) (4,765)
Increase in buildings and improvements........................................... (20,377) (45,037) (70,770)
Increase in property under development........................................... (49,668) (11,566) (7,056)
Acquisition of outlet centers.................................................... (159,232) (134,668) --
Increase in construction reserves................................................ (497) (40,067) --
Proceeds from sale of land....................................................... 1,358 -- 624
Lease commissions................................................................ (537) -- --
Cash distributions in excess of equity in earnings of joint ventures............. (82) -- --
--------- --------- ---------
Net cash used in investing activities.......................................... (229,702) (232,291) (81,967)
--------- --------- ---------
FINANCING ACTIVITIES
Contributions from general partner............................................... 233,019 38,931 --
Contributions from limited partners.............................................. 9,710 -- --
Proceeds from notes payable...................................................... 160,057 591,520 185,078
Principal repayments on notes payable............................................ (175,683) (397,951) (93,149)
Deferred financing costs......................................................... (583) (18,222) (4,822)
Distributions to minority interests.............................................. (264) (375) (190)
Distributions to partners........................................................ (40,890) (34,861) (30,283)
--------- --------- ---------
Net cash provided by financing activities...................................... 185,366 179,042 56,634
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................................. 2,359 (11,004) 11,939
Cash and cash equivalents at beginning of year................................... 3,918 14,922 2,983
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 6,277 $ 3,918 $ 14,922
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Assumption of note payable....................................................... $ 31,368 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PRIME RETAIL, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) OF PRIME PARTNERSHIP
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Partners' capital (deficit) at January 1, 1995................................ $ (69,413) $ 218,264 $ 148,851
Distributions................................................................. (5,033) (25,250) (30,283)
Net income (loss)............................................................. (5,531) 19,220 13,689
---------- ---------- ----------
Partners' capital (deficit) at December 31, 1995.............................. (79,977) 212,234 132,257
Contributions................................................................. -- 38,931 38,931
Distributions................................................................. (8,540) (26,321) (34,861)
Net income (loss)............................................................. (8,953) 12,403 3,450
---------- ---------- ----------
Partners' capital (deficit) at December 31, 1996.............................. (97,470) 237,247 139,777
Contributions................................................................. 9,710 233,019 242,729
Distributions................................................................. (10,102) (30,788) (40,890)
Net income.................................................................... 1,653 16,112 17,765
---------- ---------- ----------
Partners' capital (deficit) at December 31, 1997.............................. $ (96,209) $ 445,590 $ 359,381
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Prime Retail, L.P. ("Prime Partnership") was organized as a Delaware
partnership on March 22, 1994. Prime Partnership is a limited partnership
engaged in ownership, development, construction, acquisition, leasing, marketing
and management of factory outlet centers. Prime Partnership's factory outlet
center portfolio, including three factory outlet centers owned through joint
venture partnerships, consists of 28 factory outlet centers in 20 states, which
total approximately 7,217,000 square feet of gross leasable area ("GLA") at
December 31, 1997.
At December 31, 1997, Prime Partnership had outstanding 2,300,000 Series A
Preferred Units (the "Senior Preferred Units"), 2,981,800 Series B Convertible
Preferred Units (the "Series B Convertible Preferred Units"), 4,363,636 Series C
Preferred Units (the "Series C Preferred Units "), and 35,800,423 Common Units
(the "Common Units").
A summary of the holders of units in Prime Partnership as of December 31,
1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF UNITS
------------------------------------------------
HOLDER SERIES A SERIES B SERIES C COMMON
- ----------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Prime Retail, Inc. ("General Partner")... 2,300,000 2,981,800 3,636,363 27,294,951
PGI, management and other (1) ("Limited
Partner").............................. -- -- -- 8,505,472
Security Capital Preferred Growth
Incorporated ("Limited Partner")....... -- -- 727,273 --
---------- ---------- ---------- ------------
2,300,000 2,981,800 4,363,636 35,800,423
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
- ------------------------
Note:
(1) Includes 742,180 units beneficially owned by management and 4,091,255 units
owned by certain executive officers based on their ownership interests in
The Prime Group, Inc ("PGI").
As of December 31, 1997, the General Partner has a 76.2% general partnership
interest in Prime Partnership with full and complete control over the management
of Prime Partnership as the sole general partner not subject to removal by the
limited partners. At December 31, 1997 and 1996, loans to certain limited
partners, who also are executive officers of Prime Partnership, aggregating
$4,750 were reported as a reduction in the Limited Partners' capital account in
the consolidated balance sheets.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Prime
Partnership and the partnerships in which Prime Partnership has operational
control ("Prime Retail Partnerships"). Profits and losses are allocated in
accordance with the terms of the agreements of limited and general partnership
of Prime Retail Partnerships. The preparation of financial statements in
conformity with generally accepted accounting ("GAAP") 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
F-8
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Investments in partnerships in which Prime Partnership does not have
operational control are accounted for on the equity method of accounting. Income
applicable to minority interests and common units as presented in the
consolidated statements of operations is allocated based on income before
minority interest after income allocated to preferred unitholders. Minority
interest includes these property partnerships that are not wholly owned by Prime
Partnership.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RENTAL PROPERTY
Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Land improvements...................................... 20 years
Principally 40
Buildings and improvement.............................. years
Term of related
Tenant improvements.................................... lease
Furniture and equipment................................ 5 years
</TABLE>
Rental property is carried at historical cost net of accumulated
depreciation. Development costs, which include fees and costs incurred in
developing new properties, are capitalized as incurred. Upon completion of
construction, development costs are amortized over the useful lives of the
respective properties on a straight-line basis.
Prime Partnership evaluates its rental properties periodically to assess
whether any impairment indications are present, including recurring operating
losses and significant adverse changes in the business climate that affect the
recovery of recorded asset value. If any rental property is considered impaired,
a loss is provided to reduce the carrying value of the asset to its estimated
fair value. No impairment losses have been recorded in any of the periods
presented.
Expenditures for ordinary maintenance and repairs are expensed to operations
as incurred. Significant renovations and improvements which improve and/or
extend the useful life of assets are capitalized and depreciated over their
estimated useful lives.
CASH EQUIVALENTS
Prime Partnership considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Management regularly reviews accounts receivable and determines an
appropriate range for the allowance for doubtful accounts based upon the impact
of economic conditions on the merchants' ability to pay, past collection
experience and such other factors which, in management's judgment, deserve
current
F-9
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognition. In turn, a provision is charged against earnings in order to
maintain the allowance level within this range. The allowance for doubtful
accounts at December 31, 1997 and 1996 was $1,780 and $1,349, respectively.
Accounts receivable due after one year primarily representing straight-line
rents were $5,969 and $5,310 at December 31, 1997 and 1996, respectively.
DEFERRED CHARGES
Deferred charges consists of leasing commissions and financing costs.
Deferred leasing commissions incurred to originate and renew operating leases
are amortized on a straight-line basis over the term of the related lease. Fees
and costs incurred to obtain financing are deferred and are being amortized as a
component of interest expense over the terms of the respective loans on a basis
that approximates the interest method.
REVENUE RECOGNITION
Leases with tenants are accounted for as operating leases. Minimum rental
income is recognized on a straight-line basis over the term of the lease and
unpaid rents are included in accounts receivable in the accompanying balance
sheet. Certain lease agreements contain provisions which provide for rents based
on a percentage of sales or based on a percentage of sales volume above a
specified threshold. In addition, the lease agreements generally provide for the
reimbursement of real estate taxes, insurance, advertising and certain common
area maintenance costs. These additional rents and tenant reimbursements are
accounted for on the accrual basis.
NET INCOME (LOSS) PER UNIT
Net income per partnership unit is determined by allocating net income
(loss) available to the general partner and limited partner common unitholders
based on their weighted average partnership units outstanding during the
respective periods presented.
INTEREST RATE PROTECTION CONTRACTS
Prime Partnership uses interest rate protection contracts, including
interest rate caps and corridors, to manage interest rate risk associated with
floating rate debt. These contracts generally involve limiting Prime
Partnership's interest costs with an upper limit or specified range on the
underlying interest rate index. The cost of such contracts are included in
deferred charges and are being amortized on a straight-line basis as a component
of interest expense over the life of the contracts. Amounts earned from interest
rate protection contracts are recorded as a reduction of interest expense. Prime
Partnership is exposed to credit losses in the event of counterparty
nonperformance, but does not anticipate any such losses based on the
creditworthiness of the counterparties.
INCOME TAXES
Prime Partnership is not liable for income taxes, and the income or loss
from the partnerships are included on the respective income tax returns of the
partners. Accordingly, no provision for income taxes has been made in these
financial statements.
F-10
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES
Prime Partnership's results of operations are significantly dependent on the
overall health of the retail industry. Prime Partnership's tenant base is
comprised almost exclusively of merchants in the retail industry. The retail
industry is subject to external factors such as inflation, consumer confidence,
unemployment rates and consumer tastes and preferences. A decline in the retail
industry could reduce merchant sales, which could adversely affect the operating
results of Prime Partnership. A number of the merchants have occupied space in
more than one of Prime Partnership's factory outlet centers; however, no single
merchant accounts for more than 5.7% of Prime Partnership's revenues.
NOTE 3--RESTRICTED CASH
At December 31, 1997 and 1996, Prime Partnership had placed in escrow
$41,736 and $45,127, respectively, to be used to complete certain development
projects, to fund real estate taxes and debt service and to pay certain
operating costs under a mortgage loan agreement. At December 31, 1997,
restricted cash included $34,692 relating to a nonrecourse expansion loan which
can only be used to fund certain development costs relating to the expansion of
13 of Prime Partnership's factory outlet centers, provided certain occupancy and
other conditions have been attained.
NOTE 4--DEFERRED CHARGES
Deferred charges were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Leasing commissions................................................... $ 11,261 $ 10,567
Financing costs....................................................... 18,145 25,587
---------- ----------
29,406 36,154
Accumulated amortization.............................................. (13,200) (15,313)
---------- ----------
$ 16,206 $ 20,841
---------- ----------
---------- ----------
</TABLE>
NOTE 5--INVESTMENT IN PARTNERSHIPS
At December 31, 1997, Prime Partnership owned a 50% partnership interest in
two real estate ventures that are accounted for using the equity method of
accounting. Prime Partnership manages these
F-11
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 5--INVESTMENT IN PARTNERSHIPS (CONTINUED)
ventures and earns a property management fee based on the ventures' revenues.
The condensed combined balance sheets of these ventures and their condensed
statements of operations are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Total assets, primarily rental property................................. $ 51,864 $ 75,444
--------- ---------
--------- ---------
Liabilities, primarily long-term debt................................... $ 51,077 $ 70,750
Partners' capital....................................................... 787 4,694
--------- ---------
Total liabilities and partners' capital................................. $ 51,864 $ 75,444
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues..................................................... $ 12,368 $ 17,868 $ 12,671
Operating expense............................................ 4,899 6,268 4,504
Interest expense............................................. 4,174 5,598 3,923
Depreciation and amortization................................ 3,206 3,615 2,298
Extraordinary loss........................................... 851 -- --
--------- --------- ---------
Net income (loss)............................................ $ (762) $ 2,387 $ 1,946
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1997, Prime Partnership guaranteed long-term debt of
joint venture partnerships of $24,019.
On September 2, 1997, Prime Partnership acquired a 25% partnership interest
in Buckeye Factory Shops Limited Partnership ("Buckeye") from its joint venture
partner for $23,148 (including $22,642 of mortgage indebtedness relating to such
property), thereby increasing its ownership percentage in such property to 100%
(the "Buckeye Acquisition"). Prior to September 2, 1997, Prime Partnership
accounted for its 75% investment in Buckeye using the equity method of
accounting. Commencing September 2, 1997, the operating results of Buckeye are
consolidated. As a result of the prepayment of the mortgage indebtedness noted
above, the joint venture partnership incurred an extraordinary loss of $851
related to the write-off of certain unamortized financing costs totaling $624
and a debt prepayment penalty of $227. Prime Partnership's 75% share of the
extraordinary loss, or $638, is included in the extraordinary loss in the
Consolidated Statements of Operations.
NOTE 6--RELATED PARTY TRANSACTIONS
At December 31, 1997, the net amount due from affiliates consisted of $8,930
and $1,052 due primarily from the General Partner and its affiliates and joint
venture partnerships, respectively, relating to reimbursement of costs paid by
Prime Partnership on behalf of the General Partner and its affiliates and joint
venture partnerships. At December 31, 1996, the net amount due from affiliates
consisted of $3,626 and $595 due primarily from the General Partner and its
affiliates and joint venture partnerships, respectively, relating to
reimbursement of costs paid by Prime Partnership on behalf of the General
F-12
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 6--RELATED PARTY TRANSACTIONS (CONTINUED)
Partner and its affiliates and joint venture partnerships, and $954 of fees due
from joint venture partnerships in connection with the development of two
factory outlet centers.
NOTE 7--BONDS AND NOTES PAYABLE
Bonds payable consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Variable rate tax-exempt revenue bonds (the Bonds), rate determined by
remarketing agents, ranging from 3.80% to 3.95% at December 31, 1997,
interest-only payments, due 2012 to 2014, collateralized by properties
in Chattanooga, TN and
Knoxville, TN......................................................... $ 28,250 $ 28,250
Urban Development Action Grant Loans, 3% through August 31, 1997 and 6%
thereafter, interest-only payments, due 2016 to 2019, collateralized
by property in Chattanooga, TN........................................ 4,650 4,650
--------- ---------
$ 32,900 $ 32,900
--------- ---------
--------- ---------
</TABLE>
Under the terms of the loan agreements relating to the Bonds, the issuing
partnerships are required to make interest-only payments calculated using a
variable rate determined by the remarketing agents of the Bonds. The interest
rates ranged from 3.00% to 4.70% in 1997, 2.45% to 5.30% in 1996 and 2.65% to
5.30% in 1995. Under certain conditions, the interest rate on the Bonds may be
converted to a fixed rate at the request of Prime Partnership. A bondholder may
tender bonds during the variable interest rate period and receive principal,
plus accrued interest through the tender date. Upon tender, the remarketing
agents are required to immediately remarket the Bonds. In the event the
remarketing agents fail to remarket any bonds, the remarketing agents may draw
on certain liquidity facilities as described below. The remarketing agents
receive fees varying from 0.1% to 0.125% per annum on the outstanding bond
balance, payable quarterly in arrears.
At December 31, 1997, the Bonds are collateralized by letters of credit (the
"Letters of Credit") issued by a group of financial institutions pursuant to a
master letter of credit agreement. A letter of credit fee of 1.0% per annum of
the stated amount of the Letters of Credit is payable quarterly in advance to
such financial institutions. The Letters of Credit are collateralized by a
reimbursement agreement under the master letter of credit agreement (the
"Reimbursement Agreement") which obligates an insurance company to reimburse the
financial institutions for any funds drawn on the Letters of Credit. In
addition, in March 1994, the issuing partnerships, Prime Partnership and an
insurance company entered into standby bond purchase and indemnity agreements
(the "Standby Agreements") in order to address the scheduled expirations of
various credit enhancements, including the Letters of Credit, through March 21,
1999.
Pursuant to the Standby Agreements, the insurance company agreed that in the
event that any of the issuing partnerships are unable to arrange replacement
credit enhancement facilities as necessary, the
F-13
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 7--BONDS AND NOTES PAYABLE (CONTINUED)
insurance company will purchase the applicable Bonds and hold the same until
March 21, 1999, at which time the issuing partnership and Prime Partnership will
purchase the Bonds pursuant to the terms of the related Standby Agreement.
The Letters of Credit are scheduled to expire on December 31, 1998. The
total commitments outstanding under the Letters of Credit, the Reimbursement
Agreement and the Standby Agreements as of December 31, 1997 were $28,909. The
due date of the Bonds accelerates upon the expiration of the Letters of Credit
unless the Letters of Credit are extended or replaced.
Notes payable consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
First Mortgage and Expansion Loan, LIBOR plus 1.51% through November
10, 1998, 7.782% thereafter, 7.51% at December 31, 1997, monthly
installments of $2,580 including interest, due November 11, 2003,
collateralized by sixteen properties located throughout the United
States.............................................................. $ 355,996 $ 358,748
Term loan, LIBOR plus 1.95%, 7.95% at December 31, 1997, monthly
interest-only payments through February 10, 1998; quarterly
principal and monthly interest payments thereafter, due November 11,
1999, collateralized by excess cash flow of sixteen properties
located throughout the United States................................ 53,290 53,290
Mortgage, 6.83%, monthly installments of $218 including interest, due
June 6, 2006, collateralized by property in Niagara Falls, NY....... 31,328 --
Mortgage, 8.35%, monthly installments of $215 including interest, due
June 11, 2007, collateralized by three properties located throughout
the United States................................................... 26,784 --
Mortgage, 9.375%, monthly installments of $71 including interest, due
March 1, 2004, collateralized by property located in Lombard, IL.... 6,735 6,940
Mortgage, 7.50%, monthly installments of $29 including interest, due
June 22, 2000, collateralized by property in Knoxville, TN.......... 3,732 3,793
Term loan, LIBOR plus 1.95%, 7.95% at December 31, 1997, monthly
interest-only payments through April 10, 1998; monthly principal and
interest payments thereafter, due February 13, 2000, collateralized
by excess cash flow of three properties located throughout the
United States....................................................... 3,000 --........
Unsecured term loans, 8.25%, monthly interest-only payments, due
August 31, 1998..................................................... 1,500 12,000
</TABLE>
F-14
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 7--BONDS AND NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Unsecured term loans, LIBOR plus 3.50%, 9.09% at December 31, 1996,
monthly interest-only payments, due November 11, 1997............... -- $ 16,000
Mortgage, LIBOR plus 2.25%, 7.87% at December 31, 1996, monthly
interest-only payments, due September 10, 1998, collateralized by
property located in Gaffney, SC..................................... -- 15,852
Unsecured line of credit, $15,000 at December 31, 1997, LIBOR plus
2.50%, monthly interest-only payments, due July 11, 1998............ -- --
---------- ----------
$ 482,365 $ 466,623
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, unused commitments were $35,396. Interest costs are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest incurred............................................ $ 36,551 $ 24,357 $ 19,354
Interest capitalized......................................... (4,056) (3,348) (2,336)
Interest earned on interest rate protection contracts........ (115) (201) (721)
Amortization of deferred financing costs and interest rate
protection contracts....................................... 3,742 3,724 4,524
--------- --------- ---------
Interest expense............................................. $ 36,122 $ 24,532 $ 20,821
--------- --------- ---------
--------- --------- ---------
Interest paid................................................ $ 36,177 $ 23,998 $ 18,295
--------- --------- ---------
--------- --------- ---------
</TABLE>
The scheduled maturities of bonds and notes payable at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
1998............................................................................ $ 13,951
1999............................................................................ 50,179
2000............................................................................ 10,340
2001............................................................................ 5,069
2002............................................................................ 5,484
Thereafter...................................................................... 430,242
------------
$ 515,265
------------
------------
</TABLE>
F-15
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 7--BONDS AND NOTES PAYABLE (CONTINUED)
The aggregate carrying amount of bonds and notes payable at December 31,
1997 approximated their fair value. At December 31, 1997, the aggregate carrying
amount of rental property collateralizing bonds and notes payable was $712,247
At December 31, 1997, Prime Partnership held interest rate protection
contracts on $28,250 of its floating rate tax-exempt indebtedness which expire
in 1999 and approximately $355,996 of other floating rate indebtedness which
expire in November 1998. In addition, Prime Partnership purchased additional
interest rate protection contracts on $43,900 (of which $22,000 expires in July
1998 and $21,900 expires in April 1999) of the $355,996 floating rate
indebtedness to further reduce Prime Partnership's exposure to increases in
interest rates. These contracts have a weighted average maturity of
approximately 0.9 years.
The following table summarizes the material terms of the interest rate
protection contracts held for purposes other than trading and related borrowings
at December 31, 1997:
INTEREST RATE PROTECTION CONTRACTS
<TABLE>
<CAPTION>
NOTIONAL DATE
BORROWINGS AMOUNT PURCHASED/ MAXIMUM INDEX RATE
(IN MILLIONS) (IN MILLIONS) AMENDED TERM INDEX
- ------------- ------------- ----------- --------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C>
$ 356.0 $ 356.0 11/1/96 2 years LIBOR 7.0%
28.3 28.3 3/21/94 5 years Kenny Year 1 3.0%
Index Year 2 3.5%
Year 3 4.0%
Year 4 4.5%
Year 5 5.0%
------ ------
$ 384.3 $ 384.3
------ ------
------ ------
</TABLE>
ADDITIONAL INTEREST RATE PROTECTION ON $356.0 MILLION FLOATING RATE INDEBTEDNESS
<TABLE>
<CAPTION>
MAXIMUM SPREAD
DATE BETWEEN MAXIMUM
NOTIONAL AMOUNT PURCHASED/ MAXIMUM INDEX RATE INDEX RATE
(IN MILLIONS) AMENDED TERM INDEX AND INDEX
- ----------------- ----------- --------- ---------- -------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 22.0 7/1/94 4 years LIBOR Year 1 5.0% 2.0%
Year 2 5.5% 1.5%
Year 3 6.0% 1.0%
Year 4 6.5% 0.5%
21.9 3/31/94, 5 years LIBOR Year 1 3.75% 3.25%
Amended Year 2 4.25% 2.75%
7/1/94 Year 3 4.75% 2.25%
Year 4 5.25% 1.75%
Year 5 5.75% 1.25%
-----
$ 43.9
-----
-----
</TABLE>
F-16
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 7--BONDS AND NOTES PAYABLE (CONTINUED)
The net carrying amount of interest rate protection contracts at December
31, 1997 was $1,266. The estimated fair value of interest rate protection
contracts based on quoted market rates at December 31, 1997 was $99.
On February 13, 1997, Prime Partnership closed on $30,000 of loan facilities
with Nomura Asset Capital Corporation. The transaction provided (i) a $27,000
nonrecourse first mortgage loan (the "First Mortgage Loan") and (ii) a junior
secured loan (the "Junior Secured Loan") of $3,000. The First Mortgage Loan (i)
is a cross collateralized by first mortgages on three of Prime Partnership's
factory outlet centers, (ii) bears a fixed rate of interest of 8.35%, and (iii)
requires monthly principal and interest payments pursuant to a 360-month
amortization schedule. The Junior Secured Loan is a recourse loan to Prime
Partnership that (i) is secured by a pledge of excess cash flow after debt
service on the First Mortgage Loan, (ii) bears a variable interest rate at the
London Interbank offered rate for 30-day deposits in U.S. dollars ("30-day
LIBOR") plus 1.95%, (iii) matures in three years, and (iv) requires monthly
interest only payments through April 10, 1998 and monthly principal and interest
payments thereafter.
On July 11, 1997, Prime Partnership's $15,000 unsecured line of credit (the
"Unsecured Line") was renewed. The purpose of the Unsecured Line is to provide
working capital to facilitate the funding of short-term operating cash needs of
Prime Partnership. The Unsecured Line bears an interest rate of 30-day LIBOR
plus 2.50% and matures on July 11, 1998. No amounts were outstanding under the
Unsecured Line at December 31, 1997.
In September 1997, Prime Partnership repaid certain outstanding indebtedness
aggregating $113,410, including the Junior Secured Loan, with proceeds from
contributions made by the General Partner and a limited partner. As a result of
the prepayment of such indebtedness, Prime Partnership incurred an extraordinary
loss of $1,423 related to the write-off of certain unamortized financing costs.
Prime Partnership also incurred an extraordinary loss of $638 related to the
write-off of certain unamortized financing costs in connection with the Buckeye
Acquisition (see Note 5-- "Investment in Partnerships" of the Notes to the
Consolidated Financial Statements).
On November 13, 1997, Prime Partnership closed on a term loan with Nomura
Securities (Bermuda) Ltd. ("Nomura Securities") of $53,290 (the "Term Loan").
The Term Loan is a recourse loan to Prime Partnership that (i) is secured by a
pledge of excess cash flow after debt service on a first mortgage loan
collateralized by 16 of Prime Partnership's factory outlet centers, (ii) bears a
variable interest rate of 30-day LIBOR plus 1.95%, (iii) matures on November 11,
1999, (iv) requires monthly interest-only payments through February 10, 1998 and
monthly interest payments and quarterly principal payments thereafter that
approximate a six-year amortization schedule, and (v) may be subject to earlier
principal payments via "mark-to-market" of the underlying debt instrument.
In addition, on November 13, 1997, Prime Partnership closed on a term loan
with Nomura Securities of $3,000 (the "Second Term Loan"). The Second Term Loan
is a recourse loan to Prime Partnership that (i) is secured by a pledge of
excess cash flow after debt service on a first mortgage loan collaterlized by
three of Prime Partnership's factory outlet centers, (ii) bears a variable
interest rate of 30-day LIBOR plus 1.95%, (iii) matures on February 13, 2000,
(iv) requires monthly interest-only payments through April 10, 1998 and monthly
principal and interest payments thereafter that approximate a five-year
amortization schedule, and (v) may be subject to earlier principal payments via
"mark-to-market" of the underlying debt instrument.
F-17
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 7--BONDS AND NOTES PAYABLE (CONTINUED)
On December 2, 1997, Prime Partnership assumed a $31,328 mortgage loan in
connection with the purchase of Niagara International Factory Outlets (the
"Niagara Loan"). The Niagara Loan (i) bears a fixed interest rate of 6.83%, (ii)
requires monthly principal and interest payments that approximates a 25-year
amortization schedule, and (iii) is collateralized by Niagara International
Factory Outlets.
On December 31, 1997, Prime Partnership obtained from a financial
institution a commitment for a construction mortgage loan in an amount not to
exceed $20,396 (the "Construction Mortgage Loan"). The Construction Mortgage
Loan (i) bears a variable interest rate at the financial institution's prime
rate or, at Prime Partnership's option, a LIBOR index plus 1.75%, (ii) matures
on December 3, 1999, and (iii) requires monthly interest-only payments. The
Construction Mortgage Loan is collateralized by a first mortgage on Lebanon
Factory Shops, a factory outlet center located in Lebanon, Tennessee. At
December 31, 1997, no amounts were on the Construction Mortgage Loan.
NOTE 8--SERIES C UNIT CONTRIBUTION
On August 8, 1997, Prime Partnership entered into a purchase agreement with
Security Capital Preferred Growth Incorporated ("Security Capital") providing
for the issuance of a new series of cumulative convertible non-voting preferred
units (the "Series C Preferred Units") at $13.75 per unit. The Series C
Preferred Units pay distributions equivalent to the amount being paid on Prime
Partnership's Common Units, with an annual minimum equal to $1.18 per unit.
Prime Partnership has the right to call the Series C Preferred Units, at
liquidation preference, after 10 years. The Series C Preferred Units may be
converted into Common Units on a one-to-one basis commencing August 8, 1998 (or
earlier subject to certain conditions).
On September 8, 1997, Prime Partnership issued 727,273 Series C Preferred
Units at $13.75 per unit to Security Capital and received net proceeds of $9,710
after commissions and underwriting discounts.
On December 2, 1997, Prime Partnership issued 3,636,363 Series C Preferred
Units at $13.75 per unit to the General Partner for net proceeds of $49,045 that
were used in the acquisition of Niagara International Factory Outlets and Shasta
Factory Stores. The General Partner, in turn, issued 3,636,363 shares of Series
C Cumulative Participating Convertible Redeemable Preferred Stock to Security
Capital.
F-18
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 9--LEASE AGREEMENTS
Prime Partnership is the lessor of retail and office space under operating
leases with initial lease terms that expire from 1998 to 2016. Most leases are
renewable for five years at the lessee's option. Future minimum base rent to be
received under noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 91,287
1999.............................................................................. 81,579
2000.............................................................................. 66,987
2001.............................................................................. 48,046
2002.............................................................................. 28,635
Thereafter........................................................................ 55,352
----------
$ 371,886
----------
----------
</TABLE>
Prime Partnership leases certain land, buildings and equipment under various
noncancelable operating lease agreements. Rental expense for operating leases
was $1,046, $1,011, and $961 for the years ended December 31, 1997, 1996 and
1995, respectively. Future minimum rental payments, by year and in the
aggregate, payable under these noncancelable operating leases with initial or
remaining terms of one year or more consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------------
<S> <C>
1998................................................................................. $ 934
1999................................................................................. 898
2000................................................................................. 841
2001................................................................................. 803
2002................................................................................. 744
Thereafter........................................................................... 583
---------
$ 4,803
---------
---------
</TABLE>
NOTE 10--LEGAL PROCEEDINGS
In the ordinary course of business, Prime Partnership is subject to certain
legal actions. While any litigation contains an element of uncertainty,
management believes that losses, if any, resulting from such matters, will not
have a material adverse effect on the consolidated financial statements of Prime
Partnership.
NOTE 11--ACQUISITIONS
On November 1, 1996, Prime Partnership acquired Rocky Mountain Factory
Stores and Kansas City Factory Outlets for an aggregate purchase price of
$71,700.
On November 1, 1996, Prime Partnership purchased its joint venture partner's
first mortgage on and 50% partnership interest in Grove City Factory Shops for
$57,094 thereby increasing its ownership interest in such property to 100%.
F-19
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 11--ACQUISITIONS (CONTINUED)
On February 13, 1997, Prime Partnership, acquired Oak Creek Factory Stores,
Bend Factory Outlets and Factory Outlets at Post Falls from an unrelated third
party for an aggregate purchase price of $37,250. Prime Partnership financed the
purchase with loan proceeds from a financial institution and a $4,000 promissory
note issued to the seller which was repaid in 1997. The operating results of
Prime Partnership for 1997 include the results of these acquisitions effective
with the closing on February 13, 1997.
On September 2, 1997, Prime Partnership acquired a 25% partnership interest
in Buckeye from its joint venture partner for $23,148 (including $22,642 of
mortgage indebtedness relating to such property), thereby increasing its
ownership percentage in such property to 100%. Prior to September 2, 1997, Prime
Partnership accounted for its 75% investment in Buckeye using the equity method
of accounting. Commencing September 2, 1997, the operating results of Buckeye
are consolidated. Prime Partnership financed the acquisition with proceeds from
the General Partner.
On October 29, 1997, Prime Partnership acquired Tidewater Outlet Mall,
Manufacturer's Outlet Mall, Kittery Outlet Village (collectively "Prime Retail
Outlets of Kittery"), and Latham Factory Outlet Center (the "Latham Property")
from an unrelated third party for an aggregate purchase price of $26,000. Prime
Partnership financed the purchase primarily with the proceeds from the General
Partner.
In addition, on December 2, 1997, Prime Partnership acquired Niagara
International Factory Outlets ("Niagara") and Shasta Factory Stores ("Shasta")
from an unrelated third party for an aggregate purchase price of $100,975,
including the assumption of mortgage indebtedness of $31,368. Prime Partnership
financed the purchase with proceeds from the General Partner and a limited
partner.
Prime Partnership accounted for these acquisitions using the purchase method
of accounting. The operating results of these acquisitions have been included in
Prime Partnership's consolidated results of operations commencing on the date of
acquisition. The following unaudited pro forma information presents a summary of
the consolidated results of operations of Prime Partnership as if the above
acquisitions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Total revenues........................................................ $ 148,750 $ 129,565
---------- ----------
---------- ----------
Income before extraordinary item...................................... $ 20,843 $ 9,459
---------- ----------
---------- ----------
Net income............................................................ $ 18,569 $ 5,179
---------- ----------
---------- ----------
Net income (loss) applicable to common units.......................... $ 5,574 $ (9,057)
---------- ----------
---------- ----------
Earnings per common unit:
Income (loss) before extraordinary item............................. $ 0.28 $ (0.28)
Extraordinary item.................................................. (0.08) (0.25)
---------- ----------
Net income (loss)................................................... $ 0.20 $ (0.53)
---------- ----------
---------- ----------
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense based on the purchase price of such assets acquired and interest expense
on debt incurred on financing the acquisitions. These unaudited pro forma
F-20
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 11--ACQUISITIONS (CONTINUED)
results do not purport to be indicative of the results of operations which
actually would have resulted had the combination been in effect on January 1,
1996 or of future results of operations of Prime Partnership.
NOTE 12--MERGER AGREEMENT
On November 12, 1997 and as amended on February 1, 1998, Prime Partnership's
General Partner entered into a definitive merger agreement (as amended the
"Merger Agreement") with Horizon Group, Inc. ("Horizon") for an aggregate
consideration of approximately $945,200, including the assumption of $556,900 of
Horizon debt and transaction costs. Upon completion of the transaction, Prime
Partnership will own and operate 48 outlet centers totaling approximately
13,406,261 square feet of GLA.
Under the terms of the Merger Agreement, the General Partner will pay a
fixed exchange ratio of 0.20 of a share of Series B Convertible Preferred Stock
and 0.597 of a share of Common Stock for each share of common stock of Horizon.
In addition, each common unit in Horizon Partnership will entitle the holder to
receive 0.9193 of a Common Unit of Prime Partnership. that will be exchangeable
for a like number of shares of Common Stock of the General Partner.
Immediately prior to the merger, Horizon Group Properties, Inc. ("HGP"), a
subsidiary of Horizon, will become the sole general partner of Horizon/Glen
Outlet Center Limited Partnership ("Horizon Partnership") and the common stock
of HGP will be distributed to the shareholders of both the General Partner and
Horizon. All of the common equity of HGP will be distributed to the convertible
preferred and common shareholders and unitholders of the General Partner and the
shareholders and limited partners of Horizon based on their ownership in the
General Partner immediately following the merger. It is presently expected that
following the merger one share of common stock of HGP will be distributed for
every 20 shares of Common Stock or Common Units of the General Partner, and that
approximately 1.196 shares of common stock of HGP will be distributed for every
20 shares of Series B Convertible Preferred Stock held in General Partner.
Immediately prior to the closing of the merger, Prime Partnership will pay a
special cash distribution of $0.60 per share of Series B Preferred Unit and
$0.50 per Prime Partnership Common Unit, and Series C Preferred Unit, as
applicable. Shareholders and limited partners in Horizon will not participate in
this distribution. HGP will own and operate 15 outlet centers totaling
approximately 3.1 million square feet of GLA.
The merger will be accounted for as a purchase. It is conditioned upon,
among other things, the approvals of each the General Partner's and Horizon's
shareholders and partners and the satisfaction of other customary conditions.
The closing is expected during the second quarter of 1998. The exchange of
shares of Horizon for shares of the General Partner will be made on a tax-free
basis.
On December 10, 1997, a shareholder of Horizon filed a purported class
action lawsuit in the Circuit Court for Muskegon County, Michigan against
Horizon, the General Partner, and certain directors and former directors of
Horizon claiming, among other things, that Horizon's directors breached their
fiduciary duties to Horizon's shareholders in approving the merger of Horizon
and the General Partner and that the consideration to be paid to Horizon's
shareholders in connection with the merger is unfair and inadequate. The lawsuit
requests that such merger be enjoined or, in the event that the purported
transaction is consummated, that it be rescinded or unspecified damages be
awarded to the class members. On January 16, 1998, the defendants answered the
complaint, denying that the Horizon board of directors breached their fiduciary
duties and denying that such consideration is unfair or inadequate. Although the
F-21
<PAGE>
PRIME RETAIL, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
NOTE 12--MERGER AGREEMENT (CONTINUED)
General Partner is named as a defendant in the complaint, the substantive
allegations focus on the actions of Horizon and its board of directors and not
on any actions of the General Partner or its board of directors. Since this
litigation is in the initial phases of discovery, its outcome is not susceptible
to easy or certain prediction; however, the General Partner intends to defend
itself vigorously.
F-22
<PAGE>
PRIME RETAIL, L.P.
SCHEDULE III-- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST TO COMPANY ACQUISITION PERIOD
------------------------ ------------------------ ------------------------
BUILDINGS & BUILDINGS & BUILDINGS &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ------------------------------ ------------- --------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bend Factory Shops............ $ 7,936 $ 2,560 $ 8,476 $ 42 $ 2,560 $ 8,518
Buckeye Factory Shops......... -- 1,013 21,455 677 1,013 22,132
Carolina Factory Shops........ -- -- -- $ 827 24,900 827 24,900
Castle Rock Factory Shops..... 35,942 4,424 47,200 2,717 14,460 7,141 61,660
Coral Isle Factory Shops...... 10,840 2,753 15,602 -- 278 2,753 15,880
Factory Outlets at Post
Falls....................... 11,805 3,100 12,163 -- 69 3,100 12,232
Florida Keys Factory Shops.... 15,632 -- -- 2,874 21,366 2,874 21,366
Gainesville Factory Shops..... 20,824 -- -- 535 29,657 535 29,657
Grove City Factory Shops...... 41,305 1,193 58,630 (70) 3,116 1,123 61,746
Gulf Coast Factory Shops...... 29,438 -- -- 3,877 28,734 3,877 28,734
Gulfport Factory Shops........ 19,968 -- -- -- 33,438 -- 33,438
Huntley Factory Shops......... 17,800 -- -- 1,506 34,772 1,506 34,772
Indiana Factory Shops......... 14,263 -- -- 531 24,068 531 24,068
Kansas City Factory Shops..... 14,605 815 31,311 -- 2,151 815 33,462
Prime Retail Outlets of
Kittery..................... -- 820 24,061 -- 17 820 24,078
Latham Factory Shops.......... -- 507 1,476 -- -- 507 1,476
Magnolia Bluff Factory
Shops....................... 25,331 -- -- 3,074 30,541 3,074 30,541
Melrose Place................. 2,000 -- -- 499 1,880 499 1,880
Nebraska Crossing Factory
Stores...................... 11,753 2,904 16,614 -- 457 2,904 17,071
Niagara International Factory
Outlets..................... 31,328 7,247 82,842 -- 2 7,247 82,844
Northgate Plaza............... 6,735 3,626 11,630 -- 142 3,626 11,772
Oak Creek Factory Stores...... 7,043 1,924 9,099 -- 32 1,924 9,131
Ohio Factory Shops............ 26,529 843 31,084 250 12,637 1,093 43,721
Rocky Mountain Factory
Shops....................... 22,808 6,400 33,244 -- (53) 6,400 33,191
San Marcos Factory Shops...... 39,537 -- -- 1,626 40,320 1,626 40,320
Shasta Factory Stores......... -- 1,875 11,036 -- 1 1,875 11,037
Triangle Factory Shops........ 9,421 -- -- 2,502 21,916 2,502 21,916
Warehouse Row................. 23,900 -- -- 1,175 32,073 1,175 32,073
Warehouse Row II.............. -- -- -- 350 2,580 350 2,580
Western Plaza................. 10,732 -- -- 2,000 6,990 2,000 6,990
Property Under Development.... -- -- -- -- 53,139 -- 53,139
Other Property................ -- -- 1,588 -- 328 -- 1,916
------------- --------- ------------- --------- ------------- --------- -------------
$ 457,475 $ 42,004 $ 417,511 $ 24,273 $ 420,730 $ 66,277 $ 838,241
------------- --------- ------------- --------- ------------- --------- -------------
------------- --------- ------------- --------- ------------- --------- -------------
<CAPTION>
ACCUMULATED CONSTRUCTED(C)
DESCRIPTION TOTAL DEPRECIATION ACQUIRED(A)
- ------------------------------ --------- ------------ --------------------
<S> <C> <C> <C>
Bend Factory Shops............ $ 11,078 $ 215 Feb. 1997(A)
Buckeye Factory Shops......... 23,145 398 Sept. 1997(A)
Carolina Factory Shops........ 25,727 1,268 Nov. 1996(C)
Castle Rock Factory Shops..... 68,801 7,515 Mar. 1994(A)
Coral Isle Factory Shops...... 18,633 1,552 Mar. 1994(A)
Factory Outlets at Post
Falls....................... 15,332 315 Feb. 1997(A)
Florida Keys Factory Shops.... 24,240 3,165 Sept. 1994(C)
Gainesville Factory Shops..... 30,192 5,075 Aug. 1993(C)
Grove City Factory Shops...... 62,869 2,634 Nov. 1996(A)
Gulf Coast Factory Shops...... 32,611 6,135 Oct. 1991(C)
Gulfport Factory Shops........ 33,438 2,710 Oct. 1995(C)
Huntley Factory Shops......... 36,278 4,049 Sept. 1994(C)
Indiana Factory Shops......... 24,599 2,859 Nov. 1994(C)
Kansas City Factory Shops..... 34,277 1,874 Nov. 1996(A)
Prime Retail Outlets of
Kittery..................... 24,898 100 Oct. 1997(A)
Latham Factory Shops.......... 1,983 6 Oct. 1997(A)
Magnolia Bluff Factory
Shops....................... 33,615 3,153 July 1995(C)
Melrose Place................. 2,379 744 Aug. 1987(C)
Nebraska Crossing Factory
Stores...................... 19,975 1,600 Mar. 1994(A)
Niagara International Factory
Outlets..................... 90,091 180 Dec. 1997(A)
Northgate Plaza............... 15,398 1,278 Mar. 1994(A)
Oak Creek Factory Stores...... 11,055 218 Feb. 1997(A)
Ohio Factory Shops............ 44,814 5,588 Mar. 1994(A)
Rocky Mountain Factory
Shops....................... 39,591 1,851 Nov. 1996(A)
San Marcos Factory Shops...... 41,946 9,940 Aug. 1990(C)
Shasta Factory Stores......... 12,912 24 Dec. 1997(A)
Triangle Factory Shops........ 24,418 5,249 Oct. 1991(C)
Warehouse Row................. 33,248 10,171 Nov. 1989(C)
Warehouse Row II.............. 2,930 334 Dec. 1993(A)
Western Plaza................. 8,990 954 Jun. 1993(A)
Property Under Development.... 53,139 -- Under Construction
Other Property................ 1,916 862 Mar. 1994-(A)
Dec. 1997
--------- ------------
$ 904,518 $ 82,016
--------- ------------
--------- ------------
</TABLE>
F-23
<PAGE>
PRIME RETAIL, L.P.
NOTES TO SCHEDULE III OF PRIME PARTNERSHIP (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT UNIT INFORMATION)
Depreciation on building and improvements is calculated on a straight-line
basis over the estimated useful lives of the asset as follows:
<TABLE>
<S> <C>
Land improvements...................................... 20 years
Principally 40
Buildings and improvements............................. years
Term of related
Tenant improvements.................................... lease
Furniture and equipment................................ 5 years
</TABLE>
The aggregate cost for federal income tax purposes was $986,004 at December
31, 1997.
<TABLE>
<CAPTION>
INVESTMENT IN RENTAL PROPERTY
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period..................................... $ 640,751 $ 454,471 $ 376,181
Retirements...................................................... (718) (8) (258)
Acquisitions..................................................... 191,345 131,593 --
Improvements..................................................... 73,517 54,695 79,066
Cost of real estate sold......................................... ( 377) -- (518)
----------- ----------- -----------
Balance, end of period........................................... $ 904,518 $ 640,751 $ 454,471
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period..................................... $ 57,670 $ 40,189 $ 26,668
Retirements...................................................... (718) (8) (258)
Other............................................................ 20 24 --
Depreciation for the period...................................... 25,044 17,465 13,779
----------- ----------- -----------
Balance, end of period........................................... $ 82,016 $ 57,670 $ 40,189
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-24
<PAGE>
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
BASIS OF PRESENTATION TO UNAUDITED POST-TRANSACTIONS
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
The accompanying Unaudited Post-Transactions Pro Forma Consolidated Balance
Sheet gives effect to the proposed Transactions as if the Transactions and
certain other transactions which have either occurred or are probable of
occurring subsequent to December 31, 1997, had occurred on December 31, 1997.
The Unaudited Post-Transactions Pro Forma Consolidated Balance Sheet gives
effect to the Transactions under the purchase method of accounting in accordance
with Accounting Principles Board Opinion No. 16. In the opinion of management,
all significant adjustments to reflect the effects of the Transactions have been
made.
The accompanying Unaudited Post-Transactions Pro Forma Consolidated Balance
Sheet is presented for comparative purposes only and is not necessarily
indicative of what the actual consolidated position of Prime Partnership and
Horizon Partnership would have been at December 31, 1997 if the Transactions had
been completed as of that date, nor does it purport to represent the future
consolidated financial position of Prime Partnership and Horizon Partnership.
The Unaudited Post-Transactions Pro Forma Consolidated Balance Sheet should be
read in conjunction with, and is qualified in its entirety by, (a) the
historical financial statements and the notes thereto of Prime Partnership and
Horizon Partnership included in this Joint Consent Solicitation
Statement/Prospectus/Information Statement; and (b) the Unaudited Pre-
Transactions Pro Forma Consolidated Balance Sheets as of December 31, 1997 of
Prime Partnership and Horizon Partnership and notes thereto, included elsewhere
herein.
F-25
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TRANSACTIONS
PRE-TRANSACTIONS ADJUSTMENTS
HORIZON -------------
PRIME PARTNERSHIP
PARTNERSHIP [A] PRO FORMA [B] HGP LP [C]
---------------- ----------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investment in rental property, net.............................. $ 822,502 $ 987,026 $ (213,190)
Cash and cash equivalents....................................... 6,277 12,090 (3,581)
Restricted cash................................................. 41,736 1,670 (281)
Accounts receivable, net........................................ 9,745 6,918 (395)
Deferred charges, net........................................... 16,206 19,651 (4,933)
Due from affiliates, net........................................ 9,982 11,639 (11,639)
Investment in Partnerships...................................... 3,278 309 (309)
Assets held for sale............................................ 1,933 (1,933)
Other assets.................................................... 2,108 8,815 (1,075)
---------------- ----------------- -------------
Total assets.................................................. $ 911,834 $ 1,050,051 $ (237,336)
---------------- ----------------- -------------
---------------- ----------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgages and other debt........................................ $ 515,265 $ 596,784 $ (146,846)
Accrued interest................................................ 3,767 3,294 (818)
Real estate taxes payable....................................... 4,639 6,679 (1,322)
Construction costs payable...................................... 5,849 2,807 (417)
Accounts payable and other liabilities.......................... 19,022 16,201 (4,771)
---------------- ----------------- -------------
Total liabilities............................................. 548,542 625,765 (154,174)
Commitments and contingencies[P]
Minority interests.............................................. 3,911 41,254
Partners' capital (deficit)[U]:
General partner............................................... 455,590 325,805 (70,738)
Limited partners.............................................. (96,209) 57,227 (12,424)
---------------- ----------------- -------------
Total partners' capital (deficit)........................... 359,381 383,032 (83,162)
---------------- ----------------- -------------
Total liabilities and partners' capital (deficit)............. $ 911,834 $ 1,050,051 $ (237,336)
---------------- ----------------- -------------
---------------- ----------------- -------------
<CAPTION>
PRIME TRANSFERRED PURCHASE OF FINGER LAKES FINANCINGS
PROPERTIES [D] CENTER [E] AND OTHER
------------------- ------------------------- -------------
<S> <C>
ASSETS
Investment in rental property, net.............................. $ (42,058) $ 4,601 $ 217,930[F]
15,011[G]
(40,565)[H]
Cash and cash equivalents....................................... 25,958 (25,300)[I]
Restricted cash.................................................
Accounts receivable, net........................................ (336)
Deferred charges, net........................................... 2,002[J]
(14,718)[K]
Due from affiliates, net........................................ (44)
Investment in Partnerships......................................
Assets held for sale............................................
Other assets....................................................
---------- ---------- -------------
Total assets.................................................. $ (16,480) $ 4,601 $ 154,360
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgages and other debt........................................ $ 46,100 $ 45,474[L]
21,865[M]
21,747[N]
18,750[O]
2,002[J]
(25,300)[I]
Accrued interest................................................
Real estate taxes payable....................................... $ (375)
Construction costs payable......................................
Accounts payable and other liabilities.......................... (1,094)
---------- ---------- -------------
Total liabilities............................................. (1,469) 46,100 84,538
Commitments and contingencies[P]
Minority interests.............................................. (41,499)
Partners' capital (deficit)[U]:
General partner............................................... (11,445) 205,166[Q]
115,760[R]
11,445[G]
(30,928)[H]
(38,680)[L]
(17,612)[M]
(181,676)[T]
Limited partners.............................................. (3,566) 55,375[S]
3,566[G]
(9,637)[H]
(6,794)[L]
(4,253)[M]
(31,910)[T]
---------- ---------- -------------
Total partners' capital (deficit)........................... (15,011) -- 69,822
---------- ---------- -------------
Total liabilities and partners' capital (deficit)............. $ (16,480) $ 4,601 $ 154,360
---------- ---------- -------------
---------- ---------- -------------
<CAPTION>
PRIME
PARTNERSHIP PRO
FORMA
---------------
ASSETS
Investment in rental property, net.............................. $ 1,751,257
Cash and cash equivalents....................................... 15,444
Restricted cash................................................. 43,125
Accounts receivable, net........................................ 15,932
Deferred charges, net........................................... 18,208
Due from affiliates, net........................................ 9,938
Investment in Partnerships...................................... 3,278
Assets held for sale............................................
Other assets.................................................... 9,848
---------------
Total assets.................................................. $ 1,867,030
---------------
---------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgages and other debt........................................ $ 1,095,841
Accrued interest................................................ 6,243
Real estate taxes payable....................................... 9,621
Construction costs payable...................................... 8,239
Accounts payable and other liabilities.......................... 29,358
---------------
Total liabilities............................................. 1,149,302
Commitments and contingencies[P]
Minority interests.............................................. 3,666
Partners' capital (deficit)[U]:
General partner............................................... 762,687
Limited partners.............................................. (48,625)
---------------
Total partners' capital (deficit)........................... 714,062
---------------
Total liabilities and partners' capital (deficit)............. $ 1,867,030
---------------
---------------
</TABLE>
See accompanying Notes to Post-Transactions Pro Forma Consolidated Balance
Sheet.
F-26
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[A] Represents Prime Partnership's historical balances at December 31, 1997.
[B] See Pre-Transactions Horizon Partnership Pro Forma Consolidated Balance
Sheet as of December 31, 1997 included elsewhere herein.
[C] Represents the historical cost of 13 factory outlet centers to be owned and
operated by HGP LP which were previously owned and operated by Horizon
Partnership. See HGP LP Pro Forma Combined Balance Sheet included elsewhere
herein.
[D] Represents the historical cost of the Prime Transferred Properties in
connection with the sale of such properties to HGP LP for $26,015 upon
consummation of the Transactions as follows:
<TABLE>
<CAPTION>
ELIMINATION OF
HISTORICAL
COST SALE PROCEEDS TOTAL
-------------- ------------- ----------
<S> <C> <C> <C>
Investment in rental property, net................. $ (42,058) $ (42,058)
Cash and cash equivalents.......................... (57) $ 26,015 25,958
Accounts receivable, net........................... (336) (336)
Due from affiliates, net........................... (44) (44)
-------------- ------------- ----------
Total assets................................... $ (42,495) $ 26,015 $ (16,480)
-------------- ------------- ----------
-------------- ------------- ----------
Real estate taxes payable.......................... $ (375) $ (375)
Accounts payable and other liabilities............. (1,094) (1,094)
Partners' capital:
General partner.................................. (31,279) $ 19,834 (11,445)
Limited partners................................. (9,747) 6,181 (3,566)
-------------- ------------- ----------
Total partners' capital........................ (41,026) 26,015 (15,011)
-------------- ------------- ----------
Total liabilities and partners' capital........ $ (42,495) $ 26,015 $ (16,480)
-------------- ------------- ----------
-------------- ------------- ----------
</TABLE>
[E] Represents the purchase of the remaining 50% interest of the Finger Lakes
Center for $46,100 from Horizon Partnership's joint venture partner upon
consummation of the Transactions. The purchase is expected to be 100% debt
financed. Pursuant to a mortgage loan commitment expected to be closed
simultaneously upon closing of the Transactions, such indebtedness is
expected to (i) be collaterized by first mortgages on four factory outlet
centers, (ii) bear a fixed rate of interest equal to the yield on the
10-year Treasury plus 1.50%, (iii) mature in 10 years, and (iv) require
monthly principal and interest payments pursuant to a 27-year amortization
schedule. Horizon Partnership consolidated this joint venture in its
financial statements; therefore, the Minority Interests attributable to the
Finger Lakes Center of $41,499 has been eliminated. The remaining $4,601
represents a step-up adjustment to rental property.
[F] Represents adjustments to record the Transactions in accordance with the
purchase method of accounting, asssuming a purchase price of $1,020,528,
based on the March 24, 1998 closing prices of
F-27
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
$14.25 and $24.00 per Prime Common Unit and Prime Series B Preferred Unit,
respectively, as follows:
<TABLE>
<CAPTION>
Issuance of 14,397,631 Prime Partnership Common Units
(i).................................................. $ 205,166
<S> <C> <C>
Issuance of 3,885,940 Prime Partnership Common Units
based on a 0.9193 exchange rate for 4,227,064 Horizon
Partnership Common Units............................. 55,375
Issuance of 4,823,327 Prime Partnership Series B
Preferred Units (i).................................. 115,760
Assumption of Horizon Partnership's liabilities
(ii)................................................. 625,477
Transactions costs (iii).............................. 18,750
---------
Total purchase price................................ 1,020,528
Less historical basis of net assets acquired (iv):
Rental property, net................................ $(773,836)
Cash and cash equivalents........................... (8,509)
Restricted cash..................................... (1,389)
Accounts receivable, net............................ (6,523)
Other assets........................................ (7,740)
---------
Subtotal.......................................... (797,997)
Less step-up recognized with the purchase of the 50%
interest in the Finger Lakes Center, see Note [E]
above................................................ (4,601)
---------
Step-up to record fair value of rental property....... $ 217,930
---------
---------
Components of the step-up adjustment include the following:
Issuance of 14,397,631 Prime Partnership Common
Units (see Note [Q]).............................. $ 205,166
Issuance of 4,823,327 Prime Partnership Series B
Preferred Units (see Note [R]).................... 115,760
Issuance of 3,885,940 Prime Partnership Common Units
(see Note [S]).................................... 55,375
Premium required to adjust assumed debt of Horizon
Partnership to its estimated fair value (see Note
[N]).............................................. 21,747
Transaction costs (see Note [O]).................... 18,750
Elimination of Horizon Partnership's deferred
charges, net of the portion attributable to HGP LP
of $4,933 (See Note [K]).......................... 14,718
Elimination of Horizon Partnership's Partners'
Capital (see Note [T])............................ (213,586)
---------
---------
Total............................................. $ 217,930
---------
---------
</TABLE>
- ------------------------
NOTES:
(i) Based on the exchange ratio of 0.5970 of a Prime Partnership Common Unit
and 0.20 of a Prime Partnership Series B Preferred Unit for 24,116,635
Horizon Partnership Common Units.
F-28
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
(ii) Represents primarily long-term debt of $596,784 and other liabilities
and accrued expenses of $28,693.
(iii) The following is a calculation of the estimated fees and other expenses
related to the Transactions:
<TABLE>
<CAPTION>
Employee termination costs................................. $ 4,600
<S> <C>
Advisory fees.............................................. 9,000
Legal and accounting fees.................................. 3,550
Other, including printing and filing costs................. 1,600
---------
Total.................................................... $ 18,750
---------
---------
</TABLE>
(iv) Represents the Pre-Transactions Horizon Partnership Pro Forma balances
less HGP LP's historical balances per the Prime Partnership's Pro Forma
Consolidated Balance Sheet included herein:
<TABLE>
<CAPTION>
PRE-TRANSACTIONS
HORIZON
PARTNERSHIP
PRO FORMA [B] LESS HGP LP [C] TOTAL
--------------- ---------------- ----------
<S> <C> <C> <C>
Rental property, net............... $ 987,026 $ (213,190) $ 773,836
Cash and cash equivalents.......... 12,090 (3,581) 8,509
Restricted cash.................... 1,670 (281) 1,389
Accounts receivable, net........... 6,918 (395) 6,523
Other assets....................... 8,815 (1,075) 7,740
--------------- ---------------- ----------
$ 1,016,519 $ (218,522) $ 797,997
--------------- ---------------- ----------
--------------- ---------------- ----------
</TABLE>
[G] Elimination of Prime Transferred Properties' Partners' Capital.
F-29
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[H] Represents the distribution of net assets to HGP LP calculated as follows:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
Estimated fair value of HGP LP's assets........................................... $ 176,749
Total liabilities of HGP LP....................................................... 136,184
----------
Purchase price allocated to HGP LP (See Note (i) below)......................... $ 40,565
----------
----------
</TABLE>
The estimated fair value of HGP LP's operating properties was based upon a
direct capitalization of each property's estimated net operating income.
Property capitalization rates were based upon various factors including
property location, historical operating performance, occupancy rates and
industry information relating to sales of outlet centers.
- ------------------------
NOTE:
(i) Reflects the difference between HGP LP's net assets on a historical cost
and fair value basis as follows:
<TABLE>
<CAPTION>
Historical cost basis of HGP LP's net assets.............. $ 83,162
<S> <C>
Adjustment of HGP LP's net assets to its fair value....... (42,597)
---------
Estimated fair value of HGP LP's net assets........... $ 40,565
---------
---------
</TABLE>
[I] Represents the repayment of the mortgage debt for the Silverthorne Center.
[J] Represents estimated financing costs associated with the closing of the
mortgage loan commitments discussed in Notes [M] and [O].
[K] Elimination of Horizon Partnership's deferred charges in connection with
the Transactions, net of the portion attributable to HGP LP of $4,933.
[L] To reflect the debt allocated to HGP LP included in the historical
financial statements of HGP LP of $45,474 based upon the proportionate use
of debt methodology (see Note 2 - "Debt Allocated From Horizon Partnership"
of the notes to historical combined financial statements of HGP LP,
included elsewhere herein).
[M] Reflects the issuance of debt to finance the Prime Cash Distribution.
Pursuant to a mortgage loan commitment expected to be closed simultaneously
upon closing of the Transactions, such indebtedness is expected to (a) be
collateralized by first mortgages on four factory outlet centers, (b) bear a
fixed rate of interest equal to the yield on the 10-year U.S. Treasury plus
1.50%, (c) mature in 10 years, and (d) require monthly principal and
interest payments pursuant to a 27-year amortization schedule.
[N] Premium required to adjust historical debt of Horizon to its estimated fair
value based on an effective interest rate of 7.00%. The effective interest
rate represents the prevailing rate charged by lenders for first mortgages
on similar property with similar loan terms.
[O] Issuance of debt to finance the cost of the Transactions. Pursuant to a
mortgage loan commitment expected to be closed sumultaneously upon
consummation of the Transactions, such indebtedness is
F-30
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
expected to (a) be collateralized by first mortgages on six factory outlet
centers, (b) bear a variable rate of interest equal to 30-day LIBOR plus
1.25%, (c) mature in three years, and (d) require monthly interest-only
payments.
[P] In connection with obtaining a first mortgage loan commitment for HGP LP
from a third party lender, Prime Partnership has agreed to guarantee up to
$10,000 in principal of HGP LP's mortgage indebtedness. If HGP LP receives
a capital contribution of at least $50,000 and such proceeds are used to
repay the mortgage loan, then Prime Partnership will be released from such
guaranty.
[Q] Reflects the issuance of 14,397,631 Prime Partnership Common Units to the
general partner of Horizon Partnership based on the March 24, 1998 closing
price of $14.25 per Prime Common Share as follows (see Note [F] above):
<TABLE>
<CAPTION>
Prime Partnership Common Units issued (in thousands).............. 14,398
<S> <C>
Multiply by market price.......................................... $ 14.25
---------
Total......................................................... $ 205,166
---------
---------
</TABLE>
[R] Reflects the issuance of 4,823,327 Prime Partnership Series B Preferred
Units to the general partner of Horizon Partnership based on the March 24,
1998 closing price of $24.00 per Prime Series B Preferred Share as follows
(see Note [F] above):
<TABLE>
<CAPTION>
Prime Partnership Series B Preferred Units issued (in
thousands)...................................................... 4,823
<S> <C>
Multiply by market price.......................................... $ 24.00
---------
Total......................................................... $ 115,760
---------
---------
</TABLE>
[S] Reflects the issuance of 3,885,940 Prime Partnership Common Units to the
limited partners of Horizon Partnership based on the March 24, 1998 closing
price of $14.25 per Prime Common Share as follows (see Note [F] above):
<TABLE>
<CAPTION>
Prime Partnership Common Units issued (in thousands)............... 3,886
<S> <C>
Multiply by market price........................................... $ 14.25
---------
Total.......................................................... $ 55,375
---------
---------
</TABLE>
[T] Represents the elimination of Horizon Partnership's Partners' Capital (see
Note [F]).
F-31
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[U] The number of units authorized, issued and outstanding on a historical and
pro forma basis for each class of equity is as follows:
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
UNITS UNITS
ISSUED OUTSTANDING
------------ ------------
<S> <C> <C>
Preferred Units:
Prime Partnership Series A Preferred Units...................... 2,300,000 2,300,000
Prime Partnership Series B Preferred Units...................... 2,981,800 2,981,800
Prime Partnership Series C Preferred Units...................... 4,363,636 4,363,636
------------ ------------
Total......................................................... 9,645,436 9,645,436
------------ ------------
------------ ------------
Prime Partnership Common Units.................................... 35,880,423 35,880,423
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
ISSUED OUTSTANDING
------------ ------------
<S> <C> <C>
Preferred Units:
Prime Partnership Series A Preferred Units...................... 2,300,000 2,300,000
Prime Partnership Series B Preferred Units...................... 7,805,127 7,805,127
Prime Partnership Series C Preferred Units...................... 4,363,636 4,363,636
------------ ------------
Total......................................................... 14,468,763 14,468,763
------------ ------------
------------ ------------
Prime Partnership Common Units.................................... 54,083,994 54,083,994
------------ ------------
------------ ------------
</TABLE>
F-32
<PAGE>
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
BASIS OF PRESENTATION TO UNAUDITED POST-TRANSACTIONS
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
The accompanying Unaudited Post-Transactions Pro Forma Consolidated
Statements of Operations for the year ended December 31, 1997 and for the year
ended December 31, 1996 give effect to the Transactions and certain other
transactions which have either occurred or are probable of occurring subsequent
to December 31, 1997, as if they had occurred at the beginning of the earliest
period presented. The Unaudited Post-Transactions Pro Forma Consolidated
Statements of Operations gives effect to the Transactions under the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16 with the consolidated entity (a) qualifying as a REIT; (b) distributing at
least 95% of its taxable income; and (c) therefore, incurring no federal income
tax liability for the respective periods. In the opinion of management, all
significant adjustments to reflect the effects of the Transactions have been
made.
The accompanying Unaudited Post-Transactions Pro Forma Consolidated
Statements of Operations are presented for comparative purposes only and are not
necessarily indicative of what the actual consolidated results of Prime
Partnership and Horizon Partnership would have been for the years ended December
31, 1997 and 1996 if the Transactions had been completed at the beginning of the
earliest period presented, nor does it purport to represent the future
consolidated results of operations of Prime Partnership and Horizon Partnership.
These Unaudited Post-Transactions Pro Forma Consolidated Statements of
Operations should be read in conjunction with, and are qualified in their
entirety by, (a) the historical financial statements and the notes thereto of
Prime Partnership and Horizon Partnership included in this Joint Consent
Solicitation Statement/Prospectus; and (b) the Unaudited Pre-Transactions Pro
Forma Consolidated Statements of Operations for the years ended December 31,
1997 and 1996 of Prime Partnership and Horizon Partnership and notes thereto,
included elsewhere herein.
F-33
<PAGE>
POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
TRANSACTIONS
ADJUSTMENTS
-------------
PRE-TRANSACTIONS PRE-TRANSACTIONS
PRIME PARTNERSHIP HORIZON PARTNERSHIP
PRO FORMA [A] PRO FORMA [B] HGP LP [C]
------------------ -------------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Base rents................................................... $ 91,035 $ 111,929 $ (23,129)
Percentage rents............................................. 4,020 4,271 (151)
Tenant reimbursements........................................ 43,370 32,703 (7,116)
Income from investment partnerships.......................... 243
Interest and other........................................... 10,082 8,149 (2,147)
-------- -------- -------------
Total revenues........................................... 148,750 157,052 (32,543)
EXPENSES
Property operating........................................... 35,952 23,171 (6,153)
Real estate taxes............................................ 10,641 12,796 (3,036)
Depreciation and amortization................................ 30,306 41,230 (10,228)
General and administrative................................... 4,232 10,733 (2,813)
Interest..................................................... 43,194 47,009 (7,936)
Impairment and severance..................................... 6,949 (6,949)
Other charges................................................ 3,214 6,070 (2,163)
-------- -------- -------------
Total expenses........................................... 127,539 147,958 (39,278)
-------- -------- -------------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND EXTRAORDINARY
ITEM....................................................... 21,211 9,094 6,735
(Income) loss allocated to minority interests................ (189) (3,211)
-------- -------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM....................................................... 21,022 5,883 6,735
(Income) loss allocated to preferred unit holders............ 12,995
-------- -------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM APPLICABLE TO COMMON UNITS............................ $ 8,027 $ 5,883 $ 6,735
-------- -------- -------------
-------- -------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM APPLICABLE TO COMMON UNITS:
General partner............................................ $ 5,562 $ 4,963
Limited partners........................................... 2,465 920
-------- --------
Total.................................................... $ 8,027 $ 5,883
-------- --------
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM
PER COMMON UNIT:
General partner............................................ $ 0.29 $ 0.21
-------- --------
-------- --------
Limited partners........................................... $ 0.29 $ 0.21
-------- --------
-------- --------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
General partner............................................ 19,189 23,848
Limited partners........................................... 8,505 4,422
-------- --------
Total.................................................... 27,694 28,270
-------- --------
-------- --------
<CAPTION>
PURCHASE OF PRIME
PRIME TRANSFERRED FINGER LAKES FINANCINGS PARTNERSHIP
PROPERTIES [D] CENTER [E] AND OTHER PRO FORMA
------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Base rents................................................... $ (4,287) $ 175,548
Percentage rents............................................. 8,140
Tenant reimbursements........................................ (2,225) 66,732
Income from investment partnerships.......................... 243
Interest and other........................................... (491) 15,593
------- -----------
Total revenues........................................... (7,003) 266,256
EXPENSES
Property operating........................................... (1,709) 51,261
Real estate taxes............................................ (746) 19,655
Depreciation and amortization................................ (1,586) $ 104 $ 1,844[F] 61,670
General and administrative................................... (3,919) 8,233
Interest..................................................... 3,342 (4,399) 81,210
Impairment and severance.....................................
Other charges................................................ (133) 6,988
------- ------------- ----------- -----------
Total expenses........................................... (4,174) 3,446 (6,474) 229,017
------- ------------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND EXTRAORDINARY
ITEM....................................................... (2,829) (3,446) 6,474 37,239
(Income) loss allocated to minority interests................ 3,476 76
------- ------------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM....................................................... (2,829) 30 6,474 37,315
(Income) loss allocated to preferred unit holders............ 10,250[I] 23,245
------- ------------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM APPLICABLE TO COMMON UNITS............................ $ (2,829) $ 30 $ (3,776) $ 14,070
------- ------------- ----------- -----------
------- ------------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM APPLICABLE TO COMMON UNITS:
General partner............................................ $ 10,278
Limited partners........................................... 3,792
-----------
Total.................................................... $ 14,070
-----------
-----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM
PER COMMON UNIT:
General partner............................................ $ 0.31
-----------
-----------
Limited partners........................................... $ 0.31
-----------
-----------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
General partner............................................ (9,450)[J] 33,587
Limited partners........................................... (536)[K] 12,391
----------- -----------
Total.................................................... (9,986) 45,978
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Post-Transactions Pro Forma Consolidated Statement of
Operations.
F-34
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] See Pre-Transactions Prime Partnership Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1997 included elsewhere herein.
[B] See Pre-Transactions Horizon Partnership Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1997 included elsewhere herein.
[C] To eliminate HGP LP's historical operations for the year ended December 31,
1997. See HGP LP Combined Financial Statements included elsewhere herein.
The pro forma adjustment to interest expense reflects the following:
<TABLE>
<CAPTION>
HGP LP's historical interest expense.................................... $ (11,497)
<S> <C>
Adjustment to interest expense allocated to HGP LP (i).................. 3,561
---------
$ (7,936)
---------
---------
- ------------------------
Note:
(i) Adjustment to interest expense results from the elimination of a portion of the
debt which was included in the debt allocated to HGP LP in the historical
Combined Financial Statements of HGP LP based upon the proportionate use of debt
methodology (see Note 5--"Debt Allocated From Horizon Partnership" of the Notes
to Combined Financial Statements of HGP LP included elsewhere herein). The
adjustment to interest expense allocated to HGP LP is calculated as follows:
Elimination of portion of debt allocated to HGP LP..................... $ 45,474
Weighted average interest rate......................................... 7.83%
---------
$ 3,561
---------
---------
The effect of a 1/8% variance in the weighted average interest rate on the debt
eliminated would be approximately $57.
</TABLE>
[D] To eliminate the historical operations of the Prime Transferred Properties
for the year ended December 31, 1997. See Prime Transferred Properties
Statements of Revenue and Certain Expenses included elsewhere herein. There
is no elimination of interest expense since the debt historically allocated
to the Prime Transferred Properties will not be transferred to HGP LP.
[E] Horizon Partnership owned 50% of the Finger Lakes Center in a joint venture
partnership prior to the pending acquisition. Because Horizon Partnership
controlled the operations of the Finger Lakes Center, the operating results
were consolidated in the historical operating results of Horizon Partnership
for the year ended December 31, 1997. Accordingly, the pro forma adjustments
reflect the (i) depreciation expense on the step-up adjustment allocated to
rental property, (ii) interest expense on debt issued to finance the
acquisition, and (iii) elimination of the income allocated to the minority
interest during the same period.
A step-up adjustment to rental property results from recording the purchase
of the 50% partnership interest in the Finger Lakes Center at its contract
price less the minority interest balance. The step-up adjustment was
allocated 10.0% to land and 90.0% to depreciable assets. The depreciation
expense on the step-up adjustment is computed using the straight-line method
over an estimated useful life of 40 years.
F-35
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(CONTINUED)
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
The effect of a 1/8% variance in the interest rate on the debt issued would
be approximately $58.
[F] Increase reflects the following:
<TABLE>
<CAPTION>
Depreciation on step-up adjustment allocated to depreciable rental
property.............................................................. $ 3,991
<S> <C>
Elimination of Horizon Partnership's historical amortization of deferred
leasing commissions, net of HGP LP.................................... (1,980)
Elimination of Horizon Partnership's historical amortization of deferred
charges, net of HGP LP................................................ (167)
---------
$ 1,844
---------
---------
</TABLE>
The step-up adjustment to rental property results from recording the Horizon
Partnership real estate at its purchase price. The step-up adjustment was
allocated 10.0% to land and 90.0% to depreciable assets. The depreciation
expense on the step-up adjustment is computed using the straight-line method
over an estimated useful life of 40 years.
[G] The pro forma adjustment related to general and administrative expenses
results from the identification of certain costs which are anticipated to be
eliminated or reduced as a result of the Transactions. The components of
such a decrease are as follows:
<TABLE>
<CAPTION>
Salaries and related benefits............................................. $ 2,327(i)
<S> <C>
Public company expenses................................................... 736(ii)
Travel and entertainment expense.......................................... 711(iii)
Occupancy and other....................................................... 145
---------
$ 3,919
---------
---------
</TABLE>
- ------------------------
Notes:
(i) Reduction is primarily attributable to the expected cost savings
associated with net reduction in the number of full-time Horizon
Partnership employees being retained by Prime Partnership.
(ii) The following summarizes the components of such reduction:
<TABLE>
<CAPTION>
Professional fees, primarily accounting fees............... $ 470
<S> <C>
D & O insurance............................................ 205
Other...................................................... 61
---------
$ 736
---------
---------
</TABLE>
(iii) The following summarizes the components of such reduction:
<TABLE>
<CAPTION>
Travel, lodging, meals and entertainment................... $ 390
<S> <C>
Conventions and meetings................................... 211
Operating lease expense.................................... 110
---------
$ 711
---------
---------
</TABLE>
F-36
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(CONTINUED)
PRIME PARTNERSHIP (PRIME RETAIL, L.P.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[H] Decrease reflects the following:
<TABLE>
<CAPTION>
Amortization of premium required to record Horizon Partnership's debt,
net of HGP LP, at its estimated fair value............................ $ (3,708)
<S> <C>
Elimination of Horizon Partnership's historical amortization of deferred
financing costs, net of HGP LP........................................ (1,823)
Interest savings resulting from repayment of the Silverthorne Center
debt.................................................................. (1,885)
Interest savings attributable to debt refinancings...................... (248)
Interest expense on debt issued to finance the Transactions, including
the Prime Partnership Special Distribution............................ 2,888
Amortization of deferred financing costs attributable to debt
refinancing........................................................... 377
---------
$ (4,399)
---------
---------
The effect of a 1/8% variance in the interest rate on the debt issued would be
approximately $234.
</TABLE>
- ------------------------
Note:
(i) The premium is being amortized over the remaining terms of the
underlying debt instruments in accordance with the effective interest
method. The underlying debt instruments have a weighted average remaining
term of approximately 6.6 years as of December 31, 1997.
[I] Increase reflects additional income allocated to Prime Partnership Series B
Preferred Units issued in connection with the consummation of the
Transactions at the beginning of the period presented.
[J] Decrease reflects the following:
<TABLE>
<CAPTION>
Elimination of Horizon Partnership's historical general partnership
units outstanding..................................................... (23,848)
<S> <C>
Issuance of Prime Partnership common units issued in connection with
consummation of the Transactions...................................... 14,398
---------
(9,450)
---------
---------
</TABLE>
[K] Decrease reflects the following:
<TABLE>
<CAPTION>
Elimination of Horizon Partnership's historical limited partnership
units outstanding..................................................... (4,422)
<S> <C>
Issuance of Prime Partnership common units issued in connection with
consummation of the Transactions...................................... 3,886
---------
(536)
---------
---------
</TABLE>
F-37
<PAGE>
PRIME RETAIL, L.P.
BASIS OF PRESENTATION TO
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
The accompanying Unaudited Pre-Transactions Pro Forma Consolidated Statement
of Operations for the year ended December 31, 1997 reflects the acquisition of
eight factory outlet centers during 1997 including, the assumption of certain
indebtedness and the assumed issuance of debt to finance the acquisitions, as if
they had occurred on January 1, 1997.
The accompanying Unaudited Pre-Transactions Pro Forma Consolidated Statement
of Operations has been prepared by management of Prime Partnership and does not
purport to be indicative of the results which would have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The Unaudited Pre-Transactions Pro Forma Consolidated
Statement of Operations should be read in conjunction with the Notes to the
Pre-Transactions Pro Forma Consolidated Statement of Operations.
F-38
<PAGE>
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
PRIME RETAIL, L.P.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
<TABLE>
<CAPTION>
PRE-TRANSACTIONS
1997 PRIME
PRIME ACQUIRED PARTNERSHIP
PARTNERSHIP PROPERTIES [A] FINANCINGS [B] PRO FORMA
----------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Base rents.......................................... $ 78,049 $ 12,986 $ 91,035
Percentage rents.................................... 3,277 743 4,020
Tenant reimbursements............................... 37,519 5,851 43,370
Income from investment partnerships................. 103 140 243
Interest and other.................................. 10,144 (62) 10,082
----------- ------------- ---------------
Total revenues.................................. 129,092 19,658 148,750
EXPENSES
Property operating.................................. 29,492 6,460 35,952
Real estate taxes................................... 9,417 1,224 10,641
Depreciation and amortization....................... 26,704 3,602 30,306
General and administrative.......................... 4,232 4,232
Interest............................................ 36,122 2,323 $ 4,749 43,194
Other charges....................................... 3,110 104 3,214
----------- ------------- ------- ---------------
Total expenses.................................. 109,077 13,713 4,749 127,539
----------- ------------- ------- ---------------
Income (loss) from continuing operations before
minority interests and extraordinary item......... 20,015 5,945 (4,749) 21,211
Income allocated to minority interests.............. (189) (189)
----------- ------------- ------- ---------------
Income (loss) from continuing operations before
extraordinary item................................ 19,826 5,945 (4,749) 21,022
Income allocated to preferred unit holders.......... 12,995 12,995
----------- ------------- ------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM APPLICABLE TO COMMON UNITS..... $ 6,831 $ 5,945 $ (4,749) $ 8,027
----------- ------------- ------- ---------------
----------- ------------- ------- ---------------
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM APPLICABLE TO COMMON UNITS:
General partner................................... $ 4,733 $ 5,562
Limited partners.................................. 2,098 2,465
----------- ---------------
Total........................................... $ 6,831 $ 8,027
----------- ---------------
----------- ---------------
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM PER COMMON UNIT:
General partner................................... $ 0.25 $ 0.29
----------- ---------------
----------- ---------------
Limited partners.................................. $ 0.25 $ 0.29
----------- ---------------
----------- ---------------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
General partner................................... 19,189 19,189
Limited partners.................................. 8,505 8,505
----------- ---------------
Total........................................... 27,694 27,694
----------- ---------------
----------- ---------------
</TABLE>
See accompanying Notes to Pre-Transactions Pro Forma Consolidated Statement of
Operations.
F-39
<PAGE>
NOTES TO PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
PRIME RETAIL, L.P.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] To reflect the operations and the depreciation expense through the
acquisition date for the following properties acquired by Prime Partnership
in 1997 (the "1997 Acquired Properties"):
<TABLE>
<CAPTION>
1997 ACQUIRED PROPERTIES DATE ACQUIRED
- -------------------------------------------------------- ------------------
<S> <C>
Oak Creek Factory Stores................................ February 13, 1997
Bend Factory Outlets.................................... February 13, 1997
Factory Outlets at Post Falls........................... February 13, 1997
Buckeye Factory Shops................................... September 2, 1997
Kittery Center.......................................... October 29, 1997
Latham Factory Outlet Center............................ October 29, 1997
Niagara International Factory Outlets................... December 2, 1997
Shasta Factory Stores................................... December 2, 1997
</TABLE>
Depreciation on the 1997 Acquired Properties is computed based upon the
contract price of the real estate assets acquired, less amounts allocated to
land, over an estimated useful life of 40 years. Depreciation expense is
computed using the straight-line method.
[B] To reflect interest expense on debt issued to finance the purchase of the
1997 Acquired Properties. The effect of a 1/8% variance in the interest rate
on the debt issued would be approximately $80.
F-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Horizon/Glen Outlet Centers Limited Partnership
We have audited the accompanying consolidated balance sheets of Horizon/Glen
Outlet Centers Limited Partnership (the "Partnership") as of December 31, 1997
and 1996, and the related consolidated statements of operations, partners'
capital, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement Schedule III, Real
Estate and Accumulated Depreciation. These financial statements and schedule are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Horizon/Glen Outlet Centers Limited Partnership at December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
Ernst & Young LLP
Chicago, Illinois
March 13, 1998,
except for the second
paragraph of Note 3 and
the fourth and fifth paragraphs
of Note 4, as to which the date is
April 1, 1998.
F-41
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(THOUSANDS)
<S> <C> <C>
ASSETS
REAL ESTATE, AT COST:
Land................................................................................ $ 145,184 $ 135,078
Buildings and improvements.......................................................... 989,660 855,707
Construction in progress............................................................ 3,178 71,113
Furniture, fixtures and equipment................................................... 10,343 11,592
Less accumulated depreciation....................................................... (97,044) (65,490)
------------ ------------
Total real estate............................................................... 1,051,321 1,008,000
Cash and cash equivalents............................................................. 12,902 16,209
Restricted cash....................................................................... 1,670 2,363
Tenant accounts receivable............................................................ 6,804 6,807
Due from joint venture................................................................ 11,639 13,764
Assets held for sale.................................................................. 1,933 13,075
Deferred costs........................................................................ 20,126 20,696
Other assets.......................................................................... 9,136 14,307
------------ ------------
Total assets.................................................................... $ 1,115,531 $ 1,095,221
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Mortgages and other debt.............................................................. $ 626,097 $ 557,672
Accounts payable and accrued expenses................................................. 21,006 31,300
Prepaid rents and other tenant liabilities............................................ 6,071 5,568
Other liabilities..................................................................... 8,164 5,524
Distributions payable................................................................. 15 14,832
------------ ------------
Total liabilities............................................................... 661,353 614,896
------------ ------------
MINORITY INTERESTS.................................................................... 41,254 34,686
PARTNERS' CAPITAL:
47,000 units authorized, 28,294 and 27,974 issued and outstanding as of December 31,
1997 and 1996, respectively....................................................... 412,924 445,639
------------ ------------
Total liabilities and partners' capital............................................... $ 1,115,531 $ 1,095,221
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-42
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
(THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C>
REVENUE
Base rent.................................................................... $ 115,929 $ 109,983 $ 68,533
Percentage rent.............................................................. 3,975 3,154 2,441
Expense recoveries........................................................... 34,088 33,934 18,930
Other........................................................................ 8,471 7,428 4,025
---------- ---------- ---------
Total revenue............................................................ 162,463 154,499 93,929
---------- ---------- ---------
EXPENSES
Property operating........................................................... 25,662 23,192 14,351
Real estate taxes............................................................ 13,297 11,942 6,148
Land leases and other........................................................ 12,323 1,476 1,159
General and administrative................................................... 13,259 11,764 4,970
Merger expense............................................................... 1,001 -- --
Depreciation and amortization................................................ 42,045 37,209 20,660
Impairment and severance..................................................... 7,798 65,355 --
Interest..................................................................... 48,894 38,694 19,270
---------- ---------- ---------
Total expenses........................................................... 164,279 189,632 66,558
---------- ---------- ---------
INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE, MINORITY INTERESTS AND
EXTRAORDINARY CHARGE.......................................................... (1,816) (35,133) 27,371
Gain on sale of real estate.................................................. 8 563 776
---------- ---------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND EXTRAORDINARY CHARGE............... (1,808) (34,570) 28,147
Minority interests........................................................... (3,211) (331) --
---------- ---------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE...................................... (5,019) (34,901) 28,147
Extraordinary charge on debt prepayment...................................... (3,927) (419) --
---------- ---------- ---------
NET INCOME (LOSS).............................................................. $ (8,946) $ (35,320) $ 28,147
---------- ---------- ---------
---------- ---------- ---------
WEIGHTED AVERAGE UNITS OUTSTANDING--BASIC AND DILUTED.......................... 28,270 26,377 18,538
---------- ---------- ---------
---------- ---------- ---------
EARNINGS PER UNIT--BASIC AND DILUTED:
Income (loss) per unit before gain on sale of real estate and extraordinary
charge........................................................................ $ (0.18) $ (1.34) $ 1.47
GAIN ON SALE OF REAL ESTATE.................................................... -- 0.02 0.05
LOSS ON EXTRAORDINARY CHARGE................................................... (0.14) (0.02) --
---------- ---------- ---------
NET INCOME (LOSS) PER UNIT..................................................... $ (0.32) $ (1.34) $ 1.52
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-43
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before extraordinary charge.................................. $ (5,019) $ (34,901) $ 28,147
Adjustments to reconcile income (loss) before extraordinary charge to net
cash provided by operating activities:
Minority interests in net income (loss).................................. 3,211 331 --
Depreciation............................................................. 39,084 35,214 19,655
Amortization............................................................. 5,631 2,700 2,081
Gain on sale of real estate.............................................. (8) (563) (776)
Loss on asset impairment................................................. 7,798 61,653 --
Compensation related to the Company's bonus arrangement.................. -- 9 97
CHANGES IN ASSETS AND LIABILITIES:
Tenant accounts receivable............................................... 3 (287) (4,198)
Due from joint venture................................................... 2,125 (13,763) --
Deferred costs and other assets.......................................... 1,197 (14,401) (7,909)
Accounts payable and accrued expenses.................................... (7,326) (6,511) (19)
Other liabilities........................................................ 2,541 1,897 (589)
Prepaid rents and other tenant liabilities............................... 541 1,064 (770)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 49,778 32,442 35,719
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements............................ (86,618) (95,999) (146,165)
Proceeds from sale of real estate........................................ 4,643 1,508 1,185
Proceeds from restricted cash............................................ 693 -- --
Investment in restricted cash............................................ -- (2,363) --
Business acquired, net of cash received.................................. -- -- (5,936)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (81,282) (96,854) (150,916)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital...................................................... 5,940 45,124 680
Contribution from minority interests..................................... 7,600 34,900 --
Distributions............................................................ (44,525) (54,095) (32,478)
Distributions to minority interests...................................... (4,243) (173) --
Proceeds from borrowings................................................. 261,738 197,067 137,451
Principal payments on mortgages and other debt........................... (42,543) (115,633) (27,378)
Net proceeds (repayments) on revolving credit facilities................. (150,395) (26,635) 42,122
Debt issue costs......................................................... (5,375) (6,501) (2,805)
----------- ----------- -----------
Net cash provided by financing activities................................ 28,197 74,054 117,592
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (3,307) 9,642 2,395
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................................ 16,209 6,567 4,172
----------- ----------- -----------
END OF YEAR.............................................................. $ 12,902 $ 16,209 $ 6,567
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-44
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED PARTNERS'
PARTNER PARTNER CAPITAL
---------- ---------- ----------
(THOUSANDS)
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995...................................................... $ 148,849 $ 29,614 $ 178,463
Compensation related to the Company's bonus arrangement..................... 97 -- 97
Consolidation with McArthur/Glen............................................ 191,082 130,951 322,033
Units exchanged............................................................. 9,870 (9,870) --
Units issued................................................................ 681 1,932 2,613
Net income.................................................................. 21,371 6,776 28,147
Distributions declared...................................................... (30,054) (9,706) (39,760)
---------- ---------- ----------
BALANCE, DECEMBER 31, 1995.................................................... 341,896 149,697 491,593
Compensation related to the Company's bonus arrangement..................... 9 -- 9
Units exchanged............................................................. 47,743 (47,743) --
Units canceled.............................................................. -- (38) (38)
Units issued................................................................ 45,124 -- 45,124
Net loss.................................................................... (27,274) (8,046) (35,320)
Distributions declared...................................................... (43,617) (12,112) (55,729)
---------- ---------- ----------
BALANCE, DECEMBER 31, 1996.................................................... 363,881 81,758 445,639
Units exchanged............................................................. 14,026 (14,026) --
Units issued................................................................ 5,940 -- 5,940
Net loss.................................................................... (7,584) (1,362) (8,946)
Distributions declared...................................................... (25,032) (4,677) (29,709)
---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 $ 351,231 $ 61,693 $ 412,924
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-45
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of Horizon/Glen Outlet
Centers Limited Partnership (the "Partnership") include the accounts of the
Partnership and its wholly owned sub-entities. The Partnership is a subsidiary
of Horizon Group, Inc. (the "Company"), a self-administered and self-managed
real estate investment trust ("REIT"). The Company is the general partner of the
Partnership and each common share of the Company is equivalent to one unit of
the Partnership. The Company's assets, which include investments in joint
ventures, are owned by, and substantially all of its operations are conducted
through, the Partnership. As of December 31, 1997 and 1996, the Company owned an
85.1% and an 81.6% interest, respectively, in the Partnership. The Partnership
is engaged in the development, ownership, acquisition and operation of outlet
centers.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION--The accounts of all wholly or majority owned subsidiaries of
the Partnership have been consolidated in the accompanying financial statements.
All intercompany accounts and transactions have been eliminated in
consolidation.
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
REAL ESTATE AND DEPRECIATION--Real estate assets consist primarily of outlet
centers and are stated at cost, less accumulated depreciation. Costs incurred
for the acquisition, development, construction and improvement of properties, as
well as significant renovations and betterments to the properties, are
capitalized. Maintenance and repairs are charged to expense as incurred.
Interest costs incurred with respect to qualified expenditures relating to the
construction of assets are capitalized during the construction period. Leasing
costs and costs to obtain or refinance mortgages are capitalized as incurred.
At December 31, 1997 and 1996, the Partnership had an aggregate cost basis
of $860.0 million and $873.4 million, respectively, in its real estate assets
for federal income tax purposes. The cost of real estate assets are depreciated
on the straight-line method over estimated useful lives which are:
<TABLE>
<CAPTION>
Buildings............................... 31.5 years
<S> <C>
Improvements........................... 10 years or lease term, if less
Furniture, fixtures or equipment....... 3-7 years
</TABLE>
In accordance with 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, the Partnership records impairment losses
on long-lived assets used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
Impairment losses are measured as the difference between carrying value and fair
value for assets to be held in portfolio. For assets to be sold, impairment is
measured as the difference between carrying value and fair value, less costs to
dispose. Fair value is based on estimated cash flows discounted at a
risk-adjusted rate of interest or a value derived from comparable sales
transactions in the marketplace. During 1997 and 1996, events and circumstances
occurred which required a $7.8 million and a $61.7 million loss on the
impairment of assets, respectively. See Note 5. It is
F-46
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reasonably possible that the estimate of the loss on asset impairment may change
in the near term because of the degree of judgment involved in determining fair
value.
Periodically, in the course of reviewing the performance of its outlet
centers, the Partnership will determine that certain outlet centers no longer
meet the parameters the Partnership sets forth for its operating properties, and
such outlet centers are designated to be sold based on the Partnership's intent
to sell such property. As of December 31, 1996, two such centers, Port Huron,
Michigan and Holland, Michigan were classified as held for sale. As of December
31, 1997, the Algodones, New Mexico outlet center was classified as held for
sale. See Note 5.
REVENUE RECOGNITION--Leases with tenants are accounted for as operating
leases. Minimum annual rentals are generally recognized on a straight-line basis
over the term of the respective lease. As a result of recording rental revenue
on a straight-line basis, the Partnership has recorded receivables from tenants,
net of reserves, in the amount of $3.6 million and $2.6 million as of December
31, 1997 and 1996, respectively, which the Partnership expects to collect over
the remaining life of the leases rather than currently. Contingent rentals based
on common area maintenance expenses and certain other expenses are accrued in
the period in which the related expense is incurred. Percentage rents are
accrued on the basis of reported tenant sales. Accounts receivable are reflected
net of reserves of $2.4 million and $2.1 million as of December 31, 1997 and
1996, respectively. The provision for doubtful accounts in 1997, 1996 and 1995
was $1.1 million, $2.1 million and $0.3 million, respectively.
OTHER REVENUE--Other revenue consists primarily of development, management
and leasing income related to other unconsolidated or managed properties,
interest income and income related to marketing services that is recovered from
tenants pursuant to lease agreements.
CASH AND CASH EQUIVALENTS--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
and cash equivalents.
RESTRICTED CASH--Restricted cash consists of amounts deposited to secure
outstanding letters of credit and other amounts which use by the Partnership is
contractually restricted.
DEFERRED COSTS AND OTHER ASSETS--Leasing costs and direct financing costs
are capitalized at cost. Amortization is recorded on the straight-line method
over a ten year lease period or the life of the loan, respectively.
INCOME TAXES--State excise taxes of the Partnership for the years ended
December 31, 1997, 1996 and 1995 were not significant. Except for the taxes
incurred by the Partnership, the results of the Partnership's operations are
included in the income tax returns of the partners.
The Company elected to be taxed as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with the taxable year ending December 31, 1994. As a REIT, the Company generally
will not be taxed on income to the extent it distributes its REIT taxable income
as defined in the Code to its shareholders and satisfies certain other
requirements.
STOCK OPTION PLAN--The Partnership is subject to the provisions of stock and
stock option accounting pursuant to its relationship with the Company wherein
the issuance of a share of common stock by the Company results in the
corresponding issuance of a unit in the Partnership. Accordingly, the
Partnership has elected to apply Accounting Principles Board Opinion No. 25
("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," in accounting for its
employee stock options because the alternative fair value accounting
F-47
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provided for under Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "ACCOUNTING FOR STOCK BASED COMPENSATION," requires the use of option
valuation models that were not developed for use on valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals or exceeds fair market value of the underlying stock on the
date of grant, no compensation expense is recognized.
NET INCOME (LOSS) PER UNIT--In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"EARNINGS PER SHARE," which the Partnership adopted, as required by SFAS 128, on
December 31, 1997. SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per unit amounts for all periods have been presented, and
when appropriate, restated to conform to the SFAS 128 requirements.
RECLASSIFICATIONS--Certain reclassifications have been made to previously
reported statements in order to provide comparability to the statements reported
herein. These reclassifications have not changed previously reported results or
partners' capital.
NOTE 3--BUSINESS COMBINATIONS AND ACQUISITIONS
On November 12, 1997, the Company and the Partnership entered into a merger
agreement (which was amended and restated on February 1, 1998) with Prime
Retail, Inc. and Prime Retail, L.P. (collectively, "Prime") which provides for
Prime to integrate 22 of the Partnership's existing outlet centers into its
portfolio and the Partnership's remaining 13 centers (as well as two centers
currently owned by Prime) to be operated by a newly formed entity. The units of
the newly formed entity will be distributed following the merger, on a pro rata
basis, to the unitholders of both Prime and the Partnership. The Partnership has
expensed costs of $1.0 million in 1997 in conjunction with this merger. The
merger is conditioned upon, among other things, the approvals of each of the
respective Company's shareholders and Partnership's unitholders and the
satisfaction of other customary conditions.
On April 1, 1998, the Company and the Partnership consummated a Contribution
Agreement with Castle & Cooke Properties, Inc. which released the Company and
the Partnership from its obligations under its long-term lease of the Dole
Cannery outlet center in Honolulu, Hawaii, in connection with the formation of a
joint venture with certain affiliates of Castle & Cooke, Inc. ("Castle & Cooke")
to operate such property. Under the terms of the agreement, Castle & Cooke, the
landlord of the project, released the Partnership from all post-closing
obligations under the lease, which expires in 2045, in exchange for the
Partnership's conveyance to the joint venture of its rights and obligations
under such lease. The Contribution Agreement also provided that the Partnership
transfer to such joint venture substantially all of the Partnership's economic
interest in its outlet center in Lake Elsinore, California together with vacant
property located adjacent to the center. The Partnership expects to record an
approximate net loss of $30.0 million to reflect the transfer of the economic
interest in this property. The Partnership holds a small minority interest in
the joint venture but has no obligation or commitment with respect to the
operations of the Dole Cannery project following the closing.
In December 1997, the Partnership acquired a 203,000 square foot outlet
center adjacent to one of the Partnership's existing centers for $38.5 million,
which was financed in its entirety.
F-48
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS AND ACQUISITIONS (CONTINUED)
In 1996, the Partnership formed a venture (the "Venture") with a pension
fund (the "Fund") advised by Heitman Capital Management, a company whose
chairman of its board is also the chairman of the board of the Company. The
Partnership contributed a 325,000 square foot center in the Finger Lakes region
of New York in 1996 and a 67,000 square foot expansion in 1997 to the Venture.
In exchange for the contribution, the Partnership received $34.9 million and
$7.6 million in cash in 1996 and 1997, respectively, and a 50% interest in the
Venture. The Fund contributed, concurrent with the Partnership's contribution of
property, $34.9 million and $7.6 million in cash in 1996 and 1997, respectively,
in return for a $38.2 million preferred equity position that earns a 9.6% return
on the outstanding balance and a 50% ownership in the Venture. The Fund's entire
equity position, upon election of the Fund, is convertible into 2.2 million
shares of the Company's Common Stock, which represents an exercise price of
$19.63 per share (the approximate market price of the Company's Common Stock on
the issue date). Should the Company issue such stock, the Partnership would be
required to issue units to the Company on a one-for-one basis. The accompanying
financial statements consolidate the financial position and results of
operations of the Venture and the interest of the Fund has been reflected as a
component of minority interests. The Venture is consolidated as a result of the
Partnership's control over the operations, leasing activity and disposition of
the center (the principal asset of the Venture).
On July 14, 1995, McG Outlet Centers Limited Partnership ("McArthur/Glen")
and Horizon Outlet Centers Limited Partnership were consolidated into the
Partnership (the "Consolidation"). McArthur/ Glen developed, owned and managed
outlet centers. Each outstanding McArthur/Glen partnership unit was converted
into 0.64 units of the limited partnership interest of the Partnership. Each
outstanding unit of Horizon Outlet Centers Limited Partnership was converted
into one unit of limited partnership interest in the Partnership. The purchase
price of $600.4 million consisted of cash of $0.9 million, cash of $6.3 million
representing costs incurred by the Partnership in connection with the
Consolidation, 13.2 million Partnership units with a market value at the
Consolidation date of $322.0 million, and the assumption of $271.2 million in
liabilities. The purchase price was allocated based on estimated fair values at
the date of the Consolidation.
The Consolidation was accounted for using the purchase method in accordance
with Accounting Principles Board Opinion No. 16. The accompanying consolidated
financial statements include the results of operations of McArthur/Glen from the
date of the Consolidation.
At December 31, 1997 and 1996, the Partnership had accrued termination and
severance costs of $0.3 million and $1.1 million related to the Consolidation,
respectively. The Partnership paid $0.8 million in 1997, $2.5 million in 1996
and $1.2 million in 1995 for termination and severance costs. During 1996, the
Partnership reduced the remaining accrual by $3.3 million, which was reflected
as an adjustment of the purchase price.
The following unaudited pro forma summarized results of operations for the
year ended December 31, 1995 assumes the Consolidation occurred as of January 1,
1995 (in thousands, except per unit amounts).
<TABLE>
<CAPTION>
PRO FORMA
1995
------------
<S> <C>
Total revenue....................................................................................... $ 131,804
Net income.......................................................................................... 26,575
Net income per unit................................................................................. $ 1.46
</TABLE>
F-49
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS AND ACQUISITIONS (CONTINUED)
The pro forma information is provided for information purposes only. It is
based on historical information and is not necessarily indicative of what actual
results of operations of the Partnership would have been, assuming the
Consolidation had been consummated as of January 1, 1995.
In 1995, the Partnership acquired an outlet center, adjacent to an existing
center owned by the Partnership, for a purchase price of $8.7 million,
consisting primarily of the assumption of existing mortgage indebtedness and
unpaid real estate tax obligations.
NOTE 4--LEASES
Space in outlet centers is leased to various tenants under operating leases
which are generally for 5 to 10 year periods. The leases usually grant tenants
renewal options and provide for additional or contingent rents based on certain
operating expenses as well as tenants' sales volume. The Partnership expects
expiring leases will be renewed or replaced by other leases in the normal course
of business.
Minimum future rentals to be received under non-cancelable leases as of
December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998............................................................. $ 112,567
<S> <C>
1999............................................................. 101,666
2000............................................................. 82,362
2001............................................................. 61,890
2002............................................................. 39,716
Thereafter....................................................... 80,389
-----------
Total............................................................ $ 478,590
-----------
-----------
</TABLE>
The Partnership is subject to the usual business risks associated with the
collection of the above scheduled rentals.
The Partnership leases land and a building for outlet centers under five
operating lease agreements expiring through the year 2093. At December 31, 1997,
future minimum cash rental commitments were as follows (in thousands):
<TABLE>
<CAPTION>
1998............................................................. $ 1,864
<S> <C>
1999............................................................. 1,053
2000............................................................. 1,053
2001............................................................. 1,053
2002............................................................. 1,053
Thereafter....................................................... 75,091
-----------
Total............................................................ $ 81,167
-----------
-----------
</TABLE>
The Partnership recognized lease expense of $8.2 million in 1997 and $0.6
million in 1996, on a straight-line basis, for its Dole Cannery project lease
which expires in 2045. As discussed in Note 3 and reflected in the above table,
the Partnership was released from its obligations under the Dole Cannery lease
in conjunction with its joint venture agreement with Castle and Cooke.
F-50
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LEASES (CONTINUED)
In July 1997, The Partnership entered into an agreement with Chelsea GCA
Realty Partnership, L.P. ("Chelsea") for lease of the Partnership's outlet
center in Algodones, New Mexico (the "Center"). The term of the lease was two
years, but could be terminated at any time after December 31, 1997 by Chelsea
upon 30 days written notice. The agreement gave Chelsea the right, during the
lease term, to relocate any and all of the tenants to Chelsea's outlet center
located in Santa Fe, New Mexico. Chelsea was responsible for all costs of
operating the Center during the lease term. At closing, Chelsea prepaid the
non-refundable $4.0 million rent, $3.0 million for year one and $1.0 million for
year two. Rental payments were recognized for financial statement purposes on a
straight-line basis over an expected two year lease term. In November 1997,
Chelsea gave written notice of termination, effective January 2, 1998. The
Partnership recorded approximately $3.0 million of deferred rent in 1997 as a
result of the revised lease term.
NOTE 5--IMPAIRMENT AND SEVERANCE
Results of operations for 1997 include a charge for asset impairment of $6.9
million to reduce six properties under sales agreements, subject to certain
contingencies, to an amount equal to their estimated sales proceeds, less costs
to dispose. At September 30, 1997, these six outlet centers were classified as
held for sale resulting from these sales agreements. In November 1997, one
property sold for $4.5 million. The remaining sales agreements were subsequently
terminated. It was management's decision to then pursue the sale of only one of
the outlet centers, the Algodones, New Mexico outlet center, which was
classified as held for sale as of December 31, 1997. The remaining four outlet
centers were subsequently reclassified to real estate assets at their fair
values as of the date of the decision not to sell. The results of operations in
1997 also include a $0.9 million charge due to discontinued development
projects.
Results of operations for 1996 include a charge of $65.4 million, comprised
of a $61.7 million charge for asset impairment, a $2.2 million charge related to
discontinued development projects and a $1.5 million provision for executive
severance costs. The asset impairment loss resulted from (1) cost over-runs and
limited leasing success in its Dole Cannery project, (2) an initiative by the
Partnership to market two centers for sale and (3) revised occupancy estimates
on three centers that indicated a permanent impairment in their value.
F-51
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--EARNINGS PER UNIT
The following table sets forth the computation of basic and diluted earnings
per unit:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
(IN THOUSANDS EXCEPT PER UNIT
DATA)
<S> <C> <C> <C>
Numerator:
Income (loss) before gain on sale of real estate and extraordinary charge..... $ (5,027) $ (35,464) $ 27,371
Gain on sale of real estate................................................... 8 563 776
Extraordinary charge.......................................................... (3,927) (419) --
--------- ---------- ---------
Net income (loss)--basic and diluted.......................................... $ (8,946) $ 35,320 $ 28,147
--------- ---------- ---------
--------- ---------- ---------
Denominator:
Weighted average units outstanding--basic and diluted......................... 28,270 26,377 18,538
Basic and diluted earnings per unit:
Income (loss) before gain on sale of real estate and extraordinary charge..... $ (.18) $ (1.34) $ 1.47
Gain on sale of real estate................................................... -- .02 .05
Extraordinary charge.......................................................... (.14) (.02) --
--------- ---------- ---------
Net income (loss)............................................................. $ (.32) $ (1.34) $ 1.52
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Pursuant to the Company's stock option and incentive plans, the Company has
offered the opportunity to acquire Common Stock through the grant of stock
options to officers, directors, and key employees of the Company for 555,000,
383,677, and 35,000 shares of Common Stock at a weighted average exercise price
of $10.97, $21.00 and $24.11 per share for the years ended December 31, 1997,
1996 and 1995, respectively. As of December 31, 1997, 1996 and 1995, 1.4
million, 1.3 million and 1.3 million options to purchase shares of Common Stock
were exercisable, respectively. Any shares of Common Stock issued pursuant to
the Company's stock option plan will result in the Partnership issuing units to
the Company on a one-for-one basis. However, outstanding options and convertible
minority interests were excluded from the computation of basic and diluted
earnings per unit because the effect of such items were anti-dilutive for the
periods presented.
F-52
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DEFERRED COSTS AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred costs consist of the following (in thousands):
Deferred leasing costs...................................................................... $ 17,288 $ 14,660
Deferred financing costs.................................................................... 10,430 10,553
Other....................................................................................... 1,709 1,425
--------- ---------
29,427 26,638
Accumulated amortization.................................................................... (9,301) (5,942)
--------- ---------
$ 20,126 $ 20,696
--------- ---------
--------- ---------
Other assets consist of the following (in thousands):
Future development projects................................................................. $ 1,879 $ 3,115
Escrow deposits............................................................................. 4,505 6,064
Other....................................................................................... 2,752 5,128
--------- ---------
$ 9,136 $ 14,307
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997 and 1996, the Partnership had $11.6 million and $13.8
million, respectively, due from an unconsolidated joint venture in which the
Partnership has a 45% interest. The amount due represents cash advances for
construction of an expansion to an existing center ("Joint Venture"). The
Partnership is also a guarantor of a $17.0 million construction loan of the
Joint Venture. The outstanding balance of the loan was $11.6 million at December
31, 1997. Cash receipts from debt obtained and net cash flows generated by the
Joint Venture are applied to outstanding advances to the Joint Venture from its
partners prior to distributions to the partners.
NOTE 8--MORTGAGES AND OTHER DEBT
Mortgages and other debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Mortgage notes payable.................................................................... $ 621,748 $ 402,891
Revolving credit facilities............................................................... 4,000 132,675
Construction loans........................................................................ -- 21,720
Capital lease obligations................................................................. 349 386
---------- ----------
$ 626,097 $ 557,672
---------- ----------
---------- ----------
</TABLE>
F-53
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--MORTGAGES AND OTHER DEBT (CONTINUED)
Debt matures during each of the five years subsequent to 1997 as follows (in
thousands):
<TABLE>
<CAPTION>
1998.............................................................................. $ 9,566
<S> <C>
1999.............................................................................. 259,968
2000.............................................................................. 29,131
2001.............................................................................. 32,319
2002.............................................................................. 80,707
Thereafter........................................................................ 214,406
---------
$ 626,097
---------
---------
</TABLE>
At December 31, 1997 and 1996, the Partnership had mortgage notes payable
with various lending institutions with outstanding amounts of $621.7 million and
$402.9 million, respectively. Investments in rental property collateralize all
mortgage notes payable.
During 1997, the Partnership, through wholly-owned subsidiaries
("Borrower"), entered into a $300.6 million credit facility with Lehman Brothers
Realty Corporation ("Lender"). The initial loan (the "Initial Loan") of $250.6
million included an initial funding at closing of $212.1 million and a
reservation of financing in the amount of $38.5 million for the acquisition of a
specified property (the "Additional Loan"). The Borrower may borrow an
additional $50.0 million in increments of no less than $10.0 million each,
subject to the satisfaction of certain conditions, including predefined debt
service coverage ratios (the "Second Loan" and collectively with the "Initial
Loan," including the "Additional Loan," the "Loan"). Subsequent to the Initial
Loan, the Borrower borrowed the entire $38.5 million of the Additional Loan for
the acquisition of the specified property and $11.0 million of the Second Loan.
While the Borrower has additional availability under the Second Loan, additional
borrowings may not be available due to the financial ratios the Partnership is
required to maintain. Interest on the Loan is payable at the following rates:
(i) 1.75% over the London interbank offering rate ("LIBOR") for the Initial
Loan, and (ii) 2.25% over LIBOR for the Second Loan or (iii) if the Loan is
converted to a prime rate loan under certain circumstances at the Lender's
discretion, the prime rate plus .75% with respect to the Initial Loan and plus
1.25% with respect to the Second Loan. The maturity date of the Loan is July 1,
1999, unless otherwise extended pursuant to the terms of the Loan. The net
proceeds of the Initial Loan were primarily used to retire the Company's
aggregate outstanding balances under the following: (i) a revolving credit
facility with a subsidiary of First Chicago NBD Corporation and other banks
("FCNBD"), (ii) construction financing facilities with Canadian Imperial Bank of
Commerce ("CIBC"), (iii) four mortgage notes payable and (iv) one revolving
credit facility. The Partnership recorded a $3.9 million extraordinary charge
comprised primarily of unamortized debt issuance costs associated with the debt
retired. The Loan is guaranteed by the Partnership and is secured by a pool of
16 properties transferred to Borrower. The Loan requires the Partnership to
maintain certain financial ratios and restricts the amount of distributions that
can be made. The Partnership is currently in compliance with all its financial
covenants relating to its existing credit facilities at December 31, 1997.
During 1996, the Partnership received a $99.3 million mortgage and a $65.0
million mortgage from an institutional lender at fixed interest rates of 9.06%
and 8.574%, respectively. Each mortgage has a ten-year term. In addition, the
Partnership obtained a $10.0 million mortgage from a life insurance company at a
fixed rate of 8.25% with a four-year term. Proceeds from the mortgages were used
to repay amounts outstanding under revolving credit facilities.
F-54
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--MORTGAGES AND OTHER DEBT (CONTINUED)
Remaining notes payable mature at various dates through 2018. These loans
bear interest at fixed rates ranging between 7.875% and 10.5%. Of the December
31, 1997 mortgage notes payable balance, $61.6 million was assumed on July 14,
1995 in connection with the Consolidation. The assumed debt was recorded at fair
market value, and at December 31, 1997 a premium of $3.7 million is being
amortized over the life of the respective loans on a straight-line basis
resulting in effective interest rates ranging from 7.9% to 8.16%.
The Partnership has a $4.0 million revolving credit facility for working
capital requirements, expiring in August 1998, with interest charged at prime.
The outstanding balance on this line was $4.0 million at December 31, 1997. No
amounts were borrowed under this line at December 31, 1996. At December 31,
1996, the Partnership had a secured revolving line of credit from FCNBD of
$205.0 million, of which $132.7 million was outstanding at that date. The FCNBD
line was repaid from proceeds from the Loan during 1997. Interest was based, at
the election of the Partnership, at prime plus .25% or LIBOR plus 2 %. Average
daily short-term interest-bearing borrowings during 1997 and 1996 were $75.3
million and $165.7 million, with a weighted average interest rate of 7.9% and
7.7%, respectively. The maximum short-term borrowings outstanding at any month
end during 1997 and 1996 were $151.8 million and $198.7 million, respectively.
At December 31, 1996, the Partnership had a $125.0 million construction line
of credit (the "Construction Line") with CIBC which was charged interest at the
Partnership's option, either (i) 1.5% per annum over the greater of the
construction lender's prime rate or the overnight federal funds rate plus 1%, or
(ii) LIBOR plus 2.5%. As of December 31, 1996, borrowings under the Construction
Line were $21.7 million. Average daily short-term interest-bearing borrowings
during 1997 and 1996 were $11.9 million and $44.8 million, respectively, with a
weighted average interest rate of 9.4% and 8.6%, respectively. The maximum
short-term borrowings outstanding at any month end during 1997 and 1996 were
$28.0 million and $58.4 million, respectively. The Construction Line was repaid
in 1997 with proceeds from the Loan.
At December 31, 1997, the Partnership had an outstanding $0.7 million letter
of credit which was secured by cash on deposit.
The carrying amounts of the Partnership's borrowings under its notes payable
and revolving credit agreements approximate their fair value as of December 31,
1997 and 1996. The fair value of the Partnership's long-term debt is estimated
using discounted cash flow analyses, based on the Partnership's current
incremental borrowing rates for similar types of borrowing arrangements. The
carrying value of cash and cash equivalents, receivables and payables
approximate their fair value.
Cash paid for interest for the years ended December 31, 1997, 1996 and 1995
(net of interest capitalized of $2.6 million, $8.9 million, and $5.1 million)
was $47.0 million, $38.7 million, and $15.7 million, respectively. Debt issue
cost amortization, classified as a component of interest expense, (net of
amounts capitalized of $0.1 million, $0.2 million, and $0.2 million) was $2.3
million, $1.1 million, and $0.9 million in 1997, 1996 and 1995, respectively.
NOTE 9--RELATED PARTY TRANSACTIONS
Summary information regarding income from development, leasing and
management services performed for properties owned by Jeffrey Kerr, who served
as Chief Executive Officer, President and
F-55
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
Chairman of the Board of Directors of the Company until February 8, 1997, and
his affiliates not included in the consolidation in 1997, 1996 and 1995 is as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Development fees.......................................................................... $ 426 $ 252 $ --
Leasing fees.............................................................................. -- 32 34
Management fees........................................................................... -- 30 111
Other..................................................................................... -- 23 14
--------- --------- ---------
Total..................................................................................... $ 426 $ 337 $ 159
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1996, the Partnership leased an aircraft from a company owned by Mr. Kerr
for $.2 million. At December 31, 1996, the Partnership had recorded a $1.1
million receivable from Mr. Kerr and his affiliates, which was repaid in 1997.
NOTE 10--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information regarding non-cash investing and
financing activities are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Reclassification of assets held for sale to real estate assets...................... $ 6,458 $ -- $ --
Reclassification of real estate assets to assets held for sale...................... 2,638 13,075 --
Acquisition of property for debt assumed............................................ -- -- 8,700
</TABLE>
NOTE 11--CONTINGENCIES
In December 1997, a purported shareholder of the Company filed a class
action lawsuit naming the Company and several of its current and former
directors as defendants. The lawsuit claims, among other things, that the
directors of the Company breached their fiduciary duties to the Company's
shareholders in approving the merger between the Company and Prime and that the
consideration to be paid to the Company's shareholders in such a merger is
unfair and inadequate. The lawsuit requests that the merger be enjoined or, in
the event that the merger is consummated, that the merger be rescinded or
damages be awarded to class members. The Company believes the suit is without
merit and intends to vigorously defend the action. The Company is unable to
predict the likely outcome of the action, but management does not believe the
ultimate outcome of the pending litigation will have a material adverse impact
on the Partnership's financial position and results of operations.
F-56
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized financial data by quarter for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ----------
(THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenue.............................................................. $ 38,756 $ 38,761 $ 39,782 $ 45,164
Expenses............................................................. 36,441 36,141 40,896 43,003
Impairment........................................................... -- -- 6,877 921
Gain on sale of real estate.......................................... -- -- -- 8
--------- --------- --------- ----------
Income (loss) before minority interests and extraordinary charge..... 2,315 2,620 (7,991) 1,248
Minority interests................................................... (716) (774) (799) (922)
--------- --------- --------- ----------
Income (loss) before extraordinary charge............................ 1,599 1,846 (8,790) 326
Extraordinary charge................................................. -- (3,927) -- --
--------- --------- --------- ----------
Net income (loss).................................................... $ 1,599 $ (2,081) $ (8,790) $ 326
--------- --------- --------- ----------
--------- --------- --------- ----------
Net income (loss) per unit -- basic and diluted...................... $ .06 $ (.07) $ (.31) $ .01
1996
Revenue.............................................................. $ 37,004 $ 37,215 $ 38,651 $ 41,629
Expenses............................................................. 26,788 27,724 31,307 38,458
Impairment and severance............................................. -- -- -- 65,355
Gain on sale of real estate.......................................... -- -- 432 131
--------- --------- --------- ----------
Income (loss) before minority interests and extraordinary charge..... 10,216 9,491 7,776 (62,053)
Minority interests................................................... -- -- -- (331)
--------- --------- --------- ----------
Income (loss) before extraordinary charge............................ 10,216 9,491 7,776 (62,384)
Extraordinary charge................................................. (136) -- (283) --
--------- --------- --------- ----------
Net income (loss).................................................... $ 10,080 $ 9,491 $ 7,493 $ (62,384)
--------- --------- --------- ----------
--------- --------- --------- ----------
Net income (loss) per unit -- basic and diluted...................... $ .39 $ .37 $ .28 $ (2.16)
1997 Distributions per unit.......................................... $ .35 $ .35 $ .35 $ --
1996 Distributions per unit.......................................... $ .505 $ .530 $ .530 $ .530
</TABLE>
F-57
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO INITIAL
DEVELOPMENT OF GROSS AMOUNT AT WHICH CARRIED AT CLOSE
INITIAL COST TO COMPANY(A) ACQUISITION(B) OF PERIOD
----------------------------------------- ------------------------- ----------------------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
------------- ----------- ------------- ---------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bellport......... $12,643,100 $ 460,700 $16,036,400 $ 355,800 $ 318,500 $ 816,500 $ 16,354,900 $ 17,171,400
Birch Run........ 54,751,600 3,439,900 39,671,400 3,423,000 32,215,100 6,862,900 71,886,500 78,749,400
Burlington....... 13,117,300 3,568,200 21,629,200 -- 178,100 3,568,200 21,807,300 25,375,500
Calhoun.......... 16,410,500 3,292,100 19,862,700 439,000 6,067,900 3,731,100 25,930,600 29,661,700
Conroe........... 18,179,000 2,100,900 37,483,100 -- 218,000 2,100,900 37,701,100 39,802,000
Dry Ridge........ 1,572,300 995,900 8,627,500 (1,700) (5,567,500) 994,200 3,060,000 4,054,200
Edinburgh........ 17,197,900 988,300 11,314,700 46,400 16,077,900 1,034,700 27,392,600 28,427,300
Finger Lakes..... -- 594,400 27,010,000 900 15,648,600 595,300 42,658,600 43,253,900
Fremont.......... 14,200,900 2,434,800 10,268,700 -- 9,072,200 2,434,800 19,340,900 21,775,700
Gilroy........... 65,248,800 11,283,400 61,998,500 6,580,200 7,588,900 17,863,600 69,587,400 87,451,000
Hillsboro........ 28,318,900 6,397,700 44,761,100 50,100 3,850,100 6,447,800 48,611,200 55,059,000
Holland.......... 3,242,800 791,600 12,265,800 3,100 (6,841,800) 794,700 5,424,000 6,218,700
Jeffersonville... 20,165,800 1,629,700 37,073,300 1,900 830,600 1,631,600 37,903,900 39,535,500
Kenosha.......... 22,242,500 6,299,100 34,658,100 5,100 1,758,800 6,304,200 36,416,900 42,721,100
Lake Elsinore.... 29,312,600 19,404,900 43,393,400 (234,500) 6,047,900 19,170,400 49,441,300 68,611,700
Laughlin......... 13,855,500 -- 43,571,500 -- 1,600 43,573,100 43,573,100 71,600
Lee.............. 20,341,000 8,232,400 33,241,900 -- -- 8,232,400 33,241,900 41,474,300
Medford.......... 9,138,800 269,600 18,586,100 144,400 356,300 414,000 18,942,400 19,356,400
Michigan City.... 42,352,800 3,796,200 37,359,700 43,400 12,774,400 3,839,600 50,134,100 53,973,700
Monroe........... 8,450,900 815,000 17,982,900 225,800 1,936,800 1,040,800 19,919,700 20,960,500
Norton Shores-
Lakeshore
Marketplace.... 8,844,000 3,538,300 22,346,900 225,900 1,094,700 3,764,200 23,441,600 27,205,800
Oshkosh.......... 14,200,900 644,800 11,452,800 -- 4,987,100 644,800 16,439,900 17,084,700
Perryville....... 9,741,100 3,151,100 16,870,000 (136,200) (318,900) 3,014,900 16,551,100 19,566,000
Pismo............ 11,725,000 8,774,900 16,255,100 (100) 253,800 8,774,800 16,508,900 25,283,700
Queenstown....... 17,289,400 3,455,300 28,620,000 (900) 358,300 3,454,400 28,978,300 32,432,700
Sealy............ 10,612,800 827,400 13,454,700 18,100 4,169,500 845,500 17,624,200 18,469,700
Silverthorne..... 27,121,500 9,048,200 36,000,000 200 251,500 9,048,400 36,251,500 45,299,900
Somerset......... 4,422,000 1,750,000 16,460,300 -- 237,100 1,750,000 16,697,400 18,447,400
Tracy............ 12,023,100 4,655,100 18,087,200 1,509,000 (1,000) 6,164,100 18,086,200 24,250,300
Traverse City.... 2,554,900 675,600 7,976,000 -- (5,000,500) 675,600 2,975,500 3,651,100
Tulare........... 8,156,000 3,330,900 16,188,000 416,200 1,752,600 3,747,100 17,940,600 21,687,700
Vero Beach....... 26,798,300 2,707,800 18,915,400 (100) 10,198,300 2,707,700 29,113,700 31,821,400
Warrenton........ 11,595,400 1,982,500 14,760,800 8,300 5,750,400 1,990,800 20,511,200 22,502,000
Williamsburg..... 24,033,300 10,086,500 27,728,200 (551,100) 7,327,000 9,535,400 35,055,200 44,590,600
Woodbury......... 17,865,500 1,139,900 8,992,400 8,818,900 1,139,900 17,811,300 18,951,200 2,764,100
Miscellaneous.... 8,371,000 42,500 5,445,600 5,700 4,421,100 48,200 9,866,700 9,914,900
------------- ----------- ------------- ---------- ------------- ----------- ------------- ------------
Total............ $626,097,200 $132,605,600 $856,349,400 $12,577,900 $146,832,300 $145,183,500 $1,003,181,700 $1,148,365,200
------------- ----------- ------------- ---------- ------------- ----------- ------------- ------------
------------- ----------- ------------- ---------- ------------- ----------- ------------- ------------
<CAPTION>
ACCUMULATED DATE OF
DEPRECIATION CONSTRUCTION DATE ACQUIRED
------------ --------------- -------------
<S> <C> <C> <C>
Bellport......... $2,072,400 1992 1995
Birch Run........ 9,038,100 1986 1995
Burlington....... 1,948,400 1989 1995
Calhoun.......... 2,156,800 1992 1995
Conroe........... 3,536,500 1992 1995
Dry Ridge........ -- 1991 1995
Edinburgh........ 4,816,200 1989 --
Finger Lakes..... 1,532,400 1995 1995
Fremont.......... 2,704,900 1985 --
Gilroy........... 5,225,900 1992 1993
Hillsboro........ 4,350,400 1989 1995
Holland.......... 297,300 1988 1995
Jeffersonville... 3,444,700 1993 1995
Kenosha.......... 3,239,200 1988 1995
Lake Elsinore.... 4,316,600 1991 1995
Laughlin......... 1996 --
Lee.............. 59,000 1996 --
Medford.......... 2,345,600 1991 1995
Michigan City.... 6,398,600 1987 1993
Monroe........... 5,829,800 1987 --
Norton Shores-
Lakeshore
Marketplace.... 1,272,100 1995 --
Oshkosh.......... 4,159,200 1989 --
Perryville....... 1,800,000 1990 1995
Pismo............ 1,683,600 1994 1995
Queenstown....... 2,501,200 1989 1995
Sealy............ 1,316,100 1995 1995
Silverthorne..... 3,176,800 1988 1995
Somerset......... 2,375,900 1990 1993
Tracy............ 1,811,100 1994 1995
Traverse City.... 29,800 1990 --
Tulare........... 658,300 1995 --
Vero Beach....... 3,461,600 1994 --
Warrenton........ 1,688,900 1993 1995
Williamsburg..... 2,895,700 1988 1995
Woodbury......... 1992 --
Miscellaneous.... 2,065,200 1995 --
------------
Total............ $97,044,000
------------
------------
</TABLE>
F-58
<PAGE>
Depreciation of the Partnership's investment in buildings and improvements
reflected in the Statements of Operations is calculated over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings 31.5 years
Improvements Shorter of 10 years or useful life
</TABLE>
The aggregate gross cost of property included above for federal income tax
purposes approximated $860.0 million as of December 31, 1997.
Notes:
(a) The Initial Cost amounts for assets purchased in the merger with
McArthur/Glen have been restated to reflect refinements in the purchase
price adjustments.
(b) Includes adjustments for the impairment of long-lived assets on Dry Ridge,
Holland, New Mexico, Traverse City and Hawaii.
F-59
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
NOTES TO SCHEDULE III
DECEMBER 31, 1997
1. RECONCILIATION OF REAL ESTATE PROPERTIES:
The following table reconciles the Real Estate Properties from January 1,
1995 to December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Balance, Beginning of Period....................................... $ 1,073,490,500 $ 1,059,960,400 $ 305,987,300
Additions during Period
Development of New Projects.................................... 22,910,900 49,997,800 79,253,400
Improvements of Existing Properties............................ 21,776,100 42,372,300 73,668,900
Acquisitions................................................... 38,520,000 -- 601,050,800
Retirements.................................................... (8,361,900) (1,115,000) --
Write Down to Net Book Value (c)............................... -- (6,997,000) --
Transfer of Assets Held for Sale............................... 3,707,500 (23,754,000) --
Write-off of Impaired Properties............................... (3,677,900) (46,974,000) --
------------------ ------------------ ------------------
Balance, End of Period............................................. $ 1,148,365,200 $ 1,073,490,500 $ 1,059,960,400
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1995 to December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Balance, Beginning of Period....................................... $ 65,491,000 $ 37,838,900 $ 18,154,300
Additions during Period
Depreciation................................................... 38,892,100 34,819,400 19,684,600
Write Down to Net Book Value (c)............................... -- (6,997,000) --
Retirements During Period........................................ (7,339,100) (170,300) --
------------------ ------------------ ------------------
Balance, End of Period............................................. $ 97,044,000 $ 65,491,000 $ 37,838,900
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
- ------------------------
(c) The cost basis of the impaired assets held for sale have been adjusted to
reflect the write-off of accumulated depreciation.
F-60
<PAGE>
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
BASIS OF PRESENTATION TO
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
The accompanying Unaudited Pre-Transactions Pro Forma Consolidated Balance
Sheet as of December 31, 1997 reflects the consummation of the C&C Contribution
Agreement.
The accompanying Unaudited Pre-Transactions Pro Forma Consolidated Statement
of Operations for the year ended December 31, 1997 reflects the following
transactions which occurred subsequent to December 31, 1997, as if they had
occurred on January 1, 1997: (a) the acquisition of one factory outlet center,
including assumed issuance of debt to finance the acquisition; (b) the sale of
one factory outlet center and the application of the net proceeds to repay debt;
and (c) the consummation of the C&C Contribution Agreement.
The accompanying Unaudited Pre-Transactions Pro Forma Consolidated Financial
Statements have been prepared by management of Horizon Partnership and do not
purport to be indicative of the results which would have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The Unaudited Pro Forma Consolidated Financial
Statements should be read in conjunction with the Notes to the Pre-Transactions
Consolidated Financial Statements.
F-61
<PAGE>
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-TRANSACTIONS
HORIZON
HORIZON C&C CONTRIBUTION PARTNERSHIP
PARTNERSHIP [A] AGREEMENT [B] PRO FORMA
--------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS
Investment in rental property, net.......................... $ 1,051,321 $ (64,295) $ 987,026
Cash and cash equivalents................................... 12,902 (812) 12,090
Restricted cash............................................. 1,670 1,670
Accounts receivable, net.................................... 6,804 114 6,918
Deferred charges, net....................................... 20,126 (475) 19,651
Due from affiliates, net.................................... 11,639 11,639
Investment in partnerships.................................. 309 309
Assets held for sale........................................ 1,933 1,933
Other assets................................................ 8,827 (12) 8,815
--------------- -------- ---------------
Total assets.............................................. $ 1,115,531 $ (65,480) $ 1,050,051
--------------- -------- ---------------
--------------- -------- ---------------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and other debt.................................... $ 626,097 $ (29,313) $ 596,784
Accrued interest............................................ 3,487 (193) 3,294
Real estate taxes payable................................... 6,679 6,679
Construction costs payable.................................. 2,807 2,807
Accounts payable and other liabilities...................... 22,283 (6,082) 16,201
--------------- -------- ---------------
Total liabilities......................................... 661,353 (35,588) 625,765
Minority interests.......................................... 41,254 41,254
Partners' capital:
General partner........................................... 351,231 (25,426) 325,805
Limited partners.......................................... 61,693 (4,466) 57,227
--------------- -------- ---------------
Total partners' capital................................. 412,924 (29,892) 383,032
--------------- -------- ---------------
Total liabilities and partners' capital................... $ 1,115,531 $ (65,480) $ 1,050,051
--------------- -------- ---------------
--------------- -------- ---------------
</TABLE>
See accompanying Notes to Pre-Transactions Pro Forma Consolidated Balance
Sheets.
F-62
<PAGE>
NOTES TO PRE-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] Certain reclassifications have been made to Horizon Partnership's balance
sheet to conform to Prime Partnership's balance sheet presentation.
[B] To reflect the contribution of the Lake Elsinore Center and the contribution
of the Dole Cannery Center and release of Horizon Partnership's long-term
ground lease obligations pursuant to the C&C Contribution Agreement. In
connection with the consummation of the C&C Contribution Agreement, Horizon
Partnership incurred a loss of approximately $29,862 which represents the
net assets of such centers.
F-63
<PAGE>
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
<TABLE>
<CAPTION>
C&C
CONTRIBUTION
AGREEMENT
PURCHASE OF SALE OF -------------
HORIZON GILROY PORT HURON DOLE CANNERY
PARTNERSHIP[A] CENTER[B] CENTER[C] CENTER[D]
--------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
Base rents........................................................... $ 115,929 $ 3,662 $ (969) $ (588)
Percentage rents..................................................... 3,975 343 (3)
Tenant reimbursements................................................ 34,088 1,196 (249) (371)
Income from investment partnerships
Interest and other................................................... 8,479 (3) (155) (158)
--------------- ------ ----------- -------------
Total revenues..................................................... 162,471 5,198 (1,376) (1,117)
EXPENSES
Property operating................................................... 25,662 850 (301) (1,658)
Real estate taxes.................................................... 13,297 499 (68) (235)
Depreciation and amortization........................................ 42,045 1,159 (4)
General and administrative........................................... 11,658 89 (158) (316)
Interest............................................................. 48,894 (251) (1,704)
Impairment and severance............................................. 7,798 (142)
Other charges........................................................ 14,925 21 (42) (9,460)
--------------- ------ ----------- -------------
Total expenses..................................................... 164,279 2,618 (966) (13,373)
--------------- ------ ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM............................................. (1,808) 2,580 (410) 12,256
Income allocated to minority interests............................... (3,211)
--------------- ------ ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM... $ (5,019) $ 2,580 $ (410) $ 12,256
--------------- ------ ----------- -------------
--------------- ------ ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM:
General partner.................................................... $ (4,234)
Limited partners................................................... (785)
---------------
Total............................................................ $ (5,019)
---------------
---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM
PER COMMON UNIT:
General partner.................................................... $ (0.18)
---------------
---------------
Limited partners................................................... $ (0.18)
---------------
---------------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING
General partner.................................................... 23,848
Limited partners................................................... 4,422
---------------
Total............................................................ 28,270
---------------
---------------
<CAPTION>
PRE-TRANSACTIONS
HORIZON
LAKE ELSINORE PARTNERSHIP PRO
CENTER[E] FINANCINGS FORMA
------------- ----------- ---------------
<S> <C> <C> <C>
REVENUES
Base rents........................................................... $ (6,105) $ 111,929
Percentage rents..................................................... (44) 4,271
Tenant reimbursements................................................ (1,961) 32,703
Income from investment partnerships
Interest and other................................................... (14) 8,149
------------- ---------------
Total revenues..................................................... (8,124) 157,052
EXPENSES
Property operating................................................... (1,382) 23,171
Real estate taxes.................................................... (697) 12,796
Depreciation and amortization........................................ (1,970) 41,230
General and administrative........................................... (540) 10,733
Interest............................................................. (2,798) $ 2,868[F] 47,009
Impairment and severance............................................. 7,656
Other charges........................................................ (81) 5,363
------------- ----------- ---------------
Total expenses..................................................... (7,468) 2,868 147,958
------------- ----------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM............................................. (656) (2,868) 9,094
Income allocated to minority interests............................... (3,211)
------------- ----------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM... $ (656) $ (2,868) $ 5,883
------------- ----------- ---------------
------------- ----------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM:
General partner.................................................... $ 4,963
Limited partners................................................... 920
---------------
Total............................................................ $ 5,883
---------------
---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM
PER COMMON UNIT:
General partner.................................................... $ 0.21
---------------
---------------
Limited partners................................................... $ 0.21
---------------
---------------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING
General partner.................................................... 23,848
Limited partners................................................... 4,422
---------------
Total............................................................ 28,270
---------------
---------------
</TABLE>
See accompanying Notes to Pre-Transactions Pro Forma Consolidated Statement of
Operations.
F-64
<PAGE>
NOTES TO PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] Certain reclassifications have been made to Horizon Partnership's statement
of operations to conform to the presentation of Prime Partnership's
statement of operations.
[B] To reflect the operations and the depreciation expense for the Gilroy Center
acquired by Horizon Partnership on December 30, 1997.
Depreciation of the Gilroy Center is computed based upon the contract price
of the real estate assets acquired, less amounts allocated to land, over an
estimated useful life of 31.5 years. Depreciation expense is computed using
straight-line method.
[C] To eliminate the operations of the Port Huron Center which was sold on
November 25, 1997.
[D] To eliminate the operations of the Dole Cannery Center resulting from (i)
Horizon Partnership's contribution of such center and (ii) the release of
Horizon Partnership from its long-term ground lease of such center pursuant
to the C&C Contribution Agreement.
[E] To reflect the contribution of the Lake Elsinore Center pursuant to the
terms of the C&C Contribution Agreement, including (i) the elimination of
the operations of the center, and (ii) the recordation of management fees of
$324 to be charged to the transferee for Horizon Partnership's management
and operation of the center after such contribution. Such management fees
will be assessed at a rate of 4% of the center's gross operating revenues
less interest and other income.
[F] To reflect interest expense on debt issued to finance the acquisition of the
Gilroy Center. The effect of a 1/8% variance in the interest rate on the
debt issued would be approximately $48.
F-65
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Prime Retail, Inc.
We have audited the accompanying statements of revenue and certain expenses of
Prime Transferred Properties (the "Properties") as described in Note 2 for the
years ended December 31, 1997, 1996 and 1995. These statements of revenue and
certain expenses are the responsibility of the Properties' management. Our
responsibility is to express an opinion on these statements of revenue and
certain expenses 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 statements of revenue and certain
expenses are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the statements of
revenue and certain expenses. An audit also includes assessing the basis of
accounting used and the significant estimates made by management, as well as
evaluating the overall presentation of the statements of revenue and certain
expenses. We believe that our audits of the statements of revenue and certain
expenses provide a reasonable basis for our opinion.
The accompanying statements of revenue and certain expenses were prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission as described in Note 2 and are not intended to be a complete
presentation of the Properties' revenue and expenses.
In our opinion, the statements of revenue and certain expenses referred to above
present fairly, in all material respects, the revenue and certain expenses
described in Note 2 of the Properties for the years ended December 31, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Baltimore, Maryland
January 23, 1998
F-66
<PAGE>
PRIME TRANSFERRED PROPERTIES
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Base rents......................................................................... $ 4,287 $ 4,838 $ 4,667
Tenant reimbursements.............................................................. 2,225 2,197 2,257
Other revenue...................................................................... 491 70 160
--------- --------- ---------
Total revenue.................................................................... 7,003 7,105 7,084
EXPENSES
Property operating................................................................. 1,709 1,722 1,632
Real estate taxes.................................................................. 746 536 732
--------- --------- ---------
Total expenses................................................................... 2,455 2,258 2,364
--------- --------- ---------
REVENUE IN EXCESS OF CERTAIN EXPENSES................................................ $ 4,548 $ 4,847 $ 4,720
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-67
<PAGE>
PRIME TRANSFERRED PROPERTIES
NOTES TO THE STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS, EXCEPT FOR SQUARE FOOT INFORMATION)
1. BUSINESS
The accompanying statements of revenue and certain expenses include the
combined operations of the following factory outlet center properties (the
"Prime Transferred Properties") owned by Prime Retail, Inc.:
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION SQUARE FOOTAGE
- -------------------------------------------------------- -------------------- --------------
<S> <C> <C>
Nebraska Crossing Factory Stores........................ Gretna, Nebraska 192,000
Indiana Factory Shops................................... Daleville, Indiana 234,000
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statements of revenue and certain expenses were prepared
for the purpose of complying with the rules and regulations of the Commission.
The statements are not representative of the actual operations of the Prime
Transferred Properties for the period presented nor indicative of future
operations as certain expenses, consisting of interest expense, depreciation,
and certain other operating expenses have been excluded.
A summary of unaudited expenses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest expense................................................. $ 1,757 $ 2,009 $ 1,597
Depreciation and amortization.................................... 1,586 1,366 1,295
Other............................................................ 133 376 74
--------- --------- ---------
Total unaudited expenses....................................... $ 3,476 $ 3,751 $ 2,966
--------- --------- ---------
--------- --------- ---------
</TABLE>
REVENUE RECOGNITION
Rental revenue is recognized as income in the period earned.
USE OF ESTIMATES
The preparation of the statements of revenue and certain expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting periods. Actual results may differ from those
estimates.
3. RENTALS
The Prime Transferred Properties have entered into tenant leases with terms
from one to ten years. The leases provide for tenants to share in increases in
operating expenses and real estate taxes in excess of base amounts, as defined.
F-68
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Horizon/Glen Outlet Centers Limited Partnership
We have audited the accompanying combined statements of net assets of Horizon
Group Properties, L.P., as described in Note 1, as of December 31, 1997 and
1996, and the related combined statements of operations, changes in net assets,
and cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement Schedule III, Real Estate
and Accumulated Depreciation. These financial statements and schedule are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements and schedule 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Horizon
Group Properties, L.P. at December 31, 1997 and 1996, and the combined results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
April 3, 1998
F-69
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
COMBINED STATEMENTS OF NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Real estate, at cost:
Land.................................................................................... $ 16,882 $ 16,894
Buildings and improvements.............................................................. 178,583 140,704
Construction in progress................................................................ 1,580 39,559
Furniture, fixtures and equipment....................................................... 36,168 27,157
Less accumulated depreciation........................................................... (20,023) (12,357)
---------- ----------
Total real estate..................................................................... 213,190 211,957
Cash and cash equivalents............................................................... 3,862 4,773
Tenant accounts receivable.............................................................. 395 715
Due from joint venture.................................................................. 11,639 13,764
Assets held for sale.................................................................... 1,933 8,635
Deferred costs.......................................................................... 4,933 5,775
Other assets............................................................................ 1,384 4,041
---------- ----------
Total assets.......................................................................... 237,336 249,660
---------- ----------
LIABILITIES
Debt allocated from Horizon Partnership................................................. 146,846 132,513
Accounts payable and accrued expenses................................................... 5,005 6,109
Prepaid rents and other tenant liabilities.............................................. 1,006 1,229
Other liabilities....................................................................... 1,317 2,449
---------- ----------
Total liabilities..................................................................... 154,174 142,300
---------- ----------
Net assets................................................................................ $ 83,162 $ 107,360
---------- ----------
---------- ----------
</TABLE>
See Notes to Combined Financial Statements.
F-70
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
REVENUE
Base rent.................................................................... $ 23,129 $ 20,182 $ 11,803
Percentage rent.............................................................. 151 121 197
Expense recoveries........................................................... 7,116 7,640 3,732
Other........................................................................ 2,147 2,049 775
---------- ---------- ---------
Total revenue.............................................................. 32,543 29,992 16,507
EXPENSES
Property operating........................................................... 6,153 5,537 2,853
Real estate taxes............................................................ 3,036 2,792 1,002
Land leases and other........................................................ 2,163 780 407
General and administrative................................................... 2,813 2,284 948
Depreciation and amortization................................................ 10,228 5,974 4,439
Impairment................................................................... 6,949 24,631
Interest..................................................................... 11,497 6,682 3,062
---------- ---------- ---------
Total expenses............................................................. 42,839 48,680 12,711
---------- ---------- ---------
INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE AND EXTRAORDINARY CHARGE...... (10,296) (18,688) 3,796
Gain on sale of real estate.................................................. 73 3
---------- ---------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE...................................... (10,296) (18,615) 3,799
Extraordinary charge on debt prepayment...................................... (808) (155)
---------- ---------- ---------
NET INCOME (LOSS).............................................................. $ (11,104) $ (18,770) $ 3,799
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See Notes to Combined Financial Statements.
F-71
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
Net assets at January 1, 1995.................................................... $ 36,419
Contribution of McArthur/Glen net assets....................................... 39,526
Net contributions from Horizon Partnership..................................... 25,504
Net income..................................................................... 3,799
---------
Net assets at December 31, 1995.................................................. 105,248
Net contributions from Horizon Partnership..................................... 20,882
Net loss....................................................................... (18,770)
---------
Net assets at December 31, 1996.................................................. 107,360
Net distributions to Horizon Partnership....................................... (13,094)
Net loss....................................................................... (11,104)
---------
Net assets at December 31, 1997.................................................. $ 83,162
---------
---------
</TABLE>
See Notes to Combined Financial Statements.
F-72
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before extraordinary charge...................................... $ (10,296) $ (18,615) $ 3,799
Adjustments to reconcile income (loss) before extraordinary charge to net cash
provided by (used in) operating activities:
Depreciation and amortization................................................ 10,575 6,437 4,722
Gain on sale of real estate.................................................. (73) (3)
Impairment charge............................................................ 6,949 24,631
Changes in assets and liabilities:
Tenant accounts receivable................................................... 320 478 (834)
Due from joint venture....................................................... 2,125 (12,968) (796)
Deferred costs and other assets.............................................. 1,494 (5,277) (4,157)
Accounts payable and accrued expenses........................................ (1,487) (1,589) 5,923
Other liabilities............................................................ (1,132) 1,625 660
Prepaid rents and other tenant liabilities................................... (223) 361 261
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.......................... 8,325 (4,990) 9,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements................................ (9,793) (38,104) (72,306)
Proceeds from sale of real estate............................................ 234 3
---------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES........................................ (9,793) (37,870) (72,303)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net contributions (distributions) from (to) Horizon Partnership.............. (13,094) 20,882 25,504
Proceeds from net increase in debt allocated from Horizon Partnership........ 14,333 27,375 38,522
Allocated financing costs.................................................... (682) (2,082) (712)
---------- ---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................... (557) 46,175 63,314
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (911) 3,315 586
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD.......................................................... 4,773 1,458 872
---------- ---------- ---------
END OF PERIOD................................................................ $ 3,862 $ 4,773 $ 1,458
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See Notes to Combined Financial Statements.
F-73
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--BACKGROUND AND BASIS OF PRESENTATION
These footnotes should be read in conjunction with the Joint Consent
Solicitation Statement/ Prospectus/Information Statement.
BACKGROUND--On February 1, 1998, Prime Retail, Inc. ("Prime") and Horizon
Group, Inc. ("Horizon"), two unrelated publicly-held real estate investment
trusts, and Prime Retail, L.P. ("Prime Partnership") and Horizon/Glen Outlet
Centers Limited Partnership ("Horizon Partnership"), two limited Partnerships
through which Prime and Horizon, respectively, as the general partners, own
their assets and conduct substantially all of their operations, entered into an
amended and restated agreement and plan of merger ("Merger Agreement").
Transactions contemplated under the Merger Agreement are designed to enable
Prime Partnership to acquire 22 of Horizon Partnership's best performing outlet
centers and to establish Horizon Group Properties, Inc. ("HGP") as a corporation
that will elect status as a self-administered and self-managed real estate
investment trust ("REIT") which will be the sole general partner of Horizon
Group Properties, L.P. ("HGP LP"). HGP LP will own and operate 15 properties
including 13 outlet centers currently owned by Horizon Partnership and two
outlet centers that will be acquired from Prime Partnership. The 13 Horizon
Partnership outlet centers will be spun-off into HGP LP in connection with the
Merger Agreement. Following the consummation of the Merger Agreement, Prime
Common Shareholders, Prime Series B Preferred Shareholders, Prime Series C
Preferred Shareholders and Horizon Common Shareholders will own all of the HGP
common shares and the original holders of Prime Partnership common units (other
than Prime) and the original holders of Horizon Partnership units will own all
of the outstanding common units of HGP LP.
BASIS OF PRESENTATION--The combined financial statements reflect the results
of operations, financial position, changes in net assets and cash flows of the
13 outlet centers that will be spun-off to HGP LP as if HGP LP had been a
separate entity for all periods presented. The historical results of operations
and financial condition of the net assets comprising HGP LP are based on the
manner in which Horizon Partnership historically managed such net assets.
Accordingly, the combined financial statements of HGP LP have been prepared
using Horizon Partnership's historical basis of the assets and liabilities and
historical results of operations related to the 13 outlet centers. Due to the
fact that HGP LP has never been a separate legal entity, the net assets of HGP
LP are not insulated from the obligations and commitments of Horizon
Partnership. Certain assumptions relating to the allocation of cash and cash
equivalents, debt and financing costs, interest expense and general and
administrative expenses, all of which were historically aggregated by Horizon
Partnership, have been made in these combined financial statements. See Note 2.
These statements have been combined based upon the historical common ownership
and management of the outlet centers.
F-74
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BACKGROUND AND BASIS OF PRESENTATION (CONTINUED)
The 13 outlet centers of HGP LP as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
DATE ACQUIRED OR
NAME LOCATION INITIALLY DEVELOPED
- ---------------------------------------------------------------- ---------------------------- -------------------
<S> <C> <C>
Bellport Outlet Center* Patchogue, New York 1995
Dry Ridge Outlet Center* Dry Ridge, Kentucky 1995
Horizon Outlet Center - Holland Holland, Michigan 1990
Horizon Outlet Center - Laughlin Laughlin, Nevada 1996
Medford Outlet Center* Medford, Minnesota 1995
Horizon Outlet Center - Monroe Monroe, Michigan 1989
Lakeshore Market Place Norton Shores, Michigan 1995
New Mexico Outlet Center* Algodones, New Mexico 1995
Sealy Outlet Center* Sealy, Texas 1995
Horizon Outlet Center - Somerset Somerset, Pennsylvania 1994
Horizon Outlet Center - Traverse City Traverse City, Michigan 1990
Horizon Outlet Center - Tulare Tulare, California 1995
Warrenton Outlet Center* Warrenton, Missouri 1995
</TABLE>
* Acquired in the merger between Horizon Partnership and McG Outlet Centers
Limited Partnership ("McArthur/Glen Partnership") on July 14, 1995. See Note
3.
Bellport Outlet Center includes an unconsolidated joint venture interest in
Phase II and III. See Note 7.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires Horizon Partnership's
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
REAL ESTATE AND DEPRECIATION--Real estate assets consist primarily of outlet
centers and are stated at cost, less accumulated depreciation. Costs incurred
for the acquisition, development, construction and improvement of properties, as
well as significant renovations and betterments to the properties, are
capitalized. Maintenance and repairs are charged to expense as incurred.
Interest costs incurred with respect to qualified expenditures relating to the
construction of assets are capitalized during the construction period.
At December 31, 1997 and 1996, HGP LP had an aggregate cost basis of $235.2
million and $231.3 million, respectively, in its real estate assets for federal
income tax purposes. The cost of real estate assets are depreciated on the
straight-line method over estimated useful lives which are:
<TABLE>
<CAPTION>
Buildings 31.5 years
<S> <C>
Improvements 10 years or lease term, if less
Furniture, fixtures or equipment 3-7 years
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, the financial statements of HGP LP
F-75
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reflect impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Impairment losses are measured as the
difference between carrying value and fair value for assets to be held in the
portfolio. For assets to be sold, impairment is measured as the difference
between carrying value and fair value, less costs to dispose. Fair value is
based on estimated cash flows discounted at a risk-adjusted rate of interest or
a value derived from comparable sales transactions in the marketplace. During
the years ended December 31, 1997 and 1996, events and circumstances occurred
which required a $6.9 million and a $24.6 million charge, respectively, for the
impairment of assets. See Note 4. It is reasonably possible that the estimate
for asset impairment may change in the near term because of the degree of
judgment involved in determining fair value.
Periodically, in the course of reviewing the performance of its outlet
centers, management may determine that certain outlet centers no longer meet the
parameters set forth for its operating properties and accordingly, such outlet
centers will be classified as held for sale. As of December 31, 1996, one such
center, Holland, Michigan was classified as held for sale. As of December 31,
1997, the Algodones, New Mexico outlet center was classified as held for sale.
See Note 4.
REVENUE RECOGNITION--Leases with tenants are accounted for as operating
leases. Minimum annual rentals are generally recognized on a straight-line basis
over the term of the respective lease. As a result of recording rental revenue
on a straight-line basis, tenant accounts receivable include, net of reserves,
$396,000, and $291,000 as of December 31, 1997 and 1996, respectively, which are
expected to be collected over the remaining life of the leases rather than
currently. Contingent rentals based on common area maintenance expenses and
certain other expenses are accrued in the period in which the related expense is
incurred. Percentage rents are accrued on the basis of reported tenant sales.
Tenant accounts receivable are reflected net of reserves of $797,000 and
$504,000 as of December 31, 1997, and 1996, respectively.
OTHER REVENUE - Other revenue consists primarily of interest income and
income related to marketing services that is recovered from tenants pursuant to
lease agreements.
DEFERRED COSTS AND OTHER ASSETS - Leasing and deferred financing costs are
capitalized at cost. Amortization is recorded on the straight-line method over a
ten-year lease period or the life of the allocated debt, respectively.
NET CONTRIBUTIONS (DISTRIBUTIONS)--Net contributions (distributions) are the
net amounts advanced from and repaid to Horizon Partnership. Excess cash flows
have been reflected as being distributed back to Horizon Partnership. Net
contributions represent Horizon Partnership's funding of HGP LP's development
cost needs in excess of cash flows generated from HGP LP's operations.
INCOME TAXES--Horizon elected to be taxed as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), commencing with the taxable year
ending December 31, 1994. A REIT is a legal entity that holds real estate
interests, and, through payments of dividends to shareholders, is permitted to
reduce or to avoid the payment of federal income taxes at the REIT level. As a
REIT, Horizon was not taxed on income since it distributed its REIT taxable
income to its shareholders and satisfied certain other requirements as defined
in the Code. Accordingly, the combined financial statements of HGP LP do not
include any allocation of tax expense.
ALLOCATIONS FROM HORIZON PARTNERSHIP--The combined financial statements of
HGP LP include an allocation of the aggregate debt balances of Horizon
Partnership (which have historically been secured by a
F-76
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
pool of Horizon Partnership's assets) based upon the proportionate use of debt
proceeds by HGP LP's portfolio of outlet centers compared to Horizon
Partnership's total portfolio of outlet centers. Financing costs were allocated
based upon the same ratio. Interest expense has been estimated based upon the
aforementioned proportionate debt balances and the historical weighted average
interest rate incurred by Horizon Partnership on its debt balances. The
allocation was made in this manner because management believes it best
represents the use of funds borrowed during the periods presented and because
allocating the debt in this manner results in HGP LP's statements of operations
reflecting the stand-alone interest cost of doing business.
General and administrative expenses of Horizon Partnership have been
allocated to HGP LP based upon the ratio of gross leasable area of HGP LP's
portfolio of outlet centers compared to Horizon Partnership's outlet centers.
Cash and cash equivalents have been included in the combined financial
statements of HGP LP based upon the respective periods' ratio of gross leasable
area of HGP LP's outlet centers compared to Horizon Partnership's total
historical portfolio of outlet centers. Horizon Partnership considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash and cash equivalents.
The aforementioned allocations may not reflect actual balances had HGP LP
existed as a separate entity. Management of Horizon Partnership believes,
however, that such allocations are reasonable.
NOTE 3--BUSINESS COMBINATIONS
On July 14, 1995, McArthur/Glen Partnership merged with and into Horizon
Partnership, as the surviving partnership (the "McG Merger"). McArthur/Glen
Partnership developed, owned and managed outlet centers.
The McG Merger was accounted for using the purchase method by Horizon
Partnership in accordance with Accounting Principles Board Opinion No. 16. The
accompanying combined financial statements include the results of operations of
six McArthur/Glen Partnership properties as identified in Note 1 ("McArthur/Glen
Properties") from the date of the McG Merger. Based on the relative fair value
of the McArthur/Glen Properties, the financial statements of HGP LP reflect
$93.0 million of the total McArthur/Glen Partnership purchase price, which was
allocated to these six properties including $53.5 million of liabilities which
were also allocated.
The following unaudited pro forma summarized results of operations for the
year ended December 31, 1995 assume the McArthur/Glen Properties were
contributed to HGP LP by Horizon Partnership as of January 1, 1995.
<TABLE>
<CAPTION>
PRO FORMA 1995
---------------
(IN THOUSANDS)
<S> <C>
Total revenue $ 25,691
Net income $ 5,199
</TABLE>
The pro forma information is provided for information purposes only. It is
based on historical information and is not necessarily indicative of what actual
results of operations of HGP LP would have been, assuming the six McArthur/Glen
Properties had been contributed to HGP LP as of the beginning of the period
presented.
F-77
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS (CONTINUED)
In 1995, Horizon Partnership acquired an outlet center in Holland, MI,
adjacent to an existing outlet center owned by Horizon Partnership, for a
purchase price of $8.7 million, consisting primarily of the assumption of
existing mortgage indebtedness and unpaid real estate tax obligations. This
outlet center has been included in the net assets and operating results of HGP
LP from the date of acquisition.
NOTE 4--IMPAIRMENT
In 1997, management entered into an agreement, subject to certain
contingencies, to sell four outlet centers that have been included in the net
assets of HGP LP. Results of operations in 1997 include a charge for asset
impairment of $6.0 million which was recorded by HGP LP to reduce the carrying
value of these outlet centers to their estimated sales value less cost to
dispose. In the fourth quarter of 1997, the agreement to sell the four centers
was terminated. It was management's decision to then pursue the sale of only one
of the properties, the Algodones, New Mexico center, which has been classified
as held for sale as of December 31, 1997. The remaining outlet centers were
reclassified to real estate assets at their fair values (as of the date of the
decision not to sell) in the combined financial statements of HGP LP. The
results of operations for 1997 also include an impairment charge of $0.9 million
for development projects that will not be pursued.
Results of operations for 1996 include a charge of $24.6 million for asset
impairment. Included in the expense for impairment was a $22.8 million charge to
reduce the carrying value of four centers that resulted from (1) an initiative
by Horizon Partnership's management to market its Holland, Michigan property for
sale and (2) revised occupancy estimates on the Dry Ridge Outlet Center, the
Horizon Outlet Center - Traverse City and the New Mexico Outlet Center that
indicated a permanent impairment in their value. In addition, the expense
includes $1.8 million related to development projects which will not be pursued.
At December 31, 1996, the Holland, Michigan property was classified as held for
sale and subsequently reclassified in 1997 to real estate assets as described
above.
NOTE 5--DEBT ALLOCATED FROM HORIZON PARTNERSHIP
Debt allocated from Horizon Partnership, as of December 31, 1997 and 1996,
reflects an allocation of debt from Horizon Partnership that is based upon the
proportionate use of debt proceeds used by HGP LP's portfolio of outlet center
properties for development and expansion compared to Horizon Partnership's total
portfolio which resulted in an allocation of 23.5% and 23.8% of Horizon
Partnership's debt to HGP LP as of December 31, 1997 and 1996, respectively. The
weighted average rate of interest was 8.7%, 8.8% and 9.6% for the years ended
December 31, 1997, 1996 and 1995, respectively.
Cash paid for interest was $12.6 million, $11.1 million and $4.8 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Capitalized
interest was $1.1 million, $4.5 million, and $2.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-78
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DEBT ALLOCATED FROM HORIZON PARTNERSHIP (CONTINUED)
The aggregate amount of all required principal payments for debt allocated
from Horizon Partnership based upon the proportionate allocation of Horizon
Partnership's actual debt maturities as of December 31, 1997, were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
1998 $ 2,244
1999 60,977
2000 6,833
2001 7,581
2002 18,930
Thereafter 50,281
-------------
$ 146,846
-------------
-------------
</TABLE>
The carrying amounts of the debt allocated from Horizon Partnership
approximate their fair value. The fair value of HGP LP's long-term debt
allocated from Horizon Partnership is estimated using discounted cash flow
analyses, based on the incremental borrowing rates for similar types of
borrowing arrangements. The carrying value of cash and cash equivalents,
receivables and payables approximate their fair value due to their short-term
nature.
An extraordinary charge resulting from the early retirement of debt was
allocated from Horizon Partnership to HGP LP based upon the aforementioned debt
allocation methodology and equaled $0.8 million and $0.2 million for the years
ended December 31, 1997 and 1996, respectively.
NOTE 6--DEFERRED COSTS AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred costs consist of the following:
Deferred leasing costs $ 4,714 $ 4,625
Deferred financing costs 2,446 2,508
------------- ----------
7,160 7,133
Accumulated amortization (2,227) (1,358)
------------- ----------
$ 4,933 $ 5,775
------------- ----------
------------- ----------
Other assets consist of the following:
Escrow deposits $ 281 $ 1,239
Future development projects 948
Other 1,103 1,854
------------- ----------
$ 1,384 $ 4,041
------------- ----------
------------- ----------
</TABLE>
F-79
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--DUE FROM JOINT VENTURE
At December 31, 1997 and 1996, HGP LP's financial statements include $11.6
million and $13.8 million, respectively, due from an unconsolidated joint
venture in which Horizon Partnership has a 45% interest. The amount due
represents cash advances for construction of an expansion to an existing center
("Joint Venture"). Horizon Partnership is also a guarantor of a $17.0 million
construction loan of the Joint Venture. The outstanding balance of the loan was
$11.6 million at December 31, 1997. Cash receipts from debt obtained and net
cash flows generated by the Joint Venture are applied to outstanding advances to
the Joint Venture from its partners prior to distributions to the partners.
NOTE 8--LEASES
Space in the outlet centers is leased to various tenants under operating
leases which are generally for 5 to 10 year periods. The leases usually grant
tenants renewal options and provide for additional or contingent rents based on
certain operating expenses as well as tenants' sales volume. It is expected that
expiring leases will be renewed or replaced by other leases in the normal course
of business.
Minimum future rentals to be received under non-cancelable leases for the
HGP LP properties are summarized as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
1998 $ 18,527
1999 16,437
2000 14,190
2001 10,380
2002 7,110
Thereafter 26,491
-------------
Total $ 93,135
-------------
-------------
</TABLE>
The above scheduled rentals are subject to the usual business risks
associated with collection.
A land lease for one of the outlet centers included in the HGP LP properties
is an operating lease agreement expiring in the year 2056. At December 31, 1997,
minimum cash rental commitments to the expiration date were $30.9 million, of
which $527,000 is due in each of the next five years, adjusted biannually for
changes in the Consumer Price Index.
On July 1, 1997, Horizon Partnership entered into an agreement with Chelsea
GCA Realty Partnership, L.P. ("Chelsea") for lease of the outlet center in
Algodones, New Mexico (the "New Mexico Outlet Center"). The term of the lease
was two years, but could be terminated by Chelsea upon 30 days written notice at
any time after December 31, 1997 (the "Lease Term"). The agreement gave Chelsea
the right, during the Lease Term, to relocate any and all of the tenants to
Chelsea's outlet center located in Santa Fe, New Mexico. Chelsea was responsible
for all costs of operating the New Mexico Outlet Center during the Lease Term.
At closing, Chelsea prepaid the non-refundable $4.0 million rent. Rental
payments were recognized for financial statement purposes on a straight-line
basis over the expected two year Lease Term. On November 25, 1997, Chelsea gave
written notice of termination, effective January 2, 1998. Accordingly, HGP LP
recorded $4.0 million of income in 1997 as a result of the revised Lease Term.
F-80
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information regarding non-cash investing and
financing activities are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Reclassification of assets held for sale to real estate assets....................... $ 6,458
Reclassification of real estate assets to assets held for sale....................... 2,638 $ 8,635
Acquisition of property for debt assumed............................................. $ 8,700
</TABLE>
NOTE 10--CONTINGENCIES
In December 1997, a purported shareholder of Horizon filed a class action
lawsuit naming Horizon and several of its current and former directors as
defendants. The lawsuit claims, among other things, that the directors of
Horizon breached their fiduciary duties to Horizon's shareholders in approving
the merger between Horizon and Prime and that the consideration to be paid to
Horizon's shareholders in such a merger is unfair and inadequate. The lawsuit
requests that the merger be enjoined or, in the event that the merger is
consummated, that the merger be rescinded or damages be awarded to class
members. Horizon's management believes the suit is without merit and intends to
vigorously defend the action. Horizon's management is unable to predict the
likely outcome of the action, but does not believe the ultimate outcome of the
pending litigation will have a material adverse impact on HGP LP's financial
position and results of operations.
NOTE 11--SUBSEQUENT EVENT
On March 6, 1998, Nomura Asset Capital Corporation ("Nomura") entered into a
non-binding commitment letter pursuant to which Nomura will provide a credit
facility in the aggregate principal amount of $120,000,000 to the entities which
own the HGP LP properties (the "HGP Credit Facility") upon consummation of the
Merger Agreement.
F-81
<PAGE>
'
HORIZON GROUP PROPERTIES, L.P.
DECEMBER 31, 1997
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO INITIAL
DEVELOPMENT OR GROSS AMOUNT AT WHICH CARRIED AT CLOSE
INITIAL COST TO HGP LP ACQUISITION(A) OF PERIOD
------------------------- ------------------------ --------------------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
PROPERTY ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ---------------------- ------------ ---------- ------------- --------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bellport $7,164,800 $ 460,700 $16,036,400 $ 355,800 $ 318,500 $ 816,500 $16,354,900 $17,171,400
Dry Ridge 2,724,400 995,900 8,627,500 (1,700) (5,567,500) 994,200 3,060,000 4,054,200
Holland 7,772,000 791,600 12,265,800 3,100 (6,841,800) 794,700 5,424,000 6,218,700
Laughlin 35,494,600 43,571,500 1,600 43,573,100 43,573,100
Medford 5,047,200 269,600 18,586,100 144,400 356,300 414,000 18,942,400 19,356,400
Monroe 815,000 17,982,900 225,800 1,936,800 1,040,800 19,919,700 20,960,500
Norton Shores-
Lakeshore
Marketplace 21,095,400 3,538,300 22,346,900 225,900 1,094,700 3,764,200 23,441,600 27,205,800
Sealy 9,424,300 827,400 13,454,700 18,100 4,169,500 845,500 17,624,200 18,469,700
Somerset 10,849,700 1,750,000 16,460,300 237,100 1,750,000 16,697,400 18,447,400
Traverse City 1,909,000 675,600 7,976,000 (5,000,500) 675,600 2,975,500 3,651,100
Tulare 20,128,400 3,330,900 16,188,000 416,200 1,752,600 3,747,100 17,940,600 21,687,700
Warrenton 12,138,700 1,982,500 14,760,800 8,300 5,750,400 1,990,800 20,511,200 22,502,000
Miscellaneous(b) 13,097,900 42,500 5,445,600 5,700 4,421,100 48,200 9,866,700 9,914,900
------------ ---------- ------------- --------- ------------- ---------- ------------- -----------
Total 1$46,846,400 $15,480,000 $213,702,500 $1,401,600 $ 2,628,800 $16,881,600 $216,331,300 $233,212,900
------------ ---------- ------------- --------- ------------- ---------- ------------- -----------
------------ ---------- ------------- --------- ------------- ---------- ------------- -----------
<CAPTION>
ACCUMULATED DATE OF DATE OF
PROPERTY DEPRECIATION CONSTRUCTION ACQUISITION
- ---------------------- ------------ ------------ ----------
<S> <C> <C> <C>
Bellport $2,072,400 1992 1995
Dry Ridge 1991 1995
Holland 297,300 1988 1995
Laughlin 71,600 1996 --
Medford 2,345,600 1991 1995
Monroe 5,829,800 1987 --
Norton Shores-
Lakeshore
Marketplace 1,272,100 1995 --
Sealy 1,316,100 1995 1995
Somerset 2,375,900 1990 1993
Traverse City 29,800 1990 --
Tulare 658,300 1995 --
Warrenton 1,688,900 1993 1995
Miscellaneous(b) 2,065,200 1995 --
------------
Total $20,023,000
------------
------------
</TABLE>
Depreciation of the investment in buildings and improvements reflected in the
Statements of Operations is calculated over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Buildings 31.5 years
Shorter of 10 years or useful
Improvements life
Furniture, fixtures and
equipment 3-7 years
</TABLE>
Notes:
(a) Includes adjustments for the impairment of long-lived assets.
(b) Encumbrance reflects allocated debt from Horizon Partnership on assets held
for sale at December 31, 1997.
F-82
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
NOTES TO SCHEDULE III
DECEMBER 31, 1997
1. RECONCILIATION OF REAL ESTATE PROPERTIES:
The following table reconciles the real estate properties from January 1,
1995 to December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, Beginning of Period................ $ 224,313,900 $ 226,086,000 $ 56,844,900
Additions during Period
Development of New Projects............. 6,209,800 32,329,900 54,061,000
Improvements of Existing
Properties............................ 3,535,600 1,101,000 3,145,000
Acquisitions............................ 112,035,100
Write down to net book value(1)......... (4,098,000)
Transfer of Assets Held for Sale........ 3,707,500 (8,376,000)
Retirements............................. (1,582,700)
Write down for impaired
Properties............................ (2,971,200) (22,729,000)
-------------- -------------- --------------
Balance, End of Period...................... $ 233,212,900 $ 224,313,900 $ 226,086,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1995 to December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance, Beginning of Period.................... $ 12,356,400 $ 11,247,000 $ 7,324,600
Additions during Period
Depreciation................................ 9,249,300 5,207,400 3,922,400
Retirements................................. (1,582,700)
Write down to net book value(1)............. (4,098,000)
------------- ------------- -------------
Balance, End of Period.......................... $ 20,023,000 $ 12,356,400 $ 11,247,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(1) The cost basis of impaired assets and assets for sale have been adjusted to
reflect the write-off of accumulated depreciation.
F-83
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
BASIS OF PRESENTATION
PRO FORMA COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
The accompanying Unaudited Pro Forma Combined Balance Sheet reflects the
following transactions which are expected to occur subsequent to December 31,
1997: (a) the acquisition of the Prime Transferred Properties, including assumed
issuance of debt to finance the acquisition; (b) the refinancing of debt; and
(c) the issuance of common stock and common units.
The accompanying Unaudited Pro Forma Combined Statement of Operations for
the year ended December 31, 1997 reflects the following transaction, which
occurred or are expected to occur subsequent to December 31, 1997, as if they
had occurred on January 1, 1997: (a) the acquisition of the Prime Transferred
Properties, including assumed issuance of debt to finance the acquisition; (b)
the refinancing of debt; and (c) the issuance of common stock and common units.
The accompanying Unaudited Pro Forma Combined Financial Statements have been
prepared by management of Horizon Partnership and do not purport to be
indicative of the results which would actually have been obtained had the
transactions described above been completed on the dates indicated or which may
be obtained in the future. The Unaudited Pro Forma Combined Financial Statements
should be read in conjunction with the Notes to the Pro Forma Combined Financial
Statements.
F-84
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, L.P.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRIME
TRANSFERRED
PROPERTIES PRO FORMA
HGP LP [A] [B] ADJUSTMENTS PRO FORMA
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investment in rental property, net.................... $ 213,190 $ 27,047 $ 4,933[C] $ 157,099
(45,474)[D]
40,565[E]
(83,162)[F]
Cash and cash equivalents............................. 3,581 (25,958) 26,015[G] 3,638
Restricted cash....................................... 281 281
Accounts receivable, net.............................. 395 336 731
Deferred charges, net................................. 4,933 (4,933)[C] --
Due from affiliates, net.............................. 11,639 44 11,683
Investment in partnerships[H]......................... 309 309
Assets held for sale.................................. 1,933 1,933
Other assets.......................................... 1,075 1,075
------------ ------------- ----------- -----------
Total assets...................................... $ 237,336 $ 1,469 $ (62,056) $ 176,749
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Mortgages and other debt.............................. $ 146,846 $ 26,015[G] $ 127,387
(45,474)[D]
Accrued interest...................................... 818 818
Real estate taxes payable............................. 1,322 $ 375 1,697
Construction costs payable............................ 417 417
Accounts payable and other liabilities................ 4,771 1,094 5,865
------------ ------------- ----------- -----------
Total liabilities................................. 154,174 1,489 (19,459) 136,184
Partners' capital [I]:
General partner..................................... 33,156[E] 33,156
Limited partners.................................... 7,409[E] 7,409
Predecessor owners' capital......................... 83,162 (83,162)[F] --
------------ ------------- ----------- -----------
Total partners' capital........................... 83,162 (42,597) 40,565
------------ ------------- ----------- -----------
Total liabilities and partners' capital........... $ 237,336 $ 1,469 $ (62,056) $ 176,749
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
</TABLE>
See accompanying Notes to Pro Forma Combined Balance Sheet.
F-85
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, L.P.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] Certain reclassifications have been made to HGP LP's balance sheet to
conform to Prime Partnership's balance sheet presentation.
[B] To reflect the purchase of the Prime Transferred Properties using the
purchase method of accounting. Amounts represent purchase price allocation
calculated as follows:
<TABLE>
<CAPTION>
PRIME
PARTNERSHIP PURCHASE
HISTORICAL PRICE
COST ADJUSTMENTS TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
Investment in rental property, net..................... $ 42,058 $ 26,015(i) $ 27,047
(41,026) ii)
Cash and cash equivalents.............................. 57 (26,015)(i) (25,958)
Accounts receivable, net............................... 336 336
Due from affiliates, net............................... 44 44
----------- ----------- ----------
Total assets....................................... $ 42,495 $ (41,026) $ 1,469
----------- ----------- ----------
----------- ----------- ----------
Real estate taxes payable.............................. $ 375 $ 375
Accounts payable and other liabilities................. 1,094 1,094
Predecessor owners' capital............................ 41,026 $ (41,026) ii) --
----------- ----------- ----------
Total liabilities and predecessor owners'
capital.......................................... $ 42,495 $ (41,026) $ 1,469
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
- ------------------------
Notes:
(i) To reflect cash purchase price for Prime Transferred Properties.
(ii) To eliminate predecessor owners' capital.
[C] Reflects the elimination of HGP LP's historical Deferred Charges in
connection with the Transactions.
[D] The pro forma adjustment to Investment in Rental Property and Mortgages and
Other Debt reflects the elimination of the portion of the total debt
allocated to HGP LP and included in the historical financial statements
based upon the proportionate use of debt methodology (see Note 2 of the
historical combined financial statements of HGP LP included elsewhere
herein) which will not be transferred to HGP LP in connection with the
Transactions. The pro forma adjustment was calculated as follows:
<TABLE>
<S> <C>
HGP LP pro forma mortgages and other debt....................... $ 127,387
Less:
Financing of Prime Transferred Properties (see Note G)...... (26,015)
Historical mortgages and other debt......................... (146,846)
----------
Pro forma adjustment............................................ $ (45,474)
----------
----------
</TABLE>
F-86
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, L.P.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
The following summarizes the terms of HGP LP's pro forma Mortgages and Other
Debt:
<TABLE>
<CAPTION>
PRO FORMA
MORTGAGES AND INTEREST MATURITY
DESCRIPTION COLLATERAL OTHER DEBT RATE DATE DEBT SERVICE REQUIREMENT
- ------------------------ ---------------- ------------- ----------- --------- -------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage debt (i)....... 13 $ 108,225(iii) 7.60% iv) (vi) Monthly interest-only,
properties(ii) mandatory monthly principal
payments totaling $1,500,
$1,500 and $2,000 in years 1,
2, and 3, respectively, after
the loan closing date.
Mortgage debt........... Bellport 10,891 10.25% 7/1/18 25-year amortization, monthly
principal and interest
Unsecured note.......... None 4,000 8.50% 6/1/98 Monthly interest-only
Capital lease
obligations........... Office building 3,128 8.20%(v) Various Various
and equipment
Unsecured note.......... None 811 8.00% Various Various
-------------
Other capital lease
obligation............ Equipment 332 9.50% Various Various
HGP LP pro forma
mortgages and other
debt.................. $ 127,387
-------------
</TABLE>
- ------------------------
Notes:
(i) Pursuant to a mortgage loan commitment expected to be closed
simultaneously upon closing of the formation of HGP LP. In connection
with the mortgage loan commitment, Prime Partnership will guarantee up to
$10,000 in principal. If HGP LP receives a capital contribution of at
least $50,000 and such proceeds are used to repay the mortgage loan, then
Prime Partnership will be released from such guaranty.
(ii) The mortgage debt will be collateralized by the following properties:
Laughlin, Tulare, Medford, Dry Ridge, Warrenton, Monroe, Holland,
Somerset, Sealy, Traverse City, Norton Shores, Indiana, and Nebraska.
(iii) Includes $26,015 of mortgage indebtedness on Indiana and Nebraska (see
Note G).
(iv) Based on 30-day LIBOR plus 1.9% assuming 30-day LIBOR equals 5.7%.
(v) Based on 30-day LIBOR plus 2.5% assuming 30-day LIBOR equals 5.7%.
(vi) The maturity date will be three years from the initial closing of the
mortgage loan commitment.
[E] The pro forma adjustment reflects the issuance of 3,889 HGP LP Common Units
representing the estimated fair value of HGP LP's net assets based upon a
direct capitalization of each property's estimated net operating income.
Property capitalization rates were based upon various factors including
property location, historical operating performance, occupancy rates and
industry information relating to sales of factory outlet centers.
[F] Elimination of HGP LP's historical Partners' Capital in connection with the
Transactions.
F-87
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, L.P.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[G] To reflect the financing of the Prime Transferred Properties. See Note [D]
for terms of the financing.
[H] HGP LP holds a 45% interest in a real estate venture (Bellport outlet center
Phase II & III) that is accounted for using the equity method of accounting.
The condensed combined balance sheet of this venture and its condensed
statements of operations are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Total assets, primarily rental property......................................... $ 26,974
------------
------------
Liabilities, primarily long-term debt........................................... $ 24,056(i)
Partners' capital............................................................... 2,918
------------
Total liabilities and partners' capital......................................... $ 26,974
------------
------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Revenues........................................................................ $ 2,050
Operating expense............................................................... 749
Interest expense................................................................ 650
Depreciation and amortization................................................... 65
------------
Net income...................................................................... $ 586
------------
------------
</TABLE>
- ------------------------
Note:
(i) Includes mortgages of $11,631 pursuant to a mortgage loan commitment
expected to be closed simultaneously upon closing of the formation of HGP LP
and (a) is collateralized by Phase II and III, (b) bears interest at 30-day
LIBOR plus 1.9%, (c) matures three years from the initial closing of the
mortgage loan commitment, and (d) requires monthly interest-only payments.
In addition, the amount includes approximately $10,600 due to HGP LP
relating to cash advances to fund construction of Phase II and III.
F-88
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, L.P.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[I] Issuance of 3,389 HGP LP Common Units at $0.01 par value. The number of
units to be issued to the unit holders of Prime Partnership and Horizon
Partnership is calculated as follows:
<TABLE>
<CAPTION>
HORIZON PARTNERSHIP UNITHOLDERS PRIME PARTNERSHIP
------------------------------------------------ UNITHOLDERS
GENERAL ------------------------
LIMITED GENERAL PARTNER LIMITED GENERAL
PARTNER PARTNER SERIES B PARTNER PARTNER
TOTAL COMMON COMMON PREFERRED COMMON COMMON
UNITS UNITS UNITS UNITS UNITS UNITS
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total units as of December 31, 1997............... 28,294 8,505 35,226(i)
Common Unit award to Horizon Partnership executive
officer......................................... 50
Units to be exchanged for Prime Partnership Common
Units........................................... (4,227) 4,227
Exchange ratio.................................... 0.9193
--------- -----------
Subtotal...................................... 3,886
Units to be exchanged for Prime Partnership Common
Units and Prime Partnership Series B Preferred
Units in the Partnership Merger................. 24,117 24,117 24,117
---------
---------
Exchange ratio.................................... 0.597 0.200
----------- ----------- ----------- ----- -----------
Subtotal...................................... 3,886 14,398 4,823 8,505 35,226
Divide by applicable distribution ratio (ii)...... 20 20 16.72 20 20
----------- ----------- ----------- ----- -----------
HGP LP Common Units........................... 194 720 289 425 1,761
----------- ----------- ----------- ----- -----------
----------- ----------- ----------- ----- -----------
</TABLE>
- ------------------------
Notes:
(i) As adjusted for the conversion of Prime Partnership Series B Preferred Units
and Prime Partnership Series C Preferred Units to HGP LP Common Units at the
conversion ratio of approximately 1.196 to 1.0 and 1.0 to 1.0, respectively.
(ii) Pursuant to the HGP LP Common Unit Distribution, the Prime Partnership will
declare a distribution of the HGP LP Common Units to the record holders of
Prime Partnership Common Units, Prime Partnership Series B Preferred Units
and Prime Partnership Series C Preferred Units immediately following the
Partnership Merger such that each Prime Partnership Series B Preferred Unit
will entitle the holder thereof to receive approximately 1.196 times the
number or portion of HGP LP Common Units distributed in respect of each
Prime Partnership Common Unit and Prime Partnership Series C Preferred Unit.
F-89
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, L.P.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
Unit Ownership Summary:
<TABLE>
<CAPTION>
HGP LP OWNERHIP
------------------------------------------------
LIMITED GENERAL
PARTNER PARTNER
COMMON COMMON
UNITS UNITS TOTAL PERCENTAGE
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Prime Partnership Unitholders.......................................... 425 1,761 2,186 64.50%
Horizon Partnership Unitholders........................................ 194 1,009 1,203 35.50%
----- ----- --------- -----------
HGP LP Common Units.................................................... 619 2,770 3,389 100.00%
----- ----- --------- -----------
----- ----- --------- -----------
Ownership percentage................................................... 18.26% 81.74% 100.00%
----- ----- ---------
----- ----- ---------
</TABLE>
F-90
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
HORIZON GROUP PROPERTIES, L.P.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
<TABLE>
<CAPTION>
PRIME
TRANSFERRED
PROPERTIES PRO FORMA
HGP LP [A] [B] ADJUSTMENTS PRO FORMA
------------ ------------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUES
Base rents.............................................. $ 23,129 $ 4,287 $ 27,416
Percentage rents........................................ 151 151
Tenant reimbursements................................... 7,116 2,225 9,341
Interest and other...................................... 2,147 491 2,638
------------ ------ -----------
Total revenues...................................... 32,543 7,003 39,546
EXPENSES
Property operating...................................... 6,153 1,709 7,862
Real estate taxes....................................... 3,036 746 3,782
Depreciation and amortization........................... 10,228 1,586 $ (7,325)[C] 4,489
General and administrative.............................. 2,813 687[D] 3,500
Interest................................................ 11,497 1,757 (3,220)[E] 10,034
Impairment and severance................................ 6,949 6,949
Other charges........................................... 2,163 133 400[F] 2,696
------------ ------ -------------- -----------
Total expenses...................................... 42,839 5,931 (9,458) 39,312
------------ ------ -------------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM.................................... $ (10,296) $ 1,072 $ 9,458 $ 234
------------ ------ -------------- -----------
------------ ------ -------------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY
ITEM PER COMMON UNIT:
General partner....................................... $ 0.07
-----------
-----------
Limited partner....................................... $ 0.07
-----------
-----------
WEIGHTED AVERAGE COMMON UNITS OUTSTANDING:
General partner....................................... 2,770
Limited partner....................................... 619
-----------
Total............................................... 3,389
-----------
-----------
</TABLE>
See accompanying Notes to Pro Forma Combined Statement of Operations.
F-91
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
HORIZON GROUP PROPERTIES, L.P.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
[A] Historical statement of operations of HGP LP for the year ended December 31,
1997 included elsewhere herein.
[B] To reflect the operations of the Prime Transferred Properties.
[C] Represents the depreciation expense of HGP LP real estate at fair value
compared to historical cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the related assets which have a
useful life of approximately 31.5 years. The calculation of depreciation of
rental property for the year ended December 31, 1997 is as follows:
<TABLE>
<S> <C>
Pro forma basis of HGP LP at fair value................................................ $ 157,099
Less: Fair value allocated to land..................................................... (15,710)
---------
Pro forma basis of HGP LP depreciable rental property at fair value.................... 141,389
Divide by 31.5 years................................................................... 31.5
---------
Annual pro forma depreciation expense.................................................. 4,489
Historical depreciation................................................................ (11,814)
---------
Pro forma adjustment to depreciation expense........................................... $ (7,325)
---------
---------
</TABLE>
[D] Increase results from identified historical costs of certain items,
primarily salaries and benefits costs and public reporting expenses which
are expected to increase as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-------------
<S> <C>
Estimated pro forma general and administrative costs for the year ended December 31, 1997...... $ 3,500
Elimination of historical general and administrative costs..................................... (2,813)
-------------
Pro forma adjustment to general and administrative costs....................................... $ 687
-------------
-------------
</TABLE>
[E] Interest expense computed as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MORTGAGES AND INTEREST INTEREST
DESCRIPTION COLLATERAL OTHER DEBT RATE EXPENSE
- -------------------------------- --------------------------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Mortgage debt................... (i) $ 108,225 7.60%(ii) $ 8,225
Mortgage debt................... Bellport 10,891 10.25% 1,116
Unsecured note.................. None 4,000 8.50% 340
Capital lease obligations....... Office building and equipment 3,128 8.20%(iii) 256
Unsecured note.................. None 811 8.00% 65
Other capital lease
obligations................... Equipment 332 9.50% 32
------------- -----------
Total........................... $ 127,387 10,034
-------------
-------------
Historical interest expense for the year ended December 31, 1997................................... (13,254)
-----------
Pro forma adjustment to interest expense........................................................... $ (3,220)
-----------
-----------
</TABLE>
The effect of a 1/8% variance in the interest rate of the debt issued would
be approximately $159.
- ------------------------
Notes:
(i) Pursuant to a mortgage loan commitment expected to be closed simultaneously
upon the formation of HGP LP. The mortgage debt will be collateralized by
the following properties: Laughlin, Tulare,
F-92
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
HORIZON GROUP PROPERTIES, L.P.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT INFORMATION)
Medford, Dry Ridge, Warrenton, Monroe, Holland, Somerset, Sealy, Traverse
City, Norton Shores, Indiana, and Nebraska.
(ii) Based on 30-day LIBOR plus 1.9% assuming 30-day LIBOR equals 5.7%.
(iii) Based on 30-day LIBOR plus 2.5% assuming 30-day LIBOR equals 5.7%.
[F] Represents the 4.0% annual fee payable to Prime Partnership pursuant to the
terms of the Prime Guaranty.
F-93
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
ACQUISITION PROPOSAL.................................................... 4.3(a)
AFFILIATE............................................................... 2.13
AFFILIATES.............................................................. 4.4
AGREEMENT............................................................... PREAMBLE
AICPA STATEMENT......................................................... 5.1(b)
BASE AMOUNT............................................................. 7.2
BREAK-UP EXPENSES....................................................... 7.2
BREAK-UP FEE............................................................ 7.2
BREAK-UP FEE TAX OPINION................................................ 7.2
C&C RECITAL............................................................. W
C&C RETAIL.............................................................. RECITAL W
C&C/HORIZON CONTRIBUTION AGREEMENT...................................... RECITAL W
C&C/MURDOCK AGREEMENTS.................................................. RECITAL W
C&C/PRIME LLC........................................................... RECITAL W
CERTIFICATES............................................................ 1.14(c)(i)
CLOSING................................................................. 1.4
CLOSING DATE............................................................ 1.4
CODE.................................................................... RECITAL Q
COMMITMENT.............................................................. 4.1(i)
CONFIDENTIALITY AGREEMENT............................................... 5.2
CONTRIBUTION AGREEMENT.................................................. RECITAL F
CONTROLLED GROUP MEMBER................................................. 2.14
CORPORATE EXCHANGE FUND................................................. 1.14(b)(i)
DELAWARE CERTIFICATE OF MERGER.......................................... RECITAL J
DELAWARE SECRETARY...................................................... 1.5(a)
DESIGNATED PROPERTIES................................................... 1.18
DISSENTING SHARES....................................................... 1.13(b)
DRULPA.................................................................. 1.1(a)
EMPLOYEE PLAN........................................................... 2.14
ENCUMBRANCES............................................................ 2.9(a)
ENVIRONMENTAL LAWS...................................................... 2.12
ERISA................................................................... 2.14
EXCESS SHARES........................................................... 1.14(g)(ii)
EXCHANGE ACT............................................................ 1.8
EXCHANGE AGENT.......................................................... 1.14(a)
EXCHANGE FUND........................................................... 1.14(b)(ii)
EXCHANGE TRUST.......................................................... 1.14(g)(ii)
FINAL COMPANY DIVIDEND.................................................. 1.14(d)(i)
GAAP.................................................................... 2.6
GOVERNMENTAL ENTITY..................................................... 2.5(d)
HAZARDOUS SUBSTANCES.................................................... 2.12
HORIZON................................................................. PREAMBLE
HORIZON ARTICLES OF INCORPORATION....................................... 2.1
HORIZON BYLAWS.......................................................... 2.1
HORIZON CAPITAL BUDGET.................................................. 4.1(i)
HORIZON COMMON SHARE.................................................... 1.2
HORIZON DIRECTOR STOCK OPTION PLAN...................................... 2.3(b)
HORIZON DISCLOSURE LETTER............................................... 2.2(a)
HORIZON ECONOMIC LOSSES................................................. 6.2(a)
</TABLE>
Appendix A-i
<PAGE>
<TABLE>
<S> <C>
HORIZON ENVIRONMENTAL REPORTS........................................... 2.12
HORIZON FINANCIAL STATEMENT DATE........................................ 2.7
HORIZON LEASES.......................................................... 2.10(b)
HORIZON LONG-TERM INCENTIVE PLAN........................................ 2.3(b)
HORIZON MATERIAL ADVERSE CHANGE......................................... 2.7
HORIZON MATERIAL ADVERSE EFFECT......................................... 2.1
HORIZON/MERGER ARTICLES OF INCORPORATION................................ 1.2
HORIZON/MERGER BYLAWS................................................... 1.2
HORIZON OP UNIT......................................................... 1.11(b)
HORIZON PARTNER APPROVALS............................................... 5.1(g)
HORIZON PARTNERSHIP..................................................... PREAMBLE
HORIZON PARTNERSHIP CONTRIBUTION........................................ RECITAL F
HORIZON PERMITS......................................................... 2.19
HORIZON PROPERTIES...................................................... 2.9(a)
HORIZON SEC DOCUMENTS................................................... 2.6
HORIZON SHAREHOLDER APPROVALS........................................... 2.5(a)
HORIZON SHAREHOLDERS MEETING............................................ 5.1(d)
HORIZON STOCK OPTIONS................................................... 2.3(b)
HORIZON SUBSIDIARIES.................................................... 2.2(a)
HORIZON/SUBSIDIARY ARTICLES OF MERGER................................... RECITAL L
HORIZON/SUBSIDIARY CERTIFICATE OF MERGER................................ RECITAL L
HORIZON/SUBSIDIARY MERGER............................................... RECITAL L
HORIZON/SUBSIDIARY MERGER EFFECTIVE TIME................................ 1.5(b)
HORIZON TITLE INSURANCE POLICIES........................................ 2.9(b)
HORIZON 1993 STOCK OPTION PLAN.......................................... 2.3(b)
HORIZON 1997 STOCK OPTION PLAN.......................................... 2.3(b)
INDEBTEDNESS............................................................ 2.20(b)
INDEMNIFIED LIABILITIES................................................. 5.9(a)
INDEMNIFIED PARTIES..................................................... 5.9(a)
INTERESTED STOCKHOLDER.................................................. 2.24
IRS..................................................................... 2.14(b)
KNOWLEDGE OF PRIME...................................................... 3.20
KNOWLEDGE OF HORIZON.................................................... 2.28
LAWS.................................................................... 2.5(d)
LIENS................................................................... 2.2(b)
MARYLAND DEPARTMENT..................................................... 1.5(b)
MBCA.................................................................... 1.2
MERGERS................................................................. RECITAL C
MERGER CONSIDERATION.................................................... 1.11(e)
MGCL.................................................................... 1.2
MICHIGAN DEPARTMENT..................................................... 1.5(b)
MURDOCK................................................................. RECITAL W
MURDOCK/PACIFIC AGREEMENT............................................... RECITAL W
NEWCO................................................................... PREAMBLE
NEWCO COMMON SHARES..................................................... RECITAL O
NEWCO LP................................................................ PREAMBLE
NEWCO LP COMMON UNIT.................................................... 1.16(c)
NEWCO PARTNER APPROVALS................................................. 5.1(g)
NYSE.................................................................... 1.14(g)(ii)
ORIGINAL MERGER AGREEMENT............................................... RECITAL A
OUTSIDE PROPERTY MANAGEMENT AGREEMENTS.................................. 2.20(f)
</TABLE>
Appendix A-ii
<PAGE>
<TABLE>
<S> <C>
PACIFIC................................................................. RECITAL W
PARTNER APPROVALS....................................................... 5.1(g)
PARTNERSHIP EXCHANGE FUND............................................... 1.14(b)(ii)
PARTNERSHIP MERGER...................................................... RECITAL I
PARTNERSHIP MERGER CONSIDERATION........................................ 1.11(c)
PARTNERSHIP MERGER EFFECTIVE TIME....................................... 1.5(a)
PAYOR................................................................... 7.2
PENSION PLAN............................................................ 2.14
PERSON.................................................................. 2.2(a)
PRIME................................................................... PREAMBLE
PRIME ARTICLES OF INCORPORATION......................................... 3.1
PRIME BYLAWS............................................................ 3.1
PRIME COMMON SHARES..................................................... 3.3(a)
PRIME COMMON UNIT....................................................... 1.11(b)
PRIME CORPORATE COMMON DISTRIBUTION..................................... RECITAL P
PRIME CORPORATE CONTRIBUTION............................................ RECITAL O
PRIME DISCLOSURE LETTER................................................. 3.2(a)
PRIME ECONOMIC LOSSES................................................... 6.3(a)
PRIME FINANCIAL STATEMENT DATE.......................................... 3.7
PRIME/HORIZON ARTICLES OF MERGER........................................ RECITAL M
PRIME/HORIZON MERGER EFFECTIVE TIME..................................... 1.5(c)
PRIME/HORIZON MERGER.................................................... RECITAL M
PRIME/HORIZON MERGER CONSIDERATION...................................... 1.11(d)
PRIME LEASES............................................................ 3.10(b)
PRIME MATERIAL ADVERSE CHANGE........................................... 3.7
PRIME MATERIAL ADVERSE EFFECT........................................... 3.1
PRIME OP UNITS.......................................................... 3.3(e)
PRIME PARTNER APPROVALS................................................. 5.1(g)
PRIME PARTNERSHIP....................................................... PREAMBLE
PRIME PARTNERSHIP AGREEMENT............................................. 1.14(d)(i)
PRIME PARTNERSHIP COMMON DISTRIBUTION................................... RECITAL K
PRIME PARTNERSHIP SPECIAL DISTRIBUTION.................................. RECITAL G
PRIME PERMITS........................................................... 3.15
PRIME PREFERRED SHARES.................................................. 3.3(a)
PRIME PROPERTIES........................................................ 3.9(a)
PRIME REGULAR QUARTERLY DISTRIBUTIONS................................... 3.7
PRIME SEC DOCUMENTS..................................................... 3.6
PRIME SERIES A PREFERRED SHARES......................................... 3.3(a)
PRIME SERIES B PREFERRED SHARES......................................... 3.3(a)
PRIME SERIES C PREFERRED SHARES......................................... 3.3(a)
PRIME SERIES A PREFERRED UNIT........................................... 3.3(e)
PRIME SERIES B PREFERRED UNIT........................................... 1.11(b)
PRIME SERIES C PREFERRED UNIT........................................... 3.3(e)
PRIME SHAREHOLDER APPROVALS............................................. 3.5(a)
PRIME SHAREHOLDERS MEETING.............................................. 5.1(c)
PRIME SPECIAL DISTRIBUTION.............................................. RECITAL H
PRIME STOCK OPTIONS..................................................... 3.3(b)
PRIME SUBSIDIARIES...................................................... 3.1
PRIME TITLE INSURANCE POLICIES.......................................... 3.9(b)
PROHIBITED TRANSACTION.................................................. 2.14(c)
PROPERTY RESTRICTIONS................................................... 2.9(a)
</TABLE>
Appendix A-iii
<PAGE>
<TABLE>
<S> <C>
PROXY STATEMENT......................................................... 5.1(a)
QUALIFYING INCOME....................................................... 7.2
RECIPIENT............................................................... 7.2
REGISTRATION STATEMENT.................................................. 5.1(a)
REIT.................................................................... 2.16(b)
REIT REQUIREMENTS....................................................... 7.2
SEC..................................................................... 2.5(d)
SECOND AMENDED AND RESTATED PRIME PARTNERSHIP AGREEMENT................. 1.7
SECURITIES ACT.......................................................... 1.8
SHAREHOLDER APPROVALS................................................... 3.5(a)
SKY MERGER.............................................................. PREAMBLE
SKY MERGER ARTICLES OF INCORPORATION.................................... 2.1
SKY MERGER BYLAWS....................................................... 2.1
SKY MERGER COMMON SHARE................................................. 1.2
SKY MERGER SHAREHOLDER APPROVALS........................................ 2.5(b)
SKY MERGER STOCK OPTION................................................. 1.2
STOCK PURCHASE AGREEMENT................................................ RECITAL V
SUBJECT PRINCIPAL AMOUNT................................................ 1.1(b)
SUBSIDIARY.............................................................. 2.2(a)
SUPERIOR ACQUISITION PROPOSAL........................................... 4.3(d)
SURVIVING COMPANY....................................................... 1.3
SURVIVING COMPANY COMMON SHARE.......................................... 1.11(d)
SURVIVING COMPANY SERIES B PREFERRED SHARE.............................. 1.11(d)
SURVIVING PARTNERSHIP................................................... 1.1(a)
TAKEOVER STATUTE........................................................ 2.22
TAXES................................................................... 2.16(a)
TAX PROTECTION AGREEMENTS............................................... 2.20(j)
THIRD PARTY PROVISIONS.................................................. 8.5
TIER THREE PERCENTAGE................................................... 5.4(c)(ii)
TRANSFER AND GAINS TAXES................................................ 5.7
TRANSFERRED PRIME PROPERTIES............................................ 1.17
WELFARE PLAN............................................................ 2.14
1940 ACT................................................................ 2.23
</TABLE>
Appendix A-iv
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement")
dated as of February 1, 1998 by and among PRIME RETAIL, INC., a Maryland
corporation ("Prime"), PRIME RETAIL, L.P., a Delaware limited partnership
("Prime Partnership"), HORIZON GROUP, INC., a Michigan corporation ("Horizon"),
SKY MERGER CORP., a Maryland corporation ("Sky Merger"), HORIZON GROUP
PROPERTIES, INC., a Maryland corporation ("Newco"), HORIZON GROUP PROPERTIES,
L.P., a Delaware limited partnership ("Newco LP"), and HORIZON/GLEN OUTLET
CENTERS LIMITED PARTNERSHIP, a Delaware limited partnership ("Horizon
Partnership").
R E C I T A L S:
A. The parties hereto (other than Newco) are parties to that certain
Agreement and Plan of Merger dated as of November 12, 1997 by and among
the parties hereto (the "Original Merger Agreement").
B. The parties hereto wish to amend and restate, supersede and replace the
Original Merger Agreement in its entirety by the execution and delivery
of this Agreement.
C. The Board of Directors of each of Prime and Horizon deems it advisable
and in the best interests of their respective shareholders that Prime
acquire certain of the assets and business of Horizon and operate under the name
"Prime Retail, Inc.""; such acquisition to be effected by the consummation of
the transactions set forth herein, including without limitation, the Horizon
Partnership Contribution, the Prime Partnership Special Distribution, the Prime
Special Distribution, the Partnership Merger, the Prime Partnership Common
Distribution, the Horizon/Subsidiary Merger, the Prime/Horizon Merger, the Prime
Corporate Contribution and the Prime Corporate Common Distribution (each as
defined below; the Partnership Merger, the Horizon/Subsidiary Merger and the
Prime/Horizon Merger are collectively referred to herein as the "Mergers").
D. Newco is a Maryland corporation which, prior to the date hereof, was
formed by Horizon as its wholly-owned subsidiary.
E. Newco LP is a Delaware limited partnership, the general partnership
interests and limited partnership interests of which are owned by Newco
and Horizon Partnership, respectively.
F. Upon the terms and subject to the conditions set forth herein,
immediately prior to the declaration of the Prime Partnership Special
Distribution, it is contemplated that on the Closing Date (as hereinafter
defined) Horizon Partnership shall contribute to Newco LP certain of its assets
to Newco LP subject to obligations and liabilities relating to such properties
(collectively, the "Horizon Partnership Contribution"), all as provided in the
Contribution Agreement in substantially the form attached hereto as Exhibit A
(the "Contribution Agreement").
G. Upon the terms and subject to the conditions set forth herein,
immediately after the Horizon Partnership Contribution, it is
contemplated that on the Closing Date Prime Partnership shall declare a cash
distribution (the "Prime Partnership Special Distribution") to the record
holders of certain partnership interests in Prime Partnership immediately prior
to the consummation of the Partnership Merger, as provided in Section 1.16(a)
hereof.
H. Upon the terms and subject to the conditions set forth herein, on the
Closing Date immediately after the declaration of the Prime Partnership
Special Distribution and immediately prior to the consummation of the
Partnership Merger, Prime shall declare a cash distribution (the "Prime Special
Distribution") to the record holders of Prime Common Shares, Prime Series B
Preferred Shares and Prime Series C Preferred Shares (each as defined below)
immediately prior to the consummation of the Partnership Merger, as provided in
Section 1.16(b) hereof.
Appendix A-1
<PAGE>
I. Under the terms and subject to the conditions set forth herein, after the
declaration of the Prime Special Distribution, Prime, as the sole general
partner of Prime Partnership, and Horizon, as the sole general partner of
Horizon Partnership, deem it advisable and in the best interests of their
respective limited partners, subject to the conditions and other provisions
contained herein, that Horizon Partnership shall merge with and into Prime
Partnership, with the holders of partnership interests in Horizon Partnership
receiving the consideration set forth herein (the "Partnership Merger").
J. Upon the terms and subject to the conditions set forth herein, Prime
Partnership and Horizon Partnership shall execute a Certificate of Merger
(the "Delaware Certificate of Merger") in substantially the form attached hereto
as Exhibit B and shall file such Delaware Certificate of Merger in accordance
with Delaware law to effectuate the Partnership Merger.
K. Upon the terms and subject to the conditions set forth herein, on the
Closing Date and immediately after the consummation of the Partnership
Merger, Prime Partnership shall declare a distribution of all of the Newco LP
Common Units (as defined below) to the record holders of certain partnership
interests in Prime Partnership immediately after the consummation of the
Partnership Merger (the "Prime Partnership Common Distribution"), as provided in
Section 1.16(c) hereof.
L. Upon the terms and subject to the conditions set forth herein,
immediately following the declaration of the Prime Partnership Common
Distribution, Horizon and Sky Merger shall execute (i) the Articles of Merger
(the "Horizon/Subsidiary Articles of Merger") in substantially the form attached
hereto as Exhibit C-1 and shall file such Horizon/Subsidiary Articles of Merger
in accordance with Maryland law and (ii) the Certificate of Merger (the
"Horizon/Subsidiary Certificate of Merger") in substantially the form attached
hereto as Exhibit C-2 and file such Horizon/Subsidiary Certificate of Merger in
accordance with Michigan law, in each case to effectuate the merger of Horizon
into Sky Merger (the "Horizon/Subsidiary Merger") pursuant to which Sky Merger
shall survive as a Maryland corporation.
M. Upon the terms and subject to the conditions set forth herein,
immediately following the consummation of the Horizon/Subsidiary Merger,
Prime and Sky Merger shall execute the Articles of Merger (the "Prime/Horizon
Articles of Merger") in substantially the form attached hereto as Exhibit D and
shall file such Prime/Horizon Articles of Merger in accordance with Maryland law
in order to effectuate the merger of Prime and Sky Merger (the "Prime/Horizon
Merger") pursuant to which Sky Merger shall survive as a Maryland corporation.
N. Upon the terms and subject to the conditions set forth herein, after
consummation of the Prime/ Horizon Merger, Prime Partnership shall make
the Prime Partnership Common Distribution, as provided in Section 1.16(c)
hereof.
O. Upon the terms and subject to the conditions set forth herein, after the
consummation of the Prime Partnership Common Distribution, Surviving
Company (as defined below) shall contribute to Newco all of the Newco LP Common
Units that it receives pursuant to the Prime Partnership Common Distribution and
all of the Newco Common Shares (as defined below) held by Prime as a result of
the Prime/Horizon Merger, and Newco shall issue to Prime shares of Newco common
stock (each a "Newco Common Share") (collectively, the "Prime Corporate
Contribution"), as provided in Section 1.16(d) hereof.
P. Upon the terms and subject to the conditions set forth herein, after the
consummation of the Prime Corporate Contribution, Surviving Company shall
declare and make a distribution (the "Prime Corporate Common Distribution") of
the Newco Common Shares to the record holders of Prime Common Shares, Prime
Series B Preferred Shares and Prime Series C Preferred Shares (each as defined
below) immediately after the consummation of the Prime/Horizon Merger, all as
provided in Section 1.16(e) hereof.
Q. For federal income tax purposes, it is intended that the Partnership
Merger, regardless of form, be treated as a contribution by Horizon
Partnership of all of its assets to Prime Partnership in exchange for
Appendix A-2
<PAGE>
partnership interests in Prime Partnership, as provided for herein, under
Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"), and a
liquidating distribution of such partnership interests by Newco LP to its
partners under Section 731 of the Code.
R. For federal income tax purposes, it is intended that the
Horizon/Subsidiary Merger shall qualify as a tax-free reorganization
under Section 368(a)(1)(F) of the Code, and that this Agreement shall constitute
a plan of reorganization under Section 368(a)(1)(F) of the Code.
S. For federal income tax purposes, it is intended that the Prime/Horizon
Merger shall qualify as a tax-free reorganization under Section
368(a)(1)(A) of the Code, and that this Agreement shall constitute a plan of
reorganization under Section 368(a)(1)(A) of the Code.
T. Prime, Prime Partnership, Horizon and Horizon Partnership have each
received a fairness opinion relating to the transactions contemplated
hereby as more fully described herein.
U. Prime, Prime Partnership, Horizon and Horizon Partnership desire to make
certain representations, warranties and agreements in connection with the
Mergers.
V. Concurrently with the execution of this Agreement and as an inducement to
Prime and Prime Partnership to enter into this Agreement, Ronald Piasecki
has entered into the Amended and Restated Stock Purchase Agreement dated as of
the date hereof relating to the voting capital stock of each of First HGI, Inc.,
HGI Perryville, Inc., MG Third Party Services Corp., HGI Management Corp. and
Second HGI, Inc. (the "Stock Purchase Agreement"), providing for the sale by
Ronald Piasecki of all of the outstanding voting capital stock (other than any
such voting capital stock held by Horizon Partnership) of such companies to
Prime Retail Services, Inc. or its designees or assigns.
W. Concurrently with the execution of this Agreement and with the consent of
Prime, (i) Castle & Cooke Properties, Inc., a Hawaii corporation ("C&C"),
Castle & Cooke Retail, Inc., a California corporation ("C&C Retail"), and
Horizon Partnership have entered into a Contribution Agreement (the "C&C/
Horizon Contribution Agreement"), pursuant to which the parties thereto desire
to form Castle & Cooke/ Prime Retail, LLC, a Delaware limited liability company
("C&C/Prime LLC"), and (ii) Prime, Horizon, Mr. David H. Murdock, a resident of
the State of California ("Murdock"), and Pacific Holding Company, a sole
proprietorship of Murdock ("Pacific"), have entered into an Agreement (the
"Murdock/Pacific Agreement") which contains certain obligations of Murdock and
Pacific regarding the transactions contemplated hereunder, as more fully
described in the Murdock/Pacific Agreement (the C&C/Horizon Contribution
Agreement and the Murdock/Pacific Agreement are collectively referred to herein
as the "C&C/Murdock Agreements").
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGERS
1.1 THE PARTNERSHIP MERGER.
(a) Upon the terms and subject to the conditions of this Agreement, and
in accordance with Title 6, Chapter 17 of the Delaware Code
Annotated, as amended (the "DRULPA"), Horizon Partnership shall be merged
with and into Prime Partnership with Prime Partnership as the surviving
limited partnership (the "Surviving Partnership"), with the holders of
partnership interests in Horizon Partnership receiving the consideration set
forth in Sections 1.10 and 1.11(c).
(b) After the Partnership Merger, Newco LP shall issue and distribute to
the Surviving Partnership an unsecured negotiable recourse promissory
note, payable to the order of the Surviving Partnership on demand, in the
Subject Principal Amount (as defined below). The unpaid balance of such note
Appendix A-3
<PAGE>
shall bear interest daily at a rate per annum equal to 10% until paid in
full. As used herein, "Subject Principal Amount" shall mean the excess, if
any, of (i) the aggregate unpaid principal balance of mortgage loans to
which the Contributed Assets (as defined in the Contribution Agreement) are
subject immediately prior to the consummation of the Horizon Partnership
Contribution, over (ii) the aggregate unpaid principal balance of mortgage
loans transferred to and assumed by Newco LP as Assumed Liabilities at the
Time of Contribution (each as defined in the Contribution Agreement).
1.2 THE HORIZON/SUBSIDIARY MERGER. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Maryland
General Corporation Law ("MGCL") and the Michigan Business Corporation Act
("MBCA"), immediately following the Partnership Merger Effective Time (as
defined below), Horizon shall be merged with and into Sky Merger, with Sky
Merger as the surviving company. Following the Horizon/Subsidiary Merger, the
separate corporate existence of Horizon shall cease, and Sky Merger shall
succeed to and assume all the rights and obligations of Horizon in accordance
with the MGCL and the MBCA. The articles of incorporation of Sky Merger and the
bylaws of Sky Merger shall each be amended and restated pursuant to the
Horizon/Subsidiary Merger substantially in the forms attached hereto as Exhibits
E and F, respectively (the "Horizon/Merger Articles of Incorporation" and the
"Horizon/Merger Bylaws", respectively), and shall continue in full force and
effect thereafter until further amended in accordance with applicable Maryland
law. In the Horizon/Subsidiary Merger, each outstanding share of common stock of
Sky Merger held by Horizon shall be canceled, and each issued and outstanding
share of common stock, $0.01 par value per share of Horizon (each, a "Horizon
Common Share") (other than Horizon Common Shares owned by Horizon or any Horizon
Subsidiary, which shall automatically be canceled and retired and all rights
with respect thereto shall cease to exist), shall be converted into one share of
common stock, $0.01 par value per share, of Sky Merger (each, a "Sky Merger
Common Share"). Each certificate representing issued and outstanding Horizon
Common Shares shall upon consummation of the Horizon/Subsidiary be deemed to
represent the same number of Sky Merger Common Shares, until consummation of the
Prime/Horizon Merger in accordance with Section 1.3. There shall be no further
registration of transfers on the stock transfer books of Horizon of the Horizon
Common Shares which were outstanding immediately prior to the Horizon/Subsidiary
Merger Effective Time (as defined below). If, after the Horizon/Subsidiary
Merger Effective Time, Certificates (as defined below) are presented to the
Surviving Company (as defined below) for any reason, they shall be canceled and
exchanged as provided in Section 1.14. As of the Horizon/Subsidiary Merger
Effective Time, each outstanding Horizon Stock Option (as defined in Section
2.3(b)) shall be assumed by Sky Merger and shall be deemed to constitute an
option to acquire (each a "Sky Merger Stock Option"), on the same terms and
conditions applicable under such Horizon Stock Option, the same number of Sky
Merger Common Shares as the holder of such Horizon Stock Option would have been
entitled to receive pursuant to the Horizon/Subsidiary Merger had such holder
exercised such Horizon Stock Option in full immediately prior to the
Horizon/Subsidiary Merger Effective Time at a price per share equal to the
aggregate exercise price for the shares subject to such Horizon Stock Option
divided by the number of full Sky Merger Common Shares deemed to be purchasable
pursuant to such Horizon Stock Option.
1.3 THE PRIME/HORIZON MERGER. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the MGCL, immediately
following the Horizon/Subsidiary Merger Effective Time, Prime shall be merged
with and into Sky Merger with Sky Merger as the surviving company (the
"Surviving Company"). Following the Prime/Horizon Merger, the separate corporate
existence of Prime shall cease, and Sky Merger as the Surviving Company shall
continue and shall succeed to and assume all the rights and obligations in
accordance with the MGCL. The name of the Surviving Company shall be "Prime
Retail, Inc."
1.4 CLOSING OF MERGERS. The closing of the Mergers (the "Closing") will
take place at 10:00 a.m., local time on the date to be specified by the parties,
which (subject to satisfaction or waiver of the conditions set forth in Article
6) shall be no later than the third business day after satisfaction or waiver of
the conditions set forth in Section 6.1(a) (the "Closing Date"), at the offices
of Winston & Strawn, 35 West Wacker Drive, Chicago, Illinois 60601, unless
another date or place is agreed to in writing by the parties.
Appendix A-4
<PAGE>
1.5 EFFECTIVE TIMES. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article 6:
(a) Prime Partnership and Horizon Partnership shall execute and file the
Delaware Certificate of Merger, executed in accordance with the
DRULPA, with the Office of the Secretary of State of the State of Delaware
(the "Delaware Secretary"). The Partnership Merger shall become effective
(the "Partnership Merger Effective Time") at such time as shall be specified
in the Delaware Certificate of Merger.
(b) Immediately following the Partnership Merger Effective Time, Horizon
and Sky Merger shall execute and file (i) the Horizon/Subsidiary
Articles of Merger, executed in accordance with the MGCL, with the State
Department of Assessments and Taxation of Maryland (the "Maryland
Department"), and (ii) the Horizon/Subsidiary Certificate of Merger,
executed in accordance with the MBCA, with the Department of Commerce of the
State of Michigan (the "Michigan Department"). The Horizon/ Subsidiary
Merger shall become effective (the "Horizon/Subsidiary Merger Effective
Time") at such time as shall be specified in the Horizon/Subsidiary Articles
of Merger and the Horizon/Subsidiary Certificate of Merger.
(c) Immediately following the Horizon/Subsidiary Merger Effective Time,
Sky Merger and Prime shall execute and file the Prime/Horizon
Articles of Merger, executed in accordance with the MGCL, with the Maryland
Department. The Prime/Horizon Merger shall become effective (the
"Prime/Horizon Merger Effective Time") at such time as shall be specified in
the Prime/Horizon Articles of Merger.
Prime, Prime Partnership, Horizon, Sky Merger, Newco, Newco LP, Horizon
Partnership and the Surviving Company shall execute and file all other filings
and recordings required, with respect to the Horizon/ Subsidiary Merger and the
Prime/Horizon Merger, under the MGCL or the MBCA or, with respect to the
Partnership Merger, under the DRULPA. Unless otherwise agreed, the parties shall
cause the each Prime/ Horizon Merger Effective Time, the Horizon Subsidiary
Effective Time and the Partnership Merger Effective Time to occur on the Closing
Date in the sequence provided for in the Recitals hereto.
1.6 EFFECT OF PRIME/HORIZON MERGER ON ARTICLES OF INCORPORATION AND
BYLAWS. The Articles of Incorporation and the Bylaws of Sky Merger as in effect
immediately after the Horizon/Subsidiary Merger, shall continue in full force
and effect after the Prime/Horizon Merger until further amended in accordance
with applicable Maryland law.
1.7 EFFECT OF PARTNERSHIP MERGER ON AGREEMENT OF LIMITED PARTNERSHIP. The
Second Amended and Restated Agreement of Limited Partnership of Prime
Partnership in substantially the form of Exhibit G attached hereto (the "Second
Amended and Restated Prime Partnership Agreement"), shall continue in full force
and effect after the Partnership Merger until further amended in accordance with
applicable Delaware law.
1.8 DIRECTORS. At the Prime/Horizon Merger Effective Time, the directors
of the Surviving Company shall consist of twelve persons, including those nine
persons named in the Prime/Horizon Articles of Merger (or such other persons as
shall be designated by Prime prior to the Closing), each of whom shall serve for
the terms specified in the Prime/Horizon Articles of Merger or until their
earlier death, resignation or removal, as the case may be, together with three
persons to be designated by Horizon prior to Closing, each of whom shall, on the
third business day after the Prime/Horizon Merger Effective Time (or such
earlier time as shall be required in order to comply with applicable disclosure
requirements of the Securities Act of 1933, as amended (the "Securities Act")
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), become
a director of the Surviving Company with one of such three persons having terms
expiring at the third, second and first annual meeting of shareholders of the
Surviving Company held following the Prime/ Horizon Merger Effective Time. The
names of the three persons designated by Horizon and their respective terms of
office shall be furnished to Prime prior to the time the Proxy Statement (as
hereinafter defined) is mailed to the shareholders of Prime and Horizon. Prime
and Horizon agree to take whatever action may be necessary to accomplish the
foregoing.
Appendix A-5
<PAGE>
1.9 EFFECT ON SHARES. The effect of the Horizon/Subsidiary Merger on the
shares of capital stock of Horizon and Sky Merger shall be as provided in the
Horizon/Subsidiary Articles of Merger and the Horizon/ Subsidiary Certificate of
Merger. The effect of the Prime/Horizon Merger on the shares of capital stock of
Prime and Sky Merger shall be as provided in Section 1.14 and in the
Prime/Horizon Articles of Merger.
1.10 EFFECT ON PARTNERSHIP INTERESTS. The effect of the Partnership Merger
on the partnership interests of Horizon Partnership shall be as provided in
Section 1.11(c) and in the Delaware Certificate of Merger. The Partnership
Merger shall not change the partnership interests of Prime Partnership
outstanding immediately prior to the Partnership Merger.
1.11 MERGER CONSIDERATION.
(a) In connection with the Horizon/Subsidiary Merger, each issued and
outstanding Horizon Common Share and each outstanding Horizon Stock
Option shall be treated as set forth in Section 1.2.
(b) As of the Prime/Horizon Merger Effective Time, each Horizon Common
Share and Sky Merger Common Share that is owned by Horizon or any
Horizon Subsidiary (as defined below) shall in each case automatically be
canceled and retired and all rights with respect thereto shall cease to
exist, and no Prime/Horizon Merger Consideration (as defined below) shall be
delivered in exchange therefor. As of the Partnership Merger Effective Time,
the issued and outstanding common units of Horizon Partnership (each, a
"Horizon OP Unit") that are owned by Horizon shall convert into the right to
receive, for each such Horizon OP Unit, that number of common units of Prime
Partnership (each, a "Prime Common Unit") and convertible Series B preferred
units of Prime Partnership (each, a "Prime Series B Preferred Unit") equal
to the number of Surviving Company Common Shares and Surviving Company
Series B Preferred Shares, respectively, into which each Horizon Common
Share is converted pursuant to the Prime/Horizon Merger.
(c) Subject to Section 1.14(g), each Horizon OP Unit (other than units
held by Horizon or any Horizon Subsidiary) shall be converted by the
Partnership Merger into the right to receive, 0.9193 of a Prime Common Unit
(the "Partnership Merger Consideration"). As of the Partnership Merger
Effective Time, all such Horizon OP Units shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of record of Horizon OP Units shall cease to have any rights
thereto, except the right to receive the Partnership Merger Consideration,
any dividend or other distribution to which such holder is entitled pursuant
to Section 1.14(d) and any cash in lieu of fractional units to be issued or
paid in consideration therefor upon surrender of such Horizon OP Units in
accordance with Section 1.14(g), without interest.
(d) Subject to Section 1.14(g), each issued and outstanding Sky Merger
Common Share (other than shares held by Horizon or any Horizon
Subsidiary) shall be converted by the Prime/Horizon Merger into the right to
receive 0.20 of a share of 8.5% Series B Cumulative Participating
Convertible Preferred Stock, $.0.01 par value per share, of the Surviving
Company (the "Surviving Company Series B Preferred Share") and 0.597 of a
share of common stock, $0.01 par value per share, of the Surviving Company
(the "Surviving Company Common Share") (the "Prime/Horizon Merger
Consideration"). As of the Prime/Horizon Merger Effective Time, all such Sky
Merger Common Shares shall no longer be outstanding and shall automatically
be canceled and retired and shall cease to exist, and each holder of a
certificate representing any such Sky Merger Common Shares shall cease to
have any rights thereto, except the right to receive the Prime/Horizon
Merger Consideration, any dividend or other distribution to which such
holder is entitled pursuant to Section 1.14(d) and any cash in lieu of
fractional shares to be issued or paid in consideration therefor upon
surrender of such certificate in accordance with Section 1.14(g), without
interest.
(e) "Merger Consideration" shall mean either the Partnership Merger
Consideration or the Prime/Horizon Merger Consideration, as the
context may require.
1.12 REGISTRATION RIGHTS AGREEMENT. On the Closing Date, the Surviving
Company will enter into the Amended and Restated Registration Rights Agreement
substantially in the form of Exhibit H attached
Appendix A-6
<PAGE>
hereto under which Surviving Company will assume in writing and succeed to all
rights and obligations of Horizon and Prime pursuant to the Registration Rights
Agreements listed on Schedule 2.3(g) to the Horizon Disclosure Letter and
pursuant to the Registration Rights Agreements listed on Schedule 3.3(h) to the
Prime Disclosure Letter, respectively.
1.13 APPRAISAL RIGHTS.
(a) NO APPRAISAL RIGHTS. The holders of Horizon Common Shares, Prime
Common Shares, Prime Series B Preferred Shares, Sky Merger Common Shares,
Horizon OP Units and Prime OP Units (as defined below) are not entitled under
applicable law to appraisal rights as a result of the Mergers.
(b) PRIME SERIES A AND SERIES C PREFERRED SHARES. Notwithstanding anything
in this Agreement to the contrary, holders of Prime Series A Preferred Shares
and Prime Series C Preferred Shares (each as defined in Section 3.3(a)) that
have, as of the Effective Time, complied with all procedures necessary to assert
appraisal rights in accordance with the MGCL, if applicable, shall have such
rights, if any, as they may have pursuant to Section 3-202 of the MGCL and such
Prime Series A Preferred Shares and Prime Series C Preferred Shares shall not be
converted or be exchangeable as provided in this Article I, but such holders
shall be entitled to receive such payment as may be determined to be due to such
holders pursuant to the MGCL; PROVIDED, HOWEVER, that if such holder shall have
failed to perfect or shall have effectively withdrawn or lost his right to
appraisal and payment under the MGCL, such holder's Prime Series A Preferred
Shares and Prime Series C Preferred Shares shall thereupon be deemed to have
been converted and to have become exchangeable, as of the Prime/Horizon Merger
Effective Time, into the Prime/Sky Merger Consideration. The Prime Series A
Preferred Shares and Prime Series C Preferred Shares described in this Section
1.13(b) held by holders who exercise and perfect appraisal rights are referred
to herein as "Dissenting Shares." Sky Merger shall give Prime prompt notice of
any demands for appraisal of shares received by Sky Merger (and shall also give
Prime prompt notice of any withdrawals of such demands for appraisal rights) and
Prime shall have the opportunity and right to participate in and direct all
negotiations with respect to such demands. Sky Merger shall not, except with the
prior written consent of Prime, make any payment with respect to, settle or
otherwise negotiate or offer to settle any such demand for appraisal rights.
Prime agrees that it shall make all payments with respect to appraisal rights
and that the funds therefor shall not come, directly or indirectly, from Sky
Merger.
1.14 EXCHANGE OF CERTIFICATES; PRE-CLOSING DIVIDENDS; FRACTIONAL SHARES.
(a) EXCHANGE AGENT. Prior to the Closing Date, Prime shall appoint
American Stock Transfer and Trust Company, or another bank or trust company
reasonably acceptable to Horizon, to act as exchange agent (the "Exchange
Agent") for the exchange of the Prime/Horizon Merger Consideration upon
surrender of certificates representing issued and outstanding Sky Merger Common
Shares and the exchange of the Partnership Merger Consideration in connection
with the Partnership Merger.
(b) MERGER CONSIDERATION.
(i) The Surviving Company shall provide or cause to be provided to
the Exchange Agent on or before the Partnership Merger Effective
Time, for the benefit of those Persons who are holders of Sky Merger
Common Shares after the Horizon/Subsidiary Merger Effective Time,
Surviving Company Common Shares and Surviving Company Series B Preferred
Shares (the "Corporate Exchange Fund") issuable in exchange for the
issued and outstanding Horizon Common Shares pursuant to Section 1.11.
Horizon shall provide to the Exchange Agent on or before the Partnership
Merger Effective Time, for the benefit of the holders of Horizon Common
Shares, cash payable in respect of any dividends required pursuant to
Section 1.14(d)(i) or (ii).
(ii)Prime Partnership shall provide to the Exchange Agent, for the
benefit of the holders of Horizon OP Units, Prime Common Units
(the "Partnership Exchange Fund", and together with
Appendix A-7
<PAGE>
the Corporate Exchange Fund, the "Exchange Fund") issuable in exchange
for, issued and outstanding Horizon OP Units pursuant to Section 1.11.
Horizon shall provide to the Exchange Agent on or before the Partnership
Merger Effective Time, for the benefit of the holders of Horizon OP
Units, cash payable in respect of any distributions required pursuant to
Section 1.14(d).
(c) EXCHANGE PROCEDURE.
(i) As soon as reasonably practicable after the Prime/Horizon Merger
Effective Time, the Exchange Agent shall mail to each holder of
record of a certificate or certificates which immediately prior to the
Prime/Horizon Merger Effective Time represented outstanding Sky Merger
Common Shares (the "Certificates") whose shares were converted into the
right to receive the Prime/Horizon Merger Consideration pursuant to
Section 1.11 (d) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in a form and have such other provisions as
the Surviving Company may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for the
Prime/Horizon Merger Consideration. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as
may be appointed by the Surviving Company, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor the Prime/Horizon Merger
Consideration into which the Sky Merger Common Shares theretofore
represented by such Certificate shall have been converted pursuant to
Section 1.11, as well as any dividends or other distributions to which
such holder is entitled pursuant to Section 1.14(d), and the Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Sky Merger Common Shares which is not registered in the
transfer records of Sky Merger, payment may be made to a person other
than the person in whose name the Certificate so surrendered is
registered if such Certificate shall be properly endorsed or otherwise be
in proper form for transfer and the person requesting such payment either
shall pay any transfer or other taxes required by reason of such payment
being made to a person other than the registered holder of such
Certificate or establish to the satisfaction of the Surviving Company
that such tax or taxes have been paid or are not applicable. Until
surrendered as contemplated by this Section 1.14, each Certificate shall
be deemed at any time after the Prime/Horizon Merger Effective Time to
represent only the right to receive upon such surrender the Prime/Horizon
Merger Consideration, without interest, into which the Sky Merger Common
Shares theretofore represented by such Certificate shall have been
converted pursuant to Section 1.11, and any dividends or other
distributions to which such holder is entitled pursuant to Section
1.14(d). No interest will be paid or will accrue on the Prime/Horizon
Merger Consideration upon the surrender of any Certificate or on any cash
payable pursuant to Section 1.14(d) or Section 1.14(g).
(ii)Contemporaneous with or as soon as reasonably practicable after
the Partnership Merger Effective Time, Prime Partnership shall
mail or otherwise make available to each holder of record of Horizon OP
Units whose interest in Horizon Partnership was converted into the right
to receive the Partnership Merger Consideration a letter of transmittal
with instructions for execution and delivery of the Amended and Restated
Prime Partnership Agreement which shall specify that delivery of the
Partnership Merger Consideration shall be effected only upon execution
and delivery of the Amended and Restated Prime Partnership Agreement and
such other documentation as Prime Partnership may reasonably specify as
necessary in connection with the consummation of the transactions
contemplated hereby. Upon execution and delivery of the Amended and
Restated Prime Partnership Agreement and such other documentation as is
reasonably specified by Prime Partnership in connection with the
consummation of the transactions contemplated hereby, each holder of
Horizon OP Units shall be entitled to receive from Prime Partnership a
copy of the Amended and Restated Prime Partnership Agreement, duly
amended to reflect the Partnership Merger Consideration to be received by
such holder pursuant to Section 1.11, as well as any dividends or
distributions to which such holder is entitled pursuant to Section
1.14(d). Only holders
Appendix A-8
<PAGE>
of record on the books and records of Horizon Partnership shall be
entitled to the Partnership Merger Consideration and to become a limited
partner in Prime Partnership pursuant to this Agreement. Until the
execution and delivery of the Amended and Restated Prime Partnership
Agreement by a holder of Horizon OP Units, and the other documentation
reasonably specified by Prime, such Horizon OP Units shall be deemed at
any time after the Partnership Merger Effective Time to represent only
the rights to receive the Partnership Merger Consideration into which
such Horizon OP Units shall have been converted pursuant to Section 1.11
hereof, without interest, and any dividends or other distributions to
which such holder is entitled pursuant to Section 1.14(d), without
interest.
(d) RECORD DATES FOR FINAL DIVIDENDS; DISTRIBUTIONS WITH RESPECT TO
UNEXCHANGED SHARES.
(i) To the extent necessary to satisfy the requirements of Section
857(a)(1) of the Code for the taxable year of Prime ending at the
Closing Date (and avoid the payment of tax with respect to undistributed
income), Prime shall (i) declare a dividend (the "Final Company
Dividend") first to holders of Prime Preferred Shares (as defined below)
and then, and only to the extent necessary, to holders of Prime Common
Shares (as defined below), the record date for which shall be the close
of business on the last business day prior to the Closing Date, in an
amount equal to the minimum dividend sufficient to permit Prime to
satisfy such requirements and (ii) Prime Partnership shall pay a
corresponding distribution to holders of Prime OP Units (as defined in
Section 3.3(e)) pursuant to Section 6.2 of the Amended and Restated
Agreement of Limited Partnership of Prime Retail, L.P. dated as of
September 8, 1997, as amended (the "Prime Partnership Agreement"). If
Prime determines it necessary to declare a portion of the Final Company
Dividend to holders of Prime Common Shares, it shall notify Horizon at
least ten (10) days prior to the date for the Prime Shareholders Meeting
(as defined in Section 5.1), and Horizon shall (i) declare a dividend per
share to holders of Horizon Common Shares, the record date for which
shall be the close of business on the last business day prior to the
Closing Date, in an amount per Horizon Common Share equal to the product
obtained by multiplying (x) the Final Company Dividend per Prime Common
Share paid by Prime by (y) 0.9193. Horizon Partnership shall pay a
corresponding distribution to the holders of Horizon OP Units pursuant to
the Horizon Partnership Agreement. The dividends payable hereunder to
holders of Horizon Common Shares shall be paid upon presentation of the
certificates of Horizon Common Shares for exchange in accordance with
this Section 1.14 and the distributions payable to holders of Horizon OP
Units shall be paid upon delivery of the executed Second Amended and
Restated Prime Partnership Agreement in accordance with this Section
1.14.
(ii)(A) No dividends or other distributions with respect to Surviving
Company Common Shares or Surviving Company Series B Preferred
Shares with a record date after the Closing Date shall be paid to the
holder of any unsurrendered Certificate with respect to the Surviving
Company Common Shares or Surviving Company Series B Preferred Shares
represented thereby, and no cash payment in lieu of fractional shares
shall be paid to any such holder pursuant to Section 1.14(g), in each
case until the surrender of such Certificate in accordance with this
Section 1.14. Subject to the effect of applicable escheat laws, following
surrender of any such Certificate there shall be paid to the holder of
such Certificate, without interest, (i) at the time of such surrender,
the amount of any cash payable in lieu of any fractional Surviving
Company Common Shares or Surviving Company Series B Preferred Shares to
which such holder is entitled pursuant to Section 1.14(g) and (ii) if
such Certificate is exchangeable for one or more whole Surviving Company
Common Shares or Surviving Company Series B Preferred Shares, (x) at the
time of such surrender the amount of dividends or other distributions
with a record date after the Closing Date theretofore paid with respect
to such whole Surviving Company Common Shares or Surviving Company Series
B Preferred Shares and (y) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Closing
Date but prior to such surrender and with a payment date subsequent to
such surrender payable with respect to such whole Surviving Company
Common Shares or Surviving Company Series B Preferred Shares.
Appendix A-9
<PAGE>
(B) No dividends or distributions with respect to Surviving
Company Common Units or Surviving Company Series B Preferred
Units with a record date after the Closing Date shall be paid to any
holder of Horizon OP Units, and no cash payable in lieu of fractional
units shall be paid to any such holder pursuant to Section 1.14(g),
in each case until such holder has executed and delivered the Amended
and Restated Prime Partnership Agreement and other documentation in
accordance with this Section 1.14. Subject to the effect of the
applicable escheat laws, following execution and delivery of
requisite documents as contemplated by this Section 1.14, there shall
be paid to a holder of Horizon OP Units, without interest, (i) at the
time of such delivery, the amount of any cash payable in lieu of any
fractional Prime Common Units to which such holder is entitled
pursuant to Section 1.14(g) and (ii) if such Horizon OP Units are
exchangeable into one or more whole Prime Common Units, (x) the
amount of any dividend or other distributions with a record date
after the Closing Date theretofore paid with respect to such whole
Prime Common Units, and (y) at the appropriate payment date, the
amount of dividends or other distributions with a record date after
the Closing Date but prior to such date and with a payment date
subsequent to such date, which are payable with respect to such whole
Prime Common Units.
(e) NO FURTHER OWNERSHIP RIGHTS IN HORIZON COMMON SHARES, SKY MERGER COMMON
SHARES AND HORIZON OP UNITS.
(i) All Prime/Horizon Merger Consideration paid upon the surrender of
Certificates in accordance with the terms of this Section 1.14
(and any cash paid pursuant to Section 1.14(g)) shall be deemed to have
been paid in full satisfaction of all rights pertaining to the Horizon
Common Shares and Sky Merger Common Shares, theretofore represented by
such Certificates; provided, however, that Horizon shall transfer to the
Exchange Agent cash sufficient to pay any dividends or make any other
distributions with a record date prior to the Closing Date which may have
been declared or made by Horizon on such Horizon Common Shares which were
converted into Sky Merger Common Shares pursuant to the
Horizon/Subsidiary Merger in accordance with the terms of this Agreement
or prior to the date of this Agreement and which remain unpaid at the
Closing Date and have not been paid prior to such surrender, and there
shall be no further registration of transfers on the stock transfer books
of Sky Merger of the Sky Merger Common Shares which were outstanding
immediately prior to the Closing Date. If, after the Closing Date,
Certificates are presented to the Surviving Company for any reason, they
shall be canceled and exchanged as provided in this Section 1.14.
(ii)All Partnership Merger Consideration payable to holders of
Horizon OP Units pursuant to the terms of this Section 1.14 (and
any cash payable pursuant to Section 1.14(g)) shall be payable, and when
paid shall be deemed to have been paid, in full satisfaction of all
rights pertaining to Horizon OP Units.
(f) NO LIABILITY. None of Horizon, Prime, the Surviving Company, Prime
Partnership, Horizon Partnership, Newco, Newco LP or the Exchange Agent shall be
liable to any person in respect of any Prime/ Horizon Merger Consideration or
Partnership Merger Consideration or dividends or distributions delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Any portion of the Exchange Fund delivered to the Exchange Agent
pursuant to this Agreement that remains unclaimed for six (6) months after the
Closing Date shall be redelivered by the Exchange Agent to Prime, upon demand,
and any holders of Certificates or Horizon OP Units who have not theretofore
complied with Section 1.14(c) shall thereafter look only to Prime for delivery
of the Partnership Merger Consideration and any unpaid dividends or
distributions, subject to applicable escheat and other similar laws.
Appendix A-10
<PAGE>
(g) NO FRACTIONAL SHARES.
(i) No certificates or scrip representing fractional Surviving
Company Common Shares or Surviving Company Series B Preferred
Shares shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests will not entitle the owner thereof to
vote, to receive dividends or to any other rights of a shareholder of
Surviving Company.
(ii)Notwithstanding any other provision of this Agreement, each
holder of Sky Merger Common Shares exchanged pursuant to the
Prime/Horizon Merger who would otherwise have been entitled to receive a
fraction of a Surviving Company Common Share or a Surviving Company
Series B Preferred Share (after taking into account all Certificates
delivered by such holder) shall receive, from the Exchange Agent in
accordance with the provisions of this Section 1.14(g), a cash payment in
lieu of such fractional shares, as applicable, representing such holder's
proportionate interest, if any, in the net proceeds from the sale by the
Exchange Agent in one or more transactions (which sale transactions shall
be made at such times, in such manner and on such terms as the Exchange
Agent shall determine in its reasonable discretion) on behalf of all such
holders of the aggregate of the fractional Surviving Company Common
Shares and Surviving Company Series B Preferred Shares, as applicable,
which would otherwise have been issued (the "Excess Shares"). The sale of
the Excess Shares by the Exchange Agent shall be executed on the New York
Stock Exchange (the "NYSE") through one or more member firms of the NYSE
and shall be executed in round lots to the extent practicable. Until the
net proceeds of such sale or sales have been distributed to the holders
of Certificates, the Exchange Agent will hold such proceeds in trust (the
"Exchange Trust") for the holders of Certificates. Prime shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred
in connection with this sale of the Excess Shares. As soon as practicable
after the determination of the amount of cash, if any, to be paid to
holders of Certificates in lieu of any fractional Surviving Company
Common Shares or Surviving Company Series B Preferred Shares, as
applicable, the Exchange Agent shall make available such amounts to such
holders of Certificates without interest.
(iii)
No fractional Prime Common Units shall be issued in exchange for
Horizon OP Units, and no fractional interests shall entitle any
holder thereof to vote, receive distributions or have any other rights
in, from or to Prime Partnership. In lieu of the issuance of any
fractional Prime Common Units, each holder of Horizon OP Units, upon
execution and delivery of the documentation contemplated by this Section
1.14, shall be paid an amount in cash (without interest), rounded to the
nearest cent, equal to the product of (1) the average price at which
Surviving Company Common Shares constituting Excess Shares sold by the
Exchange Agent pursuant to the foregoing clause (ii) and (2) the
fractional amount of Prime Common Units which such holder would otherwise
be entitled to receive under this Section 1.14.
(h) WITHHOLDING RIGHTS. (A) The Surviving Company or the Exchange Agent
shall be entitled to deduct and withhold from the Prime/Horizon Merger
Consideration otherwise payable pursuant to this Agreement to any holder of Sky
Merger Common Shares such amounts as the Surviving Company or the Exchange Agent
is required to deduct and withhold with respect to the making of such payment
under the Code, or any provision of state, local or foreign tax law. To the
extent that amounts are so withheld by Surviving Company or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of Sky Merger Common Stock in
respect of which such deduction and withholding was made by Surviving Company or
the Exchange Agent.
(B) Prime Partnership shall be entitled to deduct and withhold
from the Partnership Merger Consideration otherwise payable
pursuant to this Agreement to a holder of Horizon OP Units such
amounts as Prime Partnership is required to deduct and withhold with
respect to the making of such payment under the Code or any provision
of state, local or foreign tax
Appendix A-11
<PAGE>
law. To the extent that amounts are so withheld by Prime Partnership,
such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of such Horizon OP Units
in respect of which such deduction and withholding was made by Prime
Partnership.
(i) At the Prime/Horizon Merger Effective Time, each certificate
representing an outstanding Prime Common Share, Prime Series A
Preferred Share, Prime Series B Preferred Share and Prime Series C
Preferred Share will, without any action on the part of the holder
thereof, thereafter represent one Surviving Company Common Share, one
share of Surviving Company 10.5% Series A Senior Cumulative Preferred
Stock, $.01 par value per share, one Surviving Company Series B Preferred
Share or one share of Surviving Company Series C Cumulative Convertible
Redeemable Preferred Stock, $0.01 par value per share, as the case may
be, pursuant to the terms of the Prime/ Horizon Articles of Merger.
1.15 CONTRIBUTION. As provided in the Contribution Agreement, immediately
prior to the declaration of the Prime Partnership Special Distribution, Horizon
Partnership and Newco LP shall effect the Horizon Partnership Contribution.
1.16 PRIME PARTNERSHIP SPECIAL DISTRIBUTION; PRIME SPECIAL DISTRIBUTION;
PRIME PARTNERSHIP COMMON DISTRIBUTION; THE PRIME CORPORATE CONTRIBUTION; PRIME
CORPORATE COMMON DISTRIBUTION.
(a) PRIME PARTNERSHIP SPECIAL DISTRIBUTION. On the Closing Date
immediately after the Horizon Partnership Contribution and immediately prior to
the declaration of the Prime Special Distribution, Prime Partnership shall
formally declare a cash distribution of (i) $0.50 per outstanding Prime Common
Unit and Prime Series C Preferred Unit and (ii) $0.60 per outstanding Prime
Series B Preferred Unit, in each case to each holder of record of Prime Common
Units, Prime Series B Preferred Units and Prime Series C Preferred Units as of
the close of the transfer books of Prime Partnership immediately prior to the
Partnership Merger. The payment date with respect to the Prime Partnership
Special Distribution shall be determined at Closing at the sole discretion of
Prime Partnership.
(b) PRIME SPECIAL DISTRIBUTION. On the Closing Date immediately after the
declaration of the Prime Partnership Special Distribution and immediately prior
to the Partnership Merger, Prime shall formally declare a cash distribution of
(i) $0.50 per outstanding Prime Common Share and Prime Series C Preferred Share
and (ii) $0.60 per outstanding Prime Series B Preferred Share, in each case to
each holder of record of Prime Common Shares, Prime Series B Preferred Shares
and Prime Series C Preferred Shares as of the close of the transfer books of
Prime immediately prior to the Partnership Merger. The payment date with respect
to the Prime Special Distribution shall be determined at Closing at the sole
discretion of Prime Partnership.
(c) PRIME PARTNERSHIP COMMON DISTRIBUTION. On the Closing Date immediately
after consummation of the Partnership Merger, the Prime Partnership Common
Distribution shall be effected by the distribution of each issued and
outstanding common unit of Newco LP (each, a "Newco LP Common Unit") to each
holder of record of Prime Common Units, Prime Series B Preferred Units and Prime
Series C Preferred Units as of the close of the transfer books of Prime
Partnership immediately after the consummation of the Partnership Merger such
that (i) each Prime Series B Preferred Unit shall entitle the holder to receive
Newco LP Common Units equal to 1.196 multiplied by the number of Newco LP Common
Units being distributed in respect of each Prime Common Unit, and (ii) each
Prime Series C Preferred Unit shall entitle the holder to receive that number of
Newco LP Common Units distributed in respect of each Prime Common Unit. The
number of Newco LP Common Units to be distributed in respect of each Prime OP
Unit and the payment date with respect to the Prime Partnership Common
Distribution shall be determined at Closing at the sole discretion of Prime
Partnership. Immediately after the Partnership Merger Effective Time, Prime
Partnership shall formally declare the Prime Partnership Common Distribution.
(d) PRIME CORPORATE CONTRIBUTION. Immediately following the consummation
of the Prime/Horizon Merger, Surviving Company shall transfer, assign and convey
to Newco as a capital contribution (i) all
Appendix A-12
<PAGE>
Newco LP Common Units held by Surviving Company and (ii) all Newco Common Shares
held by Surviving Company, and Newco shall issue to Surviving Company that
number of Newco Common Shares equal to the number of Newco LP Common Units so
contributed by Surviving Company.
(e) PRIME CORPORATE COMMON DISTRIBUTION. The Prime Corporate Common
Distribution shall be effected by the distribution of the Newco Common Shares
received by Surviving Company pursuant to the Prime Corporate Contribution to
each holder of record of Surviving Company Common Shares, Surviving Company
Series B Preferred Shares and Surviving Company Series C Preferred Shares as of
the close of the transfer books of Surviving Company immediately following the
consummation of the Prime/Horizon Merger such that (i) each Surviving Company
Series B Preferred Share shall entitle the holder to receive Newco Common Shares
equal to 1.196 multiplied by the number of Newco Common Shares being distributed
in respect of each Surviving Company Common Share, and (ii) each Surviving
Company Series C Preferred Share shall entitle the holder to receive that number
of Newco Common Shares distributed in respect of each Surviving Company Common
Share. The number of Newco Common Shares to be distributed in respect of each
Surviving Company Common Share, Surviving Company Series B Preferred Share and
Surviving Company Series C Preferred Share pursuant to the Prime Corporate
Common Distribution shall be identical to the number of Newco Common Units
distributed in respect of each Prime Common Unit, Prime Series B Preferred Unit
and Prime Series C Preferred Unit, respectively, pursuant to the Prime
Partnership Distribution, and the payment of the Prime Corporate Common
Distribution shall occur immediately following the payment of the Prime
Partnership Common Distribution. Immediately following the Prime/Horizon Merger
Effective Time or on such earlier date as may be required to comply with
applicable laws and regulations (including without limitation regulations of the
New York Stock Exchange), Surviving Company shall formally declare the Prime
Corporate Common Distribution.
1.17 TRANSFERRED PRIME PROPERTIES. Immediately after the consummation of
the Prime/Horizon Merger, the Surviving Partnership shall cause each of
Indianapolis Factory Shops Limited Partnership and Nebraska Crossing Factory
Shops to transfer to Newco all of their respective rights and interests in
Indiana Factory Shops in Daleville, Indiana, and Nebraska Crossing Factory
Stores in Gretna, Nebraska (the "Transferred Prime Properties") in consideration
for cash in amount equal to the aggregate mortgage indebtedness incurred by
Newco in respect of the Transferred Prime Properties.
1.18 SALE OF DESIGNATED PROPERTIES PRIOR TO CLOSING. The parties hereto
acknowledge that prior to the Closing, Horizon and Horizon Partnership may
explore the sale of all or a portion of the assets and properties which are
designated to be transferred to Newco LP pursuant to the Horizon Partnership
Contribution (the "Designated Properties"). Notwithstanding anything herein to
the contrary, in the event that on or prior to the Closing Date Prime determines
in its sole discretion that it is advisable not to effectuate the transactions
under Section 1.15 and Sections 1.16(c), (d) and (e) hereof, then (x) the
Horizon Partnership Contribution, Prime Partnership Common Distribution, Prime
Corporate Contribution and Prime Corporate Common Distribution shall not be
effectuated hereunder and Section 1.15 and Sections 1.16(c), (d) and (e) hereof
shall be deemed to be void and of no force or effect, and (y) the Mergers and
the other transactions contemplated hereby shall otherwise be consummated on the
terms and conditions set forth in this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF HORIZON
Horizon and Horizon Partnership represent and warrant to Prime and Prime
Partnership as follows:
2.1 ORGANIZATION, STANDING AND POWER OF HORIZON. Horizon and Sky Merger
are each a corporation duly organized, validly existing and in good standing
under the laws of Michigan and Maryland, respectively. Horizon has all requisite
corporate power and authority to own, operate, lease and encumber its properties
and carry on its business as now being conducted. Horizon is duly qualified or
licensed to do business as a foreign corporation and is in good standing in each
jurisdiction in which the nature of its business or the
Appendix A-13
<PAGE>
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed, individually or in the aggregate, would not have a material adverse
effect on the business, properties, assets, financial condition or results of
operations of Horizon and the Horizon Subsidiaries (as defined below), taken as
a whole (a "Horizon Material Adverse Effect"). Horizon has delivered to Prime
complete and correct copies of the Amended and Restated Articles of
Incorporation of Horizon (the "Horizon Articles of Incorporation") and the
Amended and Restated Bylaws of Horizon (the "Horizon Bylaws"), in each case, as
amended or supplemented to the date of this Agreement. Sky Merger has delivered
to Prime complete and correct copies of the Sky Merger Articles of Incorporation
(the "Sky Merger Articles of Incorporation") and the Sky Merger Bylaws (the "Sky
Merger Bylaws"), in each case, as amended or supplemented to the date of this
Agreement.
2.2 HORIZON SUBSIDIARIES.
(a) Schedule 2.2 to the letter of even date herewith signed by each of
the chief executive officer and chief financial officer of Horizon
and delivered to Prime prior to the execution hereof (the "Horizon
Disclosure Letter") sets forth (i) each Subsidiary (as defined below) of
Horizon (the "Horizon Subsidiaries"), (ii) the ownership interest therein of
Horizon (other than, as of the Closing Date, changes thereto between
February 1, 1998 and the Closing Date which result from the conversion of
Horizon OP Units into Horizon Common Shares pursuant to the terms of the
Horizon Partnership Agreement), (iii) if not wholly owned by Horizon, the
identity and ownership interest of each of the other owners of such Horizon
Subsidiary (other than, as of the Closing Date, changes thereto between
February 1, 1998 and the Closing Date which result from the conversion of
Horizon OP Units into Horizon Common Shares pursuant to the terms of the
Horizon Partnership Agreement) and (iv) each factory outlet center and other
commercial property owned by such Subsidiary. As used in this Agreement,
"Subsidiary" of any Person (as defined below) means any corporation,
partnership, limited liability company, joint venture, trust or other legal
entity of which such Person owns (either directly or through or together
with another Subsidiary of such Person) either (i) a general partner,
managing member or other similar interest, or (ii)(A) 10% or more of the
voting power of the voting capital stock or other equity interests, or (B)
10% or more of the outstanding voting capital stock or other voting equity
interests of such corporation, partnership, limited liability company, joint
venture or other legal entity. As used herein, "Person" means an individual,
corporation, partnership, limited liability company, joint venture,
association, trust, unincorporated organization or other entity. Schedule
2.2 to the Horizon Disclosure Letter sets forth a true and complete list of
the equity securities owned by Horizon, directly or indirectly, in any
corporation, partnership, limited liability company, joint venture or other
legal entity, excluding Horizon Subsidiaries.
(b) Except as set forth in Schedule 2.2 to the Horizon Disclosure Letter,
(i) all of the outstanding shares of capital stock of each Horizon
Subsidiary that is a corporation have been duly authorized, validly issued
and are (A) fully paid and nonassessable and not subject to preemptive
rights, (B) owned by Horizon or by another Horizon Subsidiary and (C) owned
free and clear of all pledges, claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever (collectively, "Liens")
and (ii) all equity interests in each Horizon Subsidiary that is a
partnership, joint venture, limited liability company or trust which are
owned by Horizon, by another Horizon Subsidiary or by Horizon and another
Horizon Subsidiary are owned free and clear of all Liens. Each Horizon
Subsidiary that is a corporation is duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of incorporation and has
the requisite corporate power and authority to own, operate, lease and
encumber its properties and carry on its business as now being conducted,
and each Horizon Subsidiary that is a partnership, limited liability company
or trust is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has the requisite power and
authority to own, operate, lease and encumber its properties and carry on
its business as now being conducted. Each Horizon Subsidiary is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing
of its properties makes such
Appendix A-14
<PAGE>
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed, individually or in the
aggregate, would not have a Horizon Material Adverse Effect. Complete and
correct copies of the articles of incorporation, bylaws, organization
documents and partnership, joint venture and operating agreements of each
Horizon Subsidiary, as amended to the date of this Agreement, have been
previously delivered or made available to Prime. No effective amendment has
been made to the Horizon Partnership Agreement since the date of this
Agreement.
2.3 CAPITAL STRUCTURE.
(a) The authorized shares of capital stock of Horizon consist of
3,000,000 shares of preferred stock, $0.01 par value per share, none
of which are issued and outstanding on the date of this Agreement,
10,000,000 shares of excess stock, $0.01 par value per share, none of which
are issued or outstanding on the date of this Agreement, and 47,000,000
Horizon Common Shares, 24,066,635 of which were issued and outstanding as of
February 1, 1998. The authorized shares of capital stock of Sky Merger
consist of 50,000,000 shares of common stock, $0.01 par value per share,
1,000 of which are issued or outstanding as of February 1, 1998.
(b) Set forth in Schedule 2.3(b) to the Horizon Disclosure Letter is a
true and complete list of the following: (i) each qualified or
nonqualified option to purchase shares of Horizon's capital stock granted
under Horizon's Amended and Restated 1993 Stock Option Plan (the "Horizon
1993 Stock Option Plan"), Horizon's 1997 Stock Option Plan (the "Horizon
1997 Stock Option Plan"), the Horizon 1993 Long-Term Incentive Plan (the
"Horizon Long-Term Incentive Plan"), Horizon's Director Stock Option Plan
(the "Horizon Director Stock Option Plan") or any other formal or informal
arrangement (collectively, the "Horizon Stock Options") and (ii) all other
warrants or other rights to acquire shares of Horizon's capital stock, all
limited stock appreciation rights, phantom stock, dividend equivalents,
performance units and performance shares. Schedule 2.3(b) to the Horizon
Disclosure Letter sets forth for each Horizon Stock Option the name of the
grantee, the date of the grant, status of the option as qualified or
nonqualified under Section 422 of the Code, the number and type of shares of
Horizon's capital stock subject to such option, the number and type of
shares subject to options that are currently exercisable, the exercise price
per share, and the number and type of such shares subject to share
appreciation rights. On the date of this Agreement, except as set forth in
this Section 2.3 or in Schedule 2.3(b) to the Horizon Disclosure Letter, no
shares of Horizon's capital stock were outstanding or reserved for issuance.
(c) All outstanding shares of Horizon's and Sky Merger's capital stock
are duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. There are no bonds, debentures, notes or
other indebtedness of Horizon or Sky Merger having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote)
on any matters on which shareholders of Horizon may vote.
(d) Except (i) as set forth in this Section 2.3 or in Schedule 2.3(d) to
the Horizon Disclosure Letter or as otherwise contemplated by this
Agreement, and (ii) for Horizon OP Units, which may be redeemed for cash or,
at the option of Horizon, Horizon Common Shares in accordance with the
Horizon Partnership Agreement, as of the date of this Agreement, there are
no outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which Horizon, Sky
Merger or any Horizon Subsidiary is a party or by which such entity is
bound, obligating Horizon, Sky Merger or any Horizon Subsidiary to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares
of capital stock, voting securities or other ownership interests of Horizon,
Sky Merger or any Horizon Subsidiary or obligating Horizon, Sky Merger or
any Horizon Subsidiary to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement
or undertaking (other than to Horizon, Sky Merger or a Horizon Subsidiary).
Appendix A-15
<PAGE>
(e) As of February 1, 1998, 28,293,699 units of Horizon Partnership are
duly and validly issued, of which 24,066,635 are owned by Horizon and
28,293,699 units of Newco LP are duly and validly issued, of which
24,066,635 are owned by Horizon. Schedule 2.3(e) to the Horizon Disclosure
Letter sets forth the name of each holder of Horizon OP Units and Newco LP
Common Units and the number of Horizon OP Units and Newco LP Common Units
owned by each such holder in each case as of the date of this Agreement. The
Horizon OP Units are subject to no restrictions except as set forth in the
Horizon Partnership Agreement. Except as provided in the Horizon Partnership
Agreement or in Schedule 2.3(e) to the Horizon Disclosure Letter, neither
Horizon Partnership nor Newco LP has issued or granted and neither is a
party to any outstanding commitments of any kind relating to, or any
presently effective agreements or understandings with respect to, the
issuance or sale of interests in Horizon Partnership or Newco LP, whether
issued or unissued, or securities convertible or exchangeable into interests
in Horizon Partnership or Newco LP, except as contemplated by this
Agreement.
(f) All dividends on Horizon Common Shares, and all distributions on
Horizon OP Units and Newco LP Common Units, which have been declared
prior to the date of this Agreement have been paid in full.
(g) Set forth on Schedule 2.3(g) to the Horizon Disclosure Letter is a
list of each Registration Rights Agreement pursuant to which Horizon
or any of the Horizon Subsidiaries is obligated to register any securities.
2.4 OTHER INTERESTS. Neither Horizon nor any Horizon Subsidiary owns
directly or indirectly any interest or investment (whether equity or debt) in
any corporation, partnership, joint venture, business, trust or other entity
(other than investments in short-term investment securities or an interest in a
Horizon Subsidiary).
2.5 AUTHORITY; NONCONTRAVENTION; CONSENTS.
(a) Horizon has the requisite corporate power and authority to enter into
this Agreement and the C&C/Murdock Agreements to which it is a party
and, subject to the requisite shareholder approval of the Mergers and the
other transactions contemplated hereby requiring shareholder approval (the
"Horizon Shareholder Approvals"), to consummate the transactions
contemplated by this Agreement and the C&C/Murdock Agreements to which
Horizon is a party. The execution and delivery of this Agreement by Horizon
and the C&C/Murdock Agreements to which Horizon is a party and the
consummation by Horizon of the transactions contemplated by this Agreement
and the C&C/Murdock Agreements to which Horizon is a party have been duly
authorized by all necessary action on the part of Horizon, except for and
subject to the Horizon Shareholder Approvals and the Horizon Partner
Approvals (as defined in Section 5.1(g)). This Agreement and the C&C/Murdock
Agreements to which Horizon is a party each has been duly executed and
delivered by Horizon and constitutes a valid and binding obligation of
Horizon, enforceable against Horizon in accordance with and subject to its
terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of equity.
(b) Sky Merger has the requisite corporate power and authority to enter
into this Agreement and, subject to the requisite shareholder
approval of the Horizon/Subsidiary Merger and the Prime/Horizon Merger and
the other transactions contemplated hereby requiring shareholder approval
(the "Sky Merger Shareholder Approvals"), to consummate the transactions
contemplated by this Agreement to which Sky Merger is a party. The execution
and delivery of this Agreement by Sky Merger and the consummation by Sky
Merger of the transactions contemplated by this Agreement to which Sky
Merger is a party have been duly authorized by all necessary action on the
part of Sky Merger, except for and subject to the Sky Merger Shareholder
Approval. This Agreement has been duly executed and delivered by Sky Merger
and constitutes a valid and binding obligation of Sky Merger, enforceable
against Sky Merger in accordance with and subject to its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating
to creditors' rights and general principles of equity.
Appendix A-16
<PAGE>
(c) Horizon Partnership and Newco LP each has the requisite partnership
power and authority to enter into this Agreement and the C&C/Murdock
Agreements to which Horizon Partnership or Newco LP is a party, subject to
the requisite Horizon Partner Approvals and Newco LP Partner Approvals (as
defined in Section 5.1(g)), to consummate the transactions contemplated by
this Agreement and the C&C/Murdock Agreements to which Horizon Partnership
or Newco LP is a party. The execution and delivery of this Agreement and the
C&C/Murdock Agreements to which Horizon Partnership or Newco LP is a party
by Horizon Partnership and Newco LP, and the consummation by Horizon
Partnership and Newco LP of the transactions contemplated by this Agreement
and the C&C/Murdock Agreements to which Horizon Partnership or Newco LP is a
party, have been duly authorized by all necessary action on the part of
Horizon Partnership and Newco LP, as applicable, except for and subject to
the Horizon Shareholder Approvals, the Horizon Partner Approvals and Newco
LP Partner Approvals. This Agreement and the C&C/Murdock Agreements to which
Horizon Partnership or Newco LP is a party each has been duly executed and
delivered by Horizon Partnership and Newco LP, as applicable, and
constitutes a valid and binding obligation of Horizon Partnership and Newco
LP, enforceable against Horizon Partnership and Newco LP in accordance with
and subject to its terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
(d) Except as set forth in Schedule 2.5(d)(1) to the Horizon Disclosure
Letter, the execution and delivery of this Agreement and the
C&C/Murdock Agreements by Horizon, Horizon Partnership and Sky Merger, as
applicable, do not, and the consummation of the transactions contemplated by
this Agreement and the C&C/Murdock Agreements to which Horizon, Horizon
Partnership or Sky Merger is a party and compliance by Horizon, Horizon
Partnership and Sky Merger with the provisions of this Agreement will not,
conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any material obligation or to
material loss of a benefit under, or result in the creation of any Lien upon
any of the properties or assets of Horizon, Sky Merger or any Horizon
Subsidiary under, (i) the Horizon or Sky Merger Articles of Incorporation or
the Horizon or Sky Merger Bylaws or the comparable charter or organizational
documents or partnership, operating, or similar agreement (as the case may
be) of any Horizon Subsidiary, each as amended or supplemented, (ii) any
loan or credit agreement, note, bond, mortgage, indenture, reciprocal
easement agreement, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Horizon or any Horizon
Subsidiary or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following
sentence, any judgment, order, decree, statute, law, ordinance, rule or
regulation (collectively, "Laws") applicable to Horizon or any Horizon
Subsidiary, or their respective properties or assets, other than, in the
case of clause (ii) or (iii), any such conflicts, violations, defaults,
rights, loss or Liens that individually or in the aggregate would not (x)
have a Horizon Material Adverse Effect or (y) prevent the consummation of
the transactions contemplated by this Agreement. No consent, approval, order
or authorization of, or registration, declaration or filing with, any
federal, state or local government or any court, administrative or
regulatory agency or commission or other governmental authority or agency,
domestic or foreign (a "Governmental Entity"), is required by or with
respect to Horizon or any Horizon Subsidiary in connection with the
execution and delivery of this Agreement or the C&C/ Murdock Agreements by
Horizon or Horizon Partnership or the consummation by Horizon or Horizon
Partnership of the transactions contemplated by this Agreement or the
C&C/Murdock Agreements, except for (i) the filing with the Securities and
Exchange Commission (the "SEC") of the Proxy Statement (as defined in
Section 5.1) and such reports under Section 13(a) of the Exchange Act, (ii)
the acceptance for record of the Horizon/Subsidiary Articles of Merger by
the Maryland Department and the Horizon/Subsidiary Certificate of Merger
with the Michigan Department, (iii) the filing of the Delaware Certificate
of Merger with the Delaware Secretary, (iv) the filing of the Prime/Horizon
Articles or Merger with the Maryland Department, (v) such filings with and
approvals of the NYSE to permit the Surviving Company Common Shares and/or
Surviving Company Series B Preferred Shares
Appendix A-17
<PAGE>
that are to be issued pursuant to the Prime/Horizon Merger and the Horizon
Stock Options to be listed on the NYSE, (vi) such filings as may be required
in connection with the payment of any transfer and gains taxes and (vii)
such other consents, approvals, orders, authorizations, registrations,
declarations and filings (A) as are set forth in Schedule 2.5(d)(2) to the
Horizon Disclosure Letter, (B) as may be required under (x) laws requiring
transfer, recordation or gains tax filings, (y) federal, state or local
environmental laws or (z) the "blue sky" laws of various states, to the
extent applicable or (C) which, if not obtained or made, would not prevent
or delay the consummation of any of the transactions contemplated by this
Agreement or the C&C/Murdock Agreements or otherwise prevent either Horizon
or Horizon Partnership from performing its obligations under this Agreement
or the C&C/ Murdock Agreements in any respect or have, individually or in
the aggregate, a Horizon Material Adverse Effect. None of Sky Merger, Newco
or Newco LP has entered into an agreement of any kind, including, but not
limited to, any loan, credit or other debt agreements, employment
agreements, benefit plans or stock option agreements, or pledge agreements
except as contemplated by this Agreement.
2.6 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. Horizon
and Horizon Partnership have filed all required reports, schedules, forms,
statements and other documents with the SEC since November 2, 1993 and March 13,
1995, respectively, through the date hereof (together, the "Horizon SEC
Documents"). Schedule 2.6(a) to the Horizon Disclosure Letter contains a
complete list of all Horizon SEC Documents filed by Horizon with the SEC since
January 1, 1997 and on or prior to the date of this Agreement. All of the
Horizon SEC Documents (other than preliminary material), as of their respective
filing dates, complied in all material respects with all applicable requirements
of the Securities Act and the Exchange Act, and, in each case, the rules and
regulations promulgated thereunder applicable to such Horizon SEC Documents.
None of the Horizon SEC Documents at the time of filing contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, except to the
extent such statements have been modified or superseded by later Horizon SEC
Documents filed and publicly available prior to the date of this Agreement. The
consolidated financial statements of Horizon and its Subsidiaries or Horizon
Partnership and its Subsidiaries, as the case may be, included in the Horizon
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") (except, in the case of unaudited statements, as
permitted by the applicable rules and regulations of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position of Horizon and its Subsidiaries or Horizon
Partnership and its Subsidiaries, as the case may be, in each case taken as a
whole, as of the dates thereof and the consolidated results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except as set forth in
Schedule 2.6(b) to the Horizon Disclosure Letter, Horizon has no Subsidiaries
which are not consolidated for accounting purposes. Except for liabilities and
obligations set forth or reflected in the Horizon SEC Documents or in Schedule
2.6(c) to the Horizon Disclosure Letter, as of the date hereof neither Horizon
nor any of the Horizon Subsidiaries has any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) required by GAAP to
be set forth on a consolidated balance sheet of Horizon or in the notes thereto
and which, individually or in the aggregate, would have a Horizon Material
Adverse Effect.
Appendix A-18
<PAGE>
2.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Horizon SEC Documents or in Schedule 2.7 to the Horizon Disclosure Letter, since
the date of the most recent audited financial statements included in Horizon SEC
Documents (the "Horizon Financial Statement Date") and to the date of this
Agreement, Horizon and its Subsidiaries have conducted their business only in
the ordinary course (taking into account prior practices, including the
acquisition of properties and issuance of securities) and there has not been (a)
any material adverse change in the business, financial condition or results of
operations of Horizon and its Subsidiaries taken as a whole (a "Horizon Material
Adverse Change"), nor has there been any occurrence or circumstance that with
the passage of time would reasonably be expected to result in a Horizon Material
Adverse Change, (b) except for regular quarterly distributions not in excess of
$0.35 declared in each of the first, second and third quarter of 1997 per
Horizon Common Share or Horizon OP Unit, respectively (or, with respect to the
period commencing on the date hereof and ending on the Closing Date,
distributions permitted pursuant to Section 5.10), in each case with customary
record and payment dates, any authorization, declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the Horizon Common Shares, Horizon OP Units or Newco
LP Common Units, (c) any split, combination or reclassification of the Horizon
Common Shares, the Horizon OP Units or Newco LP Common Units or any issuance or
the authorization of any issuance of any other securities in respect of, in lieu
of or in substitution for, or giving the right to acquire by exchange or
exercise, shares of stock of Horizon or partnership interests in Horizon
Partnership or Newco LP or any issuance of an ownership interest in, any Horizon
Subsidiary, (d) any damage, destruction or loss, whether or not covered by
insurance, that has or would have a Horizon Material Adverse Effect, (e) any
change in accounting methods, principles or practices by Horizon or any Horizon
Subsidiary materially affecting its assets, liabilities or business, except
insofar as may have been disclosed in Horizon SEC Documents or required by a
change in GAAP, or (f) any amendment of any employment, consulting, severance,
retention or any other agreement between Horizon and any current or former
officer, director, employee or consultant of Horizon.
2.8 LITIGATION. Except as disclosed in the Horizon SEC Documents or in
Schedule 2.8 to the Horizon Disclosure Letter, there is no suit, action or
proceeding pending (in which service of process has been received by an employee
of Horizon or a Horizon Subsidiary) or, to the Knowledge of Horizon (as
hereinafter defined), threatened in writing against or affecting Horizon or any
Horizon Subsidiary that, individually or in the aggregate, could reasonably be
expected to (i) have a Horizon Material Adverse Effect or (ii) prevent the
consummation of any of the transactions contemplated by this Agreement, nor is
there any judgment, decree, injunction, rule or order of any court or
Governmental Entity or arbitrator outstanding against Horizon or any of its
Subsidiaries having, or which, insofar as reasonably can be foreseen, in the
future would have, any such effect. Notwithstanding the foregoing, (y) Schedule
2.8 to the Horizon Disclosure Letter sets forth each and every uninsured claim
including but not limited to claims relating to the employment of labor, such as
claims relating to wages, hours, collective bargaining, unemployment insurance,
workers' compensation, equal employment opportunity, payment and withholding of
taxes, the Immigration Reform and Control Act, the Worker Adjustment and
Retraining Notification Act, and the Drug-Free Workplace Act pending or, to the
Knowledge of Horizon, threatened as of the date hereof which, if adversely
determined, could reasonably be expected to result in a Horizon Material Adverse
Effect, in each case with a brief summary of such claim or threatened claim, and
(z) except as set forth on Schedule 2.8 to the Horizon Disclosure Letter, no
claim has been made under any directors' and officers' liability insurance
policy maintained at any time by Horizon or any of the Horizon Subsidiaries.
2.9 PROPERTIES.
(a) Schedule 2.9(a) to the Horizon Disclosure Letter sets forth a list of
all real property outlet centers owned or leased by Horizon or one of
the Horizon Subsidiaries and sets forth the name of the owner or lessee, as
applicable, of each such property. Horizon or a Horizon Subsidiary owns fee
simple title or has a valid leasehold interest in all real property owned or
leased by Horizon or one of the Horizon Subsidiaries (the "Horizon
Properties"), which are all of the real estate properties owned or leased by
them. Other than as shown on the Horizon Title Insurance Policies (as
defined in Section
Appendix A-19
<PAGE>
2.9(b)), each of the Horizon Properties is owned or leased, as applicable,
free and clear of liens, mortgages or deeds of trust, claims against title,
charges which are liens, security interests or other encumbrances on title
("Encumbrances") except for those Encumbrances which, individually or in the
aggregate with any other condition or omission resulting in a breach of the
representations and warranties set forth in this Section 2.9, could not be
reasonably be expected to result in a Horizon Material Adverse Effect.
Except as set forth in Schedule 2.9(a) to the Horizon Disclosure Letter,
none of the Horizon Properties is subject to any restriction on the sale or
other disposition thereof or on the financing or release of financing
thereon except those which, individually or in the aggregate with any other
condition or omission resulting in a breach of the representations and
warranties set forth in this Section 2.9, could not be reasonably be
expected to result in a Horizon Material Adverse Effect. The Horizon
Properties are not subject to any rights of way, written agreements, laws,
ordinances and regulations affecting building use or occupancy, or
reservations of an interest in title (collectively, "Property Restrictions")
or Encumbrances, except for (i) Property Restrictions and Encumbrances set
forth in Schedule 2.9(a) to the Horizon Disclosure Letter, and (ii) Property
Restrictions for which the Horizon Properties comply or for which
non-compliance, individually or in the aggregate with any other condition or
omission resulting in a breach of the representations and warranties set
forth in this Section 2.9, could not be reasonably expected to result in a
Horizon Material Adverse Effect. Schedule 2.9(a) to the Horizon Disclosure
Letter lists each of the Horizon Properties which are under development as
of the date of this Agreement and describes the status of such development
as of the date hereof.
(b) Except as provided in Schedule 2.9(b) to the Horizon Disclosure
Letter, valid policies of title insurance (the "Horizon Title
Insurance Policies") have been issued insuring Horizon Partnership or the
other applicable Horizon Subsidiary's fee simple title or leasehold estate,
as the case may be, to the Horizon Properties owned by it. Such policies
are, at the date hereof, in full force and effect. Except as set forth in
Schedule 2.9(b) to the Horizon Disclosure Letter, no claim has been made
against any such policy. A true and correct copy of each Horizon Title
Insurance Policy has previously been delivered to Prime.
(c) Except as provided in Schedule 2.9(c) to the Horizon Disclosure
Letter, Horizon has no Knowledge (i) that, any certificate, permit or
license from any governmental authority having jurisdiction over any of the
Horizon Properties or any agreement, easement or other right which is
necessary to
permit the lawful use and operation of the buildings and improvements on any
of the Horizon Properties or which is necessary to permit the lawful use and
operation of all driveways, roads and other means of egress and ingress to
and from any of the Horizon Properties has not been obtained and is not in
full force and effect, or of any pending threat of modification or
cancellation of any of same which failure to obtain, modification or
cancellation would have a Horizon Material Adverse Effect, or (ii) of any
violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any of the Horizon Properties issued by
any governmental authority, or of any structural defects relating to any
Horizon Property, or of any Horizon Property whose building systems are not
in working order, or of any physical damage to any Horizon Property which in
any such case under this clause (ii) could, individually or in the aggregate
with any other condition or omission resulting in a breach of the
representations and warranties set forth in this Section 2.9, reasonably be
expected to result in a Horizon Material Adverse Effect.
(d) Neither Horizon nor any Horizon Subsidiary has received any written
or published notice to the effect that (i) any condemnation or
rezoning proceedings are pending or threatened with respect to any of the
Horizon Properties or (ii) any zoning, building or similar law, code,
ordinance, order or regulation is or will be violated by the continued
maintenance, operation or use of any buildings or other improvements on any
of the Horizon Properties or by the continued maintenance, operation or use
of
Appendix A-20
<PAGE>
the parking areas, except for such violations which, individually or in the
aggregate with any other condition or omission resulting in a breach of the
representations and warranties set forth in this Section 2.9, could not be
reasonably be expected to result in a Horizon Material Adverse Effect.
(e) Except as set forth in Schedule 2.9(e) to the Horizon Disclosure
Letter, all work required to be performed, payments required to be
made and actions required to be taken prior to the date hereof pursuant to
any agreement entered into with a governmental body or authority in
connection with a site approval, zoning reclassification or other similar
action relating to any Horizon Properties (E.G., local improvement district,
road improvement district, environmental mitigation) have been performed,
paid or taken, as the case may be, other than those where, individually or
in the aggregate with any other condition or omission resulting in a breach
of the representations and warranties set forth in this Section 2.9, the
failure would not have a Horizon Material Adverse Effect, and Horizon has no
Knowledge of any material work, payments or actions that are required after
the date hereof pursuant to such agreements, except as set forth in
development or operating budgets for such Horizon Properties delivered to
Prime and Prime Partnership prior to the date hereof.
(f) Horizon and each of the Horizon Subsidiaries have good and sufficient
title to all their personal and non-real properties and assets
reflected in their books and records as being owned by them (including those
reflected in the consolidated balance sheet of Horizon as of December 31,
1996, except as since sold or otherwise disposed of in the ordinary course
of business), free and clear of all liens and encumbrances, except such as
are reflected on the consolidated balance sheet of Horizon as of December
31, 1996, and the notes thereto, and except for liens for current taxes not
yet due and payable, and liens or encumbrances which are normal to the
business of Horizon and the Horizon Subsidiaries and are not, in the
aggregate, material in relation to the assets of Horizon on a consolidated
basis and except also for such imperfections of title, easement and
encumbrances, if any, as do not materially interfere with the present use of
the properties subject thereto or affected thereby, or otherwise materially
impair the consolidated business operations of Horizon.
2.10 LEASES.
(a) The rent roll for the Horizon Properties as of January 1, 1998
previously delivered by Horizon to Prime is correct and complete in
all material respects as of the date thereof.
(b) Except as provided in Schedule 2.10(b) to the Horizon Disclosure
Letter, (i) each of the leases and tenancies for all or any portion
of the Horizon Properties (the "Horizon Leases") is valid and subsisting and
in full force and effect except where the failure thereof, individually with
respect to any Horizon Lease or in the aggregate with more than one Horizon
Leases, could not be reasonably be expected to result in a Horizon Material
Adverse Effect, and has not been amended, modified or supplemented since the
date of the rent roll described in Section 2.10(a); and (ii) neither Horizon
nor any of the Horizon Subsidiaries has received any written notice from any
tenant of any intention to vacate which vacation would have a Horizon
Material Adverse Effect. Except as provided in Schedule 2.10(b) to the
Horizon Disclosure Letter neither Horizon nor any of the Horizon
Subsidiaries has collected payment of rent (other than security deposits)
accruing for a period which is more than one month beyond the date of
collection.
(c) Horizon has previously delivered or made available to Prime a true
and correct copy of all Horizon Leases.
(d) Except as shown in Schedule 2.10(d) to the Horizon Disclosure Letter,
as of the last day of the calendar month immediately preceding the
date hereof, none of the lessees of Horizon Properties set forth on Schedule
2.10(d) to the Horizon Disclosure Letter has asserted any claim of which
Horizon or any of the Horizon Subsidiaries has received written notice which
would materially affect the collection
Appendix A-21
<PAGE>
of rent from such tenant and neither Horizon nor any of the Horizon
Subsidiaries has received written notice of any material default or breach
on the part of Horizon or any of the Horizon Subsidiaries under any of the
Horizon Leases with such a tenant which has not been cured.
(e) Schedule 2.10(e) to the Horizon Disclosure Letter sets forth a
complete and correct list as of February 1, 1998, of all written
commitments made by Horizon or any of the Horizon Subsidiaries to lease any
of the Horizon Properties which has not yet been reduced to a written lease,
and provides with respect to each such commitment the principal terms of
such commitment, including, if applicable, (i) the space to be occupied,
(ii) the name of the tenant, (iii) the length of the original term thereof
and any right or option to renew or extend the lease term, (iv) the monthly
minimum rental, (v) rental escalations, (vi) the terms with respect to
percentage rent or other overage rent, (vii) any provisions for tenant
allowances and (viii) the right of any third-party broker to any outstanding
brokerage or other commission incident thereto. Horizon has previously
delivered or made available to Prime a true and correct copy of each such
commitment.
(f) Any material leases pursuant to which Horizon or any Horizon
Subsidiary, as lessee, leases real or personal property are in good
standing, valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any material existing default or any
event which with notice or lapse of time or both would constitute such a
default, nor do any of such leases contain any provision which would
preclude the Surviving Company, Prime Partnership or Horizon Partnership, as
applicable, from occupying and using the leased premises for the same
purposes and upon substantially the same rental and other terms as are
applicable to the occupation and use by Horizon and the Horizon
Subsidiaries, or which would have a Horizon Material Adverse Effect.
2.11 RENTS. The rents and other income and charges set forth in the rent
roll described in Section 2.10(a) are the actual rents, income and charges
presently being charged by Horizon or the Subsidiaries, as applicable, under the
Horizon Leases as of January 1, 1998. Other than set forth on Schedule 2.11 to
the Horizon Disclosure Letter, no tenant under any of the Horizon Leases is
entitled to any purchase option. None of the Horizon Leases and none of the
rents or other amounts payable thereunder have been assigned, pledged or
encumbered, other than to lenders, as described on Schedule 2.11 to the Horizon
Disclosure Letter. No brokerage or leasing commission or other compensation will
be due or payable to any person, firm, corporation or other entity with respect
to or on account of any of the Horizon Leases or any extensions or renewals
thereof as of the Prime/Horizon Merger Effective Time except in the ordinary
course of business consistent with past practice, except as set forth on
Schedule 2.11 to the Horizon Disclosure Letter.
2.12 ENVIRONMENTAL MATTERS. Horizon has delivered to Prime a true and
complete copy of the environmental reports listed on Schedule 2.12 of the
Horizon Disclosure Letter (the "Horizon Environmental Reports"). To Horizon's
Knowledge, the Horizon Environmental Reports constitute all final environmental
reports (including without limitation all final versions of environmental
investigations and testing or analysis made by or on behalf of Horizon or any of
the Horizon Subsidiaries) with respect to the Horizon Properties in the
possession of Horizon or any Horizon Subsidiary. With respect to each Horizon
Property, since the day of the most recent Environmental Report relating to such
Horizon Property, except for any condition that individually or in the aggregate
would not be reasonably likely to have a Horizon Material Adverse Effect, (a) no
Hazardous Substances (as defined below) have been used, stored, manufactured,
treated, processed or transported to or from any such Horizon Property except as
necessary to the conduct of business and in compliance with Environmental Laws
(as defined below); (b) there have been no spills, releases, discharges or
disposal of Hazardous Substances to have occurred or be presently occurring on
or from such Horizon Property; (c) such Horizon Property and the business
conducted thereon are not in violation of Environmental Laws; (d) Horizon and
its Subsidiaries have not received and do not reasonably expect to receive any
notice of potential responsibility, letter of inquiry or notice of alleged
liability from any Person regarding such Horizon Property or the business
conducted thereon. For the purposes of this Paragraph 2.12 only, "Horizon
Properties" shall include property currently or formerly owned, operated or
leased by Horizon or its Subsidiaries.
Appendix A-22
<PAGE>
"Environmental Laws" shall mean any applicable statute, code, enactment,
ordinance, rule, regulation, permit, consent, approval, authorization, judgment,
order, common law rule (including without limitation the common law respecting
nuisance and tortious liability), decree, injunction, or other requirement
having the force and effect of law, whether local, state, territorial or
national, at any time in force or effect relating to:
(a) emissions, discharges, spills, releases or threatened releases of
Hazardous Substances into ambient air, surface water, groundwater,
watercourses, publicly or privately owned treatment works, drains, sewer
systems, wetlands, septic systems or onto land;
(b) the use, treatment, storage, disposal, handling, manufacturing,
transportation or shipment of Hazardous Substances;
(c) the regulation of storage tanks; or
(d) otherwise relating to pollution or the protection of human health or
the environment.
"Hazardous Substances" shall mean all substances, wastes, pollutants,
contaminants and materials regulated or defined or designated as hazardous,
extremely or imminently hazardous, dangerous, or toxic pursuant to any law, by
any local, state, territorial or federal governmental authority, or with respect
to which such a governmental authority otherwise requires environmental
investigation, monitoring, reporting, or remediation; including but not limited
to,
(a) all substances, wastes, pollutants, contaminants and materials
regulated, or defined or designated as hazardous, extremely or
imminently hazardous, dangerous or toxic, under the following federal
statutes and their state counterparts, as well as their statutes'
implementing regulations: the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. section 9601 et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. section 6901 et seq., the Toxic
Substances Control Act, 15 U.S.C. section 2601 et seq., the Clean Water Act,
33 U.S.C. section 1251 et seq., the Clean Air Act, 42 U.S.C. section 7401 et
seq., the Emergency Planning and Community Right to Know Act, 42 U.S.C.
section 11011 et seq., the Safe Drinking Water Act, 33 U.S.C. section 300f
et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C.
section 136 et seq., the Atomic Energy Act, 42 U.S.C. section 22011 et seq.,
and the Hazardous Materials Transportation Act, 42 U.S.C. section 1801 et
seq.;
(b) petroleum and petroleum products including crude oil and any
fractions thereof;
(c) natural gas, synthetic gas, and any mixtures thereof; and
(d) radon, radioactive substances, asbestos, urea formaldehyde,
polychlorinated biphenyls and electromagnetic field radiation.
2.13 RELATED PARTY TRANSACTIONS. Except as discussed in the Horizon SEC
Documents, set forth in Schedule 2.13 to the Horizon Disclosure Letter is a list
of all material arrangements, agreements and contracts entered into by Horizon
or any of the Horizon Subsidiaries under which there are continuing obligations
on the part of Horizon or any Horizon Subsidiary that will continue on and after
the Closing Date with (a) any investment banker or financial advisor, (b) any
person who is a current or former officer, director or Affiliate (as defined
below) of Horizon or any of its Subsidiaries or any entity of which any of the
foregoing is an Affiliate except arrangements available to employees generally
or (c) any person who acquired Horizon Common Shares or Horizon OP Units in a
private placement. Such documents, copies of all of which have previously been
delivered or made available to Prime, are listed in Schedule 2.13 to the Horizon
Disclosure Letter. As used in this Agreement, the term "Affiliate" shall have
the same meaning as such term is defined in Rule 405 promulgated under the
Securities Act.
2.14 EMPLOYEE BENEFITS. As used herein, the term "Employee Plan" includes
any pension, retirement, savings, disability, medical, dental, health, life,
death benefit, group insurance, profit sharing, deferred
Appendix A-23
<PAGE>
compensation, stock option, bonus, incentive, vacation pay, tuition
reimbursement, severance pay, or other employee benefit plan, trust, agreement,
contract, agreement, policy or commitment (including, without limitation, any
pension plan, as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended, and the rules and regulations promulgated
thereunder ("ERISA") ("Pension Plan"), and any welfare plan as defined in
Section 3(1) of ERISA ("Welfare Plan")), whether any of the foregoing is funded,
insured or self-funded, written or oral, (i) sponsored or maintained by Horizon
or its Subsidiaries (each a "Controlled Group Member") and covering any
Controlled Group Member's active or former employees (or their beneficiaries),
(ii) to which any Controlled Group Member is a party or by which any Controlled
Group Member (or any of the rights, properties or assets thereof) is bound or
(iii) with respect to which any current Controlled Group Member may otherwise
have any material liability (whether or not such Controlled Group Member still
maintains such Employee Plan). Each Employee Plan is listed on Schedule 2.14 to
the Horizon Disclosure Letter. With respect to the Employee Plans:
(a) Except as disclosed in Schedule 2.14(a) to the Horizon Disclosure
Letter, no Controlled Group Member has any continuing liability under
any Welfare Plan which provides for continuing benefits or coverage for any
participant or any beneficiary of a participant after such participant's
termination of employment, except as may be required by Section 4980B of the
Code or Section 601 (et seq.) of ERISA, or under any applicable state law,
and at the expense of the participant or the beneficiary of the participant.
(b) Each Employee Plan complies with the applicable requirements of ERISA
and any other applicable law governing such Employee Plan, and, to
the best Knowledge of Horizon, each Employee Plan has at all times been
properly administered in accordance with all such requirements of law, and
in accordance with its terms and the terms of any applicable collective
bargaining agreement to the extent consistent with all such requirements of
law, except when the failure to comply or improper administration could not
reasonably be expected to result in a Material Adverse Effect. Each Pension
Plan which is intended to be qualified is qualified under Section 401(a) of
the Code, has received a favorable determination letter from the Internal
Revenue Service ("IRS") stating that such plan meets the requirements of
Section 401(a) of the Code and that the trust associated with such plan is
tax-exempt under Section 501(a) of the Code and, to the best Knowledge of
Horizon, no event has occurred which would jeopardize the qualified status
of any such plan or the tax exempt status of any such trust under Sections
401(a) and Section 501(a) of the Code, respectively. No lawsuits, claims
(other than routine claims for benefits) or complaints to, or by, any person
or governmental entity have been filed, are pending, to the best Knowledge
of Horizon, threatened with respect to any Employee Plan and, to the best
Knowledge of Horizon, there is no fact or contemplated event which would be
expected to give rise to any such lawsuit, claim (other than routine claims
for benefits) or complaint with respect to any Pension Plan. Without
limiting the foregoing, the following are true with respect to each Employee
Plan:
(i) all Controlled Group Members have complied with the reporting and
disclosure requirements of ERISA, the Code, or both, with respect
to each Employee Plan and no Controlled Group Member has incurred any
material liability in connection with such reporting or disclosure except
when the failure to comply or when such liability could not reasonably be
expected to result in a Material Adverse Effect;
(ii)all contributions and payments with respect to Employee Plans
that are required to be made by a Controlled Group Member with
respect to periods ending on or before the Closing Date (including
periods from the first day of the current plan or policy year to the
Closing Date) have been, or will be, made or accrued before the Closing
Date in accordance with the appropriate plan document, actuarial report,
collective bargaining agreements or insurance contracts or arrangements
or as otherwise required by ERISA or the Code; and
Appendix A-24
<PAGE>
(iii)
with respect to each such Employee Plan, to the extent
applicable, Horizon has delivered to or has made available to
Prime true and complete copies of (A) plan documents, or any and all
other documents that establish the existence of the plan, trust,
arrangement, contract, policy or commitment and all amendments thereto,
(B) the most recent determination letter, if any, received from the IRS,
(C) the three most recent Form 5500 Annual Reports (and all schedules and
reports relating thereto) and actuarial reports and (D) all related trust
agreements, insurance contract or other funding agreements that implement
each such Employee Plan.
(c) With respect to each Employee Plan, to the best Knowledge of Horizon,
there has not occurred, and no person or entity is contractually
bound to enter into, any "prohibited transaction" within the meaning of
Section 4975(c) of the Code or Section 406 of ERISA, which transaction is
not exempt under Section 4975(d) of the Code or Section 408 of ERISA and
which could subject Horizon or any Controlled Group Member to material
liability.
(d) Except as disclosed in Schedule 2.14(d) to the Horizon Disclosure
Letter, no Controlled Group Member has maintained or been obligated
to contribute to any Employee Plan subject to Code Section 412 or Section
302 or Title IV of ERISA. No Employee Plan subject to Code Section 412 or
Section 302 or Title IV of ERISA has been terminated.
(e) With respect to each pension plan maintained by any Controlled Group
Member, such plans provide the plan sponsor the authority to amend or
terminate the Plan at any time, subject to applicable requirements of ERISA
and the Code.
2.15 LABOR MATTERS. Neither Horizon nor any of the Horizon Subsidiaries is
a party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or other labor organization, nor
has Horizon or any of the Horizon Subsidiaries agreed that any unit of their
employees is appropriate for collective bargaining. No union or other labor
organization has been certified as bargaining representative for any of
Horizon's employees. To the Knowledge of Horizon there are no organizational
efforts with respect to the formation of a collective bargaining unit presently
being made or threatened involving employees of Horizon or any of the Horizon
Subsidiaries. During the past five (5) years, Horizon has not experienced any
strikes, work stoppages, work slowdowns, grievances or arbitration proceedings,
unfair labor practice charges or complaints or other significant labor
difficulties of any nature, nor have any such labor difficulties been
threatened. The employee handbook of Horizon was previously delivered in its
entirety to Prime and fairly and accurately summarizes all material employee
policies, including but not limited to policies concerning vacations, payroll
practices, leaves of absence, affirmative action, equal employment opportunity,
and policies relating to employee counseling, discipline and discharge.
2.16 TAXES.
(a) Each of Horizon and the Horizon Subsidiaries (A) has filed all tax
returns and reports required to be filed by it (after giving effect
to any filing extension properly granted by a Governmental Entity having
authority to do so) and all such returns and reports are accurate and
complete in all material respects, and (B) has paid (or Horizon has paid on
its behalf) all Taxes (as defined below) shown on such returns and reports
as required to be paid by it, except those where the failure to file such
tax returns and reports or pay such Taxes would not have a Horizon Material
Adverse Effect. The most recent audited financial statements contained in
the Horizon SEC Documents reflect an adequate reserve for all material Taxes
payable by Horizon and the Horizon Subsidiaries for all taxable periods and
portions thereof through the date of such financial statements. Since the
Horizon Financial Statement Date, Horizon has incurred no liability for
Taxes under Sections 857(b), 860(c) or 4981 of the Code, including without
limitation any tax arising from a prohibited transaction described in
Section 857(b)(6) of the Code, and neither Horizon nor any Horizon
Subsidiary has incurred any material liability for Taxes other than in the
ordinary course of business. No event has occurred, and no condition or
circumstance exists, which presents a material risk that any material tax
described in the preceding
Appendix A-25
<PAGE>
sentence will be imposed upon Horizon. To the Knowledge of Horizon, no
deficiencies for any Taxes have been proposed, asserted or assessed against
Horizon or any of the Horizon Subsidiaries, and no requests for waivers of
the time to assess any such Taxes are pending. As used in this Agreement,
"Taxes" shall include all federal, state, local and foreign income,
property, sales, franchise, employment, excise and other taxes, tariffs or
governmental charges of any nature whatsoever, together with penalties,
interest or additions to tax with respect thereto.
(b) Horizon (i) for each of its taxable years ending after December 31,
1993, and before the Closing Date, has been subject to taxation as a
real estate investment trust (a "REIT") within the meaning of Section 856 of
the Code and has satisfied all requirements to qualify as a REIT for such
years, (ii) has operated since the end of its latest taxable year, ending
before the Closing Date, to the date of this representation, and will
continue to operate, in such a manner as to qualify as a REIT for each
taxable year ending on or immediately following the Closing Date, and (iii)
has not taken or omitted to take any action which would reasonably be
expected to result in a challenge to its status as a REIT and, to Horizon's
Knowledge, no such challenge is pending or threatened. Each Horizon
Subsidiary which has been formed as a partnership, joint venture or limited
liability company has been since its formation and continues to be for
federal income tax purposes as a partnership and not a corporation or an
association or publicly traded partnership taxable as a corporation and has
not since the later of its formation or the acquisition by Horizon of a
direct or indirect interest therein, owned any assets (including, without
limitation, securities) that would cause Horizon to violate Section
856(c)(5) of the Code. Except as provided in Schedule 2.16 hereto, neither
Horizon nor any Horizon Subsidiary holds any asset (x) the disposition of
which would be subject to rules similar to Section 1374 of the Code as a
result of a notice under IRS Notice 88-19 or (y) which is subject to a
consent filed pursuant to Section 341(f) of the Code and the regulations
thereunder.
2.17 NO PAYMENTS TO EMPLOYEES, OFFICERS OR DIRECTORS. Schedule 2.17 to the
Horizon Disclosure Letter contains a true and complete list of all material
arrangements, agreements or plans pursuant to which cash and non-cash payments
(other than consideration issued pursuant to any of the Mergers) which will
become payable (and the maximum aggregate amount which may be payable
thereunder) to each employee, officer or director of Horizon or any Horizon
Subsidiary as a result of the Mergers or a termination of service subsequent to
the consummation of the Mergers, other than the Merger Consideration. Except as
described in Schedule 2.17 to the Horizon Disclosure Letter, or as otherwise
provided for in this Agreement, there is no employment or severance contract, or
other agreement requiring payments, cancellation of indebtedness or other
obligation to be made on a change of control or otherwise as a result of the
consummation of any of the transactions contemplated by this Agreement or as a
result of a termination of service subsequent to the consummation of any of the
transactions contemplated by this Agreement, with respect to any employee,
officer or director of Horizon or any Horizon Subsidiary.
2.18 BROKER; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker,
financial advisor or other person, other than Lehman Brothers, the fees and
expenses of which are described in the engagement letter dated September 25,
1997, between Lehman Brothers and Horizon, a true, correct and complete copy of
which has previously been given to Prime, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
Horizon or any Horizon Subsidiary.
2.19 COMPLIANCE WITH LAWS. Horizon and its Subsidiaries hold all permits,
licenses, variances, exceptions, orders, registrations and approvals of all
Governmental Entities which are required for the operation of the business of
Horizon and its Subsidiaries (the "Horizon Permits"), except where the failure
to have any such Horizon Permits individually or in the aggregate would not have
a Horizon Material Adverse Effect. Since November 12, 1992, neither Horizon nor
any of the Horizon Subsidiaries has violated or failed to comply with any
statute, law, ordinance, regulation, rule, judgment, decree or order of any
Governmental
Appendix A-26
<PAGE>
Entity applicable to its business, properties or operations (except any
Environmental Law, as to which the representation in Section 2.12 shall apply),
except to the extent that such violation or failure would not, individually or
in the aggregate, have a Horizon Material Adverse Effect.
2.20 CONTRACTS; DEBT INSTRUMENTS.
(a) To the Knowledge of Horizon, except as disclosed in the Horizon SEC
Documents or in Schedule 2.20(a) or (b) to the Horizon Disclosure
Letter, there is no contract or agreement that purports to limit in any
material respect the names or the geographic location in which Horizon and
its Subsidiaries conduct or may conduct their business. Neither Horizon nor
any Horizon Subsidiary has received a written notice that Horizon or any
Horizon Subsidiary is in violation of or in default under (nor to the
Knowledge of Horizon does there exist any condition which upon the passage
of time or the giving of notice or both would cause such a violation of or
default under) any material loan or credit agreement, note, bond, mortgage,
indenture, concession or any other similar type of material contract,
agreement, arrangement or understanding, to which it is a party or by which
it or any of its properties or assets is bound, nor to the Knowledge of
Horizon does such a violation or default exist, except to the extent that
such violation or default, individually or in the aggregate, would not have
a Horizon Material Adverse Effect.
(b) Except for any of the following expressly identified in Horizon SEC
Documents, Schedule 2.20(b) to the Horizon Disclosure Letter sets
forth a list of each material loan or credit agreement, note, bond,
mortgage, indenture and any other agreement or instrument pursuant to which
any Indebtedness (as defined below) of Horizon or any of the Horizon
Subsidiaries is outstanding or may be incurred. For purposes of this Section
2.20, "Indebtedness" shall mean (i) indebtedness for borrowed money, whether
secured or unsecured, (ii) obligations under conditional sale or other title
retention agreements relating to property purchased by such person, (iii)
capitalized lease obligations, (iv) obligations under interest rate cap,
swap, collar or similar transaction or currency hedging transactions (valued
at the termination value thereof) and (v) guarantees of any such
indebtedness of any other person.
(c) To the extent not set forth in response to the requirements of
Section 2.20(b), Schedule 2.20(c) to the Horizon Disclosure Letter
sets forth each interest rate cap, interest rate collar, interest rate swap,
currency hedging transaction, and any other agreement relating to a similar
transaction to which Horizon or any Horizon Subsidiary is a party or an
obligor with respect thereto.
(d) Except as set forth in Schedule 2.20(d) to the Horizon Disclosure
Letter, neither Horizon nor any of the Horizon Subsidiaries is a
party to any agreement which would restrict any of them from prepaying any
of their Indebtedness without penalty or premium at any time or which
requires any of them to maintain any amount of Indebtedness with respect to
any of the Horizon Properties.
(e) Except as set forth in Schedule 2.20(e) to the Horizon Disclosure
Letter, neither Horizon nor any Horizon Subsidiary is a party to any
agreement relating to the management of any Horizon Property by any Person
other than a Horizon Subsidiary.
(f) Neither Horizon nor any of the Horizon Subsidiaries is a party to any
agreement pursuant to which Horizon or any Horizon Subsidiary manages
or provides services with respect to any real properties other than Horizon
Properties, except for the agreements described in Schedule 2.20(f) to the
Horizon Disclosure Letter (the "Outside Property Management Agreements").
(g) Except for budgeted construction disclosed in the capital budget
attached as Schedule 2.20(g) to the Horizon Disclosure Letter,
Schedule 2.20(g) to the Horizon Disclosure Letter lists all material
agreements entered into by Horizon or any of the Horizon Subsidiaries
relating to the development or construction of, or additions or expansions
to, any Horizon Properties (or any properties with respect to which Horizon
has executed as of the date of this Agreement a purchase agreement
Appendix A-27
<PAGE>
or other similar agreement) which are currently in effect and under which
Horizon or any of the Horizon Subsidiaries currently has, or expects to
incur, an obligation in excess of $250,000. True, correct and complete
copies of such agreements have previously been delivered or made available
to Prime.
(h) Schedule 2.20(h) to the Horizon Disclosure Letter lists all
agreements entered into by Horizon or any Horizon Subsidiary
providing for the sale of, or option to sell, any Horizon Properties or the
purchase of, or option to purchase, by Horizon or any Horizon Subsidiary, on
the one hand, or the other party thereto, on the other hand, any real estate
which are currently in effect.
(i) Except as set forth in Schedule 2.20(i) to the Horizon Disclosure
Letter, neither Horizon nor any Horizon Subsidiary has any material
continuing contractual liability (A) for indemnification or otherwise under
any agreement relating to the sale of real estate previously owned, whether
directly or indirectly, by Horizon or any Horizon Subsidiary or (B) to pay
any additional purchase price for any of the Horizon Properties.
(j) Except as set forth in Schedule 2.20(j) to the Horizon Disclosure
Letter, neither Horizon nor any Horizon Subsidiary has entered into
or is subject, directly or indirectly, to any "Tax Protection Agreements."
As used herein, a Tax Protection Agreement is an agreement, oral or written,
(A) that has as one of its purposes to permit a person or entity to take the
position that such person or entity could defer federal taxable income that
otherwise might have been recognized upon a transfer of property to the
Horizon Partnership or any other Horizon Subsidiary that is treated as a
partnership for federal income tax purposes, and (B) that (i) prohibits or
restricts in any manner the disposition of any assets of Horizon or any
Horizon Subsidiary, (including, without limitation, requiring Horizon or any
Horizon Subsidiary to indemnify any person for any tax liabilities resulting
from any such disposition), (ii) requires that Horizon or any Horizon
Subsidiary maintain, or put in place, or replace, indebtedness, whether or
not secured by one or more of the Horizon Properties, or (iii) requires that
Horizon or any Horizon Subsidiary offer to any person or entity at any time
the opportunity to guarantee or otherwise assume, directly or indirectly,
the risk of loss for federal income tax purposes for indebtedness or other
liabilities of Horizon or any Horizon Subsidiary.
(k) Except as set forth in Schedule 2.20(k) to the Horizon Disclosure
Letter, there are no material outstanding contractual obligations of
Horizon or any Horizon Subsidiary to provide any funds to, or make any
investment (in the form of a loan, capital contribution or otherwise) in,
any Horizon Subsidiary or any other person.
2.21 OPINION OF FINANCIAL ADVISOR. Horizon has received the written
opinion of Lehman Brothers or an affiliate thereof, satisfactory to Horizon, a
signed version which has been provided to Prime, to the effect that the proposed
Prime/Horizon Merger Consideration and Partnership Merger Consideration to be
received by the holders of Horizon Common Shares and Horizon OP Units,
respectively, pursuant to the Mergers is fair to such holders from a financial
point of view.
2.22 STATE TAKEOVER STATUTES. Horizon has taken all action necessary to
exempt the transactions contemplated by this Agreement between Prime and Horizon
and its Affiliates from the operation of any "fair price," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under the state or federal laws of the United States or similar
statute or regulation (a "Takeover Statute").
2.23 INVESTMENT COMPANY ACT OF 1940. Neither Horizon nor any of the
Horizon Subsidiaries is, or at the Partnership Merger Effective Time will be,
required to be registered under the Investment Company Act of 1940, as amended
(the "1940 Act").
Appendix A-28
<PAGE>
2.24 HORIZON NOT AN INTERESTED STOCKHOLDER. Horizon is not an "interested
stockholder" of Prime pursuant to the Maryland "Business Combination" statute at
Sections 3-601 et seq. of the MGCL.
2.25 VOTE REQUIRED. The affirmative vote of at least two-thirds of the
outstanding Horizon Common Shares is the only vote of the holders of any class
or series of Horizon's capital stock necessary (under applicable law or
otherwise) to approve this Agreement and the transactions contemplated hereby.
The affirmative vote of the holders of a majority of the outstanding Newco LP
Common Units and Horizon OP Units, held by the limited partners of Newco LP and
Horizon Partnership, respectively, is the only vote by the holders of any class
or series of partnership interest therein necessary (under applicable law or
otherwise) to approve this Agreement and the translations contemplated hereby.
2.26 TRADEMARKS, PATENTS AND COPYRIGHTS. Except as set forth in Schedule
2.26 to the Horizon Disclosure Letter, or to the extent the inaccuracy of any of
the following (or the circumstances giving rise to such inaccuracy) individually
or in the aggregate would not have a Horizon Material Adverse Effect on Horizon
and each of its Subsidiaries owns or possesses adequate licenses or other legal
rights to use all patents, patent rights, trademarks, trademark rights, trade
names, trade name rights, copyrights, service marks, trade secrets, applications
for trademarks and for service marks, know-how and other proprietary rights and
information used or held for use in connection with the business of Horizon and
its Subsidiaries as currently conducted or as contemplated to be conducted, and
Horizon of any assertion or claim challenging the validity of any of the
foregoing. The conduct of the business of Horizon and the Horizon Subsidiaries
as currently conducted and as contemplated to be conducted did not, does not and
will not infringe in any way any patent, patent right, license, trademark,
trademark right, trade name, trade name right, service mark, or copyright of any
third party that, individually or in the aggregate, could have a Horizon
Material Adverse Effect. To Horizon's Knowledge, there are no infringements of
any proprietary rights owned by or licensed by or to Horizon or any Horizon
Subsidiary that individually or in the aggregate could have a Horizon Material
Adverse Effect.
2.27 INSURANCE. Except as set forth on Schedule 2.27 to the Horizon
Disclosure Letter, each of Horizon and its Subsidiaries is, and has been
continuously since January 1, 1994, insured with financially responsible
insurers in such amounts and against such risks and losses as are customary for
companies conducting the business as conducted by Horizon and its Subsidiaries
during such time period. Except as set forth on Schedule 2.27 to the Horizon
Disclosure Letter, neither Horizon nor its Subsidiaries has received any notice
of cancellation or termination with respect to any material insurance policy of
Horizon or its Subsidiaries. The insurance policies of Horizon and each of its
Subsidiaries are valid and enforceable policies in all material respects.
2.28 DEFINITION OF KNOWLEDGE OF HORIZON. As used in this Agreement, the
phrase "Knowledge of Horizon" (or words of similar import) means the actual
knowledge of the officers and directors of Horizon and Horizon Partnership
identified in Schedule 2.28 to the Horizon Disclosure Letter.
2.29 C&C/MURDOCK AGREEMENTS. Neither Horizon nor Horizon Partnership is in
default of any term or provision of any C&C/Murdock Agreement to which it is a
party.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PRIME
Prime and Prime Partnership represent and warrant to Horizon and Horizon
Partnership as follows:
3.1 ORGANIZATION, STANDING AND POWER OF PRIME. Prime is a corporation duly
organized, validly existing and in good standing under the laws of Maryland and
has all requisite power and authority to own, operate, lease and encumber its
properties and carry on its business as now being conducted. Prime is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed, individually or in
Appendix A-29
<PAGE>
the aggregate, would not have a material adverse effect on the business,
properties, assets, financial condition or results of operations of Prime and
the Subsidiaries of Prime (collectively, "Prime Subsidiaries"), taken as a whole
(a "Prime Material Adverse Effect"). Prime has delivered to Horizon complete and
correct copies of the Prime Articles of Incorporation ("Prime Articles of
Incorporation") and the Prime Bylaws ("Prime Bylaws"), as amended or
supplemented to the date of this Agreement.
3.2 PRIME SUBSIDIARIES.
(a) Schedule 3.2(a) to the letter of even date herewith signed by each of
the chief executive officer and chief financial officer of Prime and
delivered to Horizon prior to the execution hereof (the "Prime Disclosure
Letter") sets forth (i) each Prime Subsidiary, (ii) the ownership interest
therein of Prime, (iii) if not wholly owned by Prime, the identity and
ownership interest of each of the other owners of such Prime Subsidiary and
(iv) each factory outlet center and other commercial property owned by such
Subsidiary.
(b) Except as set forth in Schedule 3.2(b) to the Prime Disclosure
Letter, (i) all the outstanding shares of capital stock of each Prime
Subsidiary that is a corporation have been duly authorized, validly issued
and are (A) fully paid and nonassessable and not subject to preemptive
rights, (B) owned by Prime or by another Prime Subsidiary and (C) owned free
and clear of all Liens and (ii) all equity interests in each Prime
Subsidiary that is a partnership, joint venture, limited liability company
or trust which are owned by Prime, by another Prime Subsidiary or by Prime
and another Prime Subsidiary are owned free and clear of all Liens. Each
Prime Subsidiary that is a corporation is duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to own,
operate, lease and encumber its properties and carry on its business as now
being conducted, and each Prime Subsidiary that is a partnership, limited
liability company or trust is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has the
requisite power and authority to own, operate, lease and encumber its
properties and carry on its business as now being conducted. Each Prime
Subsidiary is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
Prime Material Adverse Effect. Complete and correct copies of the articles
of incorporation, bylaws, organization documents and partnership, joint
venture and operating agreements of each Prime Subsidiary, as amended to the
date of this Agreement, have been previously delivered or made available to
Horizon. No effective amendment has been made to the Prime Partnership
Agreement.
3.3 CAPITAL STRUCTURE.
(a) The authorized shares of capital stock of Prime consist of (i)
75,000,000 shares of common stock, $0.01 par value (the "Prime Common
Shares"), 27,294,951 of which are issued and outstanding as of the date of
this Merger Agreement, (ii) 24,315,000 shares of preferred stock, $0.01 par
value (the "Prime Preferred Shares"), (x) 2,300,000 of which are issued and
outstanding 10.5% Series A Senior Cumulative Preferred Stock (the "Prime
Series A Preferred Shares"), as of the date of this Agreement, (y) 2,981,800
of which are issued and outstanding 8.5% Series B Cumulative Participating
Convertible Preferred Stock, $.01 par value per share (the "Prime Series B
Preferred Shares"), as of the date of this Agreement, and (z) 727,273 shares
of Series C Cumulative Convertible Redeemable Preferred Stock (the "Prime
Series C Preferred Shares"), as of the date of this Agreement and (iii)
51,000,000 shares of Excess Stock, par value $0.01 per share, none of which
are issued or outstanding as of the date of this Agreement.
(b) Set forth in Schedule 3.3(b) to the Prime Disclosure Letter is a true
and complete list of the following: (i) each qualified or
nonqualified option to purchase Prime's shares of capital stock granted
under Prime's 1994 Stock Incentive Plan and 1995 Stock Incentive Plan or any
other formal or informal arrangement (collectively, the "Prime Stock
Options"); and (ii) all other warrants or other rights to
Appendix A-30
<PAGE>
acquire Prime's shares of capital stock, all limited share appreciation
rights, phantom shares, dividend equivalents, performance units and
performance shares which are outstanding on the date of this Agreement. On
the date of this Agreement, except as set forth in this Section 3.3 or in
Schedule 3.3(b) to the Prime Disclosure Letter, no shares of Prime's capital
stock were outstanding or reserved for issuance (except for Prime Common
Shares reserved for issuance upon exchange of Prime OP Units (as defined
below) or conversion of Prime Preferred Shares).
(c) All outstanding shares of capital stock of Prime are duly authorized,
validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes or other
indebtedness of Prime having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on
which shareholders of Prime may vote.
(d) Except (i) as set forth in this Section 3.3 or in Schedule 3.3(d) to
the Prime Disclosure Letter and (ii) Prime OP Units (as defined
below) or Prime Preferred Shares, which may be exchanged or converted, as
the case may be, for Prime Common Shares in accordance with the Prime
Partnership Agreement, as of the date of this Agreement, there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which Prime or any
Prime Subsidiary is a party or by which such entity is bound, obligating
Prime or any Prime Subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock voting
securities or other ownership interests of Prime or any Prime Subsidiary or
obligating Prime or any Prime Subsidiary to issue, grant, extend or enter
into any such security, option, warrant, call, right, commitment, agreement,
arrangement or undertaking (other than to Prime or a Prime Subsidiary).
(e) As of the date hereof, (i) 35,800,423 Prime Common Units are duly and
validly issued of which 27,294,951 are owned by Prime, (ii) 2,300,000
preferred units of Prime Partnership (each, a "Prime Series A Preferred
Unit") are duly and validly issued all of which are owned by Prime, (iii)
2,981,800 Prime Series B Preferred Units are duly and validly issued all of
which are owned by Prime and (iv) 727,273 Series C Preferred units of Prime
Partnership (each, a "Prime Series C Preferred Unit" and together with the
Prime Common Units, the Prime Series A Preferred Units and the Prime Series
B Preferred Units, the "Prime OP Units") are duly and validly issued none of
which are owned by Prime or Prime Subsidiaries. Schedule 3.3(e) to the Prime
Disclosure Letter sets forth the name of each holder of Prime OP Units and
the number of Prime OP Units owned by each such holder as of the date of
this Agreement. Except as set forth in this Agreement, the Prime OP Units
are subject to no restrictions except as set forth in the Prime Partnership
Agreement. Prime Partnership has not issued or granted and is not a party to
any outstanding commitments of any kind relating to, or any presently
effective agreements or understandings with respect to, interests in Prime
Partnership, whether issued or unissued, or securities convertible or
exchangeable into interests in Prime Partnership except as set forth in
Schedule 3.3(e) to the Prime Disclosure Letter.
(f) All dividends on the Prime/Horizon Merger Consideration and all
distributions on the Partnership Merger Consideration which have been
declared prior to the date of this Agreement have been paid in full, except
that the dividends payable on the Prime/Horizon Merger Consideration (along
with the corresponding distributions payable on the Partnership Merger
Consideration) which were declared on January 14, 1998 and are payable on
February 17, 1998 have not yet been paid.
(g) The Partnership Merger Consideration to be issued by Prime
Partnership pursuant to this Agreement has been duly authorized, and
upon issuance will be duly and validly issued.
(h) Set forth on Schedule 3.3(h) to the Prime Disclosure Letter is a list
of each Registration Rights Agreement pursuant to which Prime or any
of the Prime Subsidiaries is obligated to register any securities.
Appendix A-31
<PAGE>
3.4 OTHER INTERESTS. Except for interests in the Prime Subsidiaries,
neither Prime nor any of its Subsidiaries owns directly or indirectly any
interest or investment (whether equity or debt) in any corporation, partnership,
joint venture, business, trust or other entity (other than investments in
short-term investment securities). With respect to such other interests, Prime
or Prime Partnership is a partner or shareholder in good standing, and owns such
interests free and clear of all Liens.
3.5 AUTHORITY; NONCONTRAVENTION; CONSENTS.
(a) Prime has the requisite power and authority to enter into this
Agreement and, subject to the requisite shareholder approval of the
Mergers and the other transactions contemplated hereby requiring shareholder
approval (the "Prime Shareholder Approvals" and, together with the Horizon
Shareholder Approvals, the "Shareholder Approvals"), to consummate the
transactions contemplated by this Agreement to which Prime is a party. The
execution and delivery of this Agreement by Prime and the consummation by
Prime of the transactions contemplated by this Agreement to which Prime is a
party have been duly authorized by all necessary action on the part of
Prime, except for and subject to the Prime Shareholder Approvals and the
requisite approval, if any is required, of the partners of Prime
Partnership. This Agreement has been duly executed and delivered by Prime
and constitutes a valid and binding obligation of Prime, enforceable against
Prime in accordance with and subject to its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
(b) Prime Partnership has the requisite partnership power and, subject to
the requisite Prime Partner Approvals (as defined in section 5.1(g)),
if any, authority to enter into this Agreement and to consummate the
transactions contemplated by this Agreement to which Prime Partnership is a
party. The execution and delivery of this Agreement by Prime Partnership and
the consummation by Prime Partnership of the transactions contemplated by
this Agreement to which Prime Partnership is a party have been duly
authorized by all necessary action on the part of Prime Partnership, except
for and subject to the Prime Shareholder Approvals. This Agreement has been
duly executed and delivered by Prime Partnership and constitutes a valid and
binding obligation of Prime Partnership, enforceable against Prime
Partnership in accordance with and subject to its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating
to creditors' rights and general principles of equity.
(c) Except as set forth in Schedule 3.5(c)(1) to the Prime Disclosure
Letter, the execution and delivery of this Agreement by Prime and
Prime Partnership do not, and the consummation of the transactions
contemplated by this Agreement to which Prime or Prime Partnership is a
party and compliance by Prime or Prime Partnership with the provisions of
this Agreement will not, conflict with, or result in any violation of or
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any material
obligation or to loss of a material benefit under, or result in the creation
of any Lien upon any of the properties or assets of Prime or any Prime
Subsidiary under, (i) the Prime Articles of Incorporation or the Prime
Bylaws or the comparable charter or organizational documents or partnership,
operating or similar agreement (as the case may be) of any other Prime
Subsidiary, each as amended or supplemented to the date of this Agreement,
(ii) any loan or credit agreement, note, bond, mortgage, indenture,
reciprocal easement agreement, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Prime or any Prime Subsidiary
or their respective properties or assets or (iii) subject to the
governmental filings and other matters referred to in the following
sentence, any Laws applicable to Prime or any Prime Subsidiary or their
respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights, loss or Liens that
individually or in the aggregate would not (x) have a Prime Material Adverse
Effect or (y) prevent the consummation of the transactions contemplated by
this Agreement. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to Prime or any Prime Subsidiary in connection
with the execution and delivery of this Agreement or the consummation by
Prime of any
Appendix A-32
<PAGE>
of the transactions contemplated by this Agreement, except for (i) the
filing with the SEC of (x) the Registration Statement (as defined in Section
5.1) and (y) such reports under Section 13 (a) of the Exchange Act as may be
required in connection with this Agreement and the transactions contemplated
by this Agreement, (ii) the acceptance for record of the Prime/Horizon
Articles of Merger by the Maryland Department and Horizon/Subsidiary
Certificate of Merger, (iii) the filing of the Delaware Certificate of
Merger with the Delaware Secretary, (iv) such filings with and approvals of
the NYSE to permit the Prime Common Shares and Prime Series B Preferred
Shares that are to be issued pursuant to the Prime/Horizon Merger to be
listed on the NYSE, (v) such filings as may be required in connection with
the payment of any transfer and gains taxes and (vi) such other consents,
approvals, orders, authorizations, registrations, declarations and filings
(A) as are set forth in Schedule 3.5(c)(2) to the Prime Disclosure Letter or
(B) as may be required under (x) federal, state or local environmental laws
or (y) the "blue sky" laws of various states, to the extent applicable, or
(C) which, if not obtained or made, would not prevent or delay in any
material respect the consummation of any of the transactions contemplated by
this Agreement or otherwise prevent Prime from performing its obligations
under this Agreement in any material respect or have, individually or in the
aggregate, a Prime Material Adverse Effect.
3.6 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. Prime
has filed all required reports, schedules, forms, statements and other documents
with the SEC since July 1993 through the date hereof (the "Prime SEC
Documents"). Schedule 3.6(a) to the Prime Disclosure Letter contains a complete
list of all Prime SEC Documents filed by Prime under the Exchange Act since
January 1, 1997 and on or prior to the date of this Agreement. All of the Prime
SEC Documents (other than preliminary material), as of their respective filing
dates, complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act and, in each case, the rules and regulations
promulgated thereunder applicable to such Prime SEC Documents. None of the Prime
SEC Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except to the extent such statements
have been modified or superseded by later Prime SEC Documents filed and publicly
available prior to the date of this Agreement. The consolidated financial
statements of Prime and the Prime Subsidiaries included in the Prime SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, in the case
of unaudited statements, as permitted by the applicable rules and regulations of
the SEC) applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) and fairly presented, in accordance with
the applicable requirements of GAAP and the applicable rules and regulations of
the SEC, the consolidated financial position of Prime and the Prime
Subsidiaries, taken as a whole, as of the dates thereof and the consolidated
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except for
liabilities and obligations set forth or reflected in the Prime SEC Documents or
in Schedule 3.6(b) to the Prime Disclosure Letter, as of the date hereof neither
Prime nor any Prime Subsidiary has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) required by GAAP to be set
forth on a consolidated balance sheet of Prime or in the notes thereto and
which, individually or in the aggregate, would have a Prime Material Adverse
Effect.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Prime
SEC Documents or in Schedule 3.7 to the Prime Disclosure Letter, since the date
of the most recent audited financial statements included in the Prime SEC
Documents (the "Prime Financial Statement Date"), Prime and the Prime
Subsidiaries have conducted their business only in the ordinary course (taking
into account prior practices, including the acquisition of properties and
issuance of securities) and there has not been (a) any material adverse change
in the business, financial condition or results of operations of Prime and the
Prime Subsidiaries taken as a whole (a "Prime Material Adverse Change"), nor has
there been any occurrence or circumstance that with the passage of time would
reasonably be expected to result in a Prime Material Adverse
Appendix A-33
<PAGE>
Change, (b) except for regular quarterly distributions not in excess of (i)
$0.295 per Prime Common Share and $0.295 per Prime Common Unit, (ii) $0.65625
per Prime Series A Preferred Share and $0.65625 per Prime Series A Preferred
Unit, (iii) $0.53125 per Prime Series B Preferred Share and $0.53125 per Prime
Series B Preferred Unit, and (iv) $0.295 per Prime Series C Preferred Share and
$0.295 per Prime Series C Preferred Unit (together, the "Prime Regular Quarterly
Distributions"), subject to rounding adjustments as necessary and with customary
record and payment dates, any authorization, declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to any of Prime's shares of capital stock (other than as
contemplated by Sections 1.16 and 1.17 hereof), (c) any split, combination or
reclassification of any of Prime's shares of capital stock, (d) any damage,
destruction or loss, whether or not covered by insurance, that has or would have
a Prime Material Adverse Effect or (e) any change made prior to the date of this
Agreement in accounting methods, principles or practices by Prime or any Prime
Subsidiary materially affecting its assets, liabilities or business, except
insofar as may have been disclosed in the Prime SEC Documents or required by a
change in GAAP, or any amendment of any employment, consulting, severance,
retention or any other agreement between Prime and any current or former
officer, director, employee or consultant of Prime.
3.8 LITIGATION. Except as disclosed in the Prime SEC Documents or in
Schedule 3.8 to the Prime Disclosure Letter, there is no suit, action or
proceeding pending (in which service of process has been received by an employee
of Prime or a Prime Subsidiary) or, to the Knowledge of Prime (as hereinafter
defined), threatened in writing against or affecting Prime or any Prime
Subsidiary that, individually or in the aggregate, could reasonably be expected
to (i) have a Prime Material Adverse Effect or (ii) prevent the consummation of
any of the transactions contemplated by this Agreement, nor is there any
judgment, decree, injunction, rule or order of any court or Governmental Entity
or arbitrator outstanding against Prime or any of its Subsidiaries having, or
which, insofar as reasonably can be foreseen, in the future would have, any such
effect. Notwithstanding the foregoing, (y) Schedule 3.8 to the Prime Disclosure
Letter sets forth each and every uninsured claim including but not limited to
claims relating to the employment of labor, such as claims relating to wages,
hours, collective bargaining, unemployment insurance, workers' compensation,
equal employment opportunity, payment and withholding of taxes, the Immigration
Reform and Control Act, the Workers' Adjustment and Restraining Notification
Act, and the Drug-Free Workplace Act pending or, to the Knowledge of Prime,
threatened as of the date hereof, in each case with a brief summary of such
claim or threatened claim which, if adversely determined, could reasonably be
expected to result in a Prime Material Adverse Effect and (z) except as set
forth on Schedule 3.8 to the Prime Disclosure Letter, no claim has been made
under any directors' and officers' liability insurance policy maintained at any
time by Prime or any of the Prime Subsidiaries.
3.9 PROPERTIES.
(a) Schedule 3.9(a) to the Prime Disclosure Letter sets forth a list of
all real property outlet centers owned or leased by Prime or one of
the Prime Subsidiaries and sets forth the name of the owner or lessee, as
applicable, of each such property. Prime or a Prime Subsidiary owns fee
simple title or has a valid leasehold interest in all real property owned or
leased by Prime or one of the Prime Subsidiaries (the "Prime Properties"),
which are all of the real estate properties owned or leased by them. Other
than as shown on the Prime Title Insurance Policies (as defined in Section
3.9(b)), each of the Prime Properties is owned or leased, as applicable,
free and clear of liens, mortgages or deeds of trust, claims against title,
charges which are liens, security interests or other encumbrances on title
("Encumbrances") except for those Encumbrances which, individually or in the
aggregate with any other condition resulting in a breach of the
representations and warranties set forth in this Section 3.9, could not
reasonably be expected to result in a Prime Material Adverse Effect. Except
as set forth in Schedule 3.9(a) to the Prime Disclosure Letter, none of the
Prime Properties is subject to any restriction on the sale or other
disposition thereof or on the financing or release of financing thereon
except those which, individually or in the aggregate with any other
condition resulting in a breach of the representations and warranties set
forth in this Section 3.9, could not be reasonably be expected to result in
a Prime Material
Appendix A-34
<PAGE>
Adverse Effect. The Prime Properties are not subject to any rights of way,
written agreements, laws, ordinances and regulations affecting building use
or occupancy, or reservations of an interest in title (collectively,
"Property Restrictions") or Encumbrances, except for (i) Property
Restrictions and Encumbrances set forth in Schedule 3.9(a) to the Prime
Disclosure Letter, and (ii) Property Restrictions for which the Prime
Properties so comply or for which non-compliance, individually or in the
aggregate with any other condition resulting in a breach of the
representations and warranties set forth in this Section 3.9, could not be
reasonably expected to result in a Prime Material Adverse Effect. Schedule
3.9(a) to the Prime Disclosure Letter lists each of the Prime Properties
which are under development as of the date of this Agreement and describes
the status of such development as of the date hereof.
(b) Except as provided in Schedule 3.9(b) to the Prime Disclosure Letter,
valid policies of title insurance (the "Prime Title Insurance
Policies") have been issued insuring the applicable Prime Subsidiary's fee
simple title or leasehold estate, as the case may be, to the Prime
Properties owned by it. Such policies are, at the date hereof, in full force
and effect. Except as set forth in Schedule 3.9(b) to the Prime Disclosure
Letter, no claim has been made against any such policy.
(c) Except as provided in Schedule 3.9(c) to the Prime Disclosure Letter,
Prime has no Knowledge (i) that, any certificate, permit or license
from any governmental authority having jurisdiction over any of the Prime
Properties or any agreement, easement or other right which is necessary to
permit the lawful use and operation of the buildings and improvements on any
of the Prime Properties or which is necessary to permit the lawful use and
operation of all driveways, roads and other means of egress and ingress to
and from any of the Prime Properties has not been obtained and is not in
full force and effect, or of any pending threat of modification or
cancellation of any of same which failure to obtain, modification or
cancellation would have a Prime Material Adverse Effect, or (ii) of any
violation of any federal, state or municipal law, ordinance, order,
regulation or requirement affecting any of the Prime Properties issued by
any governmental authority, or of any structural defects relating to any
Prime Property, or of any Prime Property whose building systems are not in
working order, or of any physical damage to any Prime Property which in any
such case under this clause (ii) could, individually or in the aggregate
with any other condition resulting in a breach of the representations and
warranties set forth in this Section 3.9, reasonably be expected to result
in a Prime Material Adverse Effect.
(d) Neither Prime nor any Prime Subsidiary has received any written or
published notice to the effect that (i) any condemnation or rezoning
proceedings are pending or threatened with respect to any of the Prime
Properties or (ii) any zoning, building or similar law, code, ordinance,
order or regulation is or will be violated by the continued maintenance,
operation or use of any buildings or other improvements on any of the Prime
Properties or by the continued maintenance, operation or use of the parking
areas, except for such violations which, individually or in the aggregate
with any other condition resulting in a breach of the representations and
warranties set forth in this Section 3.9, could not be reasonably be
expected to result in a Prime Material Adverse Effect.
(e) Except as set forth in Schedule 3.9(e) to the Prime Disclosure
Letter, all work required to be performed, payments required to be
made and actions required to be taken prior to the date hereof pursuant to
any agreement entered into with a governmental body or authority in
connection with a site approval, zoning reclassification or other similar
action relating to any Prime Properties (e.g., local improvement district,
road improvement district, environmental mitigation) have been performed,
paid or taken, as the case may be, other than those where, individually or
in the aggregate with any other condition resulting in a breach of the
representations and warranties set forth in this Section 3.9, the failure
would not have a Prime Material Adverse Effect, and Prime has no Knowledge
of any material work, payments or actions that are required after the date
hereof pursuant to such agreements, except as set forth in development or
operating budgets for such Prime Properties delivered to Horizon and Horizon
Partnership prior to the date hereof.
Appendix A-35
<PAGE>
(f) Prime and each of the Prime Subsidiaries have good and sufficient
title to all their personal and non-real properties and assets
reflected in their books and records as being owned by them (including those
reflected in the consolidated balance sheet of Prime as of December 31,
1996, except as since sold or otherwise disposed of in the ordinary course
of business), free and clear of all liens and encumbrances, except such as
are reflected on the consolidated balance sheet of Prime as of December 31,
1996, and the notes thereto, and except for liens for current taxes not yet
due and payable, and liens or encumbrances which are normal to the business
of Prime and the Prime Subsidiaries and are not, in the aggregate, material
in relation to the assets of Prime on a consolidated basis and except also
for such imperfections of title, easement and encumbrances, if any, as do
not materially interfere with the present use of the properties subject
thereto or affected thereby, or otherwise materially impair the consolidated
business operations of Prime.
3.10 LEASES.
(a) The rent roll for the Prime Properties as of January 30, 1998
previously delivered by Prime to Horizon is correct and complete in
all material respects as of the date thereof.
(b) Except as provided in Schedule 3.10 to the Prime Disclosure Letter,
(i) each of the leases and tenancies for all or any portion of the
Prime Properties (the "Prime Leases") is valid and subsisting and in full
force and effect except where the failure thereof, individually with respect
to any Prime Lease or in the aggregate with more than one Prime Lease, could
not be reasonably be expected to result in a Prime Material Adverse Effect,
and has not been amended, modified or supplemented since the date of the
rent roll described in Section 3.10(a); and (ii) neither Prime nor any of
the Prime Subsidiaries has received any written notice from any tenant of
any intention to vacate which vacation would have a Prime Material Adverse
Effect. Except as provided in Schedule 3.10 to the Prime Disclosure Letter
neither Prime nor any of the Prime Subsidiaries has collected payment of
rent (other than security deposits) accruing for a period which is more than
one month beyond the date of collection.
(c) Prime has previously delivered or made available to Horizon a true
and correct copy of all Prime Leases.
(d) Except as shown in Schedule 3.10 to the Prime Disclosure Letter, as
of the last day of the calendar month immediately preceding the date
hereof, none of the lessees set forth on Schedule 3.10(d) to the Prime
Disclosure Letter has asserted any claim of which Prime or any of the Prime
Subsidiaries has received written notice which would materially affect the
collection of rent from such tenant and neither Prime nor any of the Prime
Subsidiaries has received written notice of any material default or breach
on the part of Prime or any of the Prime Subsidiaries under any of the Prime
Leases with such a tenant which has not been cured.
(e) Schedule 3.10 to the Prime Disclosure Letter sets forth a complete
and correct list as of January 30, 1998, of all written commitments
made by Prime or any of the Prime Subsidiaries to lease any of the Prime
Properties which has not yet been reduced to a written lease, and provides
with respect to each such commitment the principal terms of such commitment,
including, if applicable, (i) the space to be occupied, (ii) the name of the
tenant, (iii) the length of the original term thereof and any right or
option to renew or extend the lease term, (iv) the monthly minimum rental,
(v) rental escalations, (vi) the terms with respect to percentage rent or
other overage rent, (vii) any provisions for tenant allowances and (viii)
the right of any third-party broker to any outstanding brokerage or other
commission incident thereto. Prime has previously delivered or made
available to Horizon a true and correct copy of each such commitment.
(f) Any material leases pursuant to which Prime or any Prime Subsidiary,
as lessee, leases real or personal property are in good standing,
valid and effective in accordance with their respective terms, and there is
not, under any of such leases, any material existing default or any event
which with notice or lapse of time or both would constitute such a default,
nor do any of such leases contain any provision
Appendix A-36
<PAGE>
which would preclude the Surviving Company or the Prime Partnership from
occupying and using the leased premises for the same purposes and upon
substantially the same rental and other terms as are applicable to the
occupation and use by Prime and the Prime Subsidiaries, or which would have
a Prime Material Adverse Effect.
3.11 RENTS. The rents and other income and charges set forth in the rent
roll described in Section 3.10(a) are the actual rents, income and charges
presently being charged by Prime Subsidiaries under the Prime Leases. Other than
set forth on Schedule 3.10 to the Prime Disclosure Letter, no tenant under any
of the Prime Leases is entitled to any purchase option. None of the Prime Leases
and none of the rents or other amounts payable thereunder have been assigned,
pledged or encumbered, other than to lenders as set forth in the Prime SEC
Documents. No brokerage or leasing commission or other compensation will be due
or payable to any person, firm, corporation or other entity with respect to or
on account of any of the Prime Leases or any extensions or renewals thereof as
of the Horizon/Prime Effective Time except in the ordinary course of business
consistent with past practices.
3.12 ENVIRONMENTAL MATTERS. To the knowledge of Prime, except as disclosed
in the Prime SEC Documents and on the environmental reports listed on Schedule
3.12 to the Prime Disclosure Letter, and except what would not be reasonably
likely to have a Material Adverse Effect, (a) no Hazardous Substances have been
used, stood, manufactured, treated, processed or transported to or from any of
the Prime Properties except as necessary to the conduct of business and in
compliance with Environmental Laws; (b) there have been no spills, releases,
discharges or disposal of Hazardous Substances to have occurred or be presently
occurring on or from the Prime Properties; (c) the Prime Properties and the
business conducted thereon are not in violation of Environmental Laws; (d) Prime
and its Subsidiaries have not received and do not reasonably expect to receive
any notice of potential responsibility, letter of inquiry or notice of alleged
liability from any Person regarding the Prime Properties or the business
conducted thereon. Prime has previously delivered or made available to Horizon
complete copies of all final versions of environmental investigations and
testing or analysis made by or on behalf of Prime or any of the Prime
Subsidiaries that are in the possession of any of them with respect to the
environmental condition of the Prime Properties. For the purposes of this
Paragraph 3.12 only, "Prime Properties" shall include property currently or
formerly owned, operated or leased by Prime or its Subsidiaries.
"Environmental Laws" shall mean any applicable statute, code, enactment,
ordinance, rule, regulation, permit, consent, approval, authorization, judgment,
order, common law rule (including without limitation the common law respecting
nuisance and tortious liability), decree, injunction, or other requirement
having the force and effect of law, whether local, state, territorial or
national, at any time in force or effect relating to:
(a) emissions, discharges, spills, releases or threatened releases of
Hazardous Substances into ambient air, surface water, groundwater,
watercourses, publicly or privately owned treatment works, drains, sewer
systems, wetlands, septic systems or onto land;
(b) the use, treatment, storage, disposal, handling, manufacturing,
transportation or shipment of Hazardous Substances;
(c) the regulation of storage tanks; or
(d) otherwise relating to pollution or the protection of human health or
the environment.
"Hazardous Substances" shall mean all substances, wastes, pollutants,
contaminants and materials regulated or defined or designated as hazardous,
extremely or imminently hazardous, dangerous, or toxic pursuant to any law, by
any local, state, territorial or federal governmental authority, or with respect
to which such a governmental authority otherwise requires environmental
investigation, monitoring, reporting, or remediation; including but not limited
to,
Appendix A-37
<PAGE>
(a) all substances, wastes, pollutants, contaminants and materials
regulated, or defined or designated as hazardous, extremely or
imminently hazardous, dangerous or toxic, under the following federal
statutes and their state counterparts, as well as their statutes'
implementing regulations: the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. section 9601 et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. section 6901 et seq., the Toxic
Substances Control Act, 15 U.S.C. section 2601 et seq., the Clean Water Act,
33 U.S.C. section 1251 et seq., the Clean Air Act, 42 U.S.C. section 7401 et
seq., the Emergency Planning and Community Right to Know Act, 42 U.S.C.
section 11011 et seq., the Safe Drinking Water Act, 33 U.S.C. section 300f
et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C.
section 136 et seq., the Atomic Energy Act, 42 U.S.C. section 22011 et seq.,
and the Hazardous Materials Transportation Act, 42 U.S.C. section 1801 et
seq.;
(b) petroleum and petroleum products including crude oil and any
fractions thereof;
(c) natural gas, synthetic gas, and any mixtures thereof; and
(d) radon, radioactive substances, asbestos, urea formaldehyde,
polychlorinated biphenyls and electromagnetic field radiation.
3.13 TAXES.
(a) Each of Prime and the Prime Subsidiaries (i) has filed all tax
returns and reports required to be filed by it (after giving effect
to any filing extension properly granted by a Governmental Entity having
authority to do so), and all such returns and reports are accurate and
complete in all material respects, and (ii) has paid (or Prime has paid on
its behalf) all Taxes shown on such returns and reports as required to be
paid by it except where the failure to file such tax returns or reports and
failure to pay such Taxes would not have a Prime Material Adverse Effect.
The most recent audited financial statements contained in the Prime SEC
Documents reflect an adequate reserve for all material Taxes payable by
Prime and the Prime Subsidiaries for all taxable periods and portions
thereof through the date of such financial statements. Since the Prime
Financial Statement Date, Prime has incurred no liability for Taxes under
Sections 857(b), 860(c) or 4981 of the Code, including without limitation
any tax arising from a prohibited transaction described in Section 857(b)(6)
of the Code, and neither Prime nor any Prime Subsidiary has incurred any
material liability for Taxes other than in the ordinary course of business.
No event has occurred, and no condition or circumstance exists, which
presents a material risk that any material tax described in the preceding
sentence will be imposed upon Prime. To the Knowledge of Prime, no
deficiencies for any Taxes have been proposed, asserted or assessed against
Prime or any of the Prime Subsidiaries, and no requests for waivers of the
time to assess any such Taxes are pending.
(b) Prime (i) has operated in such a manner as to qualify as a REIT
within the meaning of Section 856 of the Code for each of its taxable
years ending on or before December 31, 1996, and intends to continue to
operate in such a manner as to qualify as a REIT for the taxable year that
ends on the Closing Date, and (ii) has not taken or omitted to take any
action which would reasonably be expected to result in a challenge to its
status as a REIT, and to Prime's Knowledge, no such challenge is pending or
threatened. Each Prime Subsidiary which is a partnership, joint venture or
limited liability company (x) has been since its formation and continues to
be for federal income tax purposes as a partnership and not as a corporation
or as an association or publicly traded partnership taxable as a corporation
and (y) has not since the later of its formation or the acquisition by Prime
of a direct or indirect interest therein, owned any assets (including,
without limitation, securities) that would cause Prime to violate Section
856(c)(5) of the Code. Each Prime Subsidiary which is a corporation (other
than Prime Retail Services, Inc.) has been since its formation a qualified
REIT subsidiary under Section 856(i) of the Code. Except as set forth in
Schedule 3.13 to the Prime Disclosure Letter neither Prime nor any Prime
Appendix A-38
<PAGE>
Subsidiary holds any asset (x) the disposition of which would be subject to
rules similar to Section 1374 of the Code as a result of a notice under IRS
Notice 88-19 or (y) which is subject to a consent filed pursuant to Section
341(f) of the Code and the regulations thereunder.
3.14 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker,
financial advisor or other person, other than Friedman, Billings, Ramsey & Co.,
Inc., the fees and expenses of which will be paid by Prime and are described in
the engagement letter with Friedman, Billings, Ramsey & Co., Inc., a true,
correct and complete copy of which has previously been given to Horizon, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of Prime or any Prime Subsidiary.
3.15 COMPLIANCE WITH LAWS. Prime and its Subsidiaries hold all permits,
licenses, variances, exceptions, orders, registrations and approvals of all
Governmental Entities which are required for the operation of the business of
Prime and its Subsidiaries (the "Prime Permits"), except where the failure to
have any such Prime Permits individually or in the aggregate would not have a
Prime Material Adverse Effect. Since March 22, 1994, neither Prime nor any of
the Prime Subsidiaries has violated or failed to comply with any statute, law,
ordinance, regulation, rule, judgment, decree or order of any Governmental
Entity applicable to its business, properties or operations (except any
Environmental Law, as to which the representations in Section 3.12 shall apply),
except to the extent that such violation or failure would not, individually or
in the aggregate, have a Prime Material Adverse Effect.
3.16 CONTRACTS; DEBT INSTRUMENTS.
(a) To the Knowledge of Prime, except as disclosed in the Prime SEC
Documents or in Schedule 3.16 to the Prime Disclosure Letter, there
is no contract or agreement that purports to limit in any material respect
the names or the geographic location in which Prime and its Subsidiaries
conduct or may conduct their business. Neither Prime nor any Prime
Subsidiary has received a written notice that Prime or any Prime Subsidiary
is in violation of or in default under (nor to the Knowledge of Prime does
there exist any condition which upon the passage of time or the giving of
notice or both would cause such a violation of or default under) any
material loan or credit agreement, note, bond, mortgage, indenture,
concession or any other similar type of material contract, agreement,
arrangement or understanding, to which it is a party or by which it or any
of its properties or assets is bound, nor to the Knowledge of Prime does
such a violation or default exist, except to the extent that such violation
or default, individually or in the aggregate, would not have a Prime
Material Adverse Effect.
3.17 OPINION OF FINANCIAL ADVISOR. Prime has received the written opinion
of Friedman, Billings, Ramsey & Co., Inc., satisfactory to Prime, to the effect
that proposed Prime/Horizon Merger Consideration and Partnership Merger
Consideration to be paid by Prime and Prime Partnership in connection with the
Mergers is fair, from a financial point of view, to Prime and Prime Partnership.
3.18 STATE TAKEOVER STATUTES. Prime has taken all action necessary to
exempt transactions between Prime and Horizon and its Affiliates from the
operation of Takeover Statutes.
3.19 INVESTMENT COMPANY ACT OF 1940. Neither Prime nor any of the Prime
Subsidiaries is, or at the Partnership Merger Effective Time will be, required
to be registered under the 1940 Act.
3.20 DEFINITION OF KNOWLEDGE OF PRIME. As used in this Agreement, the
phrase "Knowledge of Prime" (or words of similar import) means the actual
knowledge of officers and directors of Prime and Prime Partnership identified on
Schedule 3.20 to the Prime Disclosure Letter.
3.21 VOTE REQUIRED. The affirmative vote of at least (i) 66 2/3% of the
outstanding Prime Series C Preferred Shares and (ii) two-thirds of the
outstanding Prime Common Shares are the only votes of the holders of any class
or series of Prime's capital stock necessary (under applicable law or otherwise)
to approve this Agreement and the transactions contemplated hereby. The
affirmative vote of the holders of at least (i) 50% of the outstanding Prime
Common Units and (ii) 50% of the outstanding Prime Series C
Appendix A-39
<PAGE>
Preferred Units, held by the limited partners of Prime Partnership are the only
votes by the holders of any class or series of partnership interest therein
necessary (under applicable law or otherwise) to approve this Agreement and the
transactions contemplated hereby.
ARTICLE IV
COVENANTS
4.1 CONDUCT OF HORIZON'S, HORIZON PARTNERSHIP'S AND SKY MERGER'S BUSINESS
PENDING MERGERS. During the period from the date of this Agreement to the
Prime/Horizon Merger Effective Time, except as consented to in writing by Prime
or as expressly provided for in this Agreement or the C&C/Murdock Agreements
(other than as provided in Section 4.1(j)(2)), Horizon, Horizon Partnership and
Sky Merger shall, and shall cause (or, in the case of Horizon Subsidiaries that
Horizon, Horizon Partnership or Sky Merger do not control, shall use reasonable
best efforts to cause) each of the Horizon Subsidiaries to:
(a) conduct its business only in the usual, regular and ordinary course
and in substantially the same manner as heretofore conducted;
(b) use commercially reasonable efforts to preserve intact its business
organizations, goodwill and ongoing businesses and keep available the
services of its officers and employees;
(c) confer on a regular basis with one or more representatives of Prime
to report operational matters of materiality and any proposals to
engage in material transactions (except with respect to Acquisition
Proposals, as to which the provisions of Section 4.3 shall apply);
(d) promptly notify Prime of any material emergency or other material
change in the condition (financial or otherwise), business,
properties, assets, liabilities or the normal course of its businesses or in
the operation of its properties, or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may
be contemplated);
(e) promptly deliver to Prime true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of
this Agreement;
(f) maintain its books and records in accordance with GAAP consistently
applied and not change in any material manner any of its methods,
principles or practices of accounting in effect at the Horizon Financial
Statement Date, except as may be required by the SEC, applicable law or
GAAP;
(g) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other
authorities, subject to extensions permitted by law, provided Horizon
notifies Prime that it is availing itself of such extensions and provided
such extensions do not adversely affect Horizon's status as a qualified REIT
under the Code;
(h) not make any Tax election (unless required by law or necessary to
preserve Horizon's status as a REIT or the status of any Horizon
Subsidiary as a partnership for federal income tax purposes, as the case may
be) and not make or rescind any express or deemed election relative to
Taxes;
(i) make all capital expenditures, and expenditures relating to leasing,
in accordance with a capital budget of Horizon delivered prior to the
date hereof to Prime (the "Horizon Capital Budget") and will not (A)
acquire, enter into any option to acquire, or exercise an option or other
right or election or enter into any other commitment or contractual
obligation (each, a "Commitment") for the acquisition of any real property
or other transaction involving in excess of $100,000 which is not included
in the Horizon Capital Budget approved by Prime, encumber assets or commence
construction of, or enter into any Commitment to develop or construct other
real estate projects, except in the ordinary course of its retail property
business or (B) incur or enter into any Commitment to incur
Appendix A-40
<PAGE>
additional indebtedness (secured or unsecured) except for working capital
under its revolving line(s) of credit and Commitments for indebtedness
described on Schedule 4.1(i) to the Horizon Disclosure Letter;
(j) not (1) amend its Articles of Incorporation, or its Bylaws, or the
articles or certificate of incorporation, bylaws, code of
regulations, partnership agreement, operating agreement or joint venture
agreement or comparable charter or organization document of any Horizon
Subsidiary or (2) amend or otherwise modify or waive any rights under any
C&C/Murdock Agreement to which it is a party;
(k) not split, combine or reclassify any capital stock, partnership or
other ownership interests and make no change in the number of shares
of capital stock, membership interests or units of limited partnership
interest issued and outstanding, other than pursuant to the redemption of
Horizon OP Units pursuant to the Horizon Partnership Agreement or the
exercise of Horizon Stock Options;
(l) grant no options or other right or commitment relating to its shares
of capital stock, membership interests or units of limited
partnership interest or any security convertible into its shares of capital
stock, membership interests or units of limited partnership interest, or any
security the value of which is measured by shares of capital stock, or any
security subordinated to the claim of its general creditors and, except as
contemplated by this Agreement, not amend or waive any rights under any of
the Horizon Stock Options;
(m) except as provided in Section 5.10 and in connection with the use of
Horizon Common Shares to pay the exercise price or tax withholding in
connection with equity-based employee benefit plans by the participants
therein, not (i) authorize, declare, set aside or pay any dividend or make
any other distribution or payment with respect to any Horizon Common Shares
or Horizon OP Units or (ii) directly or indirectly redeem, purchase or
otherwise acquire any shares of capital stock, membership interests or units
of partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of capital stock, membership interests, or
units of partnership interest of Horizon, except for (A) exchanges of
Horizon Common Shares required under Section 5.4 of the Horizon Articles of
Incorporation in order to preserve the status of Horizon as a REIT under the
Code, and (B) redemptions of Horizon OP Units, whether or not outstanding on
the date of this Agreement, under the Horizon Partnership Agreement in which
Horizon Common Shares are utilized;
(n) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of the Horizon Properties, except in connection with a
transaction that is made in the ordinary course of business and is the
subject of a binding contract in existence on the date of this Agreement and
disclosed in Schedule 2.20 to the Horizon Disclosure Letter; provided,
however, without the prior written consent of Prime, leases of space in all
Horizon Properties which are to be contributed to Newco LP pursuant to the
Horizon Partnership Contribution may be made in accordance with the leasing
plans or parameters which shall be agreed from time to time between Horizon
Partnership and Prime. Notwithstanding any provision of this Agreement to
the contrary, a Horizon Subsidiary shall be permitted to enter into any
lease for any space in any property owned by it if such Horizon Subsidiary
provides written notice to Prime with respect to the terms of a proposed
lease and Prime does not object in writing by notice to such Horizon
Subsidiary to the terms of such lease within one business day after the
receipt of the aforesaid notice from such Horizon Subsidiary.
(o) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of its personal property or intangible property, except in
connection with a transaction that is permitted by Section 4.1(n) or that is
made in the ordinary course of business and is not material, individually or
in the aggregate;
(p) not make any loans, advances or capital contributions to, or
investments in, any other Person, (whether by the purchase,
redemption or other acquisition of the equity or debt of such Person or
Appendix A-41
<PAGE>
otherwise) other than loans, advances and capital contributions to Horizon
Subsidiaries in existence on the date hereof and advances to employees in
the ordinary course of business consistent with past practice;
(q) not incur, pay, discharge, satisfy or settle any claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent
or otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) furnished to Prime or incurred in the ordinary course of
business consistent with past practice;
(r) not guarantee the indebtedness of another Person, enter into any
"keep well" or other agreement to maintain any financial statement
condition of another Person or enter into any arrangement having the
economic effect of any of the foregoing;
(s) not enter into any Commitment with any officer, director or Affiliate
of Horizon or any of the Horizon Subsidiaries or any material
Commitment with any consultant;
(t) except as set forth in Schedule 4.1(t) to the Horizon Disclosure
Letter, not increase any compensation or enter into or amend any
employment agreement described in Schedule 2.17 to the Horizon Disclosure
Letter with any of its officers, directors or employees, other than as
required by any contract or Plan or in accordance with waivers by employees
of benefits under such agreements and other than normal year end bonuses in
keeping consistent with past practice and annual salary increases not
exceeding 5%; provided, however, that for any officer or employee earning an
annual salary in excess of $75,000, Horizon may provide such employee with
an annual salary increase only after consulting with Prime before effecting
such increase.
(u) not adopt any new employee benefit plan, incentive plan, severance
plan, stock option or similar plan or amend any existing plans or
rights, except for changes to severance benefits to provide that an employee
whose position is transferred to a location outside the standard
metropolitan statistical area in which such employee is currently employed
shall not forfeit severance benefits by reason of failure to accept such
transfer, and changes which are required by law;
(v) not settle any shareholder derivative, class action claims or other
suit or claims arising out of or in connection with any of the
transactions contemplated by this Agreement;
(w) not change the ownership of any of its Subsidiaries, except changes
which arise as a result of the acquisition of Horizon OP Units in
exchange for Horizon Common Shares pursuant to exercise of the Horizon OP
Unit redemption right under Section 8.6 of the Horizon Partnership
Agreement;
(x) not accept a promissory note in payment of the exercise price payable
under any option to purchase Horizon Common Shares;
(y) not enter into or amend or otherwise modify or waive any rights under
any agreement or arrangement for the persons that are affiliates, or
as of the date hereof, all officers, directors or employees, of Horizon,
Horizon Partnership or any Horizon Subsidiary not approved by a majority of
the "independent" members of the Board of Directors of Horizon;
(z) not directly or indirectly or through a subsidiary, merge or
consolidate with, acquire all or substantially all of the assets of,
or acquire the beneficial ownership of a majority of the outstanding capital
stock or other equity interest in any person or entity unless such
transaction has been approved by Prime; and.
(aa)Notwithstanding any provision of this Agreement to the contrary,
including but not limited to the provisions of this Section 4.1, (i)
on or prior to the Closing, Horizon or Horizon Partnership shall be
permitted to make any or all of the payments on Schedule 4.1(aa) to the
Horizon Disclosure Schedule
Appendix A-42
<PAGE>
without the consent of Prime and (ii) Horizon and Horizon Partnership shall
be permitted to take any and all actions expressly set forth in a quarterly
operating budget, prepared by Horizon and approved by Prime in writing prior
to the commencement of each quarter.
4.2 CONDUCT OF PRIME'S AND PRIME PARTNERSHIP'S BUSINESS PENDING
MERGERS. During the period from the date of this Agreement to the Prime/Horizon
Merger Effective Time, except as (i) contemplated by this Agreement including as
contemplated by the Contribution Agreement, or (ii) consented to in writing by
Horizon, Prime and Prime Partnership shall, and shall cause (or, in the case of
Prime Subsidiaries that Prime or Prime Partnership do not control, use
reasonable best efforts to cause) each of the Prime Subsidiaries to:
(a) use commercially reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its
officers and employees;
(b) confer on a regular basis with one or more representatives of Horizon
to report operational matters of materiality which would have a Prime
Material Adverse Effect;
(c) promptly notify Horizon of any material emergency or other material
change in the condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its
businesses or in the operation of its properties, or of any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated);
(d) promptly deliver to Horizon true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of
this Agreement;
(e) maintain its books and records in accordance with GAAP consistently
applied and not change in any material manner any of its methods,
principles or practices of accounting in effect at the Prime Financial
Statement Date, except as may be required by the SEC, applicable law or
GAAP;
(f) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other
authorities, subject to extensions permitted by law, provided such
extensions do not adversely affect Prime's status as a qualified REIT under
the Code;
(g) not make or rescind any express or deemed election relative to Taxes
(unless required by law or necessary to preserve Prime's status as a
REIT or the status of any Prime Subsidiary as a partnership for federal
income tax purposes or as a qualified REIT subsidiary under Section 856(i)
of the Code, as the case may be);
(h) not amend the Prime Articles of Incorporation or the Prime Bylaws, or
the articles or certificate of incorporation, bylaws, code of
regulations, partnership agreement, operating agreement or joint venture
agreement or comparable charter or organization document of any Prime
Subsidiary, including the Prime Partnership Agreement (except to the extent
necessary to reflect the admission of additional limited partners and other
amendments in connection therewith that can be made by Prime without a vote
of limited partners and that will not, individually or in the aggregate,
materially adversely affect the rights or obligations of holders of Prime OP
Units);
(i) except as provided in Sections 1.16, 1.17 and 5.10 hereof and in
connection with the use of Prime Common Shares to pay the exercise
price or tax withholding in connection with equity-based employee benefit
plans by the participants therein, not (i) authorize, declare, set aside or
pay any dividend or make any other distribution or payment with respect to
any Prime Common Shares or Prime Common Units or (ii) directly or indirectly
redeem, purchase or otherwise acquire any shares of capital stock,
membership interests or units of partnership interest or any option, warrant
or right to acquire, or security convertible into, shares of capital stock,
membership interests, or units of partnership interest of Prime, except for
(A) conversions of Prime Common Shares required under Section 4.9.5 or
Section 4.5.7, respectively, of the Prime Articles of Incorporation in order
to preserve the status
Appendix A-43
<PAGE>
of Prime as a REIT under the Code, and (B) exchanges of Prime Common Units,
whether or not outstanding on the date of this Agreement, under the Prime
Partnership Agreement in which Prime Common Shares are utilized;
(j) not sell, lease, mortgage, subject to Lien or otherwise dispose of
any of the Prime Properties, except in connection with a transaction
that would not reasonably be expected to have a Prime Material Adverse
Effect;
(k) not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise)
if it would reasonably be expected to have a Prime Material Adverse Effect;
and
(l) except as contemplated by Section 1.17, not directly or indirectly
through a subsidiary, merge or consolidate with, or acquire all or
substantially all of the assets of, or the beneficial ownership of a
majority of the outstanding capital stock or other equity interests in any
person or entity whose securities are registered under the Exchange Act
unless such transaction has been approved by Horizon.
4.3 NO SOLICITATION. Prior to the Prime/Horizon Merger Effective Time,
Horizon agrees, for itself and in its capacity as general partner of Horizon
Partnership, that:
(a) neither it nor any of the Horizon Subsidiaries shall, directly or
indirectly, whether through a Horizon representative specified in
Section 4.3(b) or otherwise, invite, initiate, solicit (including by way of
furnishing non-public information or assistance) or encourage any inquiries,
proposals, discussions or negotiations or the making or implementation of
any proposal or offer (including, without limitation, any proposal or offer
to its shareholders) that constitutes or may reasonably be expected to lead
to, or otherwise with respect to, (i) a merger, acquisition, consolidation,
share exchange, business combination or similar transaction, (ii) any tender
offer or exchange offer for 10% or more of the outstanding Horizon Common
Shares or the filing of a registration statement under the Securities Act in
connection therewith, (iii) a transaction resulting in the issuance of
securities representing 10% or more of the outstanding equity securities of
Horizon, (iv) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets or equity securities (including,
without limitation, partnership interests and units) of Horizon or Horizon
Partnership or (v) any public announcements of a proposal, plan or intention
to do any of the foregoing or any agreement to engage in any of the
foregoing, other than the transactions contemplated by this Agreement (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal") or engage in any discussions or negotiations concerning or
provide any confidential or non-public information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal;
(b) neither it nor any of the Horizon Subsidiaries will authorize or
permit any of its officers, directors, employees, affiliates, agents,
investment bankers, financial advisors, attorneys, accountants, brokers,
finders or other representative of Horizon to engage in any of the
activities described in Section 4.3(a);
(c) it and the Horizon Subsidiaries will immediately cease and cause to
be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing
and will take the necessary steps to inform the individuals or entities
referred to in Section 4.3(b) of the obligations undertaken in this Section
4.3; and
(d) it will notify Prime immediately if Horizon or any of the Horizon
Subsidiaries receives any such inquiries or proposals, or any
requests for such information, or if any such negotiations or discussions
are sought to be initiated or continued with it and provide all relevant
details related thereto; provided, however, that nothing contained in this
Section 4.3 shall prohibit the Board of Directors of Horizon (including with
respect to Horizon's capacity as general partner of Horizon Partnership)
from (i) furnishing information to or entering into discussions or
negotiations with, any
Appendix A-44
<PAGE>
person or entity that makes an unsolicited Acquisition Proposal, if, and
only to the extent that (A) a majority of the Board of Directors of Horizon
determines in good faith that such action is required for the Board of
Directors of Horizon to comply with its duties to shareholders imposed by
applicable law and (B) prior to furnishing such information to, or entering
into discussions or negotiations with, such person or entity, Horizon
provides written notice to Prime to the effect that it is furnishing
information to, or entering into discussions with, such person or entity;
and (ii) making any disclosure required by applicable law with regard to an
Acquisition Proposal. Nothing in this Section 4.3 shall (x) permit Horizon
to terminate this Agreement (except as specifically provided in Article 7
hereof), (y) permit Horizon to enter into an agreement for an Acquisition
Proposal during the term of this Agreement or (z) affect any other
obligation of Horizon under this Agreement; provided, however, that a
majority of the Board of Directors of Horizon may approve and recommend a
Superior Acquisition Proposal and, in connection therewith, withdraw or
modify its approval or recommendation of this Agreement and the Mergers in
accordance with Section 5.1(e). Any disclosure that the Board of Directors
of Horizon may be compelled to make with respect to the receipt of an
Acquisition Proposal in order to comply with its duties to shareholders
imposed by applicable law or Rule 14d-9 or 14e-2 of the Exchange Act will
not constitute a violation of this Section 4.3. As used herein, "Superior
Acquisition Proposal" means a bona fide Acquisition Proposal made by a third
party which a majority of the members of the Board of Directors of Horizon
resolves in good faith to be more favorable to Horizon's shareholders than
the Mergers and which the Board of Directors of Horizon determines is
reasonably capable of being consummated.
4.4 AFFILIATES. Prior to the Partnership Merger Effective Time, Horizon
and Prime shall cause to be prepared and delivered to the other a list
(reasonably satisfactory to counsel for Prime and Horizon) identifying all
persons who, at the time of the Horizon, Prime Shareholders Meetings, may be
deemed to be "affiliates" of Horizon or Prime, respectively, as that term is
used under Rule 145 under the Securities Act (the "Affiliates"). Horizon and
Prime each shall use its reasonable best efforts to cause each person who is
identified by it as an Affiliate in such list to deliver to the other on or
prior to the Prime/Horizon Merger Effective Time a written agreement, in the
form to be approved by the parties hereto prior to the Prime/ Horizon Merger
Effective Time, that such Affiliate will not sell, pledge, transfer or otherwise
dispose of any Surviving Company Common Shares issued to such Affiliate pursuant
to the Prime/Horizon Merger, except pursuant to an effective registration
statement under the Securities Act or in compliance with paragraph (d) of Rule
145 or as otherwise permitted by the Securities Act. The Surviving Company shall
be entitled to place legends as specified in such written agreements on the
certificates representing any Surviving Company Common Shares to be received
pursuant to the terms of this Agreement by such Affiliates who have executed
such agreements and to issue appropriate stop transfer instructions to the
transfer agent for the Surviving Company Common Shares issued to such
Affiliates, consistent with the terms of such agreements. The Surviving Company
shall timely file the reports required to be filed by it under the Exchange Act
and the rules and regulations adopted by the SEC thereunder, and it will take
such further action as any Affiliate of Horizon or Prime may reasonably request,
all to the extent required from time to time to enable such Affiliate to sell
shares of the Surviving Company received by such Affiliate in the Prime/Horizon
Merger without registration under the Securities Act pursuant to (i) Rule
145(d)(1) under the Securities Act, as such rule may be amended from to time, or
(ii) any successor rule or regulation hereafter adopted by the SEC.
4.5 OTHER ACTIONS. Each of Horizon, Horizon Partnership and Newco LP, on
the one hand, and Prime and Prime Partnership, on the other hand, shall not, and
shall use commercially reasonable efforts to cause their respective subsidiaries
and joint ventures not to take, any action that would result in (i) any of the
representations and warranties of such party (without giving effect to any
"knowledge" qualification) set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
(without giving effect to any "knowledge" qualification) that are not so
qualified becoming untrue in any material respect or (iii) except as
contemplated by Section 4.3, any of the conditions to the Mergers or that would
materially impair the ability of the parties hereto to consummate the
transactions contemplated by the Contribution Agreement set forth in Article 6
not being satisfied.
Appendix A-45
<PAGE>
ARTICLE V
ADDITIONAL COVENANTS
5.1 PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY STATEMENT;
HORIZON SHAREHOLDERS AND PARTNERS MEETINGS AND PRIME SHAREHOLDERS AND PARTNERS
MEETINGS.
(a) As promptly as practicable after execution of this Agreement, (i)
each of Horizon, Prime and, to the extent required, Prime
Partnership, Horizon Partnership, Sky Merger and Newco LP shall prepare and
file with the SEC (with appropriate requests for confidential treatment,
unless the parties hereto otherwise agree) under the Exchange Act, one or
more joint proxy statements/prospectuses and forms of proxies (such joint
proxy statement(s)/prospectus(es) together with any amendments to
supplements thereto, the "Proxy Statement") relating to the shareholder
meetings, and, if applicable, partners meetings, of each of Horizon, Horizon
Partnership, Sky Merger, Newco LP, Prime and Prime Partnership and the vote
of the shareholders of Horizon, Sky Merger and Prime and, if applicable,
Horizon Partnership, Newco LP, and Prime Partnership, with respect to the
Mergers and the transactions contemplated hereunder and such registration
statements, (collectively and together with any amendments or supplements
thereto, the "Registration Statement"), in which the Proxy Statement above
will be included, as may be required in connection with the registration
under the Securities Act of the securities to be distributed in connection
with the Mergers or the other transactions contemplated hereunder. The
respective parties will cause the Proxy Statement and the Registration
Statement to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and
regulations thereunder. Each of Horizon, Horizon Partnership, Sky Merger,
Newco LP, Prime and Prime Partnership shall furnish all information about
itself and its business and operations and all necessary financial
information to the other as the other may reasonably request in connection
with the preparation of the Proxy Statement and the Registration Statement.
Each such party shall use its reasonable best efforts, to have the
Registration Statement declared effective by the SEC as promptly as
practicable (including clearing the Proxy Statement with the SEC). Each of
Horizon, Horizon Partnership, Newco LP and Sky Merger, on the one hand, and
Prime and Prime Partnership, on the other hand, agree promptly to correct
any information provided by it for use in the Proxy Statement and the
Registration Statement if and to the extent that such information shall have
become false or misleading in any material respect, and each of the parties
hereto further agrees to take all steps necessary to amend or supplement the
Proxy Statement and the Registration Statement and to cause the Proxy
Statement and the Registration Statement as so amended or supplemented to be
filed with the SEC (with copies provided to the other parties hereto) and to
be disseminated to their respective shareholders and partners, in each case
as and to the extent required by applicable federal and state securities
laws. Each of Horizon, Horizon Partnership, Sky Merger, Newco LP, Prime and
Prime Partnership agrees that the information provided by it for inclusion
in the Proxy Statement or the Registration Statement and each amendment or
supplement thereto, at the time of mailing thereof and at the time of the
respective meetings of shareholders of Horizon, Sky Merger and Prime and at
the time of the respective taking of consents, if any, of partners of
Horizon Partnership, Newco LP, and Prime Partnership, will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Each party will notify the other promptly and will advise and deliver copies
(if any) to the other parties hereto, promptly after it receives notice
thereof, of any request by the SEC for amendment of the Proxy Statement or
the Registration Statement or comments thereon and responses thereto or
requests by the SEC for additional information (regardless whether such
requests relate to Prime or Prime Partnership, on the one hand, or Horizon,
Sky Merger, Horizon Partnership or Newco LP on the other hand), and each of
Prime and Prime Partnership, on the other hand, and Horizon, Horizon
Partnership, Newco LP and Sky Merger, on the other hand, shall promptly
notify the other of (i) the time when the Registration Statement has become
effective, (ii) or any supplement or amendment thereto has been filed, (iii)
the issuance of any stop order, and (iv) the suspension of the qualification
and registration of the securities issuable in connection with the Mergers
and the Distribution. The Proxy Statement shall include the recommendations
of the Board of Directors of each Prime and Horizon; provided, that the
recommendation of the Board of Directors of
Appendix A-46
<PAGE>
Horizon may not be included or may be withdrawn if the Board of Directors of
Horizon has accepted a proposal for Superior Acquisition Proposal in
accordance with the terms of Section 4.3. Each party shall also take any
action required to be taken under any applicable state securities or "blue
sky" laws in connection with the issuance of securities pursuant to the
Mergers and the other transactions contemplated hereunder, and shall furnish
all information as may be reasonably requested in connection with any such
action. Each party will use its best efforts to obtain prior to the
effective date of the Registration Statement, all necessary state securities
or "blue sky" permits or approvals required to carry out the transactions
contemplated by this Agreement. In connection with the preparation of the
Proxy Statement and the Registration Statement, Horizon shall use reasonable
efforts to cause to be delivered to Prime prior to the mailing of the Proxy
Statement, the opinion of Rudnick & Wolfe, dated the date of the Proxy
Statement, that (i) Horizon was organized and has operated in conformity
with the requirements for qualification as a REIT within the meaning of the
Code in each of its taxable years or other periods ending after December 31,
1993 and on or before the Closing Date and (ii) Horizon Partnership, Newco
LP, and each other Horizon Subsidiary has been since formation, and
continues to be, as of such date, for federal income tax purposes, a
partnership and not a corporation or an association taxable as a corporation
or publicly traded partnership. In connection with the preparation of the
Proxy Statement and the Registration Statement, Prime shall use reasonable
efforts to cause to be delivered to Horizon prior to the mailing of the
Proxy Statement, the opinion of Winston & Strawn, dated the date of the
Proxy Statement, that (i) Prime was organized and has operated in conformity
with the requirements for qualification as a REIT within the meaning of the
Code in each of its taxable years or other periods ending on or before the
Closing Date and (ii) Prime Partnership, and each other Prime Subsidiary
that is a partnership, joint venture or limited liability company has been
since formation, and continues to be, as of such date, for federal income
tax purposes, a partnership and not a corporation or an association taxable
as a corporation or publicly traded partnership.
(b) Each of Horizon, Horizon Partnership, Sky Merger, Newco LP, Prime and
Prime Partnership shall use its reasonable best efforts to timely
mail the joint proxy statement/prospectus contained in the Registration
Statements to its shareholders. It shall be a condition to the mailing of
the joint proxy statement/prospectus that (i) Prime and Prime Partnership
shall have received a "comfort" letter from Ernst & Young LLP, independent
public accountants for Horizon and Horizon Partnership, of the kind
contemplated by the Statement of Auditing Standards with respect to Letters
to Underwriters promulgated by the American Institute of Certified Public
Accountants (the "AICPA Statement"), dated as of the date on which the
Registration Statement shall become effective and as of the Closing Date,
addressed to Prime and Prime Partnership, in form and substance reasonably
satisfactory to Prime and Prime Partnership, concerning the procedures
undertaken by Ernst & Young LLP, with respect to the financial statements
and information of Horizon, Horizon Partnership and their subsidiaries
contained or incorporated by reference in the Registration Statement and the
other matters contemplated by the AICPA Statement and otherwise customary in
scope and substance or letters delivered by independent public accountants
in connection with transactions such as those contemplated by this
Agreement, (ii) Horizon shall have received a "comfort" letter from Ernst &
Young LLP, independent public accountants for Prime and Prime Partnership,
of the kind contemplated by the AICPA Statement, dated as of the date on
which the Registration Statement shall become effective and as of the
Effective Time, addressed to Horizon and Horizon Partnership, in form and
substance reasonably satisfactory to Horizon, concerning the procedures
undertaken by Ernst & Young LLP with respect to the financial statements and
information of Prime, Prime Partnership and their subsidiaries contained or
incorporated by reference in the Registration Statement and the other
matters contemplated by the AICPA Statement and otherwise customary in scope
and substance for letters delivered by independent public accountants in
connection with transactions such as those contemplated by this Agreement,
(iii) Prime shall have received reasonable assurance that the conditions set
forth in Section 6.2(f) will be satisfied on or prior to the Closing Date
and (iv) Horizon shall have received reasonable assurance that the
conditions set forth in Section 6.3(f) will be satisfied on or prior to the
Closing Date.
(c) Prime will duly call and as soon as practicable following the date of
this Agreement (but in no event sooner than 20 business days
following the date the Proxy Statement is mailed to the shareholders of
Prime), give notice of, convene and hold a meeting of its shareholders (the
"Prime Shareholders
Appendix A-47
<PAGE>
Meeting") for the purpose of obtaining the Prime Shareholder Approvals.
Prime will, through its Board of Directors, recommend to its shareholders
approval of this Agreement, the Horizon/Prime Merger and the other
transactions contemplated by this Agreement.
(d) Horizon will duly call and give notice of and, as soon as practicable
following the date of this Agreement (but in no event sooner than 20
business days following the date the Proxy Statement is mailed to the
shareholders of Horizon), convene and hold a meeting of its shareholders
(the "Horizon Shareholders Meeting") for the purpose of obtaining Horizon
Shareholder Approvals. Horizon will, through its Board of Directors,
recommend to its shareholders approval of this Agreement, the Prime/ Horizon
Merger, the Horizon/Subsidiary Merger and the other transactions
contemplated by this Agreement and include such recommendation in the Proxy
Statement; provided, however, that prior to the Horizon Shareholders
Meeting, such recommendation may be withdrawn, modified or amended with
respect to a Superior Acquisition Proposal if a majority of the Board of
Directors of Horizon determines in good faith, based upon the advice of its
outside counsel, that such action is required for the Board of Directors of
Horizon to comply with its duties to its shareholders pursuant to Section
4.3.
(e) Prime and Horizon shall use their best efforts to cause the Proxy
Statements to be mailed to their respective shareholders on the same
day and to convene their respective shareholder meetings on the same day,
which day, subject to the provisions of Sections 5.1(c), 5.1(d) and 5.3,
shall be a day not later than forty-five days after the date the Proxy
Statement is mailed.
(f) If on the date for the Prime Shareholders Meeting and Horizon
Shareholders Meeting established pursuant to Section 5.1(e) of this
Agreement, either Prime or Horizon has not received duly executed proxies
for a sufficient number of votes to approve the respective Mergers (but less
than a majority of the outstanding Horizon Common Shares or Prime Common
Shares, as the case may be, have voted against the respective Mergers), then
both parties shall recommend the adjournment of their respective
shareholders meetings until one or more dates not later than the date ten
(10) days after the originally scheduled date of the shareholders meetings.
(g) Horizon shall use commercially reasonable efforts to obtain the
written consents for approval by the limited partners of Horizon
Partnership to the transactions contemplated hereby to the extent required
by the Horizon Partnership Agreement and any other matters reasonably
requested by Prime which are reasonably determined by Prime to be required
to effect the transactions contemplated by this Agreement (collectively, the
"Horizon Partner Approvals") on or prior to the Horizon Shareholder Meeting
established pursuant to Section 5.1(d). Horizon shall use commercially
reasonable efforts to obtain the written consents for approval by the
limited partners of Newco LP to the transactions contemplated hereby,
including the Partnership Merger, to the extent required by the Newco LP
partnership agreement and any other matters reasonably requested by Prime
which are reasonably determined by Prime to be required to effect the
transactions contemplated by this Agreement (collectively, the "Newco
Partner Approvals") on or prior to the Horizon Shareholder Meeting
established pursuant to Section 5.1(d). Horizon hereby agrees to vote in
favor of such matters and to recommend to the limited partners of Horizon
Partnership and Newco LP that they approve such matters. Prime shall use
commercially reasonable efforts to obtain written consents for approval by
the limited partners of Prime Partnership to the transactions contemplated
hereby to the extent required by the Prime Partnership Agreement and any
other matters reasonably requested by Horizon which are reasonably
determined by Horizon to be required to effect the transactions contemplated
by this Agreement (collectively, the "Prime Partner Approvals", and together
with the Horizon Partner Approvals and the Newco Partner Approvals, the
"Partner Approvals") on or prior to the Prime Shareholder Meeting
established pursuant to Section 5.1(c). Prime hereby agrees to vote in favor
of such matters and to recommend to the limited partners of Prime
Partnership that they approve such matters.
Appendix A-48
<PAGE>
5.2 ACCESS TO INFORMATION; CONFIDENTIALITY. Subject to the requirements of
confidentiality agreements with third parties, each of the parties hereto shall,
and shall cause each of its Subsidiaries to, afford to the other parties and to
the officers, employees, accountants, counsel, financial advisors and other
representatives of such other parties, reasonable access during normal business
hours prior to the Prime/Horizon Merger Effective Time to all their respective
properties, books, contracts, commitments, personnel and records and, during
such period, each of the parties shall, and shall cause each of its Subsidiaries
to, furnish promptly to the other parties (a) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its business, properties and personnel as such
other party may reasonably request. Each of the parties shall, and shall cause
its Subsidiaries to, use commercially reasonable efforts to cause its officers,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to, hold any nonpublic information in confidence to the extent
required by, and in accordance with, and will comply with the provisions of the
letter agreement dated as of September 18, 1997 by and among Prime, Horizon and
Lehman Brothers (the "Confidentiality Agreement"), as amended.
5.3 REASONABLE BEST EFFORTS; NOTIFICATION.
(a) Subject to the terms and conditions herein provided, each of the
parties shall: (i) use all reasonable best efforts to cooperate with
one another in (A) determining which filings are required to be made prior
to the Prime/Horizon Merger Effective Time with, and which consents,
approvals, permits or authorizations are required to be obtained prior to
the Prime/Horizon Merger Effective Time from, governmental or regulatory
authorities of the United States, the several states and foreign
jurisdictions and any third parties in connection with the execution and
delivery of this Agreement, and the consummation of the transactions
contemplated hereby including without limitation confirmation of the
transactions under the Contribution Agreement and (B) timely making all such
filings and timely seeking all such consents, approvals, permits and
authorizations; (ii) use all reasonable best efforts (other than the payment
of money) to obtain in writing any consents required from third parties to
effectuate the Mergers, such consents to be in form reasonably satisfactory
to each of the parties; and (iii) use all reasonable best efforts to take,
or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make
effective the transactions contemplated by this Agreement. If at any time
after the Prime/Horizon Merger Effective Time any further action is
necessary or desirable to carry out the purpose of this Agreement, each
party shall take all such necessary action.
(b) Horizon and Horizon Partnership shall use all reasonable best efforts
to obtain from Ernst & Young LLP access to all work papers relating
to audits of Horizon and Horizon Partnership performed by Ernst & Young LLP,
and the continued cooperation of Ernst & Young LLP with regard to the
preparation of consolidated financial statements for the Surviving Company.
(c) Horizon and Horizon Partnership shall give prompt notice to Prime and
Prime Partnership, and Prime and Prime Partnership shall give prompt
notice to Horizon and Horizon Partnership, (i) if any representation or
warranty made by it contained in this Agreement that is qualified as to
materiality becomes untrue or inaccurate in any respect or any such
representation or warranty that is not so qualified becomes untrue or
inaccurate in any material respect or (ii) of the failure by it to comply
with or satisfy in any material respect any covenant, condition or agreement
to be complied with or satisfied by it under this Agreement; provided,
however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
Appendix A-49
<PAGE>
5.4 TAX TREATMENT.
(a) Each of Prime and Horizon shall use its reasonable best efforts
before the Prime/Horizon Merger Effective Time to cause each of the
Horizon/Subsidiary Merger and the Prime/Horizon Merger to qualify as a
reorganization under the provisions of Sections 368(a) of the Code, and to
obtain the opinions of counsel referred to in Sections 6.2(e) and 6.3(e).
(b) Immediately upon the Partnership Merger Effective Time, Horizon
Partnership will be treated as terminating for purposes of Code
Section 708(b)(2)(A) . Immediately following the Partnership Merger
Effective Time, the Surviving Partnership will elect to use the "traditional
method with curative allocations" under Treasury Regulations Section
1.704-3(c) for purposes of making allocations under Section 704(c) of the
Code with respect to the properties of or interests held by the Horizon
Partnership immediately before the Partnership Merger Effective Time. Prime
Partnership and Horizon Partnership shall negotiate in good faith to agree
upon the "Section 704(c) values" of the properties of Horizon Partnership,
effective as of the Partnership Merger Effective Time, in accordance with
Treasury Regulations Section 1.704-3(a)(3). The Surviving Partnership shall
not, in connection with the Prime/Horizon Merger (and any termination of
Prime Partnership pursuant thereto under Code Section 708(b)(1)(B) ), adjust
the capital accounts of the Prime Partnership pursuant to section
1.704-1(b)(2)(iv)(f) of the Treasury Regulations.
(c) Following the Partnership Merger Effective Time, the Surviving
Partnership shall allocate "excess nonrecourse liabilities" under
Treasury Regulations Section 1.752-3(a)(3) among the partners of the
Surviving Partnership as follows:
(i) First, assuming that the assets of the Surviving Partnership are
sold for their relative fair market values, the Surviving
Partnership shall determine for each of its partners the sum of (i) the
amount Code Section 704(c) gain allocable to such partner (taking into
account the relative Code Section 704(c) method elected by the Surviving
Partnership in respect of each contributed asset under Treasury
Regulation Section 1.704-3, and less the amount already allocated to such
partner under Treasury Regulations Section 1.752-3(a)(2)), plus (ii) the
amount, if any, of remaining income and gain which would be further
allocated to such Surviving Partnership partner under the Surviving
Partnership Agreement, after all income and gain allocable to partners
under Code Section 704(c) has been taken into account;
(ii)Second, the Surviving Partnership shall determine a percentage
(the "Tier Three Percentage") for each of its partners equal to
the fraction of the sum computed for such partner in paragraph (i) above,
over the aggregate amount of such sums for all partners of the Surviving
Partnership; and
(iii)
Third, the Surviving Partnership shall allocate the excess
nonrecourse liabilities of the Surviving Partnership to each of
its partners, pro rata, in accordance with each partner's Tier Three
Percentage.
(d) In the event that Ernst & Young LLP determines that Prime Partnership
will be treated as terminating for purposes of Code Section
708(b)(1)(B) upon the Prime/Horizon Merger Effective Time, then the
Surviving Partnership may elect to use the "traditional method" under
Treasury Regulations Section 1.704-3(b) for purposes of making allocations
under Section 704(c) of the Code with respect to the properties of or
interests in the Prime Partnership immediately before the Partnership Merger
Effective Time.
(e) For any taxable year of the Surviving Partnership that ends within
the period ending on the seventh anniversary of the Partnership
Merger Effective Time, the Surviving Partnership shall use good faith,
commercially reasonable efforts (i) to avoid or minimize any gain recognized
by the partners of the Surviving Partnership, as a result of the refinancing
or repayment of the Surviving Partnership's liabilities, and (ii) in any
case in which a Horizon Property of the Surviving Partnership is to be
disposed
Appendix A-50
<PAGE>
of, to engage in a transaction that defers, to the extent possible, the
recognition of gain by such partners under the Code, including, but not
limited to, structuring such disposition as part of a tax-free exchange
under Code Section 1031.
(f) Prime Partnership and Horizon Partnership agree that the transactions
that are contemplated by the C&C/Murdock Agreements which occur upon
the Closing shall be treated as taking place immediately after the
Partnership Merger Effective Time.
5.5 PUBLIC ANNOUNCEMENTS. Each party will consult with each other party
before issuing, and provide each other the opportunity to review and comment
upon, any press release or other written public statements which address in any
manner the transactions contemplated by this Agreement, and shall not issue any
such press release or make any such written public statement prior to such
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange. The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement will be in the form
agreed to by the parties concurrent with the execution of this Agreement.
5.6 LISTING. Prime shall use all reasonable best efforts to cause the
Surviving Company Common Shares and Surviving Company Series B Preferred Shares
to be issued in the Prime/Horizon Merger and the Surviving Company Common Shares
and Surviving Company Series B Preferred Shares reserved for issuance upon
redemption of Prime Common Units and Prime Series B Preferred Units issued in
the Partnership Merger, to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Prime/Horizon Merger Effective Time.
5.7 TRANSFER AND GAINS TAXES. Each party shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with the transactions contemplated by this Agreement (together with
any related interests, penalties or additions to tax, "Transfer and Gains
Taxes"). From and after the Prime/Horizon Merger Effective Time, Surviving
Company shall pay or cause Prime Partnership, as appropriate, to pay or cause to
be paid, without deduction or withholding from any amounts payable to the
holders of Surviving Company Common Shares or Surviving Company Series B
Preferred Shares or Prime OP Units or Prime Series B Preferred Units, as
applicable, all Transfer and Gains Taxes (which term shall not in any event be
construed to include for these purposes any tax imposed under the Code or any
applicable state or local tax imposed upon net or gross income).
5.8 BENEFIT PLANS AND OTHER EMPLOYEE ARRANGEMENTS.
(a) BENEFIT PLANS. After the Prime/Horizon Merger Effective Time, all
employees of Prime who are employed by the Surviving Company shall, at
the option of the Surviving Company, either continue to be eligible to
participate in an "employee benefit plan", as defined in Section 3(3) of
ERISA, of Prime which is, at the option of the Surviving Company, continued
by the Surviving Company, or alternatively shall be eligible to participate
in the same manner as other similarly situated employees of the Surviving
Company who were formerly employees of Horizon in any "employee benefit
plan," as defined in Section 3(3) of ERISA, sponsored or maintained by the
Surviving Company after the Prime/ Horizon Merger Effective Time. With
respect to each such employee benefit plan, service with Horizon, any
Horizon Subsidiary, Prime or any Prime Subsidiary (as applicable) and the
predecessor of any of them shall be included for purposes of determining
eligibility to participate, vesting (if applicable) and entitlement to
benefits.
(b) STOCK OPTIONS.
(i) As of the Prime/Horizon Merger Effective Time, each outstanding
Prime Stock Option shall be assumed by Surviving Company and
shall be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under such Prime Stock Option, the same
Appendix A-51
<PAGE>
number of Surviving Company Common Shares as the holder of such Prime
Stock Option would have been entitled to receive pursuant to the
Prime/Horizon Merger had such holder exercised such Prime Stock Option in
full immediately prior to the Prime/Horizon Merger Effective Time at a
price per share equal to the aggregate exercise price for the shares
subject to such Prime Stock Option divided by the number of full
Surviving Company Common Shares deemed to be purchasable pursuant to such
Prime Stock Option.
(ii)As of the Prime/Horizon Merger Effective Time, each Sky Merger
Stock Option outstanding under (a) the Horizon 1993 Stock Option
Plan and (b) the Horizon Long Term Incentive Plan (to the extent
permitted under the terms of such plan and the terms of the Horizon
Options outstanding under such plan) (in each case, as assumed by Sky
Merger pursuant to the Horizon/ Subsidiary Merger) shall in each case
automatically be canceled and all rights with respect thereto shall cease
to exist (other than the Sky Merger Stock Options outstanding and held by
Jeffrey Kerr). As of the Prime/Horizon Merger Effective Time, each Sky
Merger Stock Option outstanding under the Horizon 1997 Stock Option Plan
or the Horizon Director/Stock Option Plan and each other outstanding Sky
Merger Option not canceled pursuant to the immediately preceding sentence
shall constitute an option to acquire, on the same terms and conditions
as were applicable under such Sky Merger Stock Option (other than as
provided in the proviso to this sentence), that number of Surviving
Company Common Shares equal to the product of (A) 0.9193 times (B) the
number of Sky Merger Common Shares subject to such Horizon Stock Option
at an aggregate exercise price per share equal to the aggregate exercise
price per share set forth in such Sky Merger Stock Option; provided,
however, that (1) each option shall continue to be exercisable until its
expiration date notwithstanding the termination of employment, death or
disability of the optionee, and (2) the number of Surviving Company
Common Shares that may be purchased upon exercise of such Sky Merger
Stock Option shall not include any fractional shares and, upon the first
such exercise of such Sky Merger Stock Option, a cash payment shall be
made for any fractional shares calculated in accordance with and in the
manner provided for calculations as to be paid in lieu of fractional
shares as part of the Prime/Horizon Merger Consideration under Section
1.17(g).
(iii)
As soon as practical after the Closing Date, Prime shall file a
registration statement under the Securities Act covering the
shares issuable pursuant to the stock options assumed by the Surviving
Company pursuant to the provisions of Section 5.8(b).
(c) WITHHOLDING. To the extent required by applicable law, Horizon
shall require each employee who exercises a Horizon Stock Option or who
receives Horizon Common Shares or Sky Merger Common Shares pursuant to any
existing commitment to pay to Horizon in cash or Horizon Common Shares or
Sky Merger Common Shares an amount sufficient to satisfy in full Horizon's
obligation to withhold Taxes incurred by reason of such exercise or
issuance.
(d) RETENTION PROGRAM. Prior to the Closing Date, Horizon may implement
a retention program for key employees pursuant to which up to an
aggregate of $990,000 may be paid to such key employees who continue to be
employed through a date certain (to be approved by Prime) or who are
terminated without cause prior to such date certain.
5.9 INDEMNIFICATION.
(a) From and after the Prime/Horizon Merger Effective Time the Surviving
Company shall indemnify, defend and hold harmless each person who is
now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Prime/Horizon Merger Effective Time, an officer,
director or employee of Horizon or any Horizon Subsidiary (including,
without limitation, Newco and Newco LP) (the "Indemnified Parties") against
all losses, claims, damages, costs, expenses, liabilities or judgments, or
amounts that are paid in settlement with the approval of the indemnifying
party (which approval shall not be unreasonably withheld) of, or in
connection with, any claim, action, suit, proceeding or investigation to the
extent related to, or to the extent arising in whole or in part directly or
Appendix A-52
<PAGE>
indirectly out of the fact that such person is or was a director, officer or
employee of Horizon or any Horizon Subsidiary (including, without
limitation, Newco), whether pertaining to any matter existing or occurring
at or prior to the Prime/Horizon Merger Effective Time (including, without
limitation, any and all transactions resulting directly or indirectly from
the transactions contemplated hereby or the documents delivered hereunder)
and whether asserted or claimed prior to, or at or after, the consummation
of the transactions contemplated hereby or any document contemplated
hereunder ("Indemnified Liabilities"), in each case to the full extent a
corporation is permitted under the MGCL (and the Surviving Company will pay
expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law
upon receipt of any affirmation and undertaking required by the MGCL arising
from the investigation, defense or settlement of such Indemnification
Liabilities). Without limiting the foregoing, in the event any such claim,
action, suit, proceeding or investigation is brought against any Indemnified
Party (whether arising before or after the Prime/Horizon Merger Effective
Time), (i) the Indemnified Parties may retain counsel satisfactory to them
with the consent of the Surviving Company which consent may not be
unreasonably withheld, (ii) the Surviving Company shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received, and (iii) the Surviving Company will use
all reasonable efforts to assist in the defense of any such matter, provided
that the Surviving Company shall not be liable for any settlement of any
claim effected without its written consent, which consent, however, shall
not be unreasonably withheld. Any Indemnified Party wishing to claim
indemnification under this Section 5.9(a), upon learning of any such claim,
action, suit, proceeding or investigation, shall notify the Surviving
Company (but the failure so to notify shall not relieve the Company or the
Surviving Company from any liability which it may have under this Section
5.9(a) except to the extent such failure materially prejudices such party),
and shall deliver to the Surviving Company any affirmation and undertaking
contemplated by the MGCL. The Indemnified Parties as a group may retain only
one law firm to represent them with respect to each such matter unless there
is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified
Parties. The provisions for the indemnification and advancement of expenses
set forth in this Agreement are not exclusive of any rights an Indemnified
Party may have under any contract, law or otherwise.
(b) The Surviving Company shall obtain and maintain in effect at the
Prime/Horizon Merger Effective Time and continuing until the sixth
anniversary thereof "run-off" directors and officers liability insurance
with a coverage amount and other terms and conditions comparable to
Horizon's current directors and officers liability insurance policy covering
the directors and officers of Horizon with respect to their service as such
prior to the Prime/Horizon Merger Effective Time.
(c) This Section 5.9 is intended for the irrevocable benefit of, and to
grant third party rights to, the Indemnified Parties and their
successors, assigns and heirs and shall be binding on all successors and
assigns of Surviving Company. Each of the Indemnified Parties shall be
entitled to enforce the covenants contained in this Section 5.9 and
Surviving Company acknowledges and agrees that each Indemnified Party would
suffer irreparable harm and that no adequate remedy at law exists for a
breach of such covenants and such Indemnified Party shall be entitled to
injunctive relief and specific performance in the event of any breach of any
provision in this Section.
(d) In the event that the Surviving Company or any of its respective
successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of
its properties and assets to any person, then, and in each such case the
successors and assigns of such entity shall assume the obligations set forth
in this Section 5.9, which obligations are expressly intended to be for the
irrevocable benefit of, and shall be enforceable by, each director and
officer covered hereby.
Appendix A-53
<PAGE>
(e) At the Closing, the Surviving Company shall deliver to each
Indemnified Party a written acknowledgment of the Surviving Company's
indemnity obligations to such Indemnified Party pursuant to this Agreement.
5.10 DECLARATION OF DIVIDENDS AND DISTRIBUTIONS. From and after the date
of this Agreement, neither Horizon nor Horizon Partnership, on the one hand, nor
Prime nor Prime Partnership, on the other hand, shall declare or pay any
dividend or distribution to its shareholders or partners, as the case may be,
without the prior written consent of Prime or Horizon, respectively; provided,
however, that such written consent shall not be required for the declaration and
payment of (i) (a) a distribution of $0.295 per Prime Common Share, $0.65625 per
Prime Series A Preferred Share, $0.53125 per Prime Series B Preferred Share,
$0.09699 per Prime Series C Preferred Share, $0.295 per Prime Series C Preferred
Unit and $0.295 per Prime Common Unit, each payable on February 17, 1998 to
shareholders/unitholders of record as of February 2, 1998 and (b) a distribution
with respect to each Horizon Common Share or Horizon OP Unit in the first
quarter of 1998 in an amount equal to $0.105, (ii) a quarterly distribution with
respect to each Horizon Common Share or Horizon OP Unit in any quarterly period
ending after March 31, 1998 in an amount equal to the product of (A) 0.9193
times (B) the dividend or distribution declared in respect of each Prime Common
Share or Prime OP Unit in such quarterly period, (iii) Prime Regular Quarterly
Distributions, (iv) the Prime Newco Distribution, (v) any distribution
contemplated by the Contribution Agreement and (vi) any distribution
contemplated by Section 1.14(d), Section 1.16 or Section 1.17 hereof; provided,
however, that, except for distributions described in the foregoing clauses (i),
(iv) and (v), the record date for each distribution with respect to the Horizon
Common Shares and the Horizon OP Units, on the one hand, shall be the same date
as the record date for the quarterly distributions for the Prime Common Shares
and the Prime Common Units, on the other hand, as provided to Horizon by notice
not less than fifteen (15) days prior to the record date for any quarterly
distribution by Prime or Prime Partnership.
The foregoing restrictions shall not apply, however, to the extent a
distribution by Horizon or Prime is necessary for Horizon or Prime, as
applicable, to maintain REIT status.
5.11 TRANSFER OF SHARES/INTERESTS IN NON-WHOLLY OWNED SUBSIDIARIES OF
HORIZON; C&C/MURDOCK AGREEMENTS.
(a) At the Closing and pursuant to the Stock Purchase Agreement, Ronald
Piasecki shall transfer to Prime Retail Services, Inc. or such person
or persons as Prime Retail Services, Inc. shall designate by written notice
delivered to him prior to the Closing, all of the shares of First HGI, Inc.,
HGI Perryville, Inc., MG Third Party Services Corp., HGI Management Corp.
and Second HGI, Inc. owned by him, constituting all the outstanding shares
of such companies which are not owned by Horizon Partnership, for an
aggregate consideration in an amount equal to the fair market value of such
shares, as determined in accordance with the provisions of the Stock
Purchase Agreement.
(b) Prior to Closing Prime shall use commercially reasonably efforts to
acquire from FLOC, L.L.C. all of the outstanding membership interests
(other than such interests held by Horizon Partnership) of Finger Lakes
Outlet Center L.L.C. held by FLOC, L.L.C. on the terms and conditions set
forth on Schedule 5.11 to the Prime Disclosure Letter.
(c) Prior to Closing, Horizon and Horizon Partnership shall use
commercially reasonable efforts to consummate the transactions
contemplated by the C&C/Murdock Agreements and to enforce the rights of
Horizon and Horizon Partnership thereunder. Horizon shall promptly notify
Prime upon Horizon or Horizon Partnership obtaining Knowledge of any breach
of or default under any terms or provisions of the C&C/Murdock Agreements or
of any event which could otherwise adversely affect in a material way the
rights of Horizon or Horizon Partnership thereunder.
5.12 NOTICES. Prime and Horizon shall provide such notice to its
shareholders of the Mergers as is required under Maryland and Michigan law.
Appendix A-54
<PAGE>
5.13 RESIGNATIONS. On the Closing Date, Horizon shall cause the directors
and officers of each of the Horizon Subsidiaries to submit their resignations
from such positions, effective as of the Partnership Merger Effective Time as
requested by Prime.
5.14 THIRD PARTY MANAGEMENT AGREEMENTS. Horizon will not, and will not
permit any of its Subsidiaries to, amend the management agreements pursuant to
which Horizon, directly or indirectly, manages buildings in which Horizon does
not own a 100% interest. Horizon will not, and will not permit any Horizon
Subsidiary to, renew such management agreements except on terms which permit its
cancellation by Horizon or the applicable Horizon Subsidiary on thirty days'
notice or less without any charge, penalty or other cost for such cancellation.
5.15 CONTRIBUTION AGREEMENT. Horizon shall cause Newco to execute the
transactions contemplated hereby to which Newco is a party provided that Horizon
has obtained all material consents required to be obtained by Horizon and the
Horizon Subsidiaries from third parties in order to perform their respective
obligations under the Contribution Agreement and the other agreements
contemplated hereby to which Newco is a party, except for those consents set
forth on Schedule 5.15 to the Horizon Disclosure Letter. Horizon shall
diligently seek and use commercially reasonable efforts to obtain such consents
prior to the Closing Date. Horizon shall keep Prime currently apprised of its
progress in obtaining such consents. Horizon shall inform Prime promptly if it
appears unlikely that any given consent will be obtained. Horizon shall
cooperate with Prime in taking any action to either obtain such consents or to
put Horizon and the Horizon Subsidiaries in a position so that such consents are
no longer required; provided such action does not cost Horizon a material
amount.
5.16 ACTIONS UPON ISSUANCE OF INJUNCTION OR RESTRAINT. In the event that
the transactions contemplated by this Agreement cannot be consummated by the
parties hereto on the Closing Date due to the failure to satisfy the condition
contained in Section 6.1(d), then the parties hereto shall use their
commercially reasonable efforts to restructure the transactions contemplated
hereby in a manner that would (i) enable the condition contained in Section
6.1(d) to be satisfied or (ii) provide the same economic and other material
benefits to the parties hereto in a manner satisfactory to all parties hereto.
Notwithstanding the foregoing, the obligations contained in this Section 5.17
shall not affect, alter or in any way supersede the rights of the parties hereto
under Article VII hereof if such restructuring cannot be accomplished prior to
July 31, 1998.
5.17 DESIGNATED PROPERTIES. The parties hereto acknowledge that Horizon
and Horizon Partnership may explore the sale of the Designated Properties prior
to Closing in accordance with the provisions hereof, including without
limitation Sections 1.18 and 4.1 hereof, and shall permit Prime and Prime
Partnership and their financial and legal advisors to participate in such sale
process; provided, however, that such agreements may provide at Horizon's
election that such agreements are terminable by Horizon if this Agreement is
terminated for any reason.
ARTICLE VI
CONDITIONS
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGERS. The
respective obligations of each party to effect the Mergers and to consummate the
other transactions contemplated by this Agreement to occur on the Closing Date
shall be subject to the fulfillment or written waiver at or prior to the Closing
Date of the following conditions:
(a) SHAREHOLDER AND PARTNER APPROVALS. This Agreement, the Mergers and
all other matters necessary to consummate the other transactions
contemplated to occur on the Closing Date and the transactions contemplated
by this Agreement shall have been approved and adopted by the Shareholder
Approvals and all required Partner Approvals shall have been obtained.
Appendix A-55
<PAGE>
(b) LISTING OF SHARES. The NYSE shall have approved for listing the
Surviving Company Common Shares and Surviving Company Series B Preferred
Shares to be issued in the Prime/Horizon Merger and the Surviving Company
Common Shares reserved for issuance upon exchange of Prime Common Units and
Prime Series B Preferred Units issued in the Partnership Merger, subject to
official notice of issuance.
(c) REGISTRATION STATEMENT. The Registration Statement shall have
become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
(d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Mergers or any of the other transactions
contemplated hereby shall be in effect.
(e) BLUE SKY LAWS. Prime shall have received all state securities or
"blue sky" permits and other authorizations necessary to issue the Merger
Consideration.
(f) GOVERNMENTAL ENTITY ACTIONS AND CONSENTS. All material actions by
or in respect of or filings with any Governmental Entity required for the
consummation of the transactions contemplated hereby shall have been
obtained or made.
6.2 CONDITIONS TO OBLIGATIONS OF PRIME AND PRIME PARTNERSHIP. The
obligations of Prime and Prime Partnership to effect the Mergers and to
consummate the other transactions contemplated to occur on the Closing Date are
further subject to the following conditions, any one or more of which may be
waived by Prime:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Horizon and Horizon Partnership (without giving effect to any
"materiality" qualification or limitation) set forth in this Agreement shall
be true and correct as of the date of this Agreement and as of the Closing
Date, as though made on and as of the Closing Date, except to the extent
such representation or warranty is expressly limited by its terms to another
date, and Prime shall have received a certificate (which certificate may be
qualified by knowledge to the same extent as the representations and
warranties of Horizon and Horizon Partnership contained herein are so
qualified) signed on behalf of Horizon by the chief executive officer or the
chief financial officer of Horizon, in such capacity, to such effect. This
condition shall be deemed satisfied notwithstanding any failure of a
representation or warranty of Horizon or Horizon Partnership to be true and
correct as of the Closing Date (without giving effect to any materiality
qualification or limitation) if the aggregate amount of Horizon Economic
Losses (as defined below) that would reasonably be expected to arise as a
result of the failures of such representations and warranties to be true and
correct as of the Closing Date does not exceed $50,000,000 (such amount to
be calculated by counting in all cases from the first dollar of such Horizon
Economic Losses). "Horizon Economic Losses" shall mean any and all net
damage, net loss, net liability or expenses suffered by Horizon and the
Horizon Subsidiaries taken as a whole, but shall not include any claims,
damages, loss, expense or other liability resulting from any class action or
shareholders' derivative lawsuits relating to the Mergers against Horizon or
the Horizon Subsidiaries, if any, filed subsequent to the date of this
Agreement or any amounts paid or expenses incurred by Horizon or its
Subsidiaries in obtaining non-governmental third party consents.
(b) PERFORMANCE OF OBLIGATIONS OF HORIZON, SKY MERGER AND HORIZON
PARTNERSHIP. Horizon and Horizon Partnership shall have performed in all
material respects all obligations required to be performed by them under
this Agreement at or prior to the Prime/Horizon Merger Effective Time, and
Prime shall have received a certificate signed on behalf of Horizon by the
chief executive officer or the chief operating officer of Horizon, in such
capacity, to such effect.
Appendix A-56
<PAGE>
(c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no Horizon Material Adverse Change taken as a whole, that
have resulted or would result individually or in the aggregate, in Horizon
Economic Losses of $50,000,000 or more and Prime shall have received a
certificate of the chief executive officer or operating officer of Horizon,
in such capacity, certifying to such effect.
(d) TAX OPINIONS RELATING TO REIT STATUS AND PARTNERSHIP STATUS. Prime
shall have received an opinion of Rudnick & Wolfe or other counsel to
Horizon reasonably satisfactory to Prime, dated as of the Closing Date, to
the effect that, subject to customary exceptions, assumptions, certificates
and qualifications and based upon customary representations, (x) for each of
its taxable years ending after December 31, 1993, Horizon has operated and
complied with the requirements for qualification as a REIT under the Code,
and (y) each Horizon Subsidiary which has been formed as a partnership,
joint venture or limited liability company is, for federal income tax
purposes, a partnership and not a corporation or association or publicly
traded partnership taxable as a corporation.
(e) TAX OPINION RELATING TO THE MERGERS. Prime shall have received an
opinion dated the Closing Date from Winston & Strawn or other counsel
reasonably satisfactory to Prime, dated as of the Closing Date, to the
effect that, subject to customary exceptions, assumptions, certificates and
qualifications and the opinion of counsel to Horizon described in clause
Section 6.2(d)(i) above, and based upon customary representations, to the
effect that each of the Horizon/Prime Merger and the Horizon/ Subsidiary
Merger will qualify as a reorganization under the provisions of Section
368(a) of the Code.
(f) "COMFORT" LETTER. Prime and Prime Partnership shall have received a
"comfort" letter from Ernst & Young LLP, as described in Section 5.1(b).
(g) SHARES OF NON WHOLLY-OWNED COMPANIES. All of the voting shares of
First HGI, Inc., HGI Perryville, Inc., MG Third Party Services Corp., HGI
Management Corp. and Second HGI, Inc. (other than any such shares owned by
Horizon Partnership) shall have been transferred to Prime Retail Services,
Inc., or its designees or assigns, in accordance with the Stock Purchase
Agreement.
(h) CONTRIBUTION AGREEMENT. Horizon, Horizon Partnership, Sky Merger,
Newco and Newco LP shall have entered into the Contribution Agreement and
all of the conditions to the consummation of the transactions contemplated
thereby shall have been satisfied and each of the transactions contemplated
thereby shall have been completed to the extent required to be completed
thereunder as of such time.
6.3 CONDITIONS TO OBLIGATIONS OF HORIZON AND HORIZON PARTNERSHIP. The
obligations of Horizon and Horizon Partnership to effect the Mergers and to
consummate the other transactions contemplated to occur on the Closing Date is
further subject to the following conditions, any one or more of which may be
waived in writing by Horizon:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Prime and Prime Partnership (without giving effect to any
"materiality" qualification or limitation) set forth in this Agreement shall
be true and correct as of the date of this Agreement and as of the Closing
Date, as though made on and as of the Closing Date, except to the extent the
representation or warranty is expressly limited by its terms to another
date, and Horizon shall have received a certificate (which certificate may
be qualified by knowledge to the same extent as such representations and
warranties of Prime and Prime Partnership contained herein are so qualified)
signed on behalf of Prime by the chief executive officer or the chief
financial officer of such party, in such capacity, to such effect. This
condition shall be deemed satisfied notwithstanding any failure of a
representation or warranty of Prime or Prime Partnership to be true and
correct as of the Closing Date (without giving effect to any materiality
qualification) if the aggregate amount of Prime Economic Losses (as defined
below) that would reasonably be expected to arise as a result of the
failures of such representations and warranties to be true and correct as of
the Closing Date does not exceed $50,000,000 (such amount to be calculated
Appendix A-57
<PAGE>
by counting in all cases from the first dollar of such Prime Economic
Losses). "Prime Economic Losses" shall mean any and all net damage, net
loss, net liability or expenses suffered by Prime and the Prime Subsidiaries
taken as a whole, but shall not include any claims, damages, loss, expense
or other liability resulting from any class action or shareholders'
derivative lawsuits relating to the Mergers against Prime or the Prime
Subsidiaries, if any, filed subsequent to the date of this Agreement or any
amounts paid or expenses incurred by Prime or its Subsidiaries in obtaining
non-governmental third party consents.
(b) PERFORMANCE OF OBLIGATIONS OF PRIME AND PRIME PARTNERSHIP. Prime
and Prime Partnership shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Prime/Horizon Merger Effective Time, and Horizon shall have received
a certificate of Prime signed on behalf of Prime by the chief executive
officer or the chief financial officer of Prime, in such capacity, to such
effect.
(c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no Prime Material Adverse Change taken as a whole, that
have resulted or would result individually or in the aggregate, in Prime
Economic Losses of $50,000,000 or more and Horizon shall have received a
certificate of the chief executive officer or operating officer of Prime, in
such capacity, certifying to such effect.
(d) TAX OPINIONS RELATING TO REIT STATUS AND PARTNERSHIP
STATUS. Horizon shall have received an opinion of Winston & Strawn or
other counsel to Prime reasonably satisfactory to Horizon, dated as of the
Closing Date, to the effect that, subject to customary exceptions,
assumptions, certificates and qualifications and based upon customary
representations, (x) for each of its taxable years since formation, Prime
has operated and complied with the requirements for qualification as a REIT
under the Code, and (y) Prime Partnership is, for federal income tax
purposes, a partnership and not a corporation or association or publicly
traded partnership taxable as a corporation.
(e) TAX OPINION RELATING TO MERGERS. Horizon shall have received an
opinion dated the Closing Date from Rudnick & Wolfe or other counsel
reasonably satisfactory to Horizon, dated as of the Closing Date, to the
effect that, subject to customary exceptions, assumptions, certificates and
qualifications and the opinion of counsel to Prime described in Section
6.3(i) above, and based upon customary representations, to the effect that
each of the Horizon/Prime Merger and the Horizon/Subsidiary Merger will
qualify as a reorganization under the provisions of Section 368(a) of the
Code.
(f) "COMFORT" LETTER. Horizon and Horizon Partnership shall have
received a "comfort" letter from Ernst & Young LLP, as described in
Section 5.1(b).
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7. TERMINATION. This Agreement may be terminated at any time prior to the
filing of the Delaware Certificate of Merger with the Delaware Secretary,
whether before or after either of the Shareholder Approvals are obtained:
(a) by mutual written consent duly authorized by the Board of Directors
of Prime and the Board of Directors of Horizon;
(b) by Prime, upon (i) a breach of any representation, warranty,
covenant, obligation or agreement on the part of Horizon or Horizon
Partnership set forth in this Agreement, or (ii) if any representation or
warranty of Horizon or Horizon Partnership shall become untrue, in the case
of either (i) or (ii), such that the conditions set forth in Section 6.2(a)
or Section 6.2(b), as the case may be, would be incapable of being satisfied
by July 31, 1998 (or as otherwise extended);
Appendix A-58
<PAGE>
(c) by Horizon, upon (i) a breach of any representation, warranty,
covenant obligation or agreement on the part of Prime or Prime
Partnership set forth in this Agreement, or (ii) if any representation or
warranty of Prime or Prime Partnership shall become untrue, in the case of
either (i) or (ii), such that the conditions set forth in Section 6.3(a) or
Section 6.3(b), as the case may be, would be incapable of being satisfied by
July 31, 1998 (or as otherwise extended);
(d) by either Prime or Horizon, if any judgment, injunction, order,
decree or action by any Governmental Entity of competent authority
preventing the consummation of any of the Mergers shall have become final
and non-appealable;
(e) by either Prime or Horizon, if the Mergers shall not have been
consummated before July 31, 1998; provided, however, that a party may
not terminate pursuant to this clause (e) if the terminating party shall
have breached in any material respect its obligations under this Agreement
in such a manner that shall have proximately contributed to the failure to
close;
(f) by either Prime or Horizon (unless Horizon or Horizon Partnership is
in breach of its obligations under Section 5.1) if, upon a vote at a
duly held Horizon Shareholders Meeting or any adjournment thereof, the
Horizon Shareholder Approvals shall not have been obtained as contemplated
by Section 5.1 (excluding Section 5.1(d)) or the Horizon Partner Approvals
or Newco LP Partner Approvals shall not have been obtained;
(g) by either Horizon or Prime (unless Prime or Prime Partnership is in
breach of its obligations under Section 5.1 (excluding Section
5.1(d)) if, upon a vote at a duly held Prime Shareholders Meeting or any
adjournment thereof, the Prime Shareholder Approvals shall not have been
obtained as contemplated by Section 5.1 (excluding Section 5.1(d)) or the
Prime Partner Approvals shall not have been obtained;
(h) by Horizon, upon payment to Prime of the amounts referred to in
Section 7.2, if prior to the Horizon Shareholders Meeting, the Board
of Directors of Horizon shall have withdrawn or modified in any manner
adverse to Prime its approval or recommendation of the Mergers or this
Agreement in connection with, or approved or recommended, a Superior
Acquisition Proposal; and
(i) by Prime, if (A) prior to the Horizon Shareholders Meeting, the Board
of Directors of Horizon shall have withdrawn or modified in any
manner adverse to Prime its approval or recommendation of the Mergers or
this Agreement in connection with, or approved or recommended, any Superior
Acquisition Proposal, (B) Horizon shall have entered into any agreement for
any Acquisition Proposal, or (C) the Board of Directors of Horizon or any
committee thereof shall have resolved to do any of the foregoing.
7.2 CERTAIN FEES AND EXPENSES. If this Agreement shall be terminated (i)
pursuant to Section 7.1(h) or 7.1(i), then Horizon and Horizon Partnership
thereupon shall pay to Prime Partnership a fee equal to the Break-Up Fee (as
defined below) and Break-Up Expenses (as defined below), and (ii) pursuant to
Section 7.1(b) or 7.1(f), then Horizon and Horizon Partnership shall pay to
Prime Partnership (provided that Horizon was not entitled to terminate this
Agreement pursuant to Section 7.1(c) at the time of such termination) an amount
equal to the Break-Up Expenses (as defined below). If this Agreement shall be
terminated pursuant to Section 7.1(c) or 7.1(g), then Prime and Prime
Partnership shall pay Horizon Partnership (provided that Prime was not entitled
to terminate this Agreement pursuant to Section 7.1(b) at the time of such
termination) an amount equal to the Break-Up Expenses. If this Agreement shall
be terminated pursuant to Section 7.1(b), 7.1(d) (if primarily resulting from
any action or inaction of Horizon or any Horizon Subsidiary), 7.1(e) or 7.1(f)
and prior to the time of such termination an Acquisition Proposal has been
received by Horizon or any Horizon Subsidiary, and either prior to the
termination of this Agreement or within twelve (12) months thereafter, Horizon
or any Horizon Subsidiary enters into any written Acquisition Proposal which is
subsequently consummated (whether or not any such Acquisition Proposal is the
same Acquisition Proposal which had been received at the time of the termination
of this
Appendix A-59
<PAGE>
Agreement), then Horizon and Horizon Partnership shall pay the Break-Up Fee and
Break-Up Expenses to Prime Partnership. If prior to the Horizon Shareholders
Meeting the Board of Directors of Horizon shall have withdrawn or modified in
any manner adverse to Prime its approval or recommendation of the Mergers or
this Agreement and, within twelve (12) months after termination of this
Agreement, Horizon or Horizon Partnership enters into any written Acquisition
Proposal which is subsequently consummated (whether or not any Acquisition
Proposal had been received prior to the time of the termination of this
Agreement), then Horizon and Horizon Partnership shall pay the Break-Up Fee to
Prime Partnership. The payment of the Break-Up Fee shall be compensation for the
loss suffered by Prime and Prime Partnership as a result of the failure of the
Mergers to be consummated (including, without limitation, opportunity costs and
out-of-pocket costs and expenses) and to avoid the difficulty of determining
damages under the circumstances. The Break-Up Fee shall be paid by Horizon and
Horizon Partnership to Prime Partnership, or the Break-Up Expenses shall be paid
by Horizon and Horizon Partnership to Prime Partnership or Prime Partnership to
Horizon Partnership (as applicable), in immediately available funds within
fifteen (15) calendar days after the date the event giving rise to the
obligation to make such payment occurred (except as otherwise provided in
Section 7.1(h)). As used in this Agreement, "Break-Up Fee" shall be an amount
equal to the lesser of (i) $20,000,000 (the "Base Amount") and (ii) the sum of
(A) the maximum amount that can be paid to Prime Partnership without causing
Prime to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code
determined as if the payment of such amount did not constitute income described
in Sections 856(c)(2)(A) - (H) and 856(c)(3)(A) -(I) of the Code ("Qualifying
Income"), as determined by independent accountants to Prime, and (B) in the
event Prime receives a letter from outside counsel (the "Break-Up Fee Tax
Opinion") indicating that Prime has received a ruling from the IRS holding that
Prime Partnership's receipt of the Base Amount would either constitute
Qualifying Income or would be excluded from gross income of Prime within the
meaning of Sections 856(c)(2) and (3) of the Code (the "REIT Requirements") or
that the receipt by Prime Partnership of the remaining balance of the Base
Amount following the receipt of and pursuant to such ruling would not be deemed
constructively received prior thereto, the Base Amount less the amount payable
under clause (A) above. Horizon's and Horizon Partnership's obligation to pay
any unpaid portion of the Break-Up Fee shall terminate three years from the date
of this Agreement. In the event that Prime Partnership is not able to receive
the full Base Amount, Horizon and Horizon Partnership shall place the unpaid
amount in escrow and shall not release any portion thereof to Prime Partnership
unless and until Horizon receives either one of the following: (i) a letter from
Prime's independent accountants indicating the maximum amount that can be paid
at that time to Prime Partnership without causing Prime to fail to meet the REIT
Requirements or (ii) a Break-Up Fee Tax Opinion, in either of which events
Horizon and Horizon Partnership shall pay to Prime Partnership the lesser of the
unpaid Base Amount or the maximum amount stated in the letter referred to in (i)
above. The "Break-Up Expenses" payable to Prime Partnership or Horizon
Partnership, as the case may be (the "Recipient"), shall be an amount equal to
the lesser of (i) $4,500,000, (ii) the Recipient's out-of-pocket expenses
incurred in connection with this Agreement and the transactions contemplated
hereby (including, without limitation, all attorneys', accountants' and
investment bankers' fees and expenses) or (iii) the sum of (A) the maximum
amount that can be paid to the Recipient without causing Prime or Horizon, as
the case may be, to fail to meet the requirements of Sections 856(c)(2) and (3)
of the Code determined as if the payment of such amount did not constitute
Qualifying Income, as determined by independent accountants to the Prime or
Horizon, as the case may be, and (B) in the event Prime or Horizon, as the case
may be, receives a Break-Up Fee Tax Opinion indicating that it has received a
ruling from the IRS holding that the Recipient's receipt of the Break-Up
Expenses would either constitute Qualifying Income or would be excluded from
gross income of Prime or Horizon, as the case may be, within the meaning of the
REIT Requirements or that receipt by the Recipient of the remaining balance of
the Break-Up Expenses following the receipt of and pursuant to such ruling would
not be deemed constructively received prior thereto, the Break-Up Expenses less
the amount payable under clause (A) above. The obligation of Prime and Prime
Partnership or Horizon and Horizon Partnership, as applicable ("Payor"), to pay
any unpaid portion of the Break-Up Expenses shall terminate three years from the
date of this Agreement. In the event that the Recipient is not able to receive
the full Break-Up Expenses, the Payor shall place the unpaid amount in escrow
and shall not release any portion thereof to the Recipient
Appendix A-60
<PAGE>
unless and until the Payor receives either one of the following: (i) a letter
from the independent accountants of Prime or Horizon, as the case may be,
indicating the maximum amount that can be paid at that time to the Recipient
without causing it to fail to meet the REIT Requirements or (ii) a Break-Up
Expense Tax Opinion, in either of which events the Payor shall pay to the
Recipient the lesser of the unpaid Break-Up Expenses or the maximum amount
stated in the letter referred to in (i) above.
7.3 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Horizon or Prime as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of Prime, Prime Partnership, Newco, Newco LP, Sky Merger, Horizon or
Horizon Partnership, other than the last sentence of Section 5.2, Section 7.2,
this Section 7.3 and Article 8, and except to the extent that such termination
results from a material breach by any party of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
7.4 AMENDMENT. This Agreement may be amended by the parties in writing by
action of the respective Board of Directors of Prime and Horizon at any time
before or after any Shareholder Approvals are obtained and prior to the filing
of the Delaware Certificate with the Delaware Secretary; provided, however,
that, after the Shareholder Approvals and Partner Approvals are obtained, no
such amendment, modification or supplement shall be made which by law requires
the further approval of shareholders without obtaining such further approval.
The parties agree to amend this Agreement in the manner provided in the
immediately preceding sentence to the extent required to (a) continue the status
of each of Prime and Horizon (and its successor Horizon Subsidiary) as a REIT,
or (b) preserve each of the Prime/Horizon Merger and the Horizon/Subsidiary
Merger as a tax-free reorganization under Section 368 of the Code.
7.5 EXTENSION; WAIVER. At any time prior to the Partnership Merger
Effective Time, the parties may (a) extend the time for the performance of any
of the obligations or other acts of the other party, (b) waive any inaccuracies
in the representations and warranties of the other party contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) subject
to the proviso of Section 7.4, waive compliance with any of the agreements or
conditions of the other party contained in this Agreement. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement confirming the representations and warranties in this
Agreement shall survive the Prime/Horizon Merger Effective Time. This Section
8.1 shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Prime/Horizon Merger Effective Time.
8.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be delivered
personally, sent by overnight courier (providing proof of delivery) to
Appendix A-61
<PAGE>
the parties or sent by telecopy (providing confirmation of transmission) at the
following addresses or telecopy numbers (or at such other address or telecopy
number for a party as shall be specified by like notice):
(a) if to Prime, to::
Prime Retail, Inc.
100 East Pratt Street
19th Floor
Baltimore, Maryland 21202
Attention: Michael W. Reschke
Abraham Rosenthal
C. Alan Schroeder
Fax No.: (410) 234-1703
with a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attention: Wayne D. Boberg
Steven J. Gavin
Fax No.: (312) 558-5700
(b) if to Horizon, to:
Horizon Group, Inc.
5000 Hakes Drive
Norton Shores, MI 49441
Attention: Norman Perlmutter
James S. Wassel
Fax.: (616) 798-5100
with a copy to:
Rudnick & Wolfe
203 North LaSalle Street
Suite 1500
Chicago, IL 60601-1293
Attention: Errol R. Halperin
Hal M. Brown
Fax No.: (312) 236-7516
All notices shall be deemed given only when actually received.
8.3 INTERPRETATION. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
Appendix A-62
<PAGE>
8.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement, the
Confidentiality Agreement and the Stock Purchase Agreement and the other
agreements entered into in connection with the Mergers (a) constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral between the parties with respect to the subject matter of this
Agreement, including without limitation the Original Merger Agreement and (b)
except as provided in Sections 1.8, 1.11, 1.12, 1.13, 1.14, 5.8, 5.9, and 8.5
("Third Party Provisions"), are not intended to confer upon any person other
than the parties hereto any rights or remedies.
8.6 GOVERNING LAW. THE PARTNERSHIP MERGER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF
LAWS THEREOF. EXCEPT AS PROVIDED IN THE IMMEDIATELY PRECEDING SENTENCE, THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER
APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
8.7 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned or delegated, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
8.8 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any federal court located in
Maryland or in any state court located in Maryland this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (a) consents to submit itself (without making such
submission exclusive) to the personal jurisdiction of any federal court located
in Maryland or any state court located in Maryland in the event any dispute
arises out of this Agreement or any of the transactions contemplated by this
Agreement and (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court.
8.9 SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
[SIGNATURE PAGE FOLLOWS]
Appendix A-63
<PAGE>
IN WITNESS WHEREOF, Prime, Prime Partnership, Horizon, Sky Merger, Horizon
Partnership, Newco and Newco LP have caused this Amended and Restated Agreement
and Plan of Merger to be signed by their respective officers (or general
partners) thereunto duly authorized all as of the date first written above.
PRIME RETAIL, INC.
By: /s/ C. ALAN SCHROEDER
-----------------------------------------
NAME: C. ALAN SCHROEDER
TITLE: SENIOR VICE PRESIDENT - GENERAL
COUNSEL
AND SECRETARY
PRIME RETAIL, L.P.
By: Prime Retail, Inc., its sole general
partner
By: /s/ C. ALAN SCHROEDER
-----------------------------------------
NAME: C. ALAN SCHROEDER
TITLE: SENIOR VICE PRESIDENT - GENERAL
COUNSEL
AND SECRETARY
HORIZON GROUP, INC.
By: /s/ JAMES S. WASSEL
-----------------------------------------
NAME: JAMES S. WASSEL
TITLE: PRESIDENT
SKY MERGER CORP.
By: /s/ JAMES S. WASSEL
-----------------------------------------
NAME: JAMES S. WASSEL
TITLE: PRESIDENT
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
By: Horizon Group, Inc., its sole general
partner
By: /s/ JAMES S. WASSEL
-----------------------------------------
NAME: JAMES S. WASSEL
TITLE: PRESIDENT
Appendix A-64
<PAGE>
<TABLE>
<S> <C> <C>
HORIZON GROUP PROPERTIES, INC.
By: /s/ JAMES S. WASSEL
-----------------------------------------
NAME: JAMES S. WASSEL
TITLE: PRESIDENT
HORIZON GROUP PROPERTIES
By: Horizon Group Properties, Inc., its sole
general partner
By: /s/ JAMES S. WASSEL
-----------------------------------------
NAME: JAMES S. WASSEL
TITLE: PRESIDENT
</TABLE>
Appendix A-65
<PAGE>
APPENDIX B
DELAWARE CERTIFICATE
OF MERGER
<PAGE>
APPENDIX B
CERTIFICATE OF MERGER
OF
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
INTO
PRIME RETAIL, L.P.
The undersigned limited partnership, organized and existing under and by
virtue of the Delaware Revised Uniform Limited Partnership Act, does hereby
certify:
FIRST: That the name and jurisdiction of formation of each of the
constituent limited partnerships which is to merge is as follows:
<TABLE>
<CAPTION>
NAME STATE OF FORMATION
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Horizon/Glen Outlet Centers Limited Partnership Delaware
Prime Retail, L.P. Delaware
</TABLE>
SECOND: That an Amended and Restated Agreement and Plan of Merger dated as
of February 1, 1998 (the "Merger Agreement") by and among Prime Retail, Inc., a
Maryland corporation ("Prime"), Prime Retail, L.P., a Delaware limited
partnership, Horizon Group, Inc., a Michigan corporation ("Horizon"), Sky Merger
Corp., a Maryland corporation ("Sky Merger"), Horizon Group Properties, Inc., a
Maryland corporation, Horizon Group Properties, L.P., a Delaware limited
partnership, and Horizon/Glen Outlet Centers Limited Partnership, a Delaware
limited partnership ("Horizon Partnership"), has been approved and executed by
each of the constituent limited partnerships in accordance with the requirements
of Section 17-211(b) of the Delaware Revised Uniform Limited Partnership Act.
THIRD: That the name of the surviving limited partnership is Prime Retail,
L.P. (the "Surviving Limited Partnership").
FOURTH: That the effective time of the merger is upon the filing of this
Certificate of Merger with the Secretary of State of the State of Delaware,
which effective time is immediately before the effective time of the merger of
Horizon into Sky Merger and Prime into Sky Merger pursuant to the Merger
Agreement.
FIFTH: That the executed Merger Agreement is on file at a place of business
of the Surviving Limited Partnership. The address of such place of business is
100 East Pratt Street, 19th Floor, Baltimore, Maryland 21202.
SIXTH: That a copy of the Merger Agreement will be furnished by the
Surviving Limited Partnership, on request and without cost, to any partner of
the constituent limited partnerships.
SEVENTH: Pursuant to the Merger Agreement, upon the effective time of the
merger of Horizon Partnership into Prime Retail, L.P., all of the partnership
interests in Horizon Partnership shall cease to exist and holders of partnership
interests in Horizon Partnership shall be entitled to receive the merger
consideration provided in the Merger Agreement.
Appendix B-1
<PAGE>
IN WITNESS WHEREOF, Prime Retail, Inc., the General Partner of Prime Retail,
L.P., has caused this Certificate of Merger to be signed by a duly authorized
officer, this day of 1998
PRIME RETAIL, L.P.
By:Prime Retail, Inc., its sole
general partner
By:________________________________
Name:______________________________
Title:_____________________________
Appendix B-2
<PAGE>
APPENDIX C
CONTRIBUTION AGREEMENT
<PAGE>
APPENDIX C
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT, dated as of , 1998 (this "Agreement"), by
and between Horizon Group, Inc., a Michigan corporation ("Horizon"), Sky Merger
Corp., a Maryland corporation ("Sky Merger"), Horizon/Glen Outlet Centers
Limited Partnership, a Delaware limited partnership ("Horizon Partnership"),
Horizon Group Properties, Inc., a Maryland corporation ("Horizon Properties"),
and Horizon Group Properties, L.P., a Delaware limited partnership ("Horizon
Properties LP").
RECITALS
A. THE MERGER TRANSACTIONS. Prime Retail, Inc. ("Prime"), Prime Retail,
L.P. ("Prime Partnership") and the parties hereto have entered into an Amended
and Restated Agreement and Plan of Merger, dated as of January , 1998 (the
"Merger Agreement"), providing for, among other things, (i) the merger of
Horizon Partnership with and into Prime Partnership, with Prime Partnership as
the surviving partnership (the "Partnership Merger"), (ii) the reincorporation
of Horizon as a Maryland corporation through the merger of Horizon with and into
Sky Merger, with Sky Merger as the surviving corporation (the "Horizon/
Subsidiary Merger"), and (iii) the merger of Prime with and into Sky Merger,
with Sky Merger as the surviving corporation (the "Prime/Horizon Merger") (the
Partnership Merger, the Horizon/Subsidiary Merger and the Prime/Horizon Merger
being, collectively, the "Mergers"). Pursuant to the foregoing, Sky Merger will
become subject to all of the rights and obligations of Horizon under this
Agreement, and Prime Partnership will become subject to all of the rights and
obligations of Horizon Partnership under this Agreement.
B. THE CONTRIBUTION. Immediately prior to the Partnership Merger, Horizon
expects to cause Initial Horizon Partnership Group (as hereinafter defined) to
contribute the Contributed Assets (as hereinafter defined) to Horizon Properties
LP as a capital contribution, and to cause Horizon Properties LP to assume the
Assumed Liabilities (as hereinafter defined) (the "Contribution").
C. PURPOSE. The purpose of the Contribution is to facilitate the Mergers
by providing for the transfer to Horizon Properties LP of certain properties,
businesses and operations which Prime and Prime Partnership are unwilling to
acquire pursuant to the Merger Agreement. This Agreement sets forth or provides
for certain agreements among the parties hereto in connection with such
transfer.
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, the following terms shall have
the following respective meanings (capitalized terms used but not defined herein
shall have the respective meanings ascribed thereto in the Merger Agreement):
"Action" shall mean any suit, claim, action, arbitration, inquiry,
proceeding or investigation by or before any court, arbitral tribunal,
administrative agency or commission or other governmental, regulatory or
administrative agency or commission.
"Assumed Liabilities" shall mean all Liabilities of Initial Horizon
Partnership Group, other than the Retained Liabilities, arising from the
ownership or operation of the Contributed Assets and shall include, without
limitation, (i) all obligations to indemnify present and former officers and
directors of Horizon Properties LP Group under certificates or articles of
incorporation, by-laws, partnership agreements,
Appendix C-1
<PAGE>
employment agreements, indemnification agreements or otherwise, for any matter
occurring after the Prime/Horizon Merger Effective Time, (ii) all Liabilities
relating to the loans described on the Schedule of Debt as secured by a
Contributed Asset listed on Schedule 1.1(a), including the Lehman Brothers loans
to Third Horizon to the extent needed to obtain requisite lender consent to the
transfer of the Contributed Assets owned by Third Horizon, and (iii) all leases
(whether as lessor, lessee, sublessee, sublessor or otherwise) and related
contracts, and service contracts, relating to the Contributed Assets listed on
Schedule 1.1(a).
"Contributed Assets" shall mean, collectively, (i) all business, assets,
properties, interests in property and rights of Initial Horizon Partnership
Group solely related to the ownership and operation of the retail outlet centers
listed on Schedule 1.1(a) hereto; (ii) all capital stock, partnership interests
and membership interests of Initial Horizon Partnership Group in Horizon
Partnership, MG Long Island Limited Partnership, MG Patchogue Limited
Partnership, MG Patchogue II Limited Partnership, Third HGI, Inc., Third HGI,
L.L.C. and Third Horizon; (iii) the Retained Proprietary Name Rights (as
hereinafter defined); and (iv) Horizon's administrative offices located at 5000
Hakes Drive, Norton Shores, Michigan, including the office equipment and
computer software used therein. Contributed Assets shall not include any cash or
cash equivalents of Initial Horizon Partnership Group.
"Contributed Business" shall mean all business and operations of Initial
Horizon Partnership Group relating solely to the Contributed Assets.
"Employee Benefits Agreement" shall have the meaning assigned thereto in
Section 5.7 hereof.
"Horizon Partnership Group" shall mean, collectively, Horizon, Horizon
Partnership and their Subsidiaries (other than Horizon Properties LP Group)
after giving effect to the Contribution.
"Horizon Properties LP Group" shall mean, collectively, Horizon Properties
and its Subsidiaries, including Horizon Properties LP, after giving effect to
the Contribution.
"Indemnified Loss" shall mean, with respect to any claim by an Indemnified
Party for indemnification pursuant to Article V hereof, any and all losses,
Liabilities, claims, damages, obligations, payments, costs and expenses
(including, without limitation, the costs and expenses of any and all actions,
demands, assessments, judgments, settlements and compromises relating thereto
and reasonable costs of investigation and attorneys' fees and expenses in
connection therewith) suffered by such Indemnified Party with respect to such
claim.
"Initial Horizon Partnership Group" shall mean, collectively, Horizon
Partnership and its Subsidiaries prior to giving effect to the Contribution.
"Liabilities" shall mean, with respect to any Person, except as otherwise
provided herein, any and all liabilities and obligations of such Person, whether
absolute, accrued, contingent, reflected on a balance sheet (or in the notes
thereto) or otherwise, including, without limitation, those arising under any
law, rule, regulation, Action, order or consent decree of any governmental
entity or any judgment of any court of any kind or any award of any arbitrator
of any kind, and those arising under any contract, commitment or undertaking.
"Retained Assets" shall mean all business, assets, properties, interests in
property, and rights of Initial Horizon Partnership Group, except for the
Contributed Assets, and shall include, without limitation:
(a) all real estate and interests in real estate, buildings, fixtures,
leases (whether as lessor, lessee, sublessee, sublessor or otherwise),
rights of way, and easements;
(b) all current and fixed assets, including, but not limited to, all
machinery, equipment, furniture, fixtures and all other personal property;
(c) all contracts, purchase orders, leases, royalty agreements,
instruments, licenses, franchises and other agreements;
Appendix C-2
<PAGE>
(d) all files wherever located, whether in the form of hard copies,
computer tape or otherwise, and all software;
(e) all licenses, authorizations and permits issued by any governmental
agency;
(f) all intangible property rights including, without limitation, all
trademarks, tradenames and copyrights, all capital stock of any Person, and
all partnership or membership interests in any Person;
(g) all trade secrets, customer lists, supplier lists, and all other
rights and documents, and all books and records incident thereto;
(h) all rights to insurance proceeds arising from any casualty, security
deposits, and deposits with utilities and governmental agencies;
(i) such rights as Horizon Partnership Group has to use their present
telephone numbers;
(j) all cash and cash equivalents;
(k) all membership and other interests in Finger Lakes Outlet Center,
L.L.C.; and
(l) any and all of the business, assets, properties, interests in
property and rights, whether tangible or intangible, relating to the
ownership and operation of each of the retail outlet centers listed on
Schedule 1.1(b) hereto.
"Retained Business" shall mean all business and operations of Initial
Horizon Partnership Group primarily related to the Retained Assets.
"Retained Liabilities" shall mean all Liabilities of the Initial Horizon
Partnership Group other than the Assumed Liabilities and shall include, without
limitation, (i) all obligations to indemnify present and former officers and
directors of Initial Horizon Partnership Group under certificates or articles of
incorporation, by-laws, partnership agreements, employment agreements,
indemnification agreements or otherwise arising for any matter occurring at or
prior to the Prime/Horizon Merger Effective Time (ii) all Liabilities relating
to the loans described on the Schedule of Debt as secured by a Retained Asset
listed on Schedule 1.1(b), and any other mortgage loans secured by a Retained
Asset listed on Schedule 1.1(b) incurred after the date hereof, but not the
loans from Lehman Brothers to Third Horizon to the extent the same are Assumed
Liabilities, and (iii) all leases (whether as lessor, lessee, sublessee,
sublessor or otherwise) and related contracts, and service contracts, relating
to the Retained Assets listed on Schedule 1.1(b).
"Schedule of Debt" shall mean the Horizon Schedule of Debt attached as
Schedule 1.1(c) hereto.
"Tax Disaffiliation Agreement" shall have the meaning assigned thereto in
Article III hereof.
"Third Horizon" shall mean Third Horizon Group Limited Partnership.
"Time of Contribution" shall mean the time of consummation of the
Contribution.
"Transfer Agent" shall mean the transfer agent for the Horizon Common Stock.
ARTICLE II
TAX MATTERS
Prior to the Time of Contribution, Horizon and Horizon Properties shall
enter into an agreement relating to past and future tax sharing and certain
issues associated therewith in substantially the form attached hereto as Exhibit
A (the "Tax Disaffiliation Agreement").
Appendix C-3
<PAGE>
ARTICLE III
CONTRIBUTION AND ASSUMPTION
3.1 CONTRIBUTION OF ASSETS.
(a) Subject to Section 4.1(c) and to the satisfaction or waiver of the
conditions set forth in Article VI of this Agreement, immediately prior to the
Partnership Merger, Horizon shall cause Initial Horizon Partnership Group to
transfer, assign and convey to Horizon Properties LP as a capital contribution
all of its respective right, title and interest in and to the Contributed
Assets. If a property listed on Schedule 1.1(a) has been sold prior to the Time
of Contribution, the proceeds of such sale shall be contributed in lieu thereof.
To the extent 100% ownership of any entity that owns Contributed Assets is
transferred to Horizon Properties LP pursuant to this Agreement, the Contributed
Assets owned by such entity shall be deemed transferred to Horizon Properties
LP.
(b) Notwithstanding Sections 4.1(a), Horizon Partnership Group shall retain
and not contribute to Horizon Properties LP any of its respective right, title,
or interest in and to the Retained Assets.
(c) At the Time of Contribution, Horizon Properties LP shall issue to
Horizon Partnership, in partial consideration for the Contribution, that number
of common units of Horizon Properties LP (the "Horizon Properties LP Common
Units") which, when combined with the number of Horizon Properties LP Common
Units then outstanding, will equal the number of Horizon Properties LP Common
Units to be distributed by Prime Partnership pursuant to the Prime Partnership
Common Distribution.
3.2 ASSUMPTION OF LIABILITIES.
(a) Subject to Section 4.2(b) and effective as of the Time of Contribution,
Horizon Properties LP, in partial consideration for the Contribution, hereby
unconditionally assumes and undertakes to pay, satisfy and discharge when due in
accordance with their terms the Assumed Liabilities.
(b) Notwithstanding Section 4.2(a), Horizon Partnership Group shall retain,
and Horizon Properties LP shall not assume and shall have no liability with
respect to, the Retained Liabilities.
3.3 TRANSFER AND ASSUMPTION DOCUMENTATION. In furtherance of the
contribution, grant, conveyance, assignment, transfer and delivery of the
Contributed Assets and the assumption of the Assumed Liabilities set forth in
this Article IV, at the Time of Contribution or as promptly as practicable
thereafter (i) Horizon Partnership shall execute and deliver, and cause its
Subsidiaries to execute and deliver, such deeds, bills of sale, stock powers,
certificates of title, assignments of leases and contracts and other instruments
of contribution, grant, conveyance, assignment, transfer and delivery necessary
to evidence such contribution, grant, conveyance, assignment, transfer and
delivery and (ii) Horizon Properties LP shall execute and deliver such
instruments of assumption as and to the extent necessary to evidence such
assumption.
3.4 NONASSIGNABLE CONTRACTS. Anything contained herein to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign any
lease, license agreement, contract, agreement, sales order, purchase order, open
bid or other commitment or asset if an assignment or attempted assignment of the
same without the consent of the other party or parties thereto would constitute
a breach thereof or in any way impair the rights after the Contribution of
Horizon Partnership Group or Horizon Properties LP Group thereunder. Horizon
Partnership shall, prior to the Time of Contribution, use reasonable best
efforts (it being understood that such efforts shall not include any requirement
of the Initial Horizon Partnership Group to expend money or offer or grant any
financial accommodation) as requested by Horizon Properties LP, and Horizon
Properties LP shall cooperate in all reasonable respects with Initial Horizon
Partnership Group, to obtain all consents and waivers and to resolve all
impracticalities of assignments or transfers necessary to convey to Horizon
Properties LP the Contributed Assets. If any such consent is not obtained or if
an attempted assignment would be ineffective or would impair either group's
rights under any such lease, license agreement, contract, agreement, sales
order, purchase order, open bid or other commitment or asset so that Horizon
Properties LP would not receive all such rights,
Appendix C-4
<PAGE>
then (x) Horizon Partnership shall use reasonable best efforts (it being
understood that such efforts shall not include any requirement of Initial
Horizon Partnership Group to expend money or offer or grant any financial
accommodation) to provide or cause to be provided to Horizon Properties LP, to
the extent permitted by law, the benefits of any such lease, license agreement,
contract, agreement, sales order, purchase order, open bid or other commitment
or asset.
3.5 USE OF NAMES.
(a) Prior to the Contribution, Horizon Partnership Group and Horizon
Properties LP shall determine which of the names, trademarks, trade names and
other proprietary rights related to the Contributed Assets Horizon Partners LP
shall have the sole and exclusive ownership of and right to use, as between
Horizon Properties LP Group, on the one hand, and Horizon Partnership Group, on
the other hand, following the Time of Contribution (the "Contributed Proprietary
Name Rights"). Following the Time of Contribution, Horizon Partnership Group
shall have the sole and exclusive ownership of and right to use, as between
Horizon Properties LP Group on the one hand, and the Horizon Partnership Group
on the other hand, all names, trade marks, trade names, service marks and other
proprietary rights owned or used by Horizon Partnership Group immediately prior
to the Time of Contribution other than the Contributed Proprietary Name Rights
(the "Retained Proprietary Name Rights").
(b) Following the Contribution (i) Horizon Properties and Horizon Properties
LP shall, and shall cause their Subsidiaries and other affiliates to, take all
action necessary to cease using, and change as promptly as practicable
(including by amending any charter documents), any corporate or other names
which are the same as or confusingly similar to any of the Retained Proprietary
Name Rights, and (ii) Horizon Partnership shall, and shall cause its
Subsidiaries and other affiliates to, take all action necessary to cease using,
and change as promptly as practicable (including by amending any charter
documents), any corporate or other names which are the same as or confusingly
similar to any of the Contributed Proprietary Name Rights. From and after the
Closing Date, Horizon Properties and Horizon Properties LP Group shall cause the
Horizon Properties LP Group to cease holding itself out as having an affiliation
with Horizon Partnership Group.
ARTICLE IV
CERTAIN COVENANTS
4.1 INDEMNITY AS BETWEEN HORIZON PROPERTIES LP AND HORIZON PARTNERSHIP FROM
ASSUMED LIABILITIES.
(a) Effective upon the Contribution, Horizon Properties LP agrees to
indemnify and hold Horizon Partnership Group, its affiliates, successors and
assigns and the officers, directors, employees, agents, advisors and
representatives of any of them, harmless from and against any and all
Indemnified Losses arising out of or related to the Assumed Liabilities.
(b) Effective upon the Contribution, Horizon Partnership agrees to indemnify
and hold Horizon Properties LP Group, its affiliates, successors and assigns and
the officers, directors, employees, agents and representatives of any of them,
harmless from and against any and all Indemnified Losses arising out of or
related to the Retained Liabilities.
4.2 PROCEDURE FOR THIRD PARTY INDEMNIFICATION.
(a) If a party entitled to be indemnified hereunder (an "Indemnified Party")
shall receive notice of the assertion by a person who is not a party to this
Agreement of any claim or of the commencement by any such person of any Action
(a "Third Party Claim") with respect to which a party hereto is obligated to
provide indemnification (an "Indemnifying Party"), such Indemnified Party shall
give such Indemnifying Party prompt notice thereof after becoming aware of such
Third Party Claim; provided that the failure of any Indemnitee to give notice as
provided in this Section 5.3 shall not relieve the related Indemnifying Party of
its obligations under this Article V, except to the extent that such
Indemnifying Party is actually
Appendix C-5
<PAGE>
prejudiced by such failure to give notice. Such notice shall describe the Third
Party Claim in reasonable detail, and, if practicable, shall indicate the
estimated amount of the Indemnified Loss that has been or may be sustained by
such Indemnified Party.
(b) An Indemnifying Party may elect to defend, at such Indemnifying Party's
own expense and by such Indemnifying Party's own counsel, any Third Party Claim.
If an Indemnifying Party elects to defend a Third Party Claim, it shall, within
30 days of notice of such Third Party Claim (or sooner, if the nature of such
Third Party Claim so requires), notify the related Indemnified Party of its
intent to do so and acknowledge its liability therefor, and such Indemnified
Party shall cooperate in the defense of such Third Party Claim. After notice
from an Indemnifying Party to an Indemnified Party of its election to assume the
defense of a Third Party Claim, such Indemnifying Party shall not be liable to
such Indemnified Party under this Article V for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the defense
thereof as long as the Indemnifying Party pursues such defense diligently and in
good faith; provided that if, under applicable standards of professional conduct
(as advised by counsel to the Indemnifying Party), a conflict on any significant
issue between such Indemnified Party and such Indemnifying Party or between any
two or more Indemnified Parties may exist in respect of such claim, then the
Indemnifying Party shall pay the reasonable fees and expenses of one such
additional counsel as may be required to be retained in light of such conflict.
If an Indemnifying Party elects not to defend against a Third Party Claim, or
fails to notify an Indemnified Party of its election as provided in this Section
5.2 within the time period specified, or fails to pursue the defense of a Third
Party Claim diligently and in good faith, such Indemnified Party may defend,
compromise and settle such Third Party Claim. Notwithstanding the foregoing, (i)
neither an Indemnifying Party nor an Indemnified Party, as the party controlling
the defense of a Third Party Claim, may compromise or settle any claim or
consent to the entry of any judgment for other than monetary damages without the
prior written consent of the other; provided that (upon reasonable notice
thereof) consent to compromise or settlement or the entry of a judgment shall
not be unreasonably withheld or delayed, and (ii) no Indemnifying Party shall
consent to the entry of any judgment or enter into any compromise or settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party and all other Indemnified
Parties, as the case may be, subject to such Third Party Claim of a full and
final release from all liability in respect of such claim or litigation.
4.3 ADJUSTMENT FOR INSURANCE AND TAXES. The amount which either Horizon
Properties LP or Horizon Partnership is required to pay to, for or on behalf of
the other pursuant to Sections 5.1 and 5.2, shall be adjusted (including,
without limitation, retroactively) (i) by any insurance proceeds actually
recovered by or on behalf of Horizon Properties LP Group, Horizon Partnership
Group or the Indemnified Party, as the case may be, in reduction of the related
Indemnified Loss or Third Party Claim and (ii) reduced by the net difference
between (A) the present value of the amount of any Tax savings resulting from
any tax benefit to Horizon Properties LP Group, Horizon Partnership Group or the
Indemnified Party, as the case may be as a result of the Indemnified Loss or
Third Party Claim, and (B) the present value of the amount of any Tax due with
respect to the receipt of the indemnification payment itself. Amounts required
to be paid, as so adjusted, are hereafter sometimes called an "Indemnified
Payment." If Horizon Properties LP Group, Horizon Partnership Group or the
Indemnified Party, as the case may be, shall have received or shall have had
paid on its behalf an Indemnified Payment in respect of an Indemnified Loss or
Third Party Claim and shall subsequently receive insurance proceeds in respect
of such Indemnified Loss or Third Party Claim, or realize any net tax benefit
(as computed in clause (ii) above) as a result of such Indemnified Party or
Third Party Claim, then Horizon Properties LP, Horizon Partnership or the
Indemnified Party, as the case may be, shall pay to Horizon Properties LP,
Horizon Partnership or the Indemnified Party, as the case may be, the amount of
such insurance proceeds or net tax benefit, or if lesser, the amount of the
Indemnified Payment.
4.4 RISK OF CONTRIBUTED ASSETS. Each party understands and agrees that,
except as otherwise specifically provided herein, no party nor any of its
Subsidiaries is, in this Agreement or any other
Appendix C-6
<PAGE>
agreement or document representing or warranting to such party in any way as to
the assets, business or Liabilities transferred or assumed as contemplated
hereby or as to any consents or approvals required in connection with the
consummation of the transactions contemplated by this Agreement, it being agreed
and understood that each party shall take or keep all of its assets "as is" and
that it shall bear the economic and legal risk that conveyance of such assets
shall prove to be insufficient or that the title to any assets shall be other
than good and marketable and free from encumbrances. All implied warranties are
hereby expressly disclaimed.
4.5 TRANSFER OF EMPLOYEES. With respect to the personnel employed on-site
at the centers included in the Retained Business and such other employees of the
Contributed Business designated by Horizon Partnership not later than the
Closing Date as employees who will remain with Horizon Partnership Group
(collectively, the "Retained Employees"), except as otherwise specifically
provided in this Agreement, Horizon Partnership Group shall retain the
liabilities and obligations with respect to, and continue to be responsible for,
all liabilities and obligations whatsoever in connection with, claims made by or
on behalf of such persons in respect of salary, wages, benefits, severance pay,
salary continuation, COBRA continuation and similar obligations relating to the
continued employment, or the termination or alleged termination of such persons'
employment with Horizon Partnership Group by reason of the consummation of the
transactions contemplated in this Agreement or the Merger Agreement or otherwise
and neither Horizon Properties LP nor any member of Horizon Properties LP Group
shall assume such liability. Effective as of the Partnership Merger Effective
Time, Horizon Partnership and Horizon Properties LP shall cooperate to transfer
to the employ of Horizon Properties LP Group, each person employed by Horizon
Partnership Group, other than the Retained Employees (such employees and other
persons who become employees of the Horizon Properties LP Group after the
Partnership Merger Effective Time in accordance with this Section 5.5 shall be
hereinafter referred to as the "Transferred Employees"). With respect to the
Transferred Employees, Horizon Properties LP Group shall assume the liabilities
and obligations with respect to, and continue to be responsible for all
liabilities and obligations whatsoever in connection with, claims made by or on
behalf of such persons in respect of salary, wages, benefits, severance pay,
salary continuation, COBRA continuation and similar obligations relating to the
continued employment, or the termination or alleged termination of such persons'
employment with the Horizon Properties LP Group by reason of consummation of the
transactions contemplated in this Agreement or the Merger Agreement or otherwise
and Horizon Partnership Group shall have no such liability.
4.6 CERTAIN EMPLOYEE BENEFITS PLANS. Prior to Partnership Merger Effective
Time, Horizon Properties LP and Horizon Partnership shall enter into an
agreement relating to the parties' responsibilities with respect to certain
employee benefit liabilities and obligations (the "Employee Benefits
Agreement").
4.7 INSURANCE. The parties agree to cooperate with each other with respect
to the processing of any claims which are covered by any insurance policy in
existence prior to the Partnership Merger Effective Time. Without limiting the
generality of the foregoing, Horizon Partnership Group shall have the right to
process and pursue any claim for insurance (including negotiating with the
company issuing the insurance policy) in connection with any liability of
Horizon Partnership Group, regardless of whether the insurance policy under
which such claim is made is transferred pursuant to Section 4.1(a), and Horizon
Properties LP Group shall have the right to process and pursue any claim for
insurance (including negotiating with the company issuing the insurance policy)
in connection with any liability of Horizon Properties LP Group, regardless of
whether the insurance policy under which such claim is made is retained by
Horizon Partnership Group pursuant to Section 4.1(b).
4.8 TRANSFER TAXES. Horizon Properties LP shall pay or cause to be paid
the Transfer Taxes (as defined in the Tax Disaffiliation Agreement) imposed in
connection with or as a result of the Contribution or the Distribution.
Appendix C-7
<PAGE>
ARTICLE V
CONDITIONS
The obligations of the parties to consummate the Contribution and
Distribution shall be subject to the fulfillment or waiver in accordance with
the Merger Agreement of each condition to the closing of the Merger set forth in
Article VI of the Merger Agreement.
ARTICLE VI
ACCESS TO INFORMATION AND SERVICES
6.1 PROVISION OF CORPORATE RECORDS. At the Time of Contribution, Horizon
Partnership shall cause Initial Horizon Partnership Group to deliver, or cause
to be delivered, to Horizon Properties LP Group all corporate books and records
which relate primarily to Horizon Properties LP Group, the Contributed Assets or
the Assumed Liabilities, including, without limitation, all active agreements,
active litigation files and government filings. From and after the Time of
Contribution, all such books, records and copies shall be the property of
Horizon Properties LP Group.
6.2 ACCESS TO INFORMATION. From and after the Time of Contribution (i)
Horizon Partnership shall cause Horizon Partnership Group to afford to Horizon
Properties LP Group and its authorized accountants, counsel and other designated
representatives reasonable access (including, without limitation, using
reasonable efforts to give access to persons or firms possessing Information (as
defined below)) and duplicating rights during normal business hours to all
records, books, contracts, instruments, computer data and other data and
information (collectively, "Information") within Horizon Partnership Group's
possession relating to the Contributed Assets or the Assumed Liabilities,
insofar as such access is reasonably required by Horizon Properties LP Group,
and (ii) Horizon Properties shall cause Horizon Properties LP Group to afford to
Horizon Partnership Group and its authorized accountants, counsel and other
designated representatives reasonable access (including, without limitation,
using reasonable efforts to give access to persons or firms possessing
Information) and duplicating rights during normal business hours to all
Information within Horizon Properties LP Group's possession relating to the
Initial Horizon Partnership Group, the assets of Horizon Partnership Group
(including without limitation, the Contributed Assets or the Assumed
Liabilities), insofar as such access is reasonably required by Horizon
Partnership Group. Information may be requested under this Section 7.2 for,
without limitation, audit, accounting, claims, litigation and tax purposes, as
well as for purposes of fulfilling disclosure and reporting obligations.
6.3 PRODUCTION OF WITNESSES. From and after the Time of Contribution, each
party shall use reasonable efforts to make available to the other party, upon
written request, its officers, directors, employees and agents as witnesses to
the extent that any such person may reasonably be required in connection with
any legal, administrative or other proceedings in which the requesting party may
from time to time be involved.
6.4 RETENTION OF RECORDS. Except as otherwise required by law or agreed to
in writing, Horizon Partnership shall cause Horizon Partnership Group, and
Horizon Properties shall cause Horizon Properties LP Group each to retain, for a
period of at least five years following the Time of Contribution, all
significant Information relating to the Contributed Assets or the Retained
Business. Notwithstanding the foregoing, either Horizon Partnership Group or
Horizon Properties LP Group may destroy or otherwise dispose of any of such
Information at any time, provided that, prior to such destruction or disposal
(a) Horizon Partnership or Horizon Properties LP, as the case may be, shall
cause the Person seeking to destroy or otherwise dispose of any Information to
provide no less than 90 days or more than 120 days' prior written notice to the
parties hereto, specifying the Information proposed to be destroyed or disposed
of and (b) if any party shall request in writing prior to the scheduled date for
such destruction or disposal that any of the Information proposed to be
destroyed or disposed of be delivered to the other party, such
Appendix C-8
<PAGE>
Person shall promptly arrange for the delivery of such of the Information as was
requested, at the expense of the requesting party.
6.5 CONFIDENTIALITY. Each party shall hold, and shall cause its officers,
employees, agents, consultants and advisors to hold, in strict confidence,
unless compelled to disclose by judicial or administrative process or by other
requirements of law or in order to comply with the requirements of a binding
stock exchange listing application or agreement or applicable stock exchange
rules, all non-public Information concerning the other party furnished it by
such other party or its representatives or otherwise in its possession (except
to the extent that such Information can be shown to have been (a) available to
such party on a non-confidential basis prior to its disclosure by the other
party, (b) in the public domain through no fault of such party or (c) later
lawfully acquired from other sources by the party to which it was furnished),
and each party shall not release or disclose such Information to any other
person, except its auditors, attorneys, financial advisors, bankers and other
consultants and advisors who have a need to know such Information and who agree
to be bound by the provisions of this Section 7.5.
ARTICLE VII
MISCELLANEOUS AND GENERAL
7.1 MODIFICATION OR AMENDMENT. The parties hereto may modify or amend this
Agreement by written agreement executed and delivered by authorized officers of
the respective parties, provided Prime has consented in writing to any such
modification or amendment. The parties expressly agree that Prime shall be a
third party beneficiary of this Section 8.1.
7.2 COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in separate counterparts, each such counterpart being
deemed to be an original instrument, and which counterparts shall together
constitute the same agreement.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois, without reference to its
conflicts of law principles.
7.4 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and shall be
deemed to have been duly given (i) on the date of delivery if delivered by
facsimile (upon confirmation of receipt) or personally, (ii) on the first
business day following the date of dispatch if delivered by Federal Express or
other reputable next-day courier service or (iii) on the third business day
following the date of mailing if delivered by registered or certified mail,
return receipt requested, postage prepaid. On and after the Partnership Merger
Effective Date, all notices hereunder shall be delivered as set forth below, or
pursuant to such other instructions as may be designated in writing by the party
to receive such notice.
If to Horizon Properties or Horizon Properties LP:
[Horizon Group, Inc.
5000 Hakes Drive
Norton Shores, MI 49441
Attention: James S. Wassel
Fax: No.: (616) 798-5100
with a copy to:
Rudnick & Wolfe
203 North LaSalle Street
Suite 1500
Chicago, IL 60601-1293
Attention: Errol R. Halperin, Esq.
Fax No.: (312) 236-7516]
Appendix C-9
<PAGE>
If to Horizon, Horizon Partnership or Sky Merger
Prime Retail, Inc.
100 East Pratt Street
19th Floor
Baltimore, Maryland 21202
Attention: Michael W. Reschke
C. Alan Schroeder
Fax No.: (410) 234-1703
With a copy to:
Winston & Strawn
35 W. Wacker Drive
Chicago, Illinois 60601
Attention: Wayne D. Boberg
Steven J. Gavin
Fax No.: (312) 558-5700
7.5 CAPTIONS. All Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
7.6 ASSIGNMENT. Nothing contained in this Agreement or the agreements
referred to herein (except as otherwise expressly set forth therein) is intended
to confer on any person or entity other than the parties hereto and their
respective successors and permitted assigns any benefit, rights or remedies
under or by reason of this Agreement and such other agreements, except that the
provisions of [Section 5.1 and 5.2] hereof shall inure to the benefit of the
Persons referred to therein.
7.7 FURTHER ASSURANCES. Subject to the terms and conditions hereof and, as
applicable, of the Merger Agreement, the parties will, and will cause their
respective Subsidiaries and affiliates to, do such additional things as are
necessary or proper to carry out and effectuate the intent of this Agreement or
any part hereof or the transactions contemplated hereby.
7.8 ATTORNEY-CLIENT PRIVILEGE; WORK PRODUCT. Anything herein or in the
Merger Agreement notwithstanding, the transactions contemplated hereby and by
the Merger Agreement shall not be deemed to transfer to or vest in Horizon
Properties LP Group any right to waive, nor shall they be deemed to waive, any
attorney-client privilege between Horizon Partnership Group and its legal
counsel, with respect to legal advice concerning the business or operations of
Horizon Partnership Group including, without limitation, the Retained
Liabilities or the transactions contemplated hereby and by the Merger Agreement,
in either case, concerning privileged communications (or work product related
thereto) at any time prior to the Closing Date (as defined in the Merger
Agreement). Horizon Properties and Horizon Partnership each shall assign to
Horizon Properties LP, and cause each member of Horizon Partnership Group to
assign to Horizon Properties LP Group, its rights (if any) to any
attorney-client privilege with respect to legal advice concerning the business
or operations of Horizon Properties LP Group including, without limitation, the
Assumed Liabilities or the transactions contemplated hereby concerning
privileged communications (or work product related thereto) at any time prior
the Closing Date. Horizon Partnership Group and their successors and assigns
shall not be entitled to waive or have access, nor shall they attempt to waive
or seek access, to any privileged communications (or work product related
thereto) between Horizon Properties LP Group and its legal counsel with respect
to legal advice concerning the business or operations of the Horizon Properties
LP Group, including the Assumed Liabilities or the transactions contemplated
hereby.
Appendix C-10
<PAGE>
7.9 NO THIRD-PARTY BENEFICIARIES. Except as provided in Section 5.1 and
8.1 hereof, this Agreement, the Tax Disaffiliation Agreement and the Employee
Benefits Agreement, are not intended to confer upon any person other than the
parties hereto and thereto any rights or remedies hereunder or thereunder.
7.10 CONFLICT WITH TAX DISAFFILIATION AGREEMENT. In the event of any
conflict between this Agreement and the Tax Disaffiliation Agreement, the Tax
Disaffiliation Agreement shall control.
[SIGNATURE PAGE FOLLOWS]
Appendix C-11
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first
hereinabove written.
HORIZON GROUP, INC.
By: _________________________________
Name:
Title:
HORIZON GROUP PROPERTIES, INC.
By: _________________________________
Name:
Title:
HORIZON/GLEN OUTLET CENTERS
LIMITED PARTNERSHIP
By: Horizon Group, Inc., its sole
general partner
By: _________________________________
Name:
Title:
SKY MERGER CORP.
By: _________________________________
Name:
Title:
HORIZON GROUP PROPERTIES, L.P.
By: Horizon Group, Inc., its sole
general partner
By: _________________________________
Name:
Title:
Appendix C-12
<PAGE>
APPENDIX D
OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
<PAGE>
APPENDIX D
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
February 1, 1998
The Board of Directors
Prime Retail, Inc.
100 East Pratt Street
19th Floor
Baltimore, Maryland 21202
Members of the Board:
Prime Retail, Inc. ("Prime"), Prime Retail, L.P. ("Prime Partnership"),
Horizon Group, Inc. ("Horizon"), Sky Merger Corp. ("Horizon MergerSub"), Horizon
Group Properties, L.P. ("Newco LP"), Horizon Group Properties, Inc. ("HGP") and
Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership") propose
to enter into an Amended and Restated Agreement and Plan of Merger, dated as of
February 1, 1998 (the "Merger Agreement"), relating to a proposed business
combination transaction. Pursuant to the Merger Agreement, upon consummation of
a series of transactions set forth in detail therein and in certain related
documents, among other things, (i) Horizon Partnership will contribute certain
assets, subject to certain liabilities, to Newco LP; (ii) Prime Partnership will
merge with Horizon Partnership in a merger (the "Partnership Merger") in which
Prime Partnership is the survivor; (iii) Horizon will reincorporate in Maryland
through a merger with and into Horizon MergerSub, in which Horizon MergerSub is
the survivor and the former shareholders of Horizon will become shareholders of
Horizon MergerSub; and (iv) Prime will merge with and into Horizon MergerSub
through a merger (the "Corporate Merger" and, together with the Partnership
Merger, the "Mergers") in which Horizon MergerSub will be the survivor (the
"Surviving Company") and will be renamed as "Prime Retail, Inc."
In the Partnership Merger, limited partners in Horizon Partnership (other
than Horizon or any subsidiary of Horizon), will be entitled to receive in
exchange for each outstanding common unit of limited partnership interest in
Horizon Partnership 0.9193 of a Common Unit of Prime Retail, L.P. that will be
exchangeable for a like number of shares of Common Stock of Prime Retail.
In the Corporate Merger, shareholders of Horizon MergerSub (other than
Horizon or any subsidiary of Horizon), who immediately prior to the transactions
described above will have been shareholders in Horizon, will be entitled to
receive in exchange for each outstanding share of common stock of Horizon
MergerSub, 0.20 of a share of 8.5% Series B Cumulative Participating Convertible
Preferred Stock of the Surviving Company and 0.597 of a share of Common Stock of
the Surviving Company. The payment of cash and the ratios for issuance of
partnership units of Prime Partnership or capital stock of the Surviving
Company, as the case may be to former partners of Horizon Partnership or former
shareholders of Horizon in the Mergers are referred to herein collectively as
the "merger consideration."
In addition to the foregoing transactions, the Merger Agreement provides,
among other things, that (x) Prime Partnership will make a special cash
distribution of $0.60 per Series B Preferred Units and $0.50 per Series C
Preferred Unit and Common Unit to the record holder of such interests
immediately prior to the Mergers, (y) Prime will make a special cash
distribution of $0.60 per share of Series B Preferred Stock and $0.50 per share
of Series C Preferred Stock and Common Stock to the record holders of such
interests immediately prior to the Mergers, and (z) immediately following the
Mergers, the Surviving Company and Prime Partnership will distribute all of the
Common Stock and Common Units of HGP and HGP LP, respectively, at a rate of one
such share or unit for each 10 shares of Common Stock of the Surviving Company
or Common Units in Prime Partnership and approximately 1.196 shares or units for
each 10 shares of Series A Preferred Stock of the Surviving Company.
Appendix D-1
<PAGE>
Board of Directors
Prime Retail, Inc.
Page 2
You have requested our opinion as to the fairness, from a financial point of
view, to Prime, Prime Partnership, and their respective shareholders and
partners, of the merger consideration set forth in the Merger Agreement.
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed Horizon's Annual Reports, Form 10-K and related financial
information for the two fiscal years ended December 31, 1996 and December
31, 1995 and Horizon's Forms 10-Q and the related unaudited financial
information for the periods ended June 30, 1997, March 31, 1997 and
September 30, 1997;
2. Reviewed Prime's Forms 10-K and related financial information for the
two fiscal years ended December 31, 1996 and December 31, 1995, Prime's
unaudited financial information for the period ended September 20, 1997,
released October 28, 1997, and Prime's Forms 10-Q and the related
unaudited financial information for the periods ended June 30, 1997,
March 31, 1997 and September 30, 1997;
3. Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of Horizon and
Prime, furnished to us by the management of Horizon and Prime,
respectively;
4. Participated in discussions with certain members of senior management of
Prime and Horizon concerning their business and prospects;
5. Reviewed the historical market prices and trading activity for Horizon's
common stock and Prime's preferred and common stock and compared them
with those of certain publicly traded companies which we deemed to be
reasonably compared to Horizon and Prime, respectively;
6. Compared the results of operations of Horizon and Prime with that of
certain companies which we deemed to be reasonably comparable to Horizon
and Prime, respectively;
7. Reviewed the pro forma effect of the Merger on the Surviving Company's
capitalization ratios, funds from operations and future cash flows;
8. Reviewed the Merger Agreement and certain related documents; and
9. Performed such other analyses and reviewed such other information as
Friedman, Billings, Ramsey & Co., Inc. deemed appropriate.
In preparing our opinion, we have relied on the accuracy and completeness of
all information supplied or otherwise made available to us by Horizon and Prime,
without independent verification of such information. We have not made any
independent valuation or appraisal of the assets and liabilities of Horizon or
Prime. With respect to the financial forecasts examined by us, we have assumed
that they were reasonably prepared and reflect the best currently available
estimates and good faith judgments of the management of Prime as to the future
performance of Prime Partnership and the Surviving Company, respectively, and
their respective properties; and we have assumed that the modifications made by
Prime to Horizon's financial forecasts were reasonably made on bases reflecting
the best currently available estimates and good faith judgments of Prime's
management as to the future performance of Horizon and its properties. We have
also assumed the Mergers will have tax consequences to shareholders and partners
of Prime and Prime Partnership, respectively, as described in discussions with
representatives of Prime and Prime Partnership. No opinion is expressed herein
as to the price at which the shares to be issued in the
Appendix D-2
<PAGE>
Board of Directors
Prime Retail, Inc.
Page 3
Mergers to the shareholders of the Surviving Company may trade at any time. Our
opinion is based upon regulatory, economic, monetary, and market conditions
existing on, and the information made available to us as of the date hereof.
Our opinion is directed to the Board of Directors of Prime and does not
constitute a recommendation to any shareholder of Prime as to how any such
shareholder should vote on the Mergers. This opinion does not address the
relative merits of the Mergers and any other transaction or business strategies
discussed by the Board of Directors of Prime as alternatives to the Mergers, or
the decision of the Board of Directors to proceed with the Mergers.
As you are aware, Friedman, Billings, Ramsey & Co., Inc. is currently acting
as financial advisor to Prime and will receive a fee contingent upon
consummation of the Mergers. We have provided financial advisory services to,
and acted as an underwriter and placement agent for, Prime in the past and may
do so in the future. In the ordinary course of our business, we may trade the
equity of Prime for our own account and for the accounts of our customers and,
accordingly, may at any time hold long or short positions in such securities.
This opinion has been prepared for the Board of Directors of Prime and shall
not be reproduced, summarized, described or referred to, or given to any other
person or otherwise made public, without the prior written consent of Friedman,
Billings, Ramsey & Co., Inc.; provided, however, that this letter may be
reproduced in full in a proxy statement/prospectus relating to the Mergers.
On the basis of, and subject to the foregoing, we are of the opinion that,
as of the date hereof, the merger consideration set forth in the Merger
Agreement is fair, from a financial point of view, to Prime, Prime Partnership,
and their respective shareholders and partners.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
/s/ WILLIAM R. SWANSON
--------------------------------------
By: William R. Swanson
Managing Director
Appendix D-3
<PAGE>
APPENDIX E
OPINION OF LEHMAN BROTHERS
<PAGE>
APPENDIX E
LEHMAN BROTHERS
January 29, 1998
Board of Directors
Horizon Group, Inc.
5000 Hakes Drive
Muskegon, MI 49441
Members of the Board:
We understand that Horizon Group, Inc. ("Horizon"), Sky Merger Corp. and
Horizon/Glen Outlet Centers Limited Partnership ("Horizon L.P." and collectively
with Horizon, the "Company") propose to enter into a series of transactions with
Prime Retail, Inc. ("Prime Inc.") and Prime Retail, L.P. ("Prime L.P." and
together with Prime Inc., "Prime"), pursuant to which (i) each share of common
stock of Horizon will be converted into the right to receive 0.2 shares of
Series B Convertible Preferred Stock of Prime Inc. and 0.597 shares of common
stock of Prime Inc. and (ii) each limited partnership unit in Horizon L.P. will
be converted into the right to receive 0.9193 share of a limited partnership
unit of Prime L.P. (the "Proposed Transaction"). The terms and conditions of the
Proposed Transaction are set forth in more detail in the Amended and Restated
Agreement and Plan of Merger among Prime and the Company (the "Agreement").
We have been requested by the Board of Directors of Horizon to render our
opinion with respect to the fairness, from a financial point of view, to the
stockholders of Horizon and the limited partners of Horizon L.P. of the
consideration to be received by such stockholders and limited partners in the
Proposed Transaction. We have not been requested to opine as to, and our opinion
does not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning the Company and Prime that we believe to be relevant to
our analysis, (3) financial and operating information with respect to the
business, operations and prospects of the Company and Prime furnished to us by
the Company and Prime, (4) a trading history of Horizon's common stock from
November 3, 1993 to the present and a comparison of that trading history with
those of other companies that we deemed relevant, (5) a comparison of the
historical financial results and present financial condition of the Company with
those of other companies that we deemed relevant, (6) a trading history of Prime
Inc.'s common stock from March 15, 1994 to the present and a comparison of that
trading history with those of other companies that we deemed relevant and the
terms of, and a trading history of Prime Inc.'s Series B Convertible Preferred
Stock from March 15, 1994 to the present and a comparison of that trading
history with those of other securities that we deemed relevant, (7) a comparison
of the historical financial results and present financial condition of Prime
with those of other companies that we deemed relevant, (8) potential liquidation
values of the properties of the Company furnished to us by the Company, (9) the
results of our efforts to solicit indications of interest and proposals from
third parties with respect to a purchase of all or a portion of the business
and/or properties of the Company, (10) alternatives available to the Company on
a stand-alone basis to fund its on-going capital and operating requirements and
(11) the potential pro forma financial effects of the Proposed Transaction on
Prime (including, without limitation, the formation of Horizon Group Properties
Inc. and Horizon Group Properties L.P.). In addition, we have had discussions
with the managements of the Company and Prime concerning their respective
business, operations, assets, financial condition and prospects and the cost
savings, operating synergies and strategic benefits expected to result from a
combination of certain of the businesses and properties of the Company and Prime
and have undertaken such other studies, analyses and investigations as we deemed
appropriate.
Appendix E-1
<PAGE>
Board of Directors
Horizon Group
Page 2
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of the managements of the Company and Prime
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of the Company, Prime and the combined company upon consummation of the Proposed
Transaction ("New Prime"), upon advice of the Company and Prime we have assumed
that such projections have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the managements of the
Company and Prime as to the future financial performance of the Company, Prime
and New Prime and that the Company, Prime and New Prime will perform
substantially in accordance with such projections. We were not provided with,
and did not have access to, financial projections for Prime or New Prime for any
period subsequent to their 1998 fiscal year. In arriving at our opinion, we have
conducted only a limited physical inspection of the properties of the Company
and Prime and have not made or obtained any evaluations or appraisals of the
assets or liabilities of the Company or Prime. Upon advice of the Company, we
have assumed that the Proposed Transaction will qualify as tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended, and therefore as a tax-free transaction to the stockholders
of Horizon except to the extent they receive a taxable dividend of shares of
Horizon Group Properties Inc. In addition, we have assumed that the Proposed
Transaction will generally be tax-free to the limited partners of Horizon L.P.
Our opinion necessarily is based upon market, economic and other conditions as
they exist on, and can be evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
received by the stockholders of Horizon in the Proposed Transaction is fair to
such stockholders and the consideration to be received by the limited partners
of Horizon L.P. in the Proposed Transaction is fair to such limited partners.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have performed various investment banking
services for the Company in the past and have received customary fees for such
services. In the ordinary course of our business, we may actively trade in the
debt and equity securities of the Company and Prime for our own account and for
the accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities. In addition, Lehman Brothers Realty Corp., an
affiliate of Lehman Brothers, has made a loan to Horizon with a current
outstanding principal amount of $253.92 million and such loan is due in full
upon the closing of the Proposed Transaction.
This opinion is for the use and benefit of the Board of Directors of Horizon
and is rendered to the Board of Directors in connection with its consideration
of the Proposed Transaction. This opinion is not intended to be and does not
constitute a recommendation to any stockholder of Horizon or any limited partner
of Horizon L.P. as to how such stockholder or limited partner should vote with
respect to the Proposed Transaction.
<TABLE>
<S> <C> <C>
Very truly yours,
By: /s/ LEHMAN BROTHERS
-----------------------------------------
LEHMAN BROTHERS
</TABLE>
Appendix E-2
<PAGE>
APPENDIX F
FORM OF
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
PRIME RETAIL, L.P.
DATED AS OF , 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I
DEFINITIONS; ETC...................................................................................... 1
Accountants................................................................................ 1
Act........................................................................................ 1
Adjusted Capital Account Deficit........................................................... 1
Administrative Expenses.................................................................... 2
Affiliate.................................................................................. 2
Agreement.................................................................................. 2
Antidilution Provisions.................................................................... 2
Audited Financial Statements............................................................... 2
Bankruptcy................................................................................. 2
Capital Account............................................................................ 2
Capital Contribution....................................................................... 3
Certificate................................................................................ 3
Closing Price.............................................................................. 3
Code....................................................................................... 4
Common Distribution........................................................................ 4
Common Stock............................................................................... 4
Common Units............................................................................... 4
Consent of the Partners.................................................................... 4
Contributed Partnership Interests.......................................................... 4
Control.................................................................................... 4
Convertible Preferred Distribution......................................................... 4
Convertible Preferred Distribution Shortfall............................................... 4
Convertible Preferred Rights............................................................... 4
Convertible Preferred Stock................................................................ 4
Convertible Preferred Unit Redemption Amount............................................... 5
Convertible Preferred Units................................................................ 5
Current Per Share Market Price............................................................. 5
Depreciation............................................................................... 5
Entity..................................................................................... 5
ERISA...................................................................................... 5
GAAP....................................................................................... 5
General Partner............................................................................ 5
Gross Asset Value.......................................................................... 5
Hart Scott Act............................................................................. 6
Horizon Limited Partnership................................................................ 6
Horizon Properties......................................................................... 6
Immediate Family........................................................................... 6
Incentive Option........................................................................... 6
Incentive Option Agreement................................................................. 6
Lien....................................................................................... 6
Limited Partner............................................................................ 6
Liquidating Events......................................................................... 6
Liquidating Trustee........................................................................ 6
Major Decisions............................................................................ 6
Majority-in-Interest of the Partners....................................................... 6
</TABLE>
Appendix F-i
<PAGE>
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Merger..................................................................................... 6
Merger Agreement........................................................................... 7
Minimum Gain Capital Account............................................................... 7
Net Cash Flow.............................................................................. 7
Net Income or Net Loss..................................................................... 7
Nonrecourse Deductions..................................................................... 8
Nonrecourse Liabilities.................................................................... 8
Original Agreement......................................................................... 8
Partner Minimum Gain....................................................................... 8
Partner Nonrecourse Debt................................................................... 8
Partner Nonrecourse Deductions............................................................. 8
Partners................................................................................... 8
Partnership................................................................................ 8
Partnership Interest....................................................................... 8
Partnership Minimum Gain................................................................... 8
Partnership Payment Date................................................................... 8
Partnership Record Date.................................................................... 9
Partnership Units.......................................................................... 9
Permitted Transferee....................................................................... 9
Person..................................................................................... 9
Preferred Distribution..................................................................... 9
Preferred Distribution Shortfall........................................................... 9
Preferred Stock............................................................................ 9
Preferred Unit Redemption Amount........................................................... 9
Preferred Units............................................................................ 9
Prime/Horizon Merger....................................................................... 9
Property................................................................................... 9
Property Partnership Interests............................................................. 9
Property Partnerships...................................................................... 9
Purchase Price............................................................................. 9
Quarter.................................................................................... 9
Regulations................................................................................ 9
Regulatory Allocations..................................................................... 9
REIT....................................................................................... 9
REIT Expenses.............................................................................. 9
REIT Requirements.......................................................................... 10
Rights..................................................................................... 10
SEC........................................................................................ 10
Section 704(c) Tax Items................................................................... 10
September 9, 1997 Agreement................................................................ 10
Series C Preferred Distribution............................................................ 10
Series C Preferred Distribution Shortfall.................................................. 10
Series C Preferred Purchase Agreement...................................................... 10
Series C Preferred Rights.................................................................. 10
Series C Preferred Stock................................................................... 10
Series C Preferred Unit Redemption Amount.................................................. 10
Series C Preferred Units................................................................... 10
Service.................................................................................... 10
Shopping Center Project.................................................................... 10
Special Distribution....................................................................... 10
</TABLE>
Appendix F-ii
<PAGE>
<TABLE>
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Stock Incentive Plan....................................................................... 10
Substituted Limited Partner................................................................ 11
Tax Items.................................................................................. 11
Trading Day................................................................................ 11
Transfer................................................................................... 11
1.2 Exhibits, Etc.............................................................................. 11
ARTICLE II
ORGANIZATION.......................................................................................... 11
2.1 Formation and Continuation................................................................. 11
2.2 Name....................................................................................... 11
2.3 Character of the Business.................................................................. 11
2.4 Location of the Principal Place of Business................................................ 12
2.5 Registered Agent and Registered Office..................................................... 12
2.6 Power of Attorney.......................................................................... 12
ARTICLE III
TERM; DISSOLUTION..................................................................................... 13
3.1 Term....................................................................................... 13
3.2 Dissolution................................................................................ 13
3.3 Bankruptcy of a Limited Partner............................................................ 13
ARTICLE IV
CONTRIBUTIONS TO CAPITAL; FINANCING................................................................... 14
4.1 General Partner Capital Contribution....................................................... 14
4.2 Limited Partner Capital Contributions...................................................... 14
4.3 Additional Funds; Restrictions on General Partner.......................................... 14
4.4 Issuance of Additional Partnership Interests; Admission of Additional Limited Partners..... 15
4.5 Stock Incentive Plan....................................................................... 15
4.6 No Third Party Beneficiary................................................................. 16
4.7 No Interest; No Return..................................................................... 16
4.8 Conversion of Convertible Preferred Units or Series C Preferred Units; Redemption or
Purchase of Series C Preferred Units, Convertible Preferred Units or Preferred Units..... 16
4.9 Redemption of Series C Preferred Units..................................................... 17
4.10 Redemption of Convertible Preferred Units.................................................. 18
ARTICLE V
INTENTIONALLY OMITTED................................................................................. 19
ARTICLE VI
ALLOCATIONS, DISTRIBUTIONS AND OTHER TAX AND ACCOUNTING MATTERS.......................................
19
6.1 Allocations................................................................................ 19
6.2 Distributions.............................................................................. 19
6.3 Books of Account........................................................................... 21
6.4 Reports.................................................................................... 21
6.5 Audits..................................................................................... 21
6.6 Tax Elections and Returns.................................................................. 21
6.7 Tax Matters Partner........................................................................ 21
ARTICLE VII
RIGHTS, DUTIES AND RESTRICTIONS OF THE GENERAL PARTNER................................................ 22
</TABLE>
Appendix F-iii
<PAGE>
<TABLE>
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7.1 Expenditures by Partnership................................................................ 22
7.2 Powers and Duties of General Partner....................................................... 22
7.3 Major Decisions............................................................................ 24
7.4 No Removal................................................................................. 25
7.5 General Partner Participation.............................................................. 25
7.6 Proscriptions.............................................................................. 25
7.7 Additional Partners........................................................................ 25
7.8 Title Holder............................................................................... 25
7.9 Compensation of the General Partner........................................................ 25
7.10 Waiver and Indemnification................................................................. 25
7.11 Operation in Accordance with REIT Requirements............................................. 27
ARTICLE VIII
DISSOLUTION, LIQUIDATION AND WINDING-UP............................................................... 27
8.1 Winding Up................................................................................. 27
8.2 Distribution on Dissolution and Liquidation................................................ 28
8.3 Timing Requirements........................................................................ 28
8.4 Deemed Distribution and Recontribution..................................................... 29
8.5 Distributions in Kind...................................................................... 29
8.6 Documentation of Liquidation............................................................... 29
8.7 Deficit Capital Account Balance............................................................ 29
ARTICLE IX
TRANSFER OF PARTNERSHIP INTERESTS; WITHDRAWAL; ADMISSION OF ADDITIONAL PARTNERS.......................
29
9.1 General Partner Transfer; Withdrawal; Substitute General Partner........................... 29
9.2 Transfers by Limited Partners.............................................................. 30
9.3 Restrictions on Transfer................................................................... 31
ARTICLE X
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS........................................................ 32
10.1 No Participation in Management; No Personal Liability...................................... 32
10.2 Duties and Conflicts....................................................................... 33
ARTICLE XI
GRANT OF RIGHTS TO LIMITED PARTNERS................................................................... 33
11.1 Grant of Rights............................................................................ 33
11.2 Terms of Rights............................................................................ 33
11.3 Reissuance or Reallocation of Common Units................................................. 33
11.1A Grant of Rights............................................................................ 33
11.2A Terms of Convertible Preferred Rights...................................................... 34
11.3A Reissuance or Reallocation of Convertible Preferred Units.................................. 34
ARTICLE XII
GRANT OF RIGHTS TO LIMITED PARTNERS HOLDING SERIES C
PREFERRED UNITS; REDEMPTION OF SERIES C PREFERRED UNITS............................................... 34
12.1 Grant of Rights............................................................................ 34
12.2 Terms of Rights............................................................................ 34
12.3 Reissuance or Reallocation of Series C Preferred Units..................................... 34
ARTICLE XIII
PARTNER REPRESENTATIONS AND WARRANTIES................................................................ 35
(a) Organization.......................................................................... 35
(b) Due Authorization; Binding Agreement.................................................. 35
</TABLE>
Appendix F-iv
<PAGE>
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(c) Consents and Approvals................................................................ 35
ARTICLE XIV
GENERAL PROVISIONS.................................................................................... 35
14.1 Notices.................................................................................... 35
14.2 Successors................................................................................. 35
14.3 Effect and Interpretation.................................................................. 35
14.4 Counterparts............................................................................... 35
14.5 Partners Not Agents........................................................................ 35
14.6 Entire Understanding, Etc.................................................................. 35
14.7 Amendments................................................................................. 35
14.8 Severability............................................................................... 37
14.9 Trust Provision............................................................................ 37
14.10 Pronouns and Headings...................................................................... 37
14.11 Assurances................................................................................. 37
14.12 Remedies Cumulative........................................................................ 37
14.13 Construction............................................................................... 37
14.14 Incorporation by Reference................................................................. 37
14.15 Waiver of Action for Partition............................................................. 37
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
EXHIBITS
A Common Units, Preferred Units, Convertible Preferred Units and Series C Preferred Units
B Allocations
C Rights Terms
D Conversion Rights of Series C Preferred Units
E Section 6.2(e) Agreements
F Conversion Rights of Convertible Preferred Units
G Form of Specimen [Common, Series B, Preferred, Etc.] Unit Certificate
SCHEDULES TO EXHIBIT C
1 Exchange Exercise Notice
2 Election Notice
3 Registration Rights Agreement
</TABLE>
Appendix F-v
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
PRIME RETAIL, L.P.
THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is made
and entered into as of the day of , .
W I T N E S S E T H:
WHEREAS, the Partnership's Agreement of Limited Partnership dated March 22,
1994 (the "Original Agreement"), was amended by a First Amendment thereto dated
as of June 24, 1996, and amended and restated in its entirety as of September 7,
1997 (the "September 9, 1997 Agreement") to provide for, among other things, the
creation and issuance of Series C Preferred Units and the admission of the
holder or holders thereof as a limited partner or limited partners of the
Partnership;
WHEREAS, the Partnership entered into a certain amended and restated
agreement and plan of merger dated as of February 1, 1998 (the "Merger
Agreement"), pursuant to which the Partnership merged with and into Horizon
Limited Partnership, which merger is effective as of the date hereof;
WHEREAS, the Partners of the Partnership desire to amend and restate the
September 9, 1997 Agreement to reflect the consummation of the merger of the
Partnership, the Special Distribution (as defined herein), the Common
Distribution (as defined herein) and the other transactions contemplated by the
Merger Agreement, and the admittance of the persons listed on Exhibit A as
limited partners in the Partnership;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the partners of the
Partnership hereto, intending legally to be bound, hereby amend and restate the
September 9, 1997 Agreement and otherwise agree as follows:
ARTICLE I
DEFINITIONS; ETC.
1.1 DEFINITIONS. Except as otherwise herein expressly provided, the
following terms and phrases shall have the meanings set forth below:
"Accountants" shall mean the firm or firms of independent certified public
accountants selected by the General Partner on behalf of the Partnership and the
Property Partnerships to audit the books and records of the Partnership and the
Property Partnerships and to prepare statements and reports in connection
therewith.
"Act" shall mean the Revised Uniform Limited Partnership Act as enacted in
the State of Delaware, and as the same may hereafter be amended from time to
time.
"Adjusted Capital Account Deficit" shall mean, with respect to any Partner,
the deficit balance, if any, in such Partner's Capital Account as of the end of
any relevant Partnership taxable year and after giving effect to the following
adjustments:
(a) credit to such Capital Account any amounts which such Partner is
obligated or treated as obligated to restore with respect to any deficit
balance in such Capital Account pursuant to this Agreement or the provisions
of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or is deemed to be
obligated to restore with respect to any deficit balance pursuant to the
penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the
Regulations; and
Appendix F-1
<PAGE>
(b) debit to such Capital Account the items described in Sections
1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations.
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the requirements of the alternate test for economic effect contained
in Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted
consistently therewith.
"Administrative Expenses" shall mean (i) all administrative and operating
costs and expenses incurred by the Partnership, (ii) all administrative,
operating and other costs and expenses incurred by the Property Partnerships,
which expenses are being assumed by the Partnership pursuant to Section 7.1
hereof, (iii) those administrative costs and expenses of the General Partner,
including salaries paid to officers of the General Partner, and accounting and
legal expenses undertaken by the General Partner on behalf or for the benefit of
the Partnership, and (iv) to the extent not included in clause (iii) above, REIT
Expenses.
"Affiliate" shall mean, with respect to any Partner (or with respect to any
other Person whose affiliates are relevant for purposes of any of the provisions
of this Agreement), (i) any member of the Immediate Family of such Partner or a
trust established for the benefit of such member; (ii) any beneficiary of a
trust described in (i); or (iii) any Entity which directly or indirectly through
one or more intermediaries, Controls, is Controlled by, or is under common
Control with, any Partner or any Person referred to in the preceding clauses (i)
and (ii).
"Agreement" shall mean this Second Amended and Restated Agreement of Limited
Partnership, as originally executed and as amended, modified, supplemented or
restated from time to time, as the context requires.
"Antidilution Provisions" shall mean the provisions of Section XI of Exhibit
C hereto.
"Audited Financial Statements" shall mean financial statements (which shall
consist of a balance sheet, statement of income, statement of partners' equity
and statement of cash flows) prepared in accordance with GAAP.
"Bankruptcy" shall mean, with respect to any Partner, (i) the commencement
by such Partner of any proceeding seeking relief under any provision or chapter
of the federal Bankruptcy Code or any other federal or state law relating to
insolvency, bankruptcy or reorganization; (ii) an adjudication that such Partner
is insolvent or bankrupt; (iii) the entry of an order for relief under the
federal Bankruptcy Code with respect to such Partner; (iv) the filing of any
petition or the commencement of any case or proceeding against such Partner
seeking relief under any provision or chapter of the federal Bankruptcy Code or
other federal or state laws relating to insolvency, bankruptcy or receivership,
unless such petition and the case or proceeding initiated thereby are dismissed
within ninety (90) days from the date of such filing; (v) the filing of an
answer by such Partner admitting the allegations of any petition described in
(iv) above; (vi) the appointment of a trustee, receiver or custodian for all or
substantially all of the assets of such Partner unless such appointment is
vacated or dismissed within ninety (90) days from the date of such appointment
but not less than five (5) days before the proposed sale of any assets of such
Partner; (vii) the insolvency of such Partner or the execution by such Partner
of a general assignment for the benefit of creditors; (viii) the convening by
such Partner of a meeting of its creditors, or any class thereof, for purposes
of effecting a moratorium upon or extension or composition of its debts; (ix)
the levy, attachment, execution or other seizure of substantially all of the
assets of such Partner where such seizure is not discharged within thirty (30)
days thereafter; or (x) the admission by such Partner in writing of its
inability to pay its debts as they mature or that it is generally not paying its
debts as they become due.
"Capital Account" shall mean, with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following provisions:
(i) To each Partner's Capital Account there shall be credited such
Partner's Capital Contributions, such Partner's distributive share of Net
Income and any items in the nature of income or gain
Appendix F-2
<PAGE>
which are specially allocated pursuant to Section II or III of Exhibit B
hereto and the amount of any Partnership liabilities assumed by such Partner
or which are secured by any asset distributed to such Partner.
(ii) To each Partner's Capital Account there shall be debited the amount
of cash and the Gross Asset Value of any Property distributed to such
Partner pursuant to any provision of this Agreement, such Partner's
distributive share of Net Losses and any items in the nature of expenses or
losses which are specially allocated pursuant to Section II or III of
Exhibit B hereto, and the amount of any liabilities of such Partner assumed
by the Partnership or which are secured by any asset contributed by such
Partner to the Partnership.
(iii) In the event all or a portion of an Interest in the Partnership is
transferred in accordance with the terms of this Agreement, the transferee
shall succeed to the Capital Account of the transferor to the extent it
relates to the transferred Interest.
(iv) In determining the amount of any liability for purposes of the
foregoing subparagraphs (i) and (ii), there shall be taken into account Code
Section 752(c) and any other applicable provisions of the Code and
Regulations.
For purposes of this definition, in the event that (i) the date on which a
Limited Partner is paid, or constructively receives (if earlier), an amount of
Net Cash Flow under Section 6.2(e) in respect of subsection (a)(vii) of Section
6.2 is after the date on which the Cash Conversion Price is paid and (ii) such
Limited Partner otherwise owns no Common Units at such time, such distribution
of Net Cash Flow shall be treated as a distribution to the General Partner. The
foregoing provisions and the other provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with Sections 1.704-1(b)
and 1.704-2 of the Regulations, and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the General Partner shall
reasonably determine that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed assets or which are assumed by the Partnership, the
General Partner or any Limited Partner) are computed in order to comply with
such Regulations, the General Partner may make such modification; PROVIDED that
it does not have an adverse effect on the amounts distributable to any Partner
pursuant to Article VIII hereof upon the dissolution of the Partnership. The
General Partner also shall (i) make any adjustments that are necessary or
appropriate to maintain equality between the Capital Accounts of the Partners
and the amount of Partnership capital reflected on the Partnership's balance
sheet, as computed for book purposes, in accordance with Section
1.704-1(b)(2)(iv)(q) of the Regulations, and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Sections 1.704-1(b) or 1.704-2 of the Regulations.
"Capital Contribution" shall mean, with respect to any Partner, the amount
of money and the initial Gross Asset Value of any asset other than money, net of
the amount of any liabilities to which such asset is subject, contributed or
treated as contributed to the Partnership with respect to the Partnership
Interest held by such Partner. The principal amount of a promissory note that is
not readily tradable on an established securities market and that is contributed
to the Partnership by the maker of the note shall not be included in the Capital
Account of any Person until the Partnership makes a taxable disposition of the
note or until (and to the extent) such Partner makes principal payments on the
note, all in accordance with Section 1.704-1(b)(2)(iv)(d)(2) of the Regulations.
"Certificate" shall mean the Certificate of Limited Partnership establishing
the Partnership, as filed with the office of the Delaware Secretary of State, as
it may be amended from time to time in accordance with the terms of this
Agreement and the Act.
"Closing Price" on any date shall mean the last sale price, regular way, or,
in case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in
Appendix F-3
<PAGE>
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or, if
the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities exchange,
the last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System or, if such
system is no longer in use, the principal other automated quotations system that
may then be in use or, if the Common Stock is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock as such person is
selected from time to time by the Board of Directors of the General Partner.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time or any successor statute thereto.
"Common Distribution" shall mean the Partnership distribution described in
Section 6.2(c) hereof.
"Common Stock" shall mean the shares of the common stock, par value $.01 per
share, of the General Partner.
"Common Units" shall mean the Partnership Units designated as Common Units
under this Agreement, received by the Partners in exchange for their capital
contributions or a portion of their capital contributions or pursuant to the
Merger Agreement and having the rights described in this Agreement. The number
of Common Units outstanding, and the allocation of Common Units to each Partner,
is as set forth opposite its or his name in Exhibit A, as amended by the General
Partner from time to time.
"Consent of the Partners" means the written consent of a
Majority-in-Interest of the Partners, which consent shall be obtained prior to
the taking of any action for which it is required by this Agreement and may be
given or withheld by a Majority-in-Interest of the Partners, unless otherwise
expressly provided herein, in their sole and absolute discretion.
"Contributed Partnership Interests" shall mean, with respect to each Limited
Partner, the partnership interests in the Property Partnership(s) contributed to
the Partnership by such Limited Partner on the date of formation of the
Partnership.
"Control" shall mean the ability, whether by the direct or indirect
ownership of shares or other equity interests, by contract or otherwise, to
elect a majority of the directors of a corporation, to select the managing
partner of a partnership, or otherwise to select, or have the power to remove
and then select, a majority of those persons exercising governing authority over
an Entity. In the case of a limited partnership, the sole general partner, all
of the general partners to the extent each has equal management control and
authority, or the managing general partner or managing general partners thereof
shall be deemed to have control of such partnership and, in the case of a trust,
any trustee thereof or any Person having the right to select any such trustee
shall be deemed to have control of such trust.
"Convertible Preferred Distribution" means an amount equal to the quarterly
dividend payable in respect of one share of Convertible Preferred Stock of the
General Partner pursuant to Section 4.5.1(a) of the General Partner's Articles
of Incorporation.
"Convertible Preferred Distribution Shortfall" shall have the meaning set
forth in Section 6.2(a)(iii).
"Convertible Preferred Rights" shall have the meaning set forth in Section
11.1A.
"Convertible Preferred Stock" means the Series B Cumulative Participating
Convertible Preferred Stock, par value $.01 per share, of the General Partner.
Appendix F-4
<PAGE>
"Convertible Preferred Unit Redemption Amount" means, with respect to any
Convertible Preferred Unit, the amount payable by the General Partner on account
of the redemption of one share of Convertible Preferred Stock pursuant to
Section 4.5.3 of the General Partner's Articles of Incorporation.
"Convertible Preferred Units" shall mean the Partnership Units designated as
Convertible Preferred Units under this Agreement having the rights described in
this Agreement. The number of Convertible Preferred Units outstanding from time
to time is as set forth on Exhibit A, as amended by the General Partner from
time to time.
"Current Per Share Market Price" on any date shall mean the average of the
Closing Price for the five consecutive Trading Days ending on such date.
"Depreciation" shall mean, with respect to any asset of the Partnership for
any Partnership taxable year or other period, the depreciation, depletion,
amortization or other cost recovery deduction, as the case may be, allowed or
allowable for Federal income tax purposes in respect of such asset for such
Partnership taxable year or other period; PROVIDED, HOWEVER, that if there is a
difference between the Gross Asset Value and the adjusted tax basis of such
asset at the beginning of such Partnership taxable year or other period,
Depreciation for such asset shall be an amount that bears the same ratio to the
beginning Gross Asset Value of such asset as the Federal income tax
depreciation, depletion, amortization or other cost recovery deduction for such
Partnership taxable year or other period bears to the beginning adjusted tax
basis of such asset; PROVIDED, FURTHER, that if the Federal income tax
depreciation, depletion, amortization or other cost recovery deduction for such
asset for such Partnership taxable year or other period is zero, Depreciation
for such asset shall be determined with reference to the beginning Gross Asset
Value of such asset using any reasonable method selected by the General Partner.
"Entity" shall mean any general partnership, limited partnership,
corporation, joint venture, trust, business trust, limited liability company,
cooperative or association.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time (or any corresponding provisions of succeeding laws).
"GAAP" shall mean generally accepted accounting principles consistently
applied.
"General Partner" shall mean Prime Retail, Inc., a Maryland corporation, and
any other Person who is admitted as a successor general partner of the
Partnership at the time of reference thereto.
"Gross Asset Value" shall mean, with respect to any asset of the
Partnership, such asset's adjusted basis for Federal income tax purposes, except
as follows:
(a) the initial Gross Asset Value of any asset contributed by a Partner
to the Partnership shall be the gross fair market value of such asset as
determined by the contributing Partner and the Partnership;
(b) if the General Partner reasonably determines that an adjustment is
necessary or appropriate to reflect the relative economic interests of the
Partners, the Gross Asset Values of all Partnership assets shall be adjusted
to equal their respective gross fair market values, as reasonably determined
by the General Partner, as of the following times:
(i) a Capital Contribution (other than a DE MINIMIS Capital
Contribution) to the Partnership by a new or existing Partner as
consideration for a Partnership Interest;
(ii) the distribution by the Partnership to a Partner of more than a
DE MINIMIS amount of Partnership assets as consideration for the
redemption of a Partnership Interest; and
(iii) the liquidation of the Partnership within the meaning of
Section 1.704-1(b)(2)(ii)(g) of the Regulations;
Appendix F-5
<PAGE>
(c) the Gross Asset Values of Partnership assets distributed to any
Partner shall be the gross fair market values of such assets (taking Section
7701(g) of the Code into account) as reasonably determined by the General
Partner as of the date of distribution; and
(d) the Gross Asset Values of Partnership assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations (See Exhibit B);
PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant to
this paragraph (d) to the extent that the General Partner reasonably
determines that an adjustment pursuant to paragraph (b) above is necessary
or appropriate in connection with a transaction that would otherwise result
in an adjustment pursuant to this paragraph (d).
At all times, Gross Asset Values shall be adjusted by any Depreciation taken
into account with respect to the Partnership's assets for purposes of computing
Net Income and Net Loss. Any adjustment to the Gross Asset Values of Partnership
assets shall require an adjustment to the Partners' Capital Accounts; as for the
manner in which such adjustments are allocated to the Capital Accounts, see
Exhibit B.
"Hart Scott Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Horizon Limited Partnership" shall mean Horizon/Glen Outlet Centers Limited
Partnership, a Delaware limited partnership.
"Horizon Properties" shall mean the Partnership property acquired by the
Partnership pursuant to the Merger.
"Immediate Family" shall mean, with respect to any Person, such Person's
spouse, parents, parents-in-law, descendants, nephews, nieces, brothers,
sisters, brothers-in-law, sisters-in-law, stepchildren, sons-in-law and
daughters-in-law.
"Incentive Option" means an option to purchase Common Stock granted under
the Stock Incentive Plan.
"Incentive Option Agreement" means the Incentive Option Agreement to be used
under the Stock Incentive Plan.
"Lien" shall mean any liens, security interests, mortgages, deeds of trust,
charges, claims, encumbrances, pledges, options, rights of first offer or first
refusal and any other rights or interests of others of any kind or nature,
actual or contingent, or other similar encumbrances of any nature whatsoever.
"Limited Partner" shall mean any Person named as a "Limited Partner" on
Exhibit A hereto, as it may be amended from time to time, or any Person admitted
as a Substituted Limited Partner or additional Limited Partner, in such Person's
capacity as a limited partner of the Partnership.
"Liquidating Events" shall have the meaning set forth in Section 3.2.
"Liquidating Trustee" shall mean the General Partner or, if there is no
remaining General Partner, such Person as is selected as the Liquidating Trustee
hereunder by the Consent of the Partners, which Person may include an Affiliate
of the General Partner or any Limited Partner; PROVIDED such Liquidating Trustee
agrees in writing to be bound by the terms of this Agreement.
"Major Decisions" shall have the meaning set forth in Section 7.3 hereof.
"Majority-in-Interest of the Partners" shall mean Partner(s) who hold in the
aggregate more than fifty percent (50%) of the Common Units.
"Merger" shall mean the merger of the Partnership and Horizon Limited
Partnership pursuant to the Merger Agreement.
Appendix F-6
<PAGE>
"Merger Agreement" has the meaning set forth in the Recitals hereof.
"Minimum Gain Capital Account" shall mean, with respect to a Partner, the
sum of such Partner's Capital Account plus such Partner's share of Partner
Minimum Gain, as described in Section 1.704-2(i)(5) of the Regulations, and
Partnership Minimum Gain, as described in Section 1.704-2(g) of the Regulations.
For purposes of determining Minimum Gain Capital Account, Nonrecourse Deductions
and Partner Nonrecourse Deductions for a Partnership taxable year or other
applicable period shall be allocated in a manner that is consistent with the
method of allocation adopted under Section 9.4 or Section 9.6(c) (to the extent
Section 9.4 or Section 9.6(c) is applicable to such Partnership taxable year or
other applicable period).
"Net Cash Flow" means, with respect to the applicable period of measurement
(i.e., any period beginning on the first day of the fiscal year, quarter or
other period commencing immediately after the last day of the fiscal year,
quarter or other applicable period for purposes of the most recent calculation
of Net Cash Flow for or with respect to which a distribution has been made, and
ending on the last day of the fiscal year, quarter or other applicable period
immediately preceding the date of the calculation) the excess, if any, as of
such date, of (a) the gross cash receipts of the Partnership for such period
from all sources whatsoever, including, without limitation, the following:
(i) all rents, revenues, income and proceeds derived by the Partnership
from its operations, including, without limitation, distributions received
by the Partnership from any Entity in which the Partnership has an interest;
(ii) all proceeds and revenues received by the Partnership on account of any
sales of property of the Partnership or as a refinancing of or payments of
principal, interest, costs, fees, penalties or otherwise on account of any
borrowings or loans made by the Partnership or financings or refinancings of
any property of the Partnership; (iii) the amount of any insurance proceeds
and condemnation awards received by the Partnership; (iv) all capital
contributions or loans received by the Partnership from its Partners; (v)
any reduction in the cash amounts previously reserved by the Partnership and
described in subsection (b)(ix) below, if the General Partner determines
that such amounts are no longer needed; and (vi) the proceeds of liquidation
of the Partnership's property in accordance with this Agreement,
over (b) the sum of:
(i) all operating costs and expenses of the Partnership and capital
expenditures made during such period (without deduction, however, for any
capital expenditures, charges for depreciation or other expenses not paid in
cash or expenditures from reserves described in (ix) below); (ii) all costs
and expenses expended or paid during such period in connection with the sale
or other disposition, or financing or refinancing, of property of the
Partnership or the recovery of insurance or condemnation proceeds; (iii) all
fees provided for under this Agreement; (iv) all debt service, including
principal and interest, paid during such period on all indebtedness of the
Partnership; (v) all capital contributions, advances, reimbursements or
similar payments made to any Entity in which the Partnership has an
interest; (vi) all loans made by the Partnership in accordance with the
terms of this Agreement; (vii) all reimbursements to the General Partner or
its Affiliates during such period, including Administrative Expenses
(exclusive of REIT Expenses) to the extent not paid or payable by the
General Partner pursuant to the last sentence of Section 7.1; (viii) any
distributions pursuant to Section 6.2(f); (ix) any increases in reserves
reasonably determined by the General Partner to be necessary for working
capital, capital improvements, payments of periodic expenditures, debt
service or other purposes for the Partnership or any Person in which the
Partnership has an interest; and (x) any amounts paid pursuant to Section
4.8(b) in redemption of any Preferred Units or Convertible Preferred Units.
"Net Income or Net Loss" shall mean, for each Partnership taxable year or
other applicable period, an amount equal to the Partnership's net income or loss
for such year or period as determined for federal income tax purposes by the
General Partner, determined in accordance with Section 703(a) of the Code
Appendix F-7
<PAGE>
(for this purpose, all items of income, gain, loss or deduction required to be
stated separately pursuant to Section 703(a) of the Code shall be included in
taxable income or loss), adjusted as follows: (i) by including as an item of
gross income any tax-exempt income received by the Partnership and not otherwise
taken into account in computing Net Income or Net Loss; (ii) by treating as a
deductible expense any expenditure of the Partnership described in Section
705(a)(2)(B) of the Code and not otherwise taken into account in computing Net
Income or Net Loss, including amounts paid or incurred to organize the
Partnership (unless an election is made pursuant to Section 709(b) of the Code)
or to promote the sale of interests in the Partnership; (iii) by treating
deductions for any losses incurred in connection with the sale or exchange of
Partnership property which are disallowed pursuant to Sections 267(a)(1) or
707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the
Code; (iv) by taking into account Depreciation in lieu of depreciation,
depletion, amortization, and other cost recovery deductions taken into account
in computing taxable income or loss; (v) by computing gain or loss resulting
from any disposition of Partnership property with respect to which gain or loss
is recognized for federal income tax purposes by reference to the Gross Asset
Value of such property rather than its adjusted tax basis; (vi) in the event of
an adjustment of the Gross Asset Value of any Partnership asset which requires
that the Capital Accounts of the Partnership be adjusted pursuant to Sections
1.704-1(b)(2)(iv)(e), (f) and (m) of the Regulations, by taking into account the
amount of such adjustment as additional Net Income or Net Loss pursuant to
Exhibit B; and (vii) subject to the immediately preceding clause (vi), by
excluding the Partnership items of income, gain, loss or deduction that are
specially allocated pursuant to Sections II or III of Exhibit B attached hereto.
"Nonrecourse Deductions" shall have the meaning set forth in Sections
1.704-2(b)(1) and 1.704-2(c) of the Regulations.
"Nonrecourse Liabilities" shall have the meaning set forth in Section
1.704-2(b)(3) of the Regulations.
"Original Agreement" shall have the meaning set forth in the Recitals to
this Agreement.
"Partner Minimum Gain" shall mean an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Section 1.704-2(i)(3) of the Regulations.
"Partner Nonrecourse Debt" shall have the meaning set forth in Section
1.704-2(b)(4) of the Regulations.
"Partner Nonrecourse Deductions" shall have the meaning set forth in Section
1.704-2(i)(2) of the Regulations.
"Partners" shall mean the General Partner and the Limited Partners.
"Partnership" shall mean the limited partnership constituted by the Original
Agreement, as such limited partnership may from time to time be constituted.
"Partnership Interest" shall mean the ownership interest now or hereafter
held by a Partner in the Partnership from time to time pursuant to this
Agreement, including, but not limited to, Partnership Units, exchange rights,
capital accounts, and profits and distributions relating thereto, all other
payments (if any) due or to become due in respect of such ownership interest
pursuant to this Agreement, all rights, powers and remedies of a Partner under
this Agreement, and all proceeds of all or any of the foregoing.
"Partnership Minimum Gain" shall have the meaning set forth in Sections
1.704-2(b)(2) and (d) of the Regulations.
"Partnership Payment Date" shall mean the payment date established by the
General Partner for the distribution of Net Cash Flow pursuant to Section 6.2
hereof, which payment date shall be the same as the payment date established by
the General Partner for a distribution to its shareholders of some or all of its
portion of such distribution.
Appendix F-8
<PAGE>
"Partnership Record Date" for any distribution shall mean the same date as
the record date established by the General Partner for a distribution to its
shareholders.
"Partnership Units" shall mean fractional, undivided shares of Partnership
Interests issued pursuant to this Agreement. The ownership of Partnership Units
of any class or series may be evidenced by a certificate for such Partnership
Units in substantially the form of Exhibit G (including the restrictive legends
thereon), or as the General Partner may determine from time to time.
"Permitted Transferee" shall mean any Person to whom any Partnership Units
are transferred in a Transfer permitted under the terms of this Agreement.
"Person" shall mean any individual or Entity.
"Preferred Distribution" means an amount equal to the quarterly dividend
payable in respect of one share of Preferred Stock of the General Partner
pursuant to Section 4.3.1(a) of the General Partner's Articles of Incorporation.
"Preferred Distribution Shortfall" shall have the meaning set forth in
Section 6.2.
"Preferred Stock" means the Series A Senior Cumulative Preferred Stock, par
value $.01 per share, of the General Partner.
"Preferred Unit Redemption Amount" means, with respect to any Preferred
Unit, the amount payable by the General Partner on account of the redemption of
one share of Preferred Stock pursuant to Section 4.3.3 of the General Partner's
Articles of Incorporation.
"Preferred Units" shall mean the Partnership Units designated as Preferred
Units under this Agreement having the rights described in this Agreement. The
number of Preferred Units outstanding from time to time is as set forth on
Exhibit A, as amended by the General Partner.
"Prime/Horizon Merger" shall mean the "Prime/Horizon Merger" as defined in
the Merger Agreement.
"Property" shall mean any Shopping Center Project or other real estate
project in which the Partnership or any Property Partnership, directly or
indirectly, acquires ownership of a fee or leasehold interest.
"Property Partnership Interests" shall mean and include the interest of the
Partnership as a partner or other equity participant in any Property Partnership
currently owned or hereafter acquired by the Partnership.
"Property Partnerships" shall mean and include any partnership or other
Entity in which the Partnership, directly or indirectly, is or becomes a partner
or other equity participant and which is formed for the purpose of acquiring,
developing or owning a Property or a proposed Property.
"Purchase Price" shall have the meaning set forth in Exhibit C.
"Quarter" shall mean each of the three (3) month periods ending on March 31,
June 30, September 30 and December 31 of any year.
"Regulations" shall mean the final, temporary or proposed Income Tax
Regulations promulgated under the Code, as such regulations may be amended from
time to time (including corresponding provisions of succeeding regulations).
"Regulatory Allocations" shall have the meaning set forth in Exhibit B.
"REIT" shall mean a real estate investment trust as defined in Section 856
of the Code.
"REIT Expenses" shall mean (i) costs and expenses relating to the formation
and continuity of existence of the General Partner and its subsidiaries, if any,
(which subsidiaries shall, for purposes of this
Appendix F-9
<PAGE>
definition be included within the definition of General Partner), including
taxes, fees and assessments associated therewith and any and all costs, expenses
or fees payable to any director, officer or trustee of the General Partner or
such subsidiaries (including, without limitation, any costs of indemnification),
(ii) costs and expenses relating to any offer or registration of securities by
the General Partner and all statements, reports, fees and expenses incidental
thereto, including, without limitation, underwriting discounts and selling
commissions applicable to any such offer of securities and any costs and
expenses associated with any claims made by any holder of such securities or any
underwriter or placement agent therefor, (iii) costs and expenses associated
with the preparation and filing of any periodic reports by the General Partner
under federal, state or local laws or regulations, including filings with the
SEC, (iv) costs and expenses associated with compliance by the General Partner
with laws, rules and regulations promulgated by any regulatory body, including
the SEC, and (v) all other operating or administrative costs of the General
Partner incurred in the ordinary course of its business.
"REIT Requirements" shall have the meaning set forth in Section 6.2(b)
hereof.
"Rights" shall have the meaning set forth in Section 11.1 hereof.
"SEC" shall mean the United States Securities and Exchange Commission.
"Section 704(c) Tax Items" shall have the meaning set forth in Exhibit B.
"September 9, 1997 Agreement" has the meaning set forth in the Recitals to
this Agreement.
"Series C Preferred Distribution" means an amount equal to the quarterly
dividend payable in respect of one share of Series C Preferred Stock pursuant to
Section 3 of the General Partner's Articles of Incorporation.
"Series C Preferred Distribution Shortfall" shall have the meaning set forth
in Section 6.2.
"Series C Preferred Purchase Agreement" shall have the meaning set forth in
Section 4.2.
"Series C Preferred Rights" shall have the meaning set forth in Section
12.1.
"Series C Preferred Stock" shall mean the Series C Cumulative Convertible
Redeemable Preferred Stock, $.01 par value, of the General Partner.
"Series C Preferred Unit Redemption Amount" means, with respect to any
Series C Preferred Unit, the amount payable by the General Partner with respect
to the redemption of a share of Series C Preferred Stock pursuant to Section
5(a) of the General Partner's Articles of Incorporation and subject to Sections
5(b) and 5(c) thereof, using the amount, if any, of Series C Preferred
Distribution shortfall as the amount of accrued and unpaid dividends thereon.
"Series C Preferred Units" shall mean the Partnership Units designated as
Series C Preferred Units under this Agreement, having the rights described in
this Agreement. The number of Series C Preferred Units outstanding from time to
time is set forth in Exhibit A hereto, as amended by the General Partner from
time to time.
"Service" shall mean the Internal Revenue Service and any successor
governmental agency.
"Shopping Center Project" shall mean any shopping center, including
construction and improvement activities undertaken with respect thereto and
off-site improvements, on-site improvements, structures, buildings and/or
related parking and other facilities.
"Special Distribution" shall mean the Partnership distribution described in
Section 6.2(b) hereof.
"Stock Incentive Plan" means the Partnership's 1994 Stock Incentive Plan,
employee bonus plan and any other plan adopted from time to time by the General
Partner pursuant to which the General Partner issues Common Stock or options to
acquire Common Stock to employees or directors in partial consideration for
services.
Appendix F-10
<PAGE>
"Substituted Limited Partner" means any Person who (i) is permitted to
become a Limited Partner pursuant to the terms of Sections 9.2 and 9.3 and (ii)
agrees in writing to be bound by the terms of this Agreement by execution of a
copy of this Agreement or by another written undertaking acceptable to the
General Partner.
"Tax Items" shall have the meaning set forth in Exhibit B.
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close.
"Transfer" as a noun, shall mean any sale, assignment, conveyance, pledge,
hypothecation, gift, encumbrance or other transfer, and as a verb, shall mean to
sell, assign, convey, pledge, hypothecate, give, encumber or otherwise transfer.
Certain additional terms and phrases have the meanings set forth in Exhibit
B, C or D.
1.2 EXHIBITS, ETC. References to "Exhibit" or to a "Schedule" are, unless
otherwise specified, to one of the Exhibits or Schedules attached to this
Agreement, and references to an "Article" or a "Section" are, unless otherwise
specified, to one of the Articles or Sections of this Agreement. Each Exhibit
and Schedule attached hereto is hereby incorporated herein by reference as if
fully set forth herein.
ARTICLE II
ORGANIZATION
2.1 FORMATION AND CONTINUATION. The parties hereto do hereby continue the
Partnership as a limited partnership pursuant to the provisions of the Act, and
all other pertinent laws of the State of Delaware, for the purposes and upon the
terms and conditions hereinafter set forth. The Partners agree that the rights
and liabilities of the Partners shall be as provided in the Act except as
otherwise herein expressly provided. Promptly upon the execution and delivery
hereof, the General Partner shall cause any requisite amendment to the
Certificate of Limited Partnership and such other notice, instrument, document,
or certificate as may be required by applicable law, and which may be necessary
to enable the Partnership to conduct its business, and to own its properties,
under the Partnership name, to be filed or recorded in all appropriate public
offices.
2.2 NAME. The business of the Partnership shall be conducted under the
name of Prime Retail, L.P. or such other name as the General Partner may select,
and all transactions of the Partnership, to the extent permitted by applicable
law, shall be carried on and completed in such name.
2.3 CHARACTER OF THE BUSINESS. The purpose of the Partnership shall be to
acquire, hold, own, develop, construct, improve, maintain, operate, sell, lease,
transfer, encumber, convey, exchange, mortgage, pledge and otherwise dispose of
or deal with (either directly or indirectly through one or more Property
Partnerships) the Properties; to acquire, hold, own, develop, construct,
improve, maintain, operate, manage, sell, lease, transfer, encumber, convey,
exchange, mortgage, pledge and otherwise dispose of or deal with (either
directly or indirectly through one or more Property Partnerships) real and
personal property of all kinds; to exercise all of the powers of a partner in
Property Partnerships; to acquire, own, deal with and dispose of Property
Partnership Interests; to undertake such other activities as may be necessary,
advisable, desirable or convenient to the business of the Partnership, and to
engage in such other activities as shall be necessary or desirable to effect the
foregoing purposes. The Partnership shall have all powers necessary or desirable
to accomplish the purposes herein set forth. In connection with the foregoing,
but subject to all of the terms, covenants, conditions and limitations contained
in this Agreement, the Partnership shall have full power and authority, directly
or through its interest in Property
Appendix F-11
<PAGE>
Partnerships, to enter into, perform, and carry out contracts of any kind, to
borrow money and to issue evidences of indebtedness, whether or not secured by
mortgage, trust deed, pledge or other lien, and, directly or indirectly, to
acquire and construct additional Properties necessary or useful in connection
with its business.
2.4 LOCATION OF THE PRINCIPAL PLACE OF BUSINESS. The location of the
principal place of business of the Partnership shall be at 100 East Pratt
Street, 19th Floor, Baltimore, Maryland, 21202 or such other location as shall
be selected from time to time by the General Partner in its sole discretion.
2.5 REGISTERED AGENT AND REGISTERED OFFICE. The registered agent of the
Partnership in the State of Delaware shall be The Corporation Trust Company,
1209 Orange Street, Wilmington, Delaware 19801 or such other Person as the
General Partner may select in its sole discretion. The registered office of the
Partnership in the State of Delaware shall be The Corporation Trust Company,
1209 Orange Street, Wilmington, Delaware 19801 or such other location as the
General Partner may select in its sole and absolute discretion.
2.6 POWER OF ATTORNEY.
(a) Each Limited Partner and each assignee of a Limited Partner hereby
constitutes and appoints the General Partner, any Liquidating Trustee and
authorized officers and attorneys-in-fact of each, and each of those acting
singly, in each case with full power of substitution, as its true and lawful
agent and attorney-in-fact, with full power and authority in its name, place
and stead to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate and all amendments or restatements thereof) that the General
Partner or the Liquidating Trustee deems appropriate or necessary to
form, qualify or continue the existence or qualification of the
Partnership as a limited partnership (or a partnership in which the
Limited Partners have limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may or plans to conduct
business or own property; (b) all instruments that the General Partner or
the Liquidating Trustee deems appropriate or necessary to reflect any
amendment, change, modification or restatement of this Agreement in
accordance with its terms; (c) all conveyances and other instruments or
documents that the General Partner deems appropriate or necessary to
reflect the dissolution and liquidation of the Partnership pursuant to
the terms of this Agreement, including, without limitation, a certificate
of cancellation; (d) all instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant to, or other
events described in, Articles IV, VIII or IX hereof or the Capital
Contribution of any Partner; and (e) all certificates, documents and
other instruments relating to the determination of the rights,
preferences and privileges of Partnership Interests; and
(ii) execute, swear to, seal, acknowledge and file all ballots,
consents, approvals, waivers, certificates and other instruments
appropriate or necessary, in the sole and absolute discretion of the
General Partner or any Liquidating Trustee, to evidence, confirm or
ratify any vote, consent, approval, agreement or other action which is
made or given by the Partners hereunder or is consistent with the terms
of this Agreement or appropriate or necessary, in the sole discretion of
the General Partner or any Liquidating Trustee, to effect the terms or
intent of this Agreement.
Nothing contained herein shall be construed as authorizing the General
Partner or any Liquidating Trustee to amend this Agreement except in
accordance with Section 14.7 hereof.
(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, in recognition of the fact that each
of the Partners will be relying upon the power of the General Partner and
any Liquidating Trustee to act as contemplated by this Agreement in any
filing or other action by it on behalf of the Partnership, and it shall
survive and not be affected by the subsequent incapacity of any Limited
Partner or assignee of a Limited Partner and the transfer of all
Appendix F-12
<PAGE>
or any portion of such Limited Partner's or assignee's Partnership Units and
shall extend to such Limited Partner's or assignee's heirs, successors,
assigns and personal representatives. Each such Limited Partner or assignee
of a Limited Partner hereby agrees to be bound by any representation made by
the General Partner or any Liquidating Trustee, acting in good faith
pursuant to such power of attorney, and each such Limited Partner or
assignee hereby waives any and all defenses which may be available to
contest, negate or disaffirm the action of the General Partner or any
Liquidating Trustee, taken in good faith under such power of attorney and in
accordance with the provisions of this Agreement. Each Limited Partner or
assignee of a Limited Partner shall execute and deliver to the General
Partner or the Liquidating Trustee, within fifteen (15) days after receipt
of the General Partner's or Liquidating Trustee's request therefor, such
further designation, powers of attorney and other instruments as the General
Partner or the Liquidating Trustee, as the case may be, deems necessary to
effect the provisions of this Section 2.6.
ARTICLE III
TERM; DISSOLUTION
3.1 TERM. The Partnership shall continue until December 31, 2050, unless
the Partnership is dissolved sooner pursuant to the provisions of Section 3.2 or
as otherwise provided by law.
3.2 DISSOLUTION. Except as set forth in this Section 3.2, no Partner shall
have the right to dissolve the Partnership. The Partnership shall not be
dissolved by the admission of Substituted Limited Partners or additional Limited
Partners or by the admission of a successor General Partner in accordance with
the terms of this Agreement. Upon the withdrawal of the General Partner, any
successor General Partner shall continue the business of the Partnership. The
Partnership shall dissolve, and its affairs shall be wound up, upon the first to
occur of any of the following ("Liquidating Events"):
(a) an event described in Section 17-402(a) of the Act by reason of
which the General Partner ceases to be the general partner, unless, within
ninety (90) days after such event, a Majority-in-Interest of the Partners
(other than the General Partner) that remain agree in writing to continue
the business of the Partnership and to appoint, effective as of the date of
such event, a successor General Partner;
(b) an election to dissolve the Partnership made by the General Partner
with the Consent of the Partners;
(c) the sale of all or substantially all of the assets and properties of
the Partnership;
(d) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Act; or
(e) the expiration of the term of the Partnership as provided in Section
3.1 hereof.
3.3 BANKRUPTCY OF A LIMITED PARTNER. The Bankruptcy of any Limited Partner
shall not cause a dissolution of the Partnership, but the rights of such Limited
Partner to share in the Net Income or Net Loss of the Partnership and to receive
distributions from the Partnership shall, on the happening of such event,
devolve on its successors or assigns, subject to and in accordance with the
terms and conditions of this Agreement, and the Partnership shall continue as a
limited partnership. However, in no event shall such assignee(s) become a
Substituted Limited Partner except in accordance with Article IX hereof.
Appendix F-13
<PAGE>
ARTICLE IV
CONTRIBUTIONS TO CAPITAL; FINANCING
4.1 GENERAL PARTNER CAPITAL CONTRIBUTION.
(a) The General Partner has made contributions to the Partnership and
has the Common Units, Preferred Units, Convertible Preferred Units and
Series C Preferred Units (if any) as set forth on Exhibit A.
(b) In the event the General Partner issues Series C Preferred Stock
pursuant to the Series C Preferred Stock Purchase Agreement, the General
Partner shall contribute to the Partnership the proceeds or consideration
received therefor and receive from the Partnership an equal number of Series
C Preferred Units, as contemplated by clause (B) of subsection (b) of
Section 4.3.
4.2 LIMITED PARTNER CAPITAL CONTRIBUTIONS.
(a) Each Limited Partner had made contributions to the capital of the
Partnership and has the Common Units, Convertible Preferred Units or Series
C Preferred Units set forth opposite its name on Exhibit A.
(b) The General Partner is authorized to cause the Partnership to issue
Series C Preferred Units to an institutional investor from time to time
pursuant to that certain Series C Purchase Agreement dated as of August 8,
1997 by and among such institutional investor, the General Partner and the
Partnership (the "Series C Preferred Purchase Agreement") for the
consideration set forth therein, and upon payment of such consideration such
Person shall be admitted as a Limited Partner of the Partnership.
(c) The General Partner is authorized to cause the Partnership to issue
Common Units and Convertible Preferred Units to limited partners of Horizon
Limited Partnership as contemplated by the Merger Agreement, and upon
issuance thereof upon consummation of the Merger, such Persons shall be
admitted as Limited Partners of the Partnership.
4.3 ADDITIONAL FUNDS; RESTRICTIONS ON GENERAL PARTNER.
(a) The sums of money required to finance the business and affairs of
the Partnership shall be derived from the initial Capital Contributions made
to the Partnership from the Partners as set forth in Sections 4.1 and 4.2
hereof (including the issuance of Series C Preferred Units from time to
time) and from funds generated from the operation and business of the
Partnership, including without limitation distributions directly or
indirectly received by the Partnership from the Property Partnerships. In
the event additional financing is needed from sources other than as set
forth in the preceding sentence for any reason, the General Partner may, in
its sole discretion, in such amounts and at such times as it solely shall
determine to be necessary or appropriate, (i) issue additional Partnership
Interests in accordance with Section 4.4 hereof; (ii) make additional
Capital Contributions to the Partnership (subject to Section 4.3(b) below);
(iii) cause the Partnership to borrow money, enter into loan arrangements,
issue debt securities, obtain letters of credit or otherwise borrow money on
a secured or unsecured basis; (iv) make a loan or loans to the Partnership
(subject to Section 4.3(b) below); or (v) sell any assets or properties of
the Partnership. In no event shall the Limited Partners be required to make
any additional Capital Contributions or any loan to, or otherwise provide
any financial accommodation for the benefit of, the Partnership.
(b) The General Partner shall not issue any debt securities, any
preferred stock (including any additional Preferred Stock or Convertible
Preferred Stock (other than Series C Preferred Stock issued in exchange for
Series C Preferred Units)) or common stock (including additional shares of
Common Stock (other than (i) consideration to be issued pursuant to the
Merger Agreement or any subsequent merger, consolidation, recapitalization
or similar transaction which has been approved by the General
Appendix F-14
<PAGE>
Partner, (ii) in connection with the exercise by a Limited Partner of
Rights, Convertible Preferred Rights or Series C Preferred Rights pursuant
to Article XI or XII hereof, (iii) in connection with the conversion of
Convertible Preferred Stock as contemplated by Section 4.8 hereof or any
other conversion or exchange of securities of the General Partner solely in
conversion or exchange for other securities of the General Partner or (iv)
Common Stock exchanged for Series C Preferred Stock or Series C Preferred
Units)) or rights, options, warrants or convertible or exchangeable
securities containing the right to subscribe for or purchase any of the
foregoing (collectively, "Securities"), other than to all holders of Common
Stock (in which event the Antidilution Provisions shall apply to the extent
applicable), unless the General Partner shall (A) in the case of debt
securities, lend to the Partnership the proceeds of or consideration
received for such Securities on the same terms and conditions, including
interest rate and repayment schedule, as shall be applicable with respect to
or incurred in connection with such Securities and from any subsequent
exercise, exchange or conversion thereof (if applicable); (B) in the case of
Preferred Stock, Convertible Preferred Stock, Series C Preferred Stock or
other equity Securities senior or junior to the Common Stock as to dividends
and distributions on liquidation, contribute to the Partnership the proceeds
or consideration (including any property or other non-cash assets) received
for such Securities and from any subsequent exercise, exchange or conversion
thereof (if applicable), and receive from the Partnership Preferred Units,
Convertible Preferred Units, Series C Preferred Units or other interests in
the Partnership in consideration therefor with the same terms and
conditions, including dividend, dividend priority and liquidation
preference, as are applicable to such Securities; and (C) in the case of
Common Stock or other equity Securities on a parity with the Common Stock as
to dividends and distributions on liquidation, contribute to the Partnership
the net proceeds (including any property or other non-cash assets) received
for such Securities or from any subsequent exercise, exchange or conversion
thereof (if applicable), and receive from the Partnership a number of
additional Common Units in consideration therefor equal to the product of
(x) the number of shares of Common Stock or other equity Securities issued
by the General Partner, multiplied by (y) a fraction the numerator of which
is one and the denominator of which is the Exchange Factor (as defined in
Exhibit C hereto) in effect on the date of such contribution.
4.4 ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS; ADMISSION OF ADDITIONAL
LIMITED PARTNERS.
(a) In addition to any Partnership Interests issuable by the Partnership
pursuant to the Merger Agreement or Section 4.2, Section 4.3 or Section 4.8
hereof, the General Partner is authorized to cause the Partnership to issue
additional Partnership Interests in the form of Convertible Preferred Units
or Common Units to any Persons at any time or from time to time, for
consideration not less than the fair value thereof, and on such terms and
conditions, as the General Partner shall establish in each case in its sole
and absolute discretion, without any approval being required from any
Limited Partner or any other Person; PROVIDED, HOWEVER, that there is no
material adverse impact on (i) the right of any Limited Partner to exercise
the Rights pursuant to Article XI or (ii) the economic effect upon the
existing Limited Partners of the allocations set forth in Exhibit B. Subject
to the limitations set forth in the preceding sentence, the General Partner
may take such steps as it, in its reasonable discretion, deems necessary or
appropriate to admit any Person as a Limited Partner of the Partnership,
including, without limitation, amending the Certificate, Exhibit A or any
other provision of this Agreement.
4.5 STOCK INCENTIVE PLAN. If at any time or from time to time Incentive
Options granted in connection with the Stock Incentive Plan are exercised in
accordance with the terms of the Incentive Option Agreement:
(a) the General Partner shall, as soon as practicable after such
exercise, contribute to the capital of the Partnership an amount equal to
the exercise price paid, if any, to the General Partner by such exercising
party in connection with the exercise of the Incentive Option; and
Appendix F-15
<PAGE>
(b) the General Partner shall receive the number of Common Units
corresponding to the number of shares of Common Stock delivered by the
General Partner to such exercising party multiplied by a fraction the
numerator of which is one and the denominator of which is the Exchange
Factor (as defined in Exhibit C hereto) in effect on the date of such
contribution.
4.6 NO THIRD PARTY BENEFICIARY. No creditor or other third party having
dealings with the Partnership shall have the right to enforce the right or
obligation of any Partner to make Capital Contributions or loans or to pursue
any other right or remedy hereunder or at law or in equity, it being understood
and agreed that the provisions of this Agreement shall be solely for the benefit
of, and may be enforced solely by, the parties hereto and their respective
successors and assigns. None of the rights or obligations of the Partners herein
set forth to make Capital Contributions or loans to the Partnership shall be
deemed an asset of the Partnership for any purpose by any creditor or other
third party, nor may such rights or obligations be sold, transferred or assigned
by the Partnership or pledged or encumbered by the Partnership to secure any
debt or other obligation of the Partnership or of any of the Partners.
4.7 NO INTEREST; NO RETURN. No Partner shall be entitled to interest on
its Capital Contribution or on such Partner's Capital Account. Except as
provided herein or by law, no Partner shall have any right to demand or receive
the return of its Capital Contribution from the Partnership.
4.8 CONVERSION OF CONVERTIBLE PREFERRED UNITS OR SERIES C PREFERRED UNITS;
REDEMPTION OR PURCHASE OF SERIES C PREFERRED UNITS, CONVERTIBLE PREFERRED UNITS
OR PREFERRED UNITS.
(a) If at any time holders of the General Partner's Convertible
Preferred Stock shall exercise their rights under the General Partner's
Articles of Incorporation to convert any shares of Convertible Preferred
Stock to Common Stock, in whole or in part (including any fractions
thereof), then, simultaneously with such conversion, an equal number of
Convertible Preferred Units shall be automatically converted into the number
of Common Units equal to the product of (x) the number of shares of Common
Stock into which the Convertible Preferred Stock is converted, multiplied by
(y) a fraction the numerator of which is one and the denominator of which is
the Exchange Factor (as defined in Exhibit C hereto) in effect on such date.
(b) If at any time shares of the General Partner's Preferred Stock are
to be redeemed pursuant to the General Partner's Articles of Incorporation
or purchased by the General Partner, the Partnership shall redeem an equal
number of Preferred Units by payment to the General Partner of the Preferred
Unit Redemption Amount or purchase price to be paid by the General Partner
immediately prior to or concurrently with such redemption or purchase. If at
any time shares of the General Partner's Convertible Preferred Stock are to
be redeemed pursuant to the General Partner's Articles of Incorporation or
purchased by the General Partner, the Partnership shall redeem an equal
number of Convertible Preferred Units by payment of the Convertible
Preferred Unit Redemption Amount therefor or purchase price paid by the
General Partner immediately prior to or concurrently with such redemption or
purchase. If at any time shares of the General Partner's Series C Preferred
Stock are to be redeemed pursuant to the General Partner's Articles of
Incorporation or purchased by the General Partner, the Partnership shall
redeem an equal number of Series C Preferred Units by payment of the Series
C Preferred Unit Redemption Amount or purchase price to be paid by the
General Partner immediately prior to or concurrently with such redemption or
purchase.
(c) If at any time holders of the General Partner's Series C Preferred
Stock shall exercise their rights under the General Partner's Articles of
Incorporation to convert any shares of Series C Preferred Stock to Common
Stock, in whole or in part, then, simultaneously with such conversion, an
equal number of Series C Preferred Units shall be automatically converted
into the number of Common Units which is equal to the number of shares of
Common Stock into which the shares of the General Partner's Series C
Preferred Stock which are being converted are so converted, as such number
is determined pursuant to the General Partner's Articles of Incorporation.
Appendix F-16
<PAGE>
(d) The Series C Preferred Units may be redeemed by the Partnership at
the option of the General Partner pursuant to the terms of Section 4.9.
(e) The General Partner shall amend Exhibit A hereto to reflect (i) each
conversion of Convertible Preferred Units, and the issuance of additional
Common Units in connection therewith, (ii) each exchange by a Limited
Partner of Series C Preferred Units for Series C Preferred Stock or Common
Stock of the General Partner, and the allocation or reissuance of such
Series C Preferred Units in the name of the General Partner, pursuant to
Section 12.3 as Series C Preferred Units or Common Units, as the case may
be, and (iii) each redemption of Convertible Preferred Units, Preferred
Units and Series C Preferred Units and (iv) each exchange by a Limited
Partner of Convertible Preferred Units for Common Units or Common Units for
Convertible Preferred Units pursuant to the exchange offer contemplated by
the Merger Agreement.
4.9 REDEMPTION OF SERIES C PREFERRED UNITS.
(a) On and after August 8, 2007, the Partnership, at the option of the
General Partner, may redeem the Series C Preferred Units, in whole at any
time or from time to time in part at a redemption price for each Series C
Preferred Unit, payable in cash, in an amount equal to the Series C
Preferred Unit Redemption Amount therefor.
(b) Notice of the redemption of any Series C Preferred Units shall be
mailed by first class mail to each Partner which is a holder of record of
Series C Preferred Units to be redeemed at the address of each such Partner
as shown on the Partnership's records, not less than 30 nor more than 90
days prior to the date fixed for redemption (the "Call Date"). Neither the
failure to mail any notice required by this paragraph, nor any defect
therein or in the mailing thereof, to any particular Partner, shall affect
the sufficiency of the notice or the validity of the proceedings for
redemption with respect to the other Partners. Each such mailed notice shall
state, as appropriate: (1) the Call Date; (2) the number of Series C
Preferred Units to be redeemed and, if fewer than all the Series C Preferred
Units held by such Partner are to be redeemed, the number of such Series C
Preferred Units to be redeemed from such Partner; (3) the redemption price;
(4) the place or places of the closing for such redemption; (5) the
then-current conversion price; and (6) that the Series C Preferred
Distribution with respect to the Series C Preferred Units shall cease to
accrue on such Call Date except as otherwise provided herein. Notice having
been mailed as aforesaid, from and after the Call Date (unless the
Partnership shall fail to make available an amount of cash necessary to
effect such redemption), (i) except as otherwise provided herein, the Series
C Preferred Distribution on the Series C Preferred Units so called for
redemption shall cease to accrue, (ii) such Series C Preferred Units shall
no longer be deemed to be outstanding, and (iii) all rights of the holders
thereof as holders of Series C Preferred Units shall cease (except the
rights to receive the cash payable upon such redemption, without interest
thereon). The Partnership's obligation to provide cash in accordance with
the preceding sentence shall be deemed fulfilled if, on or before the Call
Date, the Partnership shall deposit with a bank or trust company (which may
be an affiliate of the Partnership) that has an office in the Borough of
Manhattan, City of New York, and that has, or is an affiliate of a bank or
trust company that has, capital and surplus of at least $50,000,000,
necessary for such redemption, in trust, with irrevocable instructions that
such cash be applied to the redemption of the Series C Preferred Units so
called for redemption. No interest shall accrue for the benefit of the
holders of Series C Preferred Units to be redeemed on any cash so set aside
by the Partnership. Subject to applicable escheat laws, any such cash
unclaimed at the end of two years from the Call Date shall revert to the
general funds of the Partnership, after which reversion the holders of such
Series C Preferred Units so called for redemption shall look only to the
general funds of the Partnership for the payment of such cash.
If fewer than all the outstanding Series C Preferred Units are to be
redeemed, units to be redeemed shall be selected by the General Partner from
outstanding Series C Preferred Units not previously called
Appendix F-17
<PAGE>
for redemption pro rata (as nearly as may be), by lot or by any other method
determined by the General Partner in its sole discretion to be equitable.
4.10 REDEMPTION OF CONVERTIBLE PREFERRED UNITS.
(a) On and after March 31, 1999, the Partnership, at the option of the
General Partner, may redeem the Convertible Preferred Units, in whole at any
time or from time to time in part at a redemption price for each Convertible
Preferred Unit, payable in cash, in an amount equal to the Convertible
Preferred Unit Redemption Amount therefor.
(b) Notice of the redemption of any Convertible Preferred Units shall be
mailed by first class mail to each Partner which is a holder of record of
Convertible Preferred Units to be redeemed at the address of each such
Partner as shown on the Partnership's records, not less than 30 nor more
than 90 days prior to the date fixed for redemption (the "Call Date").
Neither the failure to mail any notice required by this paragraph, nor any
defect therein or in the mailing thereof, to any particular Partner, shall
affect the sufficiency of the notice or the validity of the proceedings for
redemption with respect to the other Partners. Each such mailed notice shall
state, as appropriate: (1) the Call Date; (2) the number of Convertible
Preferred Units to be redeemed and, if fewer than all the Convertible
Preferred Units held by such Partner are to be redeemed, the number of such
Convertible Preferred Units to be redeemed from such Partner; (3) the
redemption price; (4) the place or places of the closing for such
redemption; (5) the then-current conversion price; and (6) that the
Convertible Preferred Distribution with respect to the Convertible Preferred
Units shall cease to accrue on such Call Date except as otherwise provided
herein. Notice having been mailed as aforesaid, from and after the Call Date
(unless the Partnership shall fail to make available an amount of cash
necessary to effect such redemption), (i) except as otherwise provided
herein, the Convertible Preferred Distribution on the Convertible Preferred
Units so called for redemption shall cease to accrue, (ii) such Convertible
Preferred Units shall no longer be deemed to be outstanding, and (iii) all
rights of the holders thereof as holders of Convertible Preferred Units
shall cease (except the rights to receive the cash payable upon such
redemption, without interest thereon). The Partnership's obligation to
provide cash in accordance with the preceding sentence shall be deemed
fulfilled if, on or before the Call Date, the Partnership shall deposit with
a bank or trust company (which may be an affiliate of the Partnership) that
has an office in the Borough of Manhattan, City of New York, and that has,
or is an affiliate of a bank or trust company that has, capital and surplus
of at least $50,000,000, necessary for such redemption, in trust, with
irrevocable instructions that such cash be applied to the redemption of the
Convertible Preferred Units so called for redemption. No interest shall
accrue for the benefit of the holders of Convertible Preferred Units to be
redeemed on any cash so set aside by the Partnership. Subject to applicable
escheat laws, any such cash unclaimed at the end of two years from the Call
Date shall revert to the general funds of the Partnership, after which
reversion the holders of such Convertible Preferred Units so called for
redemption shall look only to the general funds of the Partnership for the
payment of such cash.
If fewer than all the outstanding Convertible Preferred Units are to be
redeemed, units to be redeemed shall be selected by the General Partner from
outstanding Convertible Preferred Units not previously called for redemption pro
rata (as nearly as may be), by lot or by any other method determined by the
General Partner in its sole discretion to be equitable.
Appendix F-18
<PAGE>
ARTICLE V
INTENTIONALLY OMITTED
ARTICLE VI
ALLOCATIONS, DISTRIBUTIONS AND OTHER TAX AND ACCOUNTING MATTERS
6.1 ALLOCATIONS. The Net Income, Net Loss and/or other Partnership items
shall be allocated pursuant to the provisions of Exhibit B.
6.2 DISTRIBUTIONS.
(a) Except for the Special Distribution, the Common Distribution and
distributions pursuant to Section 8.2 in connection with the dissolution and
liquidation of the Partnership, the General Partner shall cause the
Partnership to distribute all Net Cash Flow to the Partners from time to
time as determined by the General Partner, but in any event not less
frequently than quarterly, in such amounts as the General Partner shall
determine, and in the following priority:
(i) First, to the extent that the amount of cash distributed to the
General Partner for all prior Quarters pursuant to Section 6.2(a)(ii)
(other than the immediately preceding Quarter) was less than the
Preferred Distribution for each of the outstanding Preferred Units for
all such Quarters, and such deficiency was not previously distributed
pursuant to this subsection (i) or paid as part of a Preferred Unit
Redemption Amount (a "Preferred Distribution Shortfall"), Net Cash Flow
shall be distributed to the General Partner in an amount equal to such
Preferred Distribution Shortfall for all such prior Quarters.
(ii) Second, Net Cash Flow shall be distributed to the General
Partner on the Partnership Payment Date in an amount equal to the
Preferred Distribution for the immediately preceding Quarter for each
outstanding Preferred Unit then held by the General Partner.
(iii) Third, to the extent the amount of cash distributed to the
Partners holding Convertible Preferred Units pursuant to Section
6.2(a)(iv) for all prior Quarters (other than the immediately preceding
Quarter) was less than the Convertible Preferred Distribution for each of
the outstanding Convertible Preferred Units for all such Quarters, and
such deficiency was not previously distributed pursuant to this
subsection (iii) or paid as part of Convertible Preferred Unit Redemption
Amount (a "Convertible Preferred Distribution Shortfall"), Net Cash Flow
shall be distributed to the Partners holding Convertible Preferred Units,
pro rata in accordance with their respective Convertible Preferred Units,
in an amount equal to such Convertible Preferred Distribution Shortfall
for all such prior Quarters.
(iv) Fourth, Net Cash Flow shall be distributed to the Partners
holding Convertible Preferred Units on the Partnership Payment Date in an
amount equal to the Convertible Preferred Distribution for the
immediately preceding Quarter for each outstanding Convertible Preferred
Unit then held by the Partners holding Convertible Preferred Units, pro
rata in accordance with their respective Convertible Preferred Units.
(v) Fifth, to the extent that the amount of cash distributed to
Partners pursuant to Section 6.2(a)(vi) for all prior Quarters (other
than the immediately preceding Quarter) was less than the Series C
Preferred Distribution for each of the outstanding Series C Preferred
Units for all such Quarters, and such deficiency was not previously
distributed pursuant to this subsection (v) or paid as part of a Series C
Preferred Unit Redemption Amount (a "Series C Preferred Distribution
Shortfall"), Net Cash Flow in an amount equal to such Series C Preferred
Distribution Shortfall for all such prior quarters shall be distributed
to the Partners holding Series C
Appendix F-19
<PAGE>
Preferred Units on the Partnership Payment Date for the immediately
preceding Quarter, pro rata, in accordance with their respective Series C
Preferred Units.
(vi) Sixth, Net Cash Flow shall be distributed to the Partners
holding Series C Preferred Units in an amount equal to the Series C
Preferred Distribution for the immediately preceding Quarter for each
outstanding Series C Preferred Unit, pro rata, in accordance with their
respective Series C Preferred Units.
(vii) Seventh, the balance of any Net Cash Flow to be distributed, if
any, shall be distributed to the Partners holding Common Units on the
Partnership Payment Date with respect to the immediately preceding
Quarter, pro rata in accordance with their respective Common Units.
(b) On the date hereof, immediately prior to the Special Distribution,
the Partnership shall formally declare a cash distribution of (i) $0.50 per
outstanding Common Unit and Series C Preferred Unit and (ii) $0.60 per
outstanding Convertible Preferred Unit, in each case to each holder of
record of Common Units, Convertible Preferred Units and Series C Preferred
Units as of the close of the transfer books of the Partnership immediately
prior to the Merger. The payment date with respect to the Special
Distribution shall be .
(c) On the date hereof immediately after consummation of the Merger, the
Common Distribution shall be effected by the distribution of each issued and
outstanding common unit of Repositioning Strategies, L.P. (each, a "RSLP
Common Unit") to each holder of record of Common Units, Convertible
Preferred Units and Series C Preferred Units as of the close of the transfer
books of the Partnership immediately after the consummation of the Merger
such that (i) each Convertible Preferred Unit shall entitle the holder to
receive RSLP Common Units equal to 1.196 multiplied by the number of RSLP
Common Units being distributed in respect of each Common Unit, and (ii) each
Series C Preferred Unit shall entitle the holder to receive that number of
RSLP Common Units distributed in respect of each Common Unit. The payment
date with respect to the Common Distribution shall be .
(d) The General Partner shall use its best efforts to cause the
Partnership to distribute sufficient amounts to enable the General Partner
to pay shareholder dividends that will (i) satisfy the requirements for
qualifying as a REIT under the Code and Regulations ("REIT Requirements"),
and (ii) avoid any federal income or excise tax liability of the General
Partner.
(e) With respect to any Limited Partner(s) from whom the General Partner
receives an Exercise Notice to exercise Rights in accordance with Article XI
for which the General Partner elects to pay the Cash Purchase Price pursuant
to Exhibit C, the General Partner shall cause the Partnership to distribute
to such Limited Partner(s), with respect to the Common Units for which the
Cash Purchase Price is paid, (i) on the Partnership Payment Date, if any,
thereafter occurring during the Quarter in which the Cash Purchase Price is
paid, an amount equal to a full PRO RATA share of any Net Cash Flow to which
such Limited Partner would have been entitled to receive pursuant to Section
6.2(a)(vii) had such Limited Partner held such Common Units on the
Partnership Payment Date occurring in such Quarter and (ii) on the
Partnership Payment Date, if any, occurring during the next succeeding
Quarter after such Exercise Notice is received, an amount equal to the Net
Cash Flow to which such Limited Partner would have been entitled to receive
pursuant to Section 6.2(a)(vii) had such Limited Partner held such Common
Units on the Partnership Payment Date, multiplied by a fraction, the
numerator of which is the number of days in the preceding Quarter (based on
three 30-day months) that the Limited Partner held such Common Units and the
denominator of which is 90.
(f) Notwithstanding any other provision in this Agreement, from time to
time and at such times as the General Partner shall determine, and prior to
any determination or distribution of Net Cash Flow pursuant to Section
6.2(a), there shall be distributed to the General Partner from the revenues,
proceeds or other funds of the Partnership, an amount equal to any REIT
Expenses (other than those
Appendix F-20
<PAGE>
described in clause (ii) of the definition of REIT Expenses), to the extent
not paid or payable by the General Partner from cash distributions which it
receives directly from any Property Partnerships on account of any interest
in the Property Partnership which it holds directly (as opposed to through
the Partnership).
(g) The provisions of Section 6.2 of this Agreement are not intended to
supersede or replace, and are subject to, the agreements set forth on
Exhibit E hereto.
6.3 BOOKS OF ACCOUNT. At all times during the continuance of the
Partnership, the General Partner shall maintain or cause to be maintained full,
true, complete and correct books of account in accordance with GAAP wherein
shall be entered particulars of all monies, goods or effects belonging to or
owing to or by the Partnership, or paid, received, sold or purchased in the
course of the Partnership's business, and all of such other transactions,
matters and things relating to the business of the Partnership as are usually
entered in books of account kept by persons engaged in a business of a like kind
and character as the Partnership. In addition, the Partnership shall keep all
records as required to be kept pursuant to the Act. The books and records of
account shall be kept at the principal office of the Partnership, and each
Partner shall at all reasonable times, and upon reasonable notice, have access
to such books and records and the right to inspect the same.
6.4 REPORTS. The General Partner shall cause to be submitted to the
Limited Partners promptly upon receipt of the same from the Accountants and in
no event later than April 1 of each year, copies of Audited Financial Statements
prepared on a consolidated basis for the Partnership and each of the Property
Partnerships, together with the reports thereon, and all supplementary schedules
and information, prepared by the Accountants. The Partnership also shall cause
to be prepared such reports and/or information as are necessary for the General
Partner to determine its qualification as a REIT and its compliance with REIT
Requirements.
6.5 AUDITS. Not less frequently than annually, the books and records of
the Partnership shall be audited by the Accountants. The General Partner shall,
unless determined otherwise by the General Partner with the Consent of the
Partners, engage the Accountants to audit the books and records of the Property
Partnerships.
6.6 TAX ELECTIONS AND RETURNS. All elections required or permitted to be
made by the Partnership under any applicable tax law shall be made by the
General Partner in its sole discretion (including the election to be a "large
partnership" under Code Section 775; PROVIDED, HOWEVER, if requested by a
transferee (or if the General Partner is a transferee, as it shall determine in
its sole discretion), the General Partner shall file an election on behalf of
the Partnership pursuant to Section 754 of the Code to adjust the basis of the
Partnership property in the case of a transfer of a Partnership Interest,
including transfers made in connection with the exercise of Rights, made in
accordance with the provisions of this Agreement. The General Partner shall be
responsible for preparing and filing all federal and state tax returns for the
Partnership and furnishing copies thereof to the Partners, together with
required Partnership schedules showing allocations of Tax Items and copies of
the tax returns of all Property Partnerships all within the period of time
prescribed by law (including extensions). The General Partner shall consult in
good faith with the Limited Partners regarding any proposed modifications to the
tax returns of the Partnership and/or the Property Partnerships by the Limited
Partners.
6.7 TAX MATTERS PARTNER. The General Partner is hereby designated as the
Tax Matters Partner for the Partnership within the meaning of Section 6231(a)(7)
of the Code and is authorized, but not required, to take all actions within its
authority as tax matters partner, as described in subchapters C and D of Chapter
63, subtitle F of the Code; PROVIDED, HOWEVER, that in exercising its authority
as Tax Matters Partner, the General Partner shall be limited by the provisions
of this Agreement affecting tax aspects of the Partnership.
Appendix F-21
<PAGE>
ARTICLE VII
RIGHTS, DUTIES AND RESTRICTIONS OF THE GENERAL PARTNER
7.1 EXPENDITURES BY PARTNERSHIP. The General Partner is hereby authorized
to pay compensation for accounting, administrative, legal, technical, management
and other services rendered to the Partnership. All of the aforesaid
expenditures shall be made on behalf of the Partnership and, except as provided
below, the General Partner shall be entitled to reimbursement by the Partnership
for any expenditures incurred by it on behalf of the Partnership which shall be
made other than out of the funds of the Partnership. The Partnership shall also
assume, and pay when due, all Administrative Expenses other than REIT Expenses,
but only to the extent not paid or payable by the General Partner from cash
distributions received by the General Partner directly from any Property
Partnership. The General Partner shall use any cash distributions which it
receives directly from any Property Partnerships on account of any interest in
the Property Partnership which it holds directly (as opposed to through the
Partnership) to pay REIT Expenses.
7.2 POWERS AND DUTIES OF GENERAL PARTNER. The General Partner shall be
responsible for the management of the Partnership's business and affairs. Except
as otherwise herein expressly provided, and subject to the limitations contained
in Section 7.3 hereof with respect to Major Decisions, the General Partner shall
have, and is hereby granted, full and complete power, authority and discretion
to take such action for and on behalf of the Partnership and in its name as the
General Partner shall, in its sole and absolute discretion, deem necessary or
appropriate to carry out the purposes for which the Partnership was organized.
Except as otherwise expressly provided herein, and subject to Section 7.3
hereof, the General Partner shall have the following rights, powers and
authorities, to the extent necessary and appropriate to pursue and accomplish
the purposes of the Partnership:
(a) To manage, control, invest, reinvest, acquire by purchase, lease or
otherwise, sell, contract to purchase or sell, hold for investment, grant,
obtain, or exercise options to purchase, options to sell or conversion
rights, assign, transfer, convey, deliver, endorse, exchange, pledge,
mortgage, abandon, improve, repair, maintain, insure, lease for any term and
otherwise deal with any and all property of whatsoever kind and nature, and
wheresoever situated, in furtherance of the business or purposes of the
Partnership;
(b) To acquire, directly or indirectly, interests in real estate of any
kind and of any type, and any and all kinds of interests therein, and to
determine the manner in which title thereto is to be held; to manage, insure
against loss, protect and subdivide any real estate, interests therein or
parts thereof; to improve, develop or redevelop any such real estate; to
participate in the ownership and development of any property; to dedicate
for public use, to vacate any subdivisions or parts thereof, to resubdivide,
to contract to sell, to grant options to purchase or lease, or to sell on
any terms; to convey, mortgage, pledge or otherwise encumber said property,
or any part thereof; to lease said property or any part thereof from time to
time, upon any terms and for any period of time, and to renew or extend
leases, to amend, change or modify the terms and provisions of any leases
and to grant options to lease and options to renew leases and options to
purchase; to partition or to exchange said real property, or any part
thereof, for other real or personal property or to grant easements or
charges of any kind; to relay, convey or assign any right, title or interest
in or about or easement appurtenant to said property or any part thereof; to
construct and reconstruct, remodel, alter, repair, add to or take from
buildings on any real property in which the Partnership owns an interest; to
insure any Person having an interest in or responsibility for the care,
management or repair of such property; to direct the trustee of any land
trust to mortgage, lease, convey or contract to convey the real estate held
in such land trust or to execute and deliver deeds, mortgages, notes, and
any and all documents pertaining to the property subject to such land trust
or in any matter regarding such trust; to execute assignments of all or any
part of the beneficial interest in any land trust in which the Partnership
owns a beneficial interest;
(c) To employ, engage or contract with or dismiss from employment or
engagement Persons to the extent deemed necessary by the General Partner for
the operation and management of the
Appendix F-22
<PAGE>
Partnership business, including but not limited to, contractors,
subcontractors, engineers, architects, surveyors, mechanics, consultants,
accountants, attorneys, insurance brokers, real estate brokers, financial
counsel, professional advisers and others;
(d) To enter into, make, amend, perform and carry out, or cancel and
rescind, contracts and other obligations, including without limitation
guaranties and indemnity agreements for any purpose pertaining to the
business of the Partnership or any Property Partnership; and to loan money
to, borrow money from and engage in transactions with Affiliates of the
Partnership or any other Person;
(e) To borrow money or procure loans and advances from any Person for
Partnership purposes, and to apply for and secure, from any Person, credit
or accommodations, without limitation as to amount; to contract liabilities
and obligations, direct or contingent and of every kind and nature with or
without security; to repay, discharge, settle, adjust, compromise, or
liquidate any such loan, advance, credit, obligation or liability; and to
draw, make, accept, endorse, execute and issue promissory notes, drafts,
bills of exchange, warrants, bonds, debentures, evidences of indebtedness
and other instruments, and to secure the payment thereof, the interest
thereon and any other obligations or liabilities relating thereto, in any
manner, including without limitation by mortgage on, security interest in or
pledge of, or conveyance or assignment in trust of, the whole or any part of
the assets of the Partnership, real, personal or mixed, including contract
rights and options, whether at the time owned or thereafter acquired, and
future earnings, and to sell, pledge or otherwise dispose of such securities
or other obligations of the Partnership for the furtherance of any purpose
of the Partnership, and to guaranty or indemnify any Person in connection
with any of the foregoing or any other activity of the Partnership;
(f) To pledge, hypothecate, mortgage, assign, deposit, deliver, enter
into sale and leaseback arrangements or otherwise give as security or as
additional or substitute security, or sell or otherwise dispose of any and
all Partnership property, tangible or intangible, including, but not limited
to, real estate and beneficial interests in land trusts, and to make
substitutions thereof, and to receive any proceeds thereof upon the release
or surrender thereof; to sign, execute and deliver any and all assignments,
deeds and other contracts and instruments in writing; to authorize, give,
make, procure, accept and receive moneys, payments, property, notices,
demands, vouchers, receipts, releases, compromises and adjustments; to waive
notices, demands, and protests and authorize and execute waivers of every
kind and nature; to enter into, make, execute, deliver and receive written
agreements, undertakings and instruments of every kind and nature; to give
oral instructions and make oral agreements; and generally to do any and all
other acts and things incidental to any of the foregoing or with reference
to any dealings or transactions which the General Partner may deem
necessary, proper or advisable to effect or accomplish any of the foregoing
or to carry out the business and purposes of the Partnership;
(g) To acquire and enter into any contract of insurance which the
General Partner deems necessary or appropriate for the protection of the
Partnership, for the conservation of the Partnership's assets or for any
purpose convenient or beneficial to the Partnership;
(h) To conduct any and all banking transactions on behalf of the
Partnership; to adjust and settle checking, savings, and other accounts with
such institutions as the General Partner shall deem appropriate; to draw,
sign, execute, accept, endorse, guarantee, deliver, receive and pay any
checks, drafts, bills of exchange, acceptances, notes, obligations,
undertakings and other instruments for or relating to the payment of money
in, into, or from any account in the Partnership's name; to execute,
procure, consent to and authorize extensions and renewals of any of the
foregoing; to make deposits into and withdrawals from the Partnership's bank
accounts and to negotiate or discount commercial paper, acceptances,
negotiable instruments, bills of exchange and dollar drafts; to invest funds
of the Partnership;
Appendix F-23
<PAGE>
(i) To demand, sue for, receive, and otherwise take steps to collect or
recover all debt, rents, proceeds, interests, dividends, goods, chattels,
income from property, damages and all other property, to which the
Partnership may be entitled or which are or may become due the Partnership
from any Person; to commence, prosecute or enforce, or to defend, answer or
oppose, contest and abandon all legal proceedings in which the Partnership
is or may hereafter be interested; and to settle, compromise or submit to
arbitration any accounts, debts, claims, disputes and matters which may
arise between the Partnership and any other Person and to grant an extension
of time for the payment or satisfaction thereof on any terms, with or
without security;
(j) To make arrangements for financing, including the taking of all
action deemed necessary or appropriate by the General Partner to cause any
approved loans to be closed;
(k) To take all reasonable measures necessary to insure compliance by
the Partnership with applicable arrangements, and other contractual
obligations and arrangements entered into by the Partnership from time to
time in accordance with the provisions of this Agreement, including periodic
reports as required to be submitted to lenders, and using all due diligence
to insure that the Partnership is in compliance with its contractual
obligations;
(l) To maintain the Partnership's books and records;
(m) To prepare and deliver, or cause to be prepared and delivered by the
Partnership's Accountants, all financial and other reports with respect to
the operations of the Partnership and all Federal and state tax returns and
reports;
(n) To act in any state or nation in which the Partnership may lawfully
act, for itself or as principal, agent or representative for any Person with
respect to any business of the Partnership;
(o) To become a partner or member in, and perform the obligations of a
partner or member of, any general or limited partnership or limited
liability company;
(p) To apply for, register, obtain, purchase or otherwise acquire
trademarks, trade names, labels and designs relating to or useful in
connection with any business of the Partnership, and to use, exercise,
develop and license the use of the same;
(q) To pay or reimburse any and all actual fees, costs and expenses
incurred in the formation and organization of the Partnership;
(r) To do all acts which are necessary, customary or appropriate for the
protection and preservation of the Partnership's assets, including the
establishment of reserves; and
(s) In general, to exercise all of the general rights, privileges and
powers permitted to be had and exercised by the provisions of the Act,
including without limitation the right to effect a merger of the Partnership
with another Entity in accordance with the provisions of the Act.
Except as otherwise provided herein, to the extent the duties of the General
Partner require expenditures of funds to be paid to third parties, the General
Partner shall not have any obligations hereunder except to the extent that
Partnership funds are reasonably available to it for the performance of such
duties, and nothing herein contained shall be deemed to require the General
Partner, in its capacity as such, to expend its individual funds to make any
payment to third parties on behalf of the Partnership or to undertake any
individual liability or obligation on behalf of the Partnership.
7.3 MAJOR DECISIONS. The General Partner shall not, without the prior
Consent of the Partners, on behalf of the Partnership, undertake any of the
following actions (the "Major Decisions"):
(a) Amend and/or modify this Agreement other than as specified in
Section 14.7.
Appendix F-24
<PAGE>
(b) Take title to any personal or real property, other than in the name
of the Partnership, a Property Partnership or pursuant to Section 7.5 or 7.8
hereof or pursuant to the transactions contemplated by the Merger Agreement.
(c) Dissolve the Partnership prior to the occurrence of any of the
Liquidating Events.
7.4 NO REMOVAL. In no event shall the Limited Partners or any other
Persons have the right to remove the General Partner as general partner of the
Partnership.
7.5 GENERAL PARTNER PARTICIPATION. The General Partner agrees that all
business activities of the General Partner, including activities pertaining to
the acquisition, development and ownership of properties, shall be conducted
through the Partnership; provided that the General Partner may own up to a one
percent (1%) interest in any Property Partnership. The General Partner agrees
that all borrowings for the purpose of making distributions to its stockholders
will not be incurred by the General Partner but will be incurred only by the
Partnership or by one or more of the Property Partnerships.
7.6 PROSCRIPTIONS. The General Partner shall not have the authority to:
(a) Do any act in contravention of this Agreement or which would make it
impossible to carry on the ordinary business of the Partnership;
(b) Possess any Partnership property or assign rights in specific
Partnership property for other than Partnership purposes; or
(c) Do any act in contravention of applicable law.
Nothing herein contained shall impose any obligation on any Person or firm doing
business with the Partnership to inquire as to whether or not the General
Partner has properly exercised its authority in executing any contract, lease,
mortgage, deed or other instrument on behalf of the Partnership, and any such
third Person shall be fully protected in relying upon such authority.
7.7 ADDITIONAL PARTNERS. Additional Partners may be admitted to the
Partnership only as provided in Section 4.4 hereof.
7.8 TITLE HOLDER. To the extent allowable under applicable law, title to
all or any part of the properties of the Partnership may be held in the name of
the Partnership or in the name of any other Person, the beneficial interest in
which shall at all times be vested in the Partnership. Any such title holder
shall perform any and all of its respective functions to the extent and upon
such terms and conditions as may be determined from time to time by the General
Partner, consistent with the business and purposes of the Partnership.
7.9 COMPENSATION OF THE GENERAL PARTNER. The General Partner shall not be
entitled to any compensation for services rendered to the Partnership solely in
its capacity as General Partner. The foregoing shall not limit the General
Partner's right to reimbursement for those costs and expenses constituting
Administrative Expenses as provided elsewhere in this Agreement.
7.10 WAIVER AND INDEMNIFICATION.
(a) Neither any Partner nor any Person acting on behalf of any Partner
(including the Liquidating Trustee), pursuant hereto, shall be liable,
responsible or accountable in damages or otherwise to the Partnership or to
any Partner for any acts or omissions performed or omitted to be performed
by them or for their errors of judgment; PROVIDED that the Partner's or such
other Person's conduct or omission to act was taken in good faith. The
Partnership shall, and hereby does, indemnify and hold harmless each Partner
and its Affiliates and any individual acting on their behalf (including the
Liquidating Trustee) from any loss, damage, expense, claim or liability,
including, but not limited to, reasonable attorneys' fees and expenses,
incurred by them by reason of the operations of the Partnership as set forth
in this Agreement in which such Partner or other Person may be involved or
in
Appendix F-25
<PAGE>
enforcing the provisions of this indemnity, unless it is established that:
(i) the act or omission of such Partner or other Person was material to the
matter giving rise to the loss, damage, expense, claim or liability and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) such Partner or other Person actually received an improper
personal benefit in money, property or services; or (iii) in the case of any
criminal proceeding, such Partner or other Person had reasonable cause to
believe that the act or omission was unlawful. Without limitation, the
foregoing indemnity shall extend to any liability of any Partner or other
Person, pursuant to a loan guaranty or otherwise, for any indebtedness of
the Partnership or any Property Partnership or other subsidiary of the
Partnership (including, without limitation, any indebtedness which the
Partnership or any Property Partnership or other subsidiary of the
Partnership has assumed or taken subject to), and the General Partner is
hereby authorized and empowered, on behalf of the Partnership, to enter into
one or more indemnity agreements consistent with the provisions of this
Section 7.10 in favor of any Partner or other Person having or potentially
having liability for any such indebtedness. The termination of any
proceeding by judgment, order or settlement does not create a presumption
that the Person seeking indemnification did not meet the requisite standard
of conduct set forth in this Section 7.10. The termination of any proceeding
by conviction of a Person seeking indemnification or upon a plea of NOLO
CONTENDERE or its equivalent by such Person, or any entry of any order or
probation against such Person prior to judgment, creates a rebuttable
presumption that such Person acted in a manner contrary to that specified in
this Section 7.10 with respect to the subject matter of such proceeding. No
Partner shall have any personal liability with respect to the foregoing
indemnification, any such indemnification to be satisfied solely out of the
assets of the Partnership.
(b) Any Person entitled to indemnification under this Agreement shall be
entitled to receive, upon application therefor, advances to cover the costs
of defending any proceeding against such Person; PROVIDED, HOWEVER, that
such advances shall be repaid to the Partnership, without interest, if such
Person is found by a court of competent jurisdiction upon entry of a final
judgment not to be entitled to such indemnification. All rights of the
indemnitee hereunder shall survive the dissolution of the Partnership;
PROVIDED, HOWEVER, that a claim for indemnification under this Agreement
must be made by or on behalf of the Person seeking indemnification prior to
the time the liquidation of the Partnership is completed. The
indemnification rights contained in this Agreement shall be cumulative of,
and in addition to, any and all rights, remedies and recourse to which the
Person seeking indemnification shall be entitled, whether at law or in
equity. Indemnification pursuant to this Agreement shall be made solely and
entirely from the assets of the Partnership and no Partner shall be liable
therefor.
(c) The Partnership shall, and hereby does, indemnify and hold harmless
the General Partner from any loss, damage, claim or liability, including,
but not limited to, reasonable attorneys' fees and expenses, incurred by the
General Partner by reason of (i) any indebtedness incurred by the General
Partner in compliance with Section 4.3 hereof or any indebtedness of the
Partnership or any subsidiary thereof that is guaranteed by the General
Partner or (ii) vicarious liability by reason of its status as General
Partner of the Partnership. The Partners agree that in the event the
Partnership becomes a debtor in a bankruptcy proceeding under a plan of
reorganization, any funds distributable to the General Partner and any funds
distributable to the Limited Partners under such plan of reorganization,
after discharging claims against the General Partner from such funds, will
be distributed to the Limited Partners and the stockholders of the General
Partner among the various classes of Partnership Units in accordance with
the agreed priorities set forth in Section 6.2. Each Partner agrees to turn
over any such funds to the General Partners to be so distributed.
(d) The Limited Partners expressly acknowledge that the General Partner
is acting on behalf of the Partnership and the General Partner's
shareholders, collectively, that the General Partner is under no obligation
to consider the separate interests of the Limited Partners (including,
without limitation, the tax consequences to the Limited Partners or their
assignees) in deciding whether to cause the
Appendix F-26
<PAGE>
Partnership to take (or decline to take) any actions and that the General
Partner shall not be liable for monetary damages for losses sustained,
liabilities incurred or benefits not derived by Limited Partners in
connection with such decisions; PROVIDED that the General Partner has acted
in good faith.
(e) Subject to its obligations and duties as General Partner set forth
in Section 7.2 hereof, the General Partner may exercise any of the powers
granted to it by this Agreement and perform any of the duties imposed upon
it hereunder either directly or through its agents.
(f) The Partnership may, but shall not be obligated to, purchase and
maintain insurance, on behalf of any Person potentially entitled to
indemnification and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expenses
that may be incurred by such Person in connection with the Partnership's
activities, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
7.11 OPERATION IN ACCORDANCE WITH REIT REQUIREMENTS. The General Partner
agrees and the Limited Partners acknowledge that the Partnership shall be
operated in a manner that will enable the General Partner to (a) satisfy the
REIT Requirements and (b) avoid the imposition of any federal income or excise
tax liability, unless the General Partner ceases to qualify as a REIT for
reasons other than the conduct of the business of the Partnership. In connection
with the foregoing, and without limiting the General Partner's rights in its
sole discretion to cease qualifying as a REIT, the Partners acknowledge that the
General Partner's current status as a REIT inures to the benefit of all Partners
and not solely the General Partner. The Partnership shall avoid taking any
action, or permitting any Property Partnership to take any action, which would
result in the General Partner ceasing to satisfy the REIT Requirements or would
result in the imposition of any federal income or excise tax liability on the
General Partner.
ARTICLE VIII
DISSOLUTION, LIQUIDATION AND WINDING-UP
8.1 WINDING UP.
(a) Upon the occurrence of an event of dissolution described in Section
3.2, the Partnership shall continue solely for the purposes of winding up
its affairs in an orderly manner, liquidating its assets and satisfying the
claims of its creditors and Partners. No Partner shall take any action that
is inconsistent with, or not necessary to or appropriate for, the winding up
of the Partnership's business and affairs. The Liquidating Trustee shall be
responsible for overseeing the winding up and liquidation of the
Partnership's assets and shall take full account of the Partnership's
liabilities and property and the Partnership's assets shall be liquidated as
promptly as is consistent with obtaining the fair value thereof, and the
proceeds therefrom (which may, to the extent determined by the Liquidating
Trustee, include shares of stock in the General Partner) shall be applied
and distributed in accordance with the provisions of Section 8.2.
(b) In the discretion of the Liquidating Trustee, a PRO RATA portion of
the distributions that would otherwise be made to the General Partner and
Limited Partners pursuant to this Article VIII may be:
(i) distributed to a trust established for the benefit of the
General Partner and Limited Partners for the purposes of liquidating
Partnership assets, collecting amounts owed to the Partnership and paying
any contingent or unforeseen liabilities or obligations of the
Partnership or of the General Partner arising out of or in connection
with the Partnership. The assets of any such trust shall be distributed
to the General Partner and Limited Partners from time to time, in the
reasonable discretion of the Liquidating Trustee, in the same proportions
as the amount distributed to such trust by the Partnership would
otherwise have been distributed to the General Partner and the Limited
Partners pursuant to this Agreement; or
Appendix F-27
<PAGE>
(ii) withheld or escrowed to provide a reasonable reserve for
Partnership liabilities (contingent or otherwise) and to reflect the
unrealized portion of any installment obligations owed to the
Partnership; PROVIDED that such withheld or escrowed amounts shall be
distributed to the General Partner and Limited Partners in the manner and
order of priority set forth in Section 8.2 as soon as possible.
(c) A reasonable time shall be allowed for the orderly winding-up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 8.1 hereof, in order to minimize any losses otherwise
attendant upon such winding-up, and the provisions of this Agreement shall
remain in effect between the Partners during the period of liquidation.
(d) The liquidation of the Partnership shall not be deemed finally
completed until the Partnership shall have received cash payments in full
with respect to obligations such as notes, installment sale contracts or
other similar receivables received by the Partnership in connection with the
sale of Partnership assets and all remaining obligations of the Partnership
have been satisfied or assumed by the Liquidating Trustee. The Liquidating
Trustee shall continue to act to enforce all of the rights of the
Partnership pursuant to any such obligations until such obligations are paid
in full or otherwise satisfied. The Liquidating Trustee shall use reasonable
efforts to liquidate the Partnership in the same year in which substantially
all of the assets of the Partnership being disposed of in the liquidation
are sold or exchanged.
(e) The Liquidating Trustee shall be empowered to give and receive
notices, reports and payments in connection with the dissolution,
liquidation and/or winding-up of the Partnership and shall hold and exercise
such other rights and powers as are necessary or required to permit all
parties to deal with the Liquidating Trustee in connection with the
dissolution, liquidation and/or winding-up of the Partnership.
8.2 DISTRIBUTION ON DISSOLUTION AND LIQUIDATION. In the event of the
dissolution and liquidation of the Partnership for any reason, the assets of the
Partnership shall be liquidated for distribution in the following rank and
order:
(a) Payment of creditors of the Partnership (other than Partners) in the
order of priority as provided by law;
(b) Establishment of reserves as determined by the Liquidating Trustee
to provide for contingent liabilities, if any;
(c) Payment of debts of the Partnership to Partners, if any, in the
order of priority provided by law;
(d) To the Partners in accordance with the positive balances in their
respective Capital Accounts after giving effect to all contributions,
distributions and allocations for all periods, including the period in which
such distribution occurs (other than those adjustments made pursuant to this
Section 8.2(d)).
Whenever the Liquidating Trustee reasonably determines that any reserves
established pursuant to paragraph (b) above are in excess of the reasonable
requirements of the Partnership, the amount determined to be excess shall be
distributed to the Partners in accordance with paragraphs (c) and (d) above.
8.3 TIMING REQUIREMENTS. In the event that the Partnership is "liquidated"
within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations, any and
all distributions to the Partners pursuant to Section 8.2(d) hereof shall be
made no later than the later to occur of (i) the last day of the taxable year of
the Partnership in which such liquidation occurs or (ii) ninety (90) days after
the date of such liquidation.
Appendix F-28
<PAGE>
8.4 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other
provision of this Article VIII, in the event the Partnership is considered
liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no
dissolution and liquidation has occurred pursuant to this Agreement, including
pursuant the Prime/Horizon Merger, the Partnership's property shall not be
liquidated, the Partnership's liabilities shall not be paid or discharged, and
the Partnership's affairs shall not be wound up. Instead, for federal and
applicable state and local income tax purposes, the Partnership shall be deemed
to have contributed the property in kind to a new limited partnership, which
shall be deemed to have assumed and taken such property subject to all
Partnership liabilities, in return for the interests in such partnership.
Immediately thereafter, the Partnership shall be deemed to have distributed the
interests in the new limited partnership to the General Partner and the Limited
Partners in proportion to their respective interests in the Partnership in
liquidation of the Partnership.
8.5 DISTRIBUTIONS IN KIND. In the event that it becomes necessary to make
a distribution of Partnership property in kind, the Liquidating Trustee may,
with the Consent of the Partners, transfer and convey such property to the
distributees as tenants in common, subject to any liabilities attached thereto,
so as to vest in the distributees undivided interests in the whole of such
property in proportion to their respective rights to share in the proceeds of
the sale of such property (other than as a creditor) in accordance with the
provisions of Section 8.2 hereof.
8.6 DOCUMENTATION OF LIQUIDATION. Upon the completion of the dissolution
and liquidation of the Partnership, the Partnership shall terminate and the
Liquidating Trustee shall have the authority to execute and record any and all
documents or instruments required to effect the dissolution, liquidation and
termination of the Partnership.
8.7 DEFICIT CAPITAL ACCOUNT BALANCE. If any Partner has a deficit Capital
Account (after giving effect to all contributions, distributions and allocations
for all taxable years of the Partnership, including the year during which a
liquidation of the Partnership occurs), such Partner shall have no obligation to
make any contribution to the capital of the Partnership with respect to such
deficit, and such deficit shall not be considered a debt owed to the Partnership
or to any other Person for any purpose whatsoever.
ARTICLE IX
TRANSFER OF PARTNERSHIP INTERESTS;
WITHDRAWAL; ADMISSION OF ADDITIONAL PARTNERS
9.1 GENERAL PARTNER TRANSFER; WITHDRAWAL; SUBSTITUTE GENERAL PARTNER.
(a) The General Partner shall not voluntarily withdraw (as provided in
Section 17-602(a) of the Act) as general partner of the Partnership and
shall not sell, assign, pledge, encumber or otherwise dispose of all or any
portion of its interest in the Partnership without the unanimous consent of
all of the Limited Partners which consent may be withheld in their sole and
absolute discretion.
(b) Upon any Transfer of a Partnership Interest in accordance with the
provisions of this Section 9.1, the transferee General Partner shall become
vested with the powers and rights of the transferor General Partner, and
shall be liable for all obligations and responsible for all duties of the
General Partner, once such transferee has executed such instruments as may
be necessary to effect such admission and to confirm the agreement of such
transferee to be bound by all the terms and provisions of this Agreement
with respect to the Partnership Interest so acquired. It is a condition to
any Transfer otherwise permitted hereunder that the transferee assumes by
operation of law or express agreement all of the obligations of the
transferor General Partner under this Agreement with respect to such
transferred Partnership Interest and no such Transfer (other than pursuant
to a statutory merger or consolidation wherein all obligations and
liabilities of the transferor General Partner are assumed by a successor
corporation or other Entity by operation of law) shall relieve the
Appendix F-29
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transferor General Partner of its obligations under this Agreement without
the Consent of the Partners, in their reasonable discretion.
(c) In the event the General Partner withdraws from the Partnership, in
violation of this Agreement or otherwise, or dissolves or terminates or upon
the Bankruptcy of the General Partner, a Majority-in-Interest of the Limited
Partners may elect to continue the Partnership business by selecting a
substitute general partner. Upon any such event, the Partnership Interest of
the General Partner shall cease to be the interest of a general partner, and
shall be converted to the interest of a "Special Limited Partner." Upon such
a conversion, the Special Limited Partner shall retain all Partnership Units
allocated to the General Partner and shall have the right to (i) receive
distributions of Net Cash Flow pursuant to Section 6.2 and 8.2, (ii)
inspect, copy or review financial records of the Partnership and (iii) vote
or exercise consent rights with respect to the number of Common Units held
by it from time to time for any matter for which the Consent of the Partners
is required or sought. Notwithstanding the conversion of the General
Partner's Partnership Interest into the Interest of a Special Limited
Partner pursuant to Section 9.1(c), the General Partner shall retain all
management powers and shall continue to manage the business and affairs of
the Partnership in accordance with the terms of this Agreement until such
time as a successor General Partner is so selected and thereafter admitted,
or a Liquidating Trustee other than the General Partner is selected.
9.2 TRANSFERS BY LIMITED PARTNERS. No Limited Partner may Transfer any
part of its Partnership Interest except in accordance with the provisions of
this Sections 9.2 and 9.3. Any purported Transfer of any Partnership Interest by
a Limited Partner in violation of any provision of this Agreement shall be void
AB INITIO and shall not be given effect for any purpose by the Partnership.
(a) Subject to the provisions of Section 9.3, a Limited Partner shall
have the right to exchange all or a portion of its Common Units for
Convertible Preferred Units, or Convertible Preferred Units for Common
Units, pursuant to the terms of any exchange offer effected as contemplated
by the Merger Agreement.
(b) Each Limited Partner shall, subject to the provisions of Section
9.3, have the right to Transfer all or any portion of its Partnership Units
to any Person, whether or not in connection with the exercise of a Limited
Partner's Rights. It is a condition to any Transfer otherwise permitted
under this Section 9.2(b) that the transferee assumes by operation of law or
express agreement (which agreement, in the event of a pledge of Partnership
Units, may be entered into and become effective at the time of foreclosure
or other realization on such pledged Partnership Units) all of the
obligations of the transferor Limited Partner under this Agreement with
respect to such transferred Partnership Units and no such Transfer (other
than pursuant to a statutory merger or consolidation wherein all obligations
and liabilities of the transferor Partner are assumed by a successor
corporation or other Entity by operation of law) shall relieve the
transferor Partner of its obligations under this Agreement without the
approval of the General Partner, in its reasonable discretion.
(c) Upon any Transfer in accordance with the provisions of this Section
9.2 and Section 9.3, the transferee shall be admitted as a Substituted
Limited Partner (as such term is defined in the Act) and shall succeed to
all of the rights and obligations (including, without limitation, the
Rights) of the transferor Limited Partner under this Agreement with respect
to the transferred Partnership Units, in the place and stead of such
transferor Limited Partner (which succession, in the event of a pledge of
Partnership Units, may be entered into and become effective at the time of
foreclosure or other realization on such pledged Partnership Units). Any
transferee, whether or not admitted as a Substituted Limited Partner, shall
take the transferred Partnership Units subject to the obligations of the
transferor hereunder. Unless admitted as a Substituted Limited Partner, no
transferee, whether by a voluntary Transfer, by operation of law or
otherwise, shall have any rights under this Agreement or with respect to the
Partnership Property, other than to receive such portion of the
distributions made by the Partnership as are allocable to the Partnership
Units transferred.
Appendix F-30
<PAGE>
(d) Intentionally Omitted.
(e) Notwithstanding anything in this Agreement to the contrary, any
transferee of any transferred Partnership Units shall be subject to any and
all ownership limitations contained in the corporate charter of the General
Partner as may be amended from time to time applicable to Persons which may
limit or restrict such transferee's ability to exercise the Rights.
(f) No Limited Partner may withdraw from the Partnership without the
prior written consent of the General Partner, other than as a result of a
Transfer of all of such Limited Partner's Partnership Interest in accordance
with this Agreement or pursuant to the exercise of the Rights with respect
to all of such Limited Partner's Partnership Units. Except pursuant to
Section 6.2(e), no Limited Partner shall be entitled to any distribution in
respect of its Partnership Interest upon any such withdrawal.
9.3 RESTRICTIONS ON TRANSFER. In addition to any other restrictions on
Transfer contained in this Agreement, in no event may any Transfer of a
Partnership Interest by any Partner be made (i) to any person or entity who
lacks the legal right, power or capacity to own a Partnership Interest; (ii) in
violation of applicable securities or other law; (iii) of any component portion
of a Partnership Unit, such as the Capital Account, or rights to Net Cash Flow,
separate and apart from all other components of a Partnership Unit; (iv) if the
General Partner determines that such Transfer may reasonably cause the General
Partner to cease to comply with the REIT Requirements; (v) if such Transfer
would cause a termination of the Partnership for federal income tax purposes;
(vi) if the General Partner determines that such Transfer may reasonably cause
the Partnership to cease to be classified as a partnership for Federal income
tax purposes or to be treated as a publicly traded partnership as provided in
Code Section 7704; (vii) if such Transfer would cause the Partnership to become,
with respect to any employee benefit plan subject to Title 1 of ERISA, a
"party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified
person" (as defined in Section 4975(c) of the Code); (viii) if such Transfer
would, in the opinion of counsel to the Partnership, cause any portion of the
assets of the Partnership to constitute assets of any employee benefit plan
pursuant to Department of Labor Section 2510.3-101 of the Regulations; and (ix)
to a lender to the Partnership or any Person who is related (within the meaning
of Section 1.752-4(b) of the Regulations) to any lender to the Partnership whose
loan constitutes a "nonrecourse liability" (within the meaning of Section
1.752-1(a)(2) of the Regulations) without the consent of the General Partner, in
its sole and absolute discretion, unless the Partnership's basis in the Property
Partnerships or applicable Property or any Partner's basis in its Partnership
Interest for tax purposes would not be reduced as a result of such Transfer;
PROVIDED, HOWEVER, that the restriction set forth in this clause (ix) of Section
9.3 shall not apply to any Transfer to a lender or a related Person to such
lender if the interest (direct or indirect) of such lender or related Person in
each item of Partnership income, gain, loss, deduction or credit for every
taxable year that the partner is a partner in the Partnership is ten percent
(10%) or less and the loan constitutes qualified nonrecourse financing within
the meaning of Section 465(b)(6) of the Code and the Regulations thereunder
(without regard to the type of activity financed).
9.4 PRORATION IN EVENT OF TRANSFERS. If any Partnership Interest is
transferred or assigned in compliance with the provisions of this Article IX or
exchanged or transferred pursuant to Article XI, on any day other than the first
day of a Partnership taxable year, Net Income, Net Losses, each item thereof and
all other items attributable to such interest for such Partnership taxable year
shall be divided and allocated between the transferor Partner and the transferee
Partner by taking into account their varying interests during the Partnership
taxable year in accordance with Section 706(d) of the Code, using the pro ration
method (unless the General Partner, in its sole and absolute discretion, elects
to adopt another reasonable method permitted by law). Other than as provided in
Section 6.2(e), all distributions of Net Cash Flow attributable to such
Partnership Unit with respect to which the Partnership Payment Date is before
the date of such transfer, assignment or redemption shall be made to the
transferor Partner or the exchanging Partner, as the case may be, and, in the
case of a transfer or assignment other than a redemption, all distributions of
Net Cash Flow thereafter attributable to such Partnership Unit shall be made to
the transferee Partner.
Appendix F-31
<PAGE>
9.5 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor to all of the
General Partner's Partnership Interest pursuant to Section 9.1 hereof who is
proposed to be admitted as a successor General Partner shall be admitted to the
Partnership as the General Partner, effective upon such transfer. The admission
of any such transferee shall not cause a dissolution of the Partnership, and
such successor shall carry on the business of the Partnership. In each case, the
admission of such successor shall be subject to the successor General Partner
executing and delivering to the Partnership an acceptance of all of the terms
and conditions of this Agreement and such other documents or instruments as may
be required to effect the admission. In the case of such admission on any day
other than the first day of a partnership year, all items attributable to the
General Partner's Partnership Interest for such Partnership taxable year shall
be allocated between the General Partner and its successor as provided in
Section 9.4 hereof.
9.6 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
(a) A Person who makes a Capital Contribution to the Partnership in
accordance with this Agreement or who exercises the right to receive
Partnership Units pursuant to the Merger Agreement or any other option to
receive any Partnership Units shall be admitted to the Partnership as an
additional Limited Partner only upon furnishing to the General Partner (i)
evidence of acceptance in form satisfactory to the General Partner of all of
the terms and conditions of this Agreement, including, without limitation,
the power of attorney granted in Section 2.6 hereof and (ii) such other
documents or instruments as may be required in the discretion of the General
Partner in order to effect such Person's admission as an additional Limited
Partner.
(b) Notwithstanding anything to the contrary in this Section 9.6, no
Person shall be admitted as an additional Limited Partner without the
consent of the General Partner, which consent may be given or withheld in
the General Partner's sole and absolute discretion. The admission of any
Person as an additional Limited Partner shall become effective on the date
upon which the name of such Person is recorded on the books and records of
the Partnership, following the consent of the General Partner to such
admission.
(c) If any additional Limited Partner is admitted to the Partnership on
any day other than the first day of a Partnership taxable year, Net Income,
Net Losses, each item thereof and all other items allocable among Partners
and assignees of Partners for such Partnership Year shall be allocated among
such additional Limited Partner and all other Partners and assignees by
taking into account their varying interests during the Partnership taxable
year in accordance with Section 706(d) of the Code, using the pro ration
method; provided, however, that except in respect of the admission of
Limited Partners pursuant to the Merger, the General Partner shall use the
interim closing of the books method. Solely for purposes of making such
allocations, each of such items for the calendar month in which an admission
of any additional Limited Partner occurs shall be allocated among all the
Partners and assignees including such additional Limited Partner. All
distributions of Net Cash Flow with respect to which the Partnership Record
Date is before the date of such admission shall be made solely to Partners
and assignees other than the additional Limited Partner, and all
distributions of Net Cash Flow thereafter shall be made to all the Partners
and assignees including such additional Limited Partner.
ARTICLE X
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
10.1 NO PARTICIPATION IN MANAGEMENT; NO PERSONAL LIABILITY. Except as
expressly permitted hereunder, the Limited Partners shall not take part in the
management of the Partnership's business, transact any business in the
Partnership's name or have the power to sign documents for or otherwise bind the
Partnership. Except for any liability to the Partnership pursuant to Section
17-607 of the Act for the amount of certain distributions and as otherwise
specifically provided in this Agreement, no Limited
Appendix F-32
<PAGE>
Partner shall have any personal liability, beyond the amount of such Limited
Partner's Capital Contributions, whether to the Partnership, to the General
Partner or to the creditors of the Partnership, including, without limitation,
for the debts, obligations, expenses or liabilities of the Partnership or any of
its losses.
10.2 DUTIES AND CONFLICTS. The General Partner recognizes that the Limited
Partners and their Affiliates have or may have other business interests,
activities and investments, some of which may be in conflict or competition with
the business of the Partnership, and that, subject to the provisions of any
separate noncompete or similar restrictive agreement with the Partnership or the
General Partner, such persons are entitled to carry on such other business
interests, activities and investments and may engage in or possess an interest
in any other business or venture of any kind, independently or with others, on
their own behalf or on behalf of other entities with which they are affiliated
or associated, and such persons may engage in any activities, whether or not
competitive with the Partnership, without any obligation to offer any interest
in such activities to the Partnership or to any Partner. Except as otherwise
provided in any separate noncompete or similar restrictive agreement with the
Partnership or the General Partner, neither the Partnership nor any Partner
shall have any right, by virtue of this Agreement, in or to such activities, or
the income or profits derived therefrom, or any portion thereof or interest
therein, and the pursuit of such activities, even if competitive with the
business of the Partnership, shall not be deemed wrongful, improper or
actionable.
ARTICLE XI
GRANT OF RIGHTS TO LIMITED PARTNERS
PART I.
11.1 GRANT OF RIGHTS. The General Partner does hereby grant to the Limited
Partners holding Common Units and such Limited Partners do hereby accept the
right, but not the obligations (hereinafter such right sometimes referred to as
the "Rights"), to exchange all or a portion of their Common Units on the terms
and subject to the conditions and restrictions contained in Exhibit C. The
Rights granted hereunder may be exercised by any one or more of the Limited
Partners, on the terms and subject to the conditions and restrictions contained
in Exhibit C, upon delivery to the General Partner of an Exchange Exercise
Notice in the form of Schedule 1 to Exhibit C, which notice shall specify the
Common Units to be exchanged by such Limited Partner. Once delivered, the
Exchange Exercise Notice shall be irrevocable, subject to payment by the General
Partner of the Purchase Price in respect of such Common Units in accordance with
the terms hereof.
11.2 TERMS OF RIGHTS. The terms and provisions applicable to the Rights,
including certain registration rights, shall be as set forth in Exhibit C.
11.3 REISSUANCE OR REALLOCATION OF COMMON UNITS. Any Common Units acquired
by the General Partner pursuant to an exercise by any Limited Partner of the
Rights shall be deemed to be acquired by and reallocated or reissued to the
General Partner. The General Partner shall amend Exhibit A hereto to reflect
each such exchange and reallocation or reissuance of Common Units and each
corresponding recalculation of the Common Units of the Partners.
PART II.
11.1A GRANT OF RIGHTS. The General Partner does hereby grant to any
Limited Partner holding Convertible Preferred Units the right (hereinafter such
right sometimes referred to as the "Convertible Preferred Rights"), to exchange
all or a portion of its Convertible Preferred Units on the terms and subject to
the conditions and restrictions contained in Exhibit F. The Convertible
Preferred Rights granted hereunder may be exercised on the terms and subject to
the conditions and restrictions contained in Exhibit F upon delivery to the
General Partner of an Exchange Exercise Notice in the form of Schedule 1 to
Exhibit F, which notice shall specify the Convertible Preferred Units to be
exchanged by such Limited Partner. Once delivered, the Exchange Exercise Notice
shall be irrevocable, subject to payment by the
Appendix F-33
<PAGE>
General Partner of the Convertible Preferred Purchase Price in respect of such
Convertible Preferred Units in accordance with the terms hereof.
11.2A TERMS OF CONVERTIBLE PREFERRED RIGHTS. The terms and provisions
applicable to the Convertible Preferred Rights shall be as set forth in Exhibit
F.
11.3A REISSUANCE OR REALLOCATION OF CONVERTIBLE PREFERRED UNITS. Any
Convertible Preferred Units acquired by the General Partner pursuant to an
exercise by any Limited Partner of the Convertible Preferred Rights shall be
deemed to be acquired by and reallocated or reissued to the General Partner. In
the event that a Limited Partner exercising Convertible Preferred Rights elects
to receive the Common Stock Purchase Price and not the Convertible Preferred
Purchase Price (as such terms are defined in Exhibit F) with respect to any
Convertible Preferred Units, then the Convertible Preferred Units acquired by
the General Partner upon payment of the Common Stock Purchase Price shall be
reallocated to the General Partner and reissued as the number of Common Units
which is equal to the number of shares of the General Partner's Common Stock
paid to the exercising Limited Partner pursuant to the terms of Exhibit F hereto
as the Common Stock Purchase Price therefor. The General Partner shall amend
Exhibit A hereto to reflect each such exchange and reallocation or reissuance of
Convertible Preferred Units and each corresponding recalculation of the
Convertible Preferred Units or Common Units of the Partners.
ARTICLE XII
GRANT OF RIGHTS TO LIMITED PARTNERS HOLDING SERIES C
PREFERRED UNITS; REDEMPTION OF SERIES C PREFERRED UNITS
12.1 GRANT OF RIGHTS. The General Partner does hereby grant to any Limited
Partner holding Series C Preferred Units the right (hereinafter such right
sometimes referred to as the "Series C Preferred Rights"), to exchange all or a
portion of their Series C Preferred Units on the terms and subject to the
conditions and restrictions contained in Exhibit D. The Series C Preferred
Rights granted hereunder may be exercised on the terms and subject to the
conditions and restrictions contained in Exhibit D upon delivery to the General
Partner of an Exchange Exercise Notice in the form of Schedule 1 to Exhibit D,
which notice shall specify the Series C Preferred Units to be exchanged by such
Limited Partner. Once delivered, the Exchange Exercise Notice shall be
irrevocable, subject to payment by the General Partner of the Series C Purchase
Price in respect of such Series C Preferred Units in accordance with the terms
hereof.
12.2 TERMS OF RIGHTS. The terms and provisions applicable to the Series C
Preferred Rights shall be as set forth in Exhibit D.
12.3 REISSUANCE OR REALLOCATION OF SERIES C PREFERRED UNITS. Any Series C
Preferred Units acquired by the General Partner pursuant to an exercise by any
Limited Partner of the Series C Preferred Rights shall be deemed to be acquired
by and reallocated or reissued to the General Partner. In the event that a
Limited Partner exercising Series C Preferred Rights elects to receive the
Common Stock Purchase Price and not the Series C Preferred Purchase Price (as
such terms are defined in Exhibit D) with respect to any Series C Preferred
Units, then the Series C Preferred Units acquired by the General Partner upon
payment of the Common Stock Purchase Price shall be reallocated to the General
Partner and reissued as the number of Common Units which is equal to the number
of shares of the General Partner's Common Stock paid to the exercising Limited
Partner pursuant to the terms of Exhibit D hereto as the Common Stock Purchase
Price therefor. The General Partner shall amend Exhibit A hereto to reflect each
such exchange and reallocation or reissuance of Series C Preferred Units and
each corresponding recalculation of the Series C Preferred Units or Common Units
of the Partners.
Appendix F-34
<PAGE>
ARTICLE XIII
PARTNER REPRESENTATIONS AND WARRANTIES
Each Partner severally represents and warrants to the Partnership and the
other Partners as follows:
(a) ORGANIZATION. Such Partner (if such Partner is an Entity) is duly
organized, validly existing and in good standing under the laws of its state
of organization.
(b) DUE AUTHORIZATION; BINDING AGREEMENT. The execution, delivery and
performance of this Agreement by it has been duly and validly authorized by
all necessary action of such Partner. This Agreement has been duly executed
and delivered by it, or an authorized representative, and constitutes its
legal, valid and binding obligation, enforceable against it in accordance
with the terms hereof.
(c) CONSENTS AND APPROVALS. No consent, waiver, approval or
authorization of, or filing, registration or qualification with, or notice
to, any governmental unit or any other person is required to be made,
obtained or given by it in connection with the execution, delivery and
performance of this Agreement other than consents, waivers, approvals or
authorizations which have been obtained prior to the date hereof.
ARTICLE XIV
GENERAL PROVISIONS
14.1 NOTICES. All notices, offers or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and may be
personally served, telecopied or sent by United States mail and shall be deemed
to have been given when delivered in person, upon receipt of telecopy and oral
or written confirmation by the addressee of such receipt, or three business days
after deposit in United States mail, registered or certified, postage prepaid,
and properly addressed, by or to the appropriate party. For purposes of this
Section 14.1, the addresses of the parties hereto shall be as set forth below
their name on a signature page hereof. The address of any party hereto may be
changed by a notice in writing given in accordance with the provisions hereof.
14.2 SUCCESSORS. This Agreement and all the terms and provisions hereof
shall be binding upon and shall inure to the benefit of all Partners, and their
respective legal representatives, heirs, legatees, successors and permitted
assigns, except as expressly herein otherwise provided.
14.3 EFFECT AND INTERPRETATION. This Agreement shall be governed by and
construed in conformity with the laws of the State of Delaware.
14.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which shall constitute one and the same
instrument.
14.5 PARTNERS NOT AGENTS. Nothing contained herein shall be construed to
constitute any Partner the agent of another Partner, except as specifically
provided herein, or in any manner to limit the Partners in the carrying on of
their own respective businesses or activities.
14.6 ENTIRE UNDERSTANDING, ETC. This Agreement constitutes the entire
agreement and understanding among the Partners and supersedes any prior
understandings and/or written or oral agreements among them respecting the
subject matter hereof.
14.7 AMENDMENTS.
(a) This Agreement may not be amended, except by a written instrument
signed by the General Partner (and approved on behalf of the General Partner
by at least a majority of its directors who are not Affiliates of any of the
Limited Partners) and by a Majority-in-Interest of the Partners; PROVIDED,
HOWEVER, that any amendment which materially and adversely alters the
rights, preferences and terms of the Common Units held by the Limited
Partners relative to those of the Common Units held by the
Appendix F-35
<PAGE>
General Partner shall require the consent of Limited Partners holding a
majority-in-interest of the Common Units held by Limited Partners.
(b) Notwithstanding Section 14.7(a) above, so long as any Series C
Preferred Units are held by Limited Partners, the consent of Limited
Partners holding at least 66 2/3% of the Series C Preferred Units shall be
necessary for effecting: (a) any amendment that materially and adversely
affects the voting powers, rights or preferences of the holders of the
Series C Preferred Units except that any amendment to authorize or create or
to increase the authorized amount of, any Partnership Interests that are not
senior in any respect to the Series C Preferred Units or are on a parity
with the Series C Preferred Units shall not be deemed to materially and
adversely affect the voting powers, rights or preferences of the holders of
Series C Preferred Units; or (b) the authorization, reclassification or
creation of, or the increase in the authorized amount of, any Partnership
Interests of any class ranking prior to the Series C Preferred Units in the
distribution of assets on any liquidation, dissolution or winding up of the
Partnership or in the payment of dividends; PROVIDED, HOWEVER, that no such
consent of the holders of Series C Preferred Units shall be required (1) for
the issuance of additional Convertible Preferred Units to the General
Partner in connection with the General Partner's issuance and sale of up to
$57 million (before deducting underwriting discounts or commissions) of its
8.5% Series B Cumulative Participating Convertible Preferred Stock, $.01 par
value $.01 per share, at a price equal to or greater than $22 per share
(before deducting underwriting discounts or commissions) as long as no
modification has been made to the General Partner's Articles of
Incorporation from the date hereof affecting the rights or privileges of
such Convertible Preferred Units, or (2) if, at or prior to the time when
such amendment, alteration or repeal is to take effect, or when the issuance
of any such prior units or convertible security is to be made, as the case
may be, provision is made for the redemption of all Series C Preferred Units
at the time outstanding to the extent such redemption is authorized by this
Agreement.
(c) Notwithstanding Section 14.7(a)or (b) above, so long as any
Convertible Preferred Units are held by Limited Partners, the consent of
Limited Partners holding at least 66 2/3% of the Convertible Preferred Units
shall be necessary for effecting: (a) any amendment that materially and
adversely affects the voting powers, rights or preferences of the holders of
the Convertible Preferred Units except that any amendment to authorize or
create or to increase the authorized amount of, any Partnership Interests
that are not senior in any respect to the Convertible Preferred Units or are
on a parity with the Convertible Preferred Units shall not be deemed to
materially and adversely affect the voting powers, rights or preferences of
the holders of Convertible Preferred Units; or (b) the authorization,
reclassification or creation of, or the increase in the authorized amount
of, any Partnership Interests of any class ranking prior to the Convertible
Preferred Units in the distribution of assets on any liquidation,
dissolution or winding up of the Partnership or in the payment of dividends;
PROVIDED, HOWEVER, that no such consent of the holders of Convertible
Preferred Units shall be required if, at or prior to the time when such
amendment, alteration or repeal is to take effect, or when the issuance of
any such prior units or convertible security is to be made, as the case may
be, provision is made for the redemption of all Convertible Preferred Units
at the time outstanding to the extent such redemption is authorized by this
Agreement.
(d) Notwithstanding Sections 14.7(b) or (c) above, the General Partner
may amend this Agreement without the Consent of the Partners or the consent
of the holders of the Series C Preferred Units or the Convertible Preferred
Units (i) to add to the representations, duties or obligations of the
General Partner; (ii) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provisions herein,
to reflect a change that does not adversely affect any of the Limited
Partners, or to make any other provisions with respect to matters or
questions arising under this Agreement which will not be inconsistent with
the provisions of this Agreement; (iii) to effect or reflect a conversion or
redemption of Preferred Units, Convertible Preferred Units or Series C
Preferred Units pursuant to Section 4.8 or 4.10 hereof; (iv) to reflect the
admission,
Appendix F-36
<PAGE>
substitution, termination or withdrawal of Partners in accordance with this
Agreement; (v) to reflect the Transfer of any Partnership Units; (vi) to set
forth the designations, rights, powers, duties and preferences of any
holders of any additional Partnership Interests issued pursuant to Section
4.3 or 4.4 hereof and the modification of the provisions relating to
distributions of Net Cash Flow and allocations of income, loss, gain and
deduction resulting therefrom; and (vii) to satisfy any requirements,
conditions or guidelines contained in any order, directive, opinion, ruling
or regulation of a federal or state agency or contained in federal or state
law.
14.8 SEVERABILITY. If any provision of this Agreement, or the application
of such provision to any person or circumstance, shall be held invalid by a
court of competent jurisdiction, the remainder of this Agreement, or the
application of such provision to persons or circumstances other than those to
which it is held invalid by such court, shall not be affected thereby.
14.9 TRUST PROVISION. This Agreement, to the extent executed by the
trustee of a trust, is executed by such trustee solely as trustee and not in a
separate capacity. Nothing herein contained shall create any liability on, or
require the performance of any covenant by, any such trustee individually, nor
shall anything contained herein subject the individual personal property of any
trustee to any liability.
14.10 PRONOUNS AND HEADINGS. As used herein, all pronouns shall include
the masculine, feminine and neuter, and all defined terms shall include the
singular and plural thereof wherever the context and facts require such
construction. The headings, titles and subtitles herein are inserted for
convenience of reference only and are to be ignored in any construction of the
provisions hereof. Any references in this Agreement to "including" shall be
deemed to mean "including without limitation".
14.11 ASSURANCES. Each of the Partners shall hereafter execute and deliver
such further instruments and do such further acts and things as may be required
or useful to carry out the intent and purpose of this Agreement and as are not
inconsistent with the terms hereof.
14.12 REMEDIES CUMULATIVE. No remedy herein conferred upon any party is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise. No single or partial exercise by any party of any right, power or
remedy hereunder shall preclude any other or further exercise thereof.
14.13 CONSTRUCTION. Every covenant, term and provision of this Agreement
shall be construed simply according to its fair meaning and not strictly for or
against any Partner.
14.14 INCORPORATION BY REFERENCE. Every exhibit, schedule and other
appendix attached to this Agreement and referred to herein is hereby
incorporated in this Agreement by reference.
14.15 WAIVER OF ACTION FOR PARTITION. Each of the Partners irrevocably
waives any right that it may have to maintain any action for partition with
respect to any of the Partnership's property.
Appendix F-37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed as of the date and year first above
written.
GENERAL PARTNER:
PRIME RETAIL, INC.,
a Maryland corporation
100 East Pratt Street
19th Floor
Baltimore, Maryland 212022
By: _________________________________
Its: ________________________________
Appendix F-38
<PAGE>
EXHIBIT A
COMMON UNITS, PREFERRED UNITS,
CONVERTIBLE PREFERRED UNITS AND SERIES C PREFERRED UNITS
PRIME RETAIL, L.P.
OWNERSHIP SCHEDULE
as of [Merger Closing Date]
Appendix F-39
<PAGE>
EXHIBIT B
ALLOCATIONS
I ALLOCATION OF NET INCOME AND NET LOSS. Except as otherwise provided
herein, Net Income and Net Loss for any Partnership taxable year or other
applicable period of the Partnership shall be allocated in the following order
and priority:
1.1 First, subject to subsection (f) of Section 1.8 of this Exhibit B,
Net Income (or, if necessary, Partnership items of income and gain) shall be
allocated to the General Partner in an amount equal to the excess of (1) the
amount of Net Cash Flow distributed to the General Partner pursuant to
subsections (a)(i), (a)(ii) of Section 6.2 for the current and all prior
Partnership taxable years over (2) the amount of Net Income (or Partnership
items of income and gain) previously allocated to the General Partner
pursuant to Section 1.1 of this Exhibit B (and Section 1.8 of this Exhibit B
to the extent that Section 1.8 operates to allocate an amount to the General
Partner in respect of an increase in the liquidation preference for the
Preferred Stock under the General Partner's Articles of Incorporation due to
accrued but unpaid dividends on the Preferred Stock).
1.2 Second, subject to Section 1.8 of this Exhibit B (and to the extent
not already allocated pursuant to Section 1.8 in respect of an increase in
the Preferred Unit Redemption Amount due to accrued but unpaid dividends on
the Preferred Stock), for any Partnership taxable year ending on or after a
date in which Preferred Units are redeemed, Net Income (or Net Loss), or, if
necessary, Partnership items of income, gain, loss and deduction thereof,
shall be allocated to the General Partner in an amount equal to the excess
(or deficit) of (1) the sum of the Preferred Unit Redemption Amount for
Preferred Units that have been or are being redeemed during the Partnership
Year over (2) the product of $25.00 times the number of such Preferred
Units.
1.3 Third, subject to Section 1.8 of this Exhibit B, Net Income (or, if
necessary, Partnership items of income and gain) shall be allocated to
Partners holding Convertible Preferred Units, pro rata, in proportion to
their relative Convertible Preferred Units, in an aggregate amount equal to
the excess of (1) the amount of Net Cash Flow distributed to Partners
holding Convertible Preferred Units pursuant to subsections (a)(iii),
(a)(iv) and (c) of Section 6.2 for the current and all prior Partnership
taxable years over (2) the amount of Net Income (or Partnership items of
income and gain) previously allocated to Partners pursuant to Section 1.3 of
this Exhibit B (and Section 1.8 of this Exhibit B to the extent that Section
1.8 operates to allocate an amount to Partners holding Convertible Preferred
Units in respect of an increase in the liquidation preference for the
Convertible Preferred Stock under the General Partner's Articles of
Incorporation due to accrued but unpaid dividends on the Convertible
Preferred Stock).
1.4 Fourth, subject to Section 1.8 of this Exhibit B (and to the extent
not already allocated pursuant to Section 1.8 in respect of an increase in
the Convertible Preferred Units Redemption Amount due to accrued but unpaid
dividends on the Convertible Preferred Stock), for any Partnership taxable
year ending on or after a date in which Convertible Preferred Units are
redeemed, Net Income (or Net Loss), or, if necessary, Partnership items of
income, gain, loss and deduction thereof, shall be allocated to Partners
holding Convertible Preferred Units, pro rata, in proportion to their
relative Convertible Preferred Units, in an aggregate amount equal to the
excess (or deficit) of (1) the sum of the Convertible Preferred Unit
Redemption Amount for Convertible Preferred Units that have been or are
being redeemed during the Partnership taxable year over (2) the product of
$25.00 times the number of such Convertible Preferred Units.
1.5 Fifth, subject to Section 1.8 of this Exhibit B, Net Income (or, if
necessary, Partnership items of income and gain) shall be allocated to the
Partners holding Series C Preferred Units in an amount equal to the excess
of (1) the amount of Net Cash Flow distributed to such Partners pursuant to
subsections (a)(v), (a)(vi) and (c) of Section 6.2 for the current and all
prior Partnership taxable years over (2) the amount of Net Income (or
Partnership items of income and gain) previously allocated to
Appendix F-40
<PAGE>
such Partners pursuant to Section 1.5 of this Exhibit B (and Section 1.8 of
this Exhibit B to the extent that Section 1.8 operates to allocate an amount
to such Partners in respect of an increase in the liquidation preference for
the Series C Preferred Stock under the General Partner's Articles of
Incorporation due to accrued but unpaid dividends on the Convertible
Preferred Stock).
1.6 Sixth, subject to Section 1.8 of this Exhibit B (and to the extent
not already allocated pursuant to Section 1.8 in respect of an increase in
the Series C Preferred Unit Redemption Amount due to accrued but unpaid
dividends on the Series C Preferred Stock), for any Partnership taxable year
ending on or after a date in which Series C Preferred Units are redeemed,
Net Income (or Net Loss), or, if necessary, Partnership items of income,
gain, loss and deduction thereof, shall be allocated to the General Partner
in an amount equal to the excess (or deficit) of (1) the sum of the Series C
Preferred Unit Redemption Amount for Series C Preferred Units that have been
or are being redeemed during the Partnership taxable year over (2) the
product of $13.75 times the number of such Series C Preferred Units.
1.7 Seventh, subject to Sections 1.8 and 1.9 of this Exhibit B, the
remaining Net Income or Net Loss, if any, shall be allocated to each of the
Partners in the following order and priority:
(a) The remaining Net Income, if any, shall be allocated among the
Partners holding Common Units in proportion to, and to the extent of, the
aggregate amounts of Net Cash Flow distributed in respect of the
Partners' Common Units pursuant to subsections (a)(vii) and(c) of Section
6.2 (including those amounts of Net Cash Flow distributed within the
Partnership taxable year or other applicable period under Section 6.2(e)
that are in respect of subsection (a)(vii) of Section 6.2, only if either
(A) such Net Cash Flow is distributed on or prior to the date on which
the Cash Conversion Price is paid or (B) the Limited Partner to whom such
Net Cash Flow is distributed otherwise continues to own one or more
Common Units on the date such distribution is made),
(b) In the event that assets of the Partnership are sold, conveyed,
transferred or disposed of in contemplation of or in connection with the
dissolution, liquidation and winding-up of the Partnership under Article
VIII (other than Section 8.4 thereof) (a "Capital Event"), any remaining
Net Income or Net Loss (or remaining Partnership items of income, gain,
loss and deduction thereof), computed by including the Net Income or Net
Loss resulting from such Capital Event, shall be allocated among the
Partners holding Common Units to the extent possible, until each Limited
Partner has a Capital Account balance equal to (and the General Partner
has a Capital Account balance equal to the sum of the Preferred Sum
(defined in Section 1.8 of this Exhibit B) plus an additional amount
equal to) the pro rata portion, based on the number of Common Units held
by each Partner, of the net positive sum of the Capital Account balances
for all Partners (determined after taking into account the allocations
required under subsections (a) and (b) of Section 2 of this Exhibit B)
less the Preferred Sum.
(c) Any remaining Net Income or Net Loss shall be allocated to the
Partners holding Common Units pro rata in accordance with their
respective Common Units.
1.8 Notwithstanding Sections 1.1, 1.2, 1.3, 1.4, 1.5, 1.6 and 1.7 of
this Exhibit B, the General Partner shall allocate Net Income or Net Loss
(or Partnership items of income, gain, loss and deduction thereof) among the
Partners to the extent possible such that the Minimum Gain Capital Account
balance of each Partner, as of the end of the Partnership taxable year or
other applicable period for which such allocations are made, is not less
than the sum (the "Preferred Sum") of (i) the product of the number of
Preferred Units held by such Partner multiplied by the liquidation
preference for a share of Preferred Stock pursuant to the General Partner's
Articles of Incorporation, (ii) the product of the number of Convertible
Preferred Units held by such Partner multiplied by the liquidation
preference for a share of Convertible Preferred Stock pursuant to the
General Partner's Articles of Incorporation, and (iii) the product of the
number of Series C Preferred Units held by such
Appendix F-41
<PAGE>
Partner multiplied by the liquidation preference for a share of Series C
Preferred Stock pursuant to the General Partner's Articles of Incorporation.
1.9 In the event allocations are made pursuant to Section 1.8 of this
Exhibit B ("Reallocated Income" and "Reallocated Loss") in prior Partnership
taxable years or other applicable periods, any Net Income or Net Loss (or
Partnership items of income, gain, loss and deduction thereof) that would
otherwise have been allocated pursuant to subsection (c) of Section 1.7 of
this Exhibit B, shall be allocated among the Partners so that, to the extent
possible, the net amount of such allocations of Net Income or Net Loss (or
Partnership items of income, gain, loss or deduction thereof) under
subsection (c) of Section 1.7 of this Exhibit B and the allocations of
Reallocated Income and Reallocated Loss to each Partner shall be equal to
the net amount that would have been allocated to each such Partner if the
allocations of Reallocated Income and Reallocated Loss had not occurred;
provided, however, that allocations under this Section 1.9 of this Exhibit B
shall not be made to the extent such allocations would cause the Minimum
Gain Capital Account balance to be less than the Preferred Sum.
II SPECIAL ALLOCATIONS. Notwithstanding any provisions of Section 1 of
this Exhibit B, the following special allocations shall be made:
2.1 MINIMUM GAIN CHARGEBACK (NONRECOURSE LIABILITIES).
(a) If there is a net decrease in Partnership Minimum Gain for any
Partnership taxable year, each Partner shall be specially allocated items
of Partnership income and gain for such year (and, if necessary,
subsequent years) in an amount equal to that Partner's share of the net
decrease in Partnership Minimum Gain. The items to be so allocated shall
be determined in accordance with Sections 1.704-2(f) and (i) of the
Regulations. This subsection (a) is intended to comply with the minimum
gain chargeback requirement in said section of the Regulations and shall
be interpreted consistently therewith. Allocations pursuant to this
subsection (a) shall be made in proportion to the respective amounts
required to be allocated to each Partner pursuant hereto.
(b) Exceptions to Section 2.1(a). The allocation otherwise required
pursuant to Section 2.1(a) of this Exhibit B shall not apply to a Partner
to the extent that: (i) such Partner's share of the net decrease in
Minimum Gain is caused by a guarantee, refinancing or other change in the
instrument evidencing a nonrecourse debt of the Partnership which causes
such debt to become a partially or wholly recourse debt or a Partner
Nonrecourse Debt, and such Partner bears the economic risk of loss
(within the meaning of Section 1.752-2 of the Regulations) for such
changed debt; (ii) such Partner's share of the net decrease in Minimum
Gain results from the repayment of a nonrecourse liability of the
Partnership, which repayment is made using funds contributed by such
Partner to the capital of the Partnership; (iii) the IRS, pursuant to
Section 1.704-2(f)(4) of the Regulations, waives the requirement of such
allocation in response to a request for such waiver made by the General
Partner on behalf of the Partnership (which request the General Partner
may or may not make, in its sole discretion, if it determines that the
Partnership would be eligible therefor); or (iv) additional exceptions to
the requirement of such allocation are established by revenue rulings
issued by the IRS pursuant to Section 1.704-2(f)(5) of the Regulations,
which exceptions apply to such Partner, as determined by the General
Partner in its sole discretion.
2.2 PARTNER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in
Section 1.704-2(i)(4) of the Regulations, if there is a net decrease in
Partner Minimum Gain attributable to Partner Nonrecourse Debt during any
Partnership taxable year, each Partner who has a share of the Partner
Minimum Gain attributable to such Partner Nonrecourse Debt, determined in
accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially
allocated items of Partnership income and gain for such year (and, if
necessary, subsequent years) in an amount equal to that Partner's share of
Appendix F-42
<PAGE>
the net decrease in the Partner Minimum Gain attributable to Partner
Nonrecourse Debt. The items to be so allocated shall be determined in
accordance with Sections 1.704-2(i)(4) and (j)(2) of the Regulations. This
Section 2.2 is intended to comply with the minimum gain chargeback
requirement with respect to Partner Nonrecourse Debt contained in said
section of the Regulations and shall be interpreted consistently therewith.
Allocations pursuant to this subsection (b) shall be made in proportion to
the respective amounts required to be allocated to each Partner pursuant
hereto.
2.3 QUALIFIED INCOME OFFSET. In the event a Partner unexpectedly
receives any adjustments, allocations or distributions described in Sections
1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, and such Partner has
an Adjusted Capital Account Deficit, items of Partnership income and gain
shall be specially allocated to such Partner in an amount and manner
sufficient to eliminate the Adjusted Capital Account Deficit of such Partner
as quickly as possible. This Section 2.3 is intended to constitute a
"qualified income offset" under Section 1.704-1(b)(2)(ii)(d) of the
Regulations and shall be interpreted consistently therewith; provided that
an allocation pursuant to this Section 2.3 of this Exhibit E shall be made
if and only to the extent that such Partner would have an Adjusted Capital
Account Deficit after all other allocations provided for in this Exhibit B
have been tentatively made as if Section 2.3 and Section 2.4(ii) of this
Exhibit B were not in this Agreement.
2.4 GROSS INCOME ALLOCATIONS.
(i) There shall be specially allocated to the General Partner an
amount of Partnership income and gain during each Partnership taxable
year or portion thereof, before any other allocations are made hereunder,
which is equal to the excess, if any, of the cumulative distributions of
cash made to the General Partner under Section 6.2(f) over the cumulative
allocations of Partnership income and gain to the General Partner
pursuant to Section 2.4(i) of this Exhibit B.
(ii) In the event any Partner has a deficit Capital Account balance
at the end of any Partnership taxable year in excess of the amount such
Partner is obligated or treated as obligated to restore pursuant to this
Agreement or the provisions of Section 1.704-1(b)(2(ii)(C) of the
Regulations, or is deemed to be obligated to restore pursuant to the
penultimate sentences of Sections 1.704-2(g)(l) and 1.704-2(i)(5) of the
Regulations, each such Partner shall be specially allocated items of
Partnership income and gain in an amount and manner sufficient to
eliminate the excess Capital Account deficit of such Partner as quickly
as possible; provided that an allocation pursuant to this Section 2.4 of
Exhibit B shall be made if and only to the extent that such Partner would
have such an excess Capital Account deficit after all other allocations
provided for in this Exhibit B have been tentatively made as if Section
2.3 and Section 2.4(ii) of this Exhibit B were not in this Agreement.
2.5 NONRECOURSE DEDUCTIONS. Any Nonrecourse Deductions for any
Partnership taxable year generally shall be allocated to the Partners in the
same proportion as the Partners are allocated items of loss and deduction
not attributable to either Partnership Nonrecourse Debt or Partner
Nonrecourse Debt.
2.6 PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions for
any taxable year or other applicable period shall be specially allocated to
the Partner that bears the economic risk of loss for the debt (i.e., the
Partner Nonrecourse Debt) in respect of which such Partner Nonrecourse
Deductions are attributable (as determined under Sections 1.704-2(b)(4) and
(i)(1) of the Regulations).
2.7 INTENTIONALLY OMITTED.
2.8 CURATIVE ALLOCATIONS. The Regulatory Allocations shall be taken
into account in allocating other items of income, gain, loss, and deduction
among the Partners so that, to the extent possible, the cumulative net
amount of allocations of Partnership items under Section 2 of this Exhibit B
shall be equal to the net amount that would have been allocated to each
Partner if the Regulatory Allocations had not occurred. Notwithstanding the
preceding sentence, Regulatory Allocations relating to
Appendix F-43
<PAGE>
(A) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and (B)
Partner Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partner Minimum Gain attributable
to Partner Nonrecourse Debt. This Section 2.8 is intended to minimize to the
extent possible and to the extent necessary any economic distortions which
may result from application of the Regulatory Allocations and shall be
interpreted in a manner consistent therewith. Allocations pursuant to this
Section 2.8 of Exhibit B shall be deferred with respect to allocations
pursuant to clauses (A) and (B) hereof to the extent the General Partner
reasonably determines that such allocations are likely to be offset by
subsequent Regulatory Allocations. For purposes of this Section 2.8 of this
Exhibit B, "Regulatory Allocations" shall mean the allocations provided
under Section 2 of this Exhibit B (other than under Sections 2.4(i), 2.5,
2.7 and 2.8.
2.9 SECTION 754 ADJUSTMENT. To the extent an adjustment to the
adjusted tax basis of any asset of the Partnership pursuant to Sections
734(b) or 743(b) of the Code is required, pursuant to Section
1.704-1(b)(2)(iv)(m) of the Regulations, to be taken into account in
determining Capital Accounts or adjustments thereto, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if
the adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis) and such gain or loss shall be specially allocated
among the Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such section of the
Regulations.
2.10 OTHER ALLOCATION RULES. To the extent permitted by Sections
1.704-2(h)(3) and 1.704-2(i)(6) of the Regulations, the Partners shall
endeavor to treat distributions of Net Cash Flow as having been made from
the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Debt only
to the extent that such distribution would not cause or increase an Adjusted
Capital Account Deficit for any Partner.
2.11 SHARING OF NONRECOURSE LIABILITIES. The General Partner shall
allocate Nonrecourse Liabilities of the Partnership that are in excess of
the amount of Partnership Minimum Gain, in each Partnership taxable year as
follows:
(i) To the extent of the total amount of built-in gain (as defined
in Regulations Section 1.752-3(a)(2)) among the Partners in accordance
with how the Members would share taxable gain if the LLC, in a taxable
transaction, disposed of all its property in full satisfaction of its
Nonrecourse Liabilities and for no other consideration (taking into
account the relative priorities of such Nonrecourse Liabilities and
rights in respect of specific Partnership properties;
(ii) To the extent of any remaining excess Nonrecourse Liabilities,
within the meaning of Regulations Section 1.752-3(a)(3)among the Partners
as follows:
(A) First, assuming that the assets of the Partnership are sold
for their relative fair market values, the General Partner shall
determine for each of its partners the sum of (i) the amount Code
Section 704(c) gain allocable to such Partner (taking into account
the relative Code Section 704(c) method elected by the Partnership in
respect of each contributed asset under Treasury Regulation Section
1.704-3, and less the amount already allocated to such partner under
Treasury Regulations Section 1.752-3(a)(2)), plus (ii) the amount, if
any, of remaining income and gain which would be further allocated to
such Partner under this Agreement, after all income and gain
allocable to Partners under Code Section 704(c) has been taken into
account;
(B) Second, the General Partner shall determine a percentage (the
"Tier Three Percentage") for each Partner equal to the fraction of
the sum computed for such partner in paragraph (i) above, over the
aggregate amount of such sums for all Partners; and
Appendix F-44
<PAGE>
(C) Third, the General Partner shall allocate the excess
nonrecourse liabilities of the Partnership to each Partner, pro rata,
in accordance with each Partner's Tier Three Percentage.
However, the General Partner may elect to use a different method to allocate
excess Nonrecourse Liabilities in a Partnership taxable year to the extent such
allocation does not cause a Limited Partner to recognize any greater amount of
taxable income that such Limited Partner would have recognized under the method
described in the previous sentence.
III TAX ALLOCATIONS.
3.1 GENERALLY. Subject to subsections (b) and (c) of Section 3 of this
Exhibit B, items of income, gain, loss, deduction and credit to be allocated
for income tax purposes (collectively, "Tax Items") shall be allocated among
the Partners on the same basis as they share Net Income and Net Loss.
3.2 RECAPTURE GAIN. If any portion of gain recognized from the
disposition of an asset by the Partnership represents the "recapture" of
previously allocated deductions by virtue of the application of Code Section
1245 or 1250 ("Recapture Gain"), such Recapture Gain, solely for income tax
purposes, shall be allocated as follows:
FIRST, to the Partners, PRO RATA, in proportion to the lesser of each
Partner's (i) allocable share of the total gain recognized from the
disposition of such asset and (ii) share of depreciation or amortization
with respect to such asset (under Regulations Sections 1.1245-1(e)(2) and
(3)), until each such Partner has been allocated Recapture Gain equal to
such lesser amount; and
SECOND, the balance of Recapture Gain will be allocated among the
Partners whose allocable shares of total gain exceed their shares of
depreciation or amortization with respect to such asset (under
Regulations Sections 1.1245-1(e)(2) and (3)), in proportion to their
shares of total gain (including Recapture Gain) from the disposition of
such asset;
PROVIDED, however, that no Partner will be allocated Recapture Gain under this
Section 3.2 in excess of the total gain allocated to such Partner from such
disposition.
3.3 ALLOCATIONS RESPECTING SECTION 704(C) AND REVALUATIONS; CURATIVE
ALLOCATIONS RESULTING FROM THE CEILING RULE. Notwithstanding Sections 3(a)
and 3(b) of this Exhibit B, Tax Items with respect to Partnership property
that is subject to Code Section 704(c) and/or Section 1.704-1(b)(2)(iv)(f)
of the Regulations (collectively "Section 704(c) Tax Items") shall be
allocated in accordance with said Code section and/or Section
1.704-1(b)(4)(i) of the Regulations, as the case may be. The General Partner
is authorized to, and shall, elect the "traditional method" in respect of
all its Properties, except that the General Partner is authorized to, and
shall, elect the "traditional method with curative allocations" under
Regulations Section 1.704-3(c) in respect of the Horizon Properties (other
than the interest in RSLP acquired through the Merger, for which the General
Partner is authorized to, and shall, elect the "traditional method"). With
respect to properties subsequently contributed to the Partnership, the
Partnership shall account for such variation under any method approved under
Section 704(c) of the Code and the applicable regulations as chosen by the
General Partner. In the event the Gross Asset Value of any Partnership asset
is adjusted pursuant to subparagraph (b) of the definition of Gross Asset
Value (provided in Article 1 of this Agreement), subsequent allocations of
Section 704(c) Tax Items with respect to such asset shall take account of
the variation, if any, between the adjusted basis of such asset and its
Gross Asset Value in the same manner as under Section 704(c) of the Code and
the applicable regulations consistent with the requirements of Regulations
Section 1.704-1(b)(2)(iv)(g) using any method approved under 704(c) of the
Code and the applicable regulations as chosen by the General Partner.
Appendix F-45
<PAGE>
EXHIBIT C
RIGHTS TERMS
The Rights granted by the General Partner to the Limited Partners pursuant
to Section 11.1 of the Partnership Agreement shall be subject to the following
terms and conditions:
I DEFINITIONS. The following terms and phrases shall, for purposes of this
Exhibit C and the Agreement, have the meanings set forth below:
"Beneficially Own" shall mean the ownership of Common Stock by a Person who
would be treated as an owner of such shares of Common Stock either directly or
constructively through the application of Section 544 of the Code, as modified
by Section 856(h)(1)(B) of the Code.
"Cash Purchase Price" shall have the meaning set forth in Paragraph IV
hereof.
"Computation Date" shall mean the date on which an Exchange Exercise Notice
is delivered to the General Partner.
"Election Notice" shall mean the written notice to be given by the General
Partner to the Exercising Partner(s) in response to the receipt by the General
Partner of an Exchange Exercise Notice from such Exercising Partner(s), the form
of which Election Notice is attached hereto as Schedule 2.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Exchange Exercise Notice" shall have the meaning set forth in Paragraph II
hereof.
"Exchange Factor" shall mean 100%; PROVIDED that such factor shall be
adjusted in accordance with the Antidilution Provisions of Paragraph XI hereof.
"Exchange Rights" shall have the meaning set forth in Paragraph II hereof.
"Exercising Partners" shall have the meaning set forth in Paragraph II
hereof.
"Offered Common Units" shall mean the Common Units of the Exercising
Partner(s) identified in an Exchange Exercise Notice which, pursuant to the
exercise of Exchange Rights, can be acquired by the General Partner under the
terms hereof.
"Ownership Limit" shall have the meaning set forth in Paragraph III hereof.
"Purchase Price" shall mean the Cash Purchase Price or the Stock Purchase
Price.
"Registration Rights Agreement" shall mean the agreement respecting the
registration rights attributable to shares of Common Stock, if any, issued to
Limited Partners in accordance with the provisions hereof, the form of which is
attached hereto as Schedule 3.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor statute.
"Stock Purchase Price" shall have the meaning set forth in Paragraph IV
hereof.
II DELIVERY OF EXCHANGE EXERCISE NOTICES. Any one or more Limited Partners
("Exercising Partners") may, subject to the limitations set forth herein,
deliver to the General Partner written notice (the "Exchange Exercise Notice")
pursuant to which such Exercising Partners elect to exercise their rights to
convert (the "Exchange Rights") all or any portion of their Common Units into
shares of Common Stock subject to the limitations contained in Paragraph III
below.
III LIMITATION ON EXERCISE OF EXCHANGE RIGHTS. The Exchange Rights shall
expire with respect to any Common Units for which an Exchange Exercise Notice
has not been delivered to the General Partner on January 1, 2050. Exchange
Rights may be exercised at any time prior to January 1, 2050, subject to the
limitations contained herein and in the General Partner's Articles of
Incorporation (the "Ownership
Appendix F-46
<PAGE>
Limit"). For purposes of computing the Ownership Limit as of any date, each
Limited Partner and its Affiliates shall be deemed to own all shares of Common
Stock issuable to such Limited Partner and its Affiliates upon the exercise of
stock options granted on or before such date under the Stock Incentive Plan. If
an Exchange Exercise Notice is delivered to the General Partner but, as a result
of the Ownership Limit, the Exchange Rights cannot be exercised in full, the
Exchange Exercise Notice shall be deemed to be modified such that the Exchange
Rights shall be exercised only to the extent permitted under the Ownership
Limit; with the exercise of the remainder of such Exchange Rights being deemed
to have been withdrawn.
IV COMPUTATION OF PURCHASE PRICE/FORM OF PAYMENT. The Purchase Price
payable by the General Partner to each Exercising Partner for the Offered Common
Units shall be payable by the issuance by the General Partner of the number of
shares of its Common Stock equal to the product, expressed as a whole number, of
(i) the number of Common Units being converted, multiplied by (ii) the Exchange
Factor (the "Stock Purchase Price"). At the election of the General Partner
exercisable by the independent directors of the General Partner in their sole
and absolute discretion, the Purchase Price may be paid in whole (but not in
part) in cash rather than in Common Stock (the "Cash Purchase Price"). The Cash
Purchase Price shall mean, with respect to the applicable number of Offered
Common Units which are being purchased for cash upon the exercise of any
Exchange Right, an amount of cash (in immediately available funds) equal to (i)
the number of shares of the General Partner's Common Stock that would be issued
to the Exercising Partner if the Stock Purchase Price were paid for such Offered
Common Units (taking into account the adjustments required pursuant to the
definition of "Exchange Factor") multiplied by (ii) the Current Per Share Market
Price computed as of the Computation Date. The Cash Purchase Price shall, in the
sole and absolute discretion of the General Partner, be paid in the form of
cash, or cashier's or certified check, or by wire transfer of immediately
available funds to the Exercising Partner's designated account.
V CLOSING; DELIVERY OF ELECTION NOTICE. The closing of the acquisition of
Offered Common Units shall, unless otherwise mutually agreed, be held at the
principal office of the General Partner, on the following date(s):
5.1 With respect to the exercise of Exchange Rights for which the Stock
Purchase Price is payable, the closing shall occur on the date agreed to by
the General Partner and the Exercising Partner(s), which date shall in no
event be on the date which is the later of (i) ten (10) days after the
delivery of the Election Notice; (ii) the expiration or termination of the
waiting period applicable to each Exercising Partner, if any, under the Hart
Scott Act; and (iii) forty (40) days after receipt of the Exchange Exercise
Notice delivered in accordance with the requirements of Paragraph 3 hereof;
and
5.2 With respect to the exercise of Exchange Rights for which the
General Partner elects to pay the Cash Purchase Price, the General Partner
shall, within thirty (30) days after delivery to the General Partner of the
Exchange Exercise Notice delivered in accordance with the requirements of
Paragraph 3 hereof, deliver to the Exercising Partner(s) an Election Notice,
which Election Notice shall (i) specify the General Partner's election to
pay the Cash Purchase Price for all of the Offered Common Units and (ii) set
forth the computation of the Cash Purchase Price to be paid by the General
Partner to such Exercising Partner(s) and the date, time and location for
completion of the purchase and sale of the Offered Common Units, which date
shall, to the extent required, in no event be more than sixty (60) days
after the Computation Date for such Exchange Exercise Notice; PROVIDED,
HOWEVER, that such sixty (60) day period may be extended for an additional
period to the extent required for the General Partner to cause additional
shares of its Common Stock to be issued to provide financing to be used to
acquire the Offered Common Units. Notwithstanding the foregoing, the General
Partner agrees to use its best efforts to cause the closing of the
acquisition of Offered Common Units hereunder to occur as quickly as
possible.
VI FURTHER LIMITATIONS ON EXERCISE. The Exchange Rights may not be
exercised unless the Partnership receives an opinion of counsel, which counsel
and opinion shall be reasonably satisfactory to the
Appendix F-47
<PAGE>
General Partner, that the proposed exercise of such Exchange Rights shall not
cause the Partnership to cease to qualify as a partnership for Federal income
tax purposes. This requirement may be waived by the independent directors of the
General Partner, and shall not apply to the exercise by the sole remaining
Limited Partner of the Exchange Rights with respect to all of his or its Common
Units.
VII CLOSING DELIVERIES. At the closing, payment of the Purchase Price
shall be accompanied by proper instruments of transfer and assignment and by the
delivery of (i) representations and warranties of (A) the Exercising Partner
with respect to its due authority to sell all of the right, title and interest
in and to such Offered Common Units to the General Partner and with respect to
the status of the Offered Common Units being sold, free and clear of all Liens,
and (B) the General Partner with respect to due authority for the purchase of
such Offered Common Units, and (ii) to the extent that shares of Common Stock
are issued in payment of the Stock Purchase Price, (A) an opinion of counsel for
the General Partner, reasonably satisfactory to the Exercising Partner(s), to
the effect that such shares of Common Stock have been duly authorized, are
validly issued, fully-paid and non-assessable, and (B) a stock certificate or
certificates evidencing the Common Stock to be issued and registered in the name
of the Exercising Partner(s) or its (their) designee.
VIII TERM OF RIGHTS. Unless sooner terminated, the rights of the parties
to exercise the Rights shall lapse for all purposes and in all respects on
January 1, 2050; PROVIDED, HOWEVER, that the parties hereto shall continue to be
bound by an Exchange Exercise Notice delivered to the General Partner prior to
such date.
IX COVENANTS OF THE GENERAL PARTNER. To facilitate the General Partner's
ability to fully perform its obligations hereunder, the General Partner
covenants and agrees as follows:
9.1 At all times during the pendency of the Rights, the General Partner
shall reserve for issuance such number of shares of Common Stock as may be
necessary to enable the General Partner to issue such shares in full payment
of the Stock Purchase Price in regard to all Common Units held by Limited
Partners and which are from time to time outstanding.
9.2 As long as the General Partner shall be obligated to file periodic
reports under the Exchange Act, the General Partner will timely file such
reports in such manner as shall enable any recipient of Common Stock issued
to Limited Partners hereunder in reliance upon an exemption from
registration under the Securities Act to continue to be eligible to utilize
Rule 144 promulgated by the SEC pursuant to the Securities Act, or any
successor rule or regulation or statute thereunder, for the resale thereof.
9.3 During the pendency of the Rights, the Limited Partners shall
receive in a timely manner all reports filed by the General Partner with the
SEC and all other communications transmitted from time to time by the
General Partner to its stockholders generally.
9.4 The General Partner shall be required to pay the Cash Purchase Price
to the extent that payment of the Stock Purchase Price by issuance of Common
Stock would disqualify the General Partner from being characterized as a
REIT.
9.5 The General Partner shall cooperate with the Limited Partners and
provide by certificate of appropriate officers the factual information
reasonably requested by any Limited Partner in connection with delivery of
an opinion of counsel pursuant to Section 6 of this Exhibit C.
X LIMITED PARTNERS' COVENANTS. 10.1 Each Limited Partner covenants and
agrees with the General Partner that all Offered Common Units tendered to the
General Partner in accordance with the exercise of Rights herein provided shall
be delivered to the General Partner free and clear of all Liens and should any
Liens exist or arise with respect to such Offered Common Units, the General
Partner shall be under no obligation to acquire the same unless, in connection
with such acquisition, the General Partner has elected to pay a portion of the
purchase price in the form of the Cash Purchase Price in circumstances where
such Cash Purchase Price will be sufficient to cause such existing Lien to be
discharged in full upon application
Appendix F-48
<PAGE>
of all or a part of the Cash Purchase Price and the General Partner is expressly
authorized to apply such portion of the Cash Purchase Price as may be necessary
to satisfy any indebtedness in full and to discharge such Lien in full. Each
Limited Partner further agrees that, in the event any state or local property
transfer tax is payable as a result of the transfer of its Offered Common Units
to the General Partner (or its designee), such Limited Partner shall assume and
pay such transfer tax. Finally, each Limited Partner agrees that, to the extent
it receives an amount of Net Cash Flow under Section 6.2(e) in respect of
subsections (a)(vii) or (a)(viii) of Section 6.2 that is treated as a
distribution to the General Partner for purposes of determining the Capital
Account of the General Partner, such Limited Partner will treat such amount of
Net Cash Flow for income tax purposes as an additional amount paid by the
General Partner and realized by it in exchange for the Offered Common Units.
XI ANTIDILUTION PROVISIONS.
11.1 The Exchange Factor shall be subject to adjustment from time to time
effective upon the occurrence of the following events and shall be expressed as
a percentage, calculated to the nearest one-thousandth of one percent (.001%):
(a) In case the General Partner shall pay or make a dividend or other
distribution in shares of Common Stock to all holders of the Common Stock,
the Exchange Factor in effect at the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution shall be increased in proportion
to the increase in outstanding shares of Common Stock resulting from such
dividend or other distribution, such increase to become effective
immediately after the opening of business on the day following the record
date fixed for such dividend or other distribution.
(b) In case outstanding shares of Common Stock shall be subdivided into
a greater number of shares, the Exchange Factor in effect at the opening of
business on the day following the day upon which such subdivision becomes
effective shall be proportionately increased, and, conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number
of shares, the Exchange Factor in effect at the opening of business on the
day following the day upon which such combination becomes effective shall be
proportionately reduced, such increase or reduction, as the case may be, to
become effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes
effective.
11.2 In case the General Partner shall issue rights, options or warrants to
all holders of its shares of Common Stock entitling them to subscribe for or
purchase Common Stock at a price per share less than the current market price
per share (as determined in the next sentence), each holder of a Common Unit
shall be entitled to receive such number of rights, options or warrants, as the
case may be, as he would have been entitled to receive had he converted his
Common Units immediately prior to the record date for such issuance by the
General Partner (except to the extent such receipt shall cause such holder to
exceed the Ownership Limit). For the purpose of any computation pursuant to the
preceding sentence, the current market price per share of Common Stock on any
date shall be deemed to be the average of the daily Closing Prices for the five
consecutive Trading Days selected by the General Partner commencing not more
than twenty (20) Trading Days before, and ending not later than, the earlier of
the day in question and the day before the "ex" date with respect to the
issuance or distribution requiring such computation. For purposes of this
Exhibit C, the term "Trading Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any day which securities are not traded on such
exchange or in such market and the term "'ex' date", when used in respect of any
issuance or distribution, shall mean the first date on which the shares trade
regular way on such exchange or in such market without the right to receive such
issuance or distribution.
11.3 In case the shares of Common Stock shall be changed into the same or a
different number of shares of any class or classes of stock, whether by capital
reorganization, reclassification, or otherwise (other than subdivision or
combination of shares or a stock dividend described in subparagraph (a)(ii) of
Appendix F-49
<PAGE>
this Paragraph) then and in each such event the Limited Partners shall have the
right thereafter to convert their Common Units into the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification or other change by holders of the number
of shares into which the Common Units might have been converted immediately
prior to such reorganization, reclassification or change.
11.4 The General Partner may, but shall not be required to, make such
adjustments to the number of shares of Common Stock issuable upon conversion of
a Common Unit, in addition to those required by this Paragraph XI, as the
General Partner's board of directors considers to be advisable in order that any
event treated for federal income tax purposes as a dividend of stock or stock
rights shall not be taxable to the recipients. The General Partner's board of
directors shall have the power to resolve any ambiguity or correct any error in
the adjustments made pursuant to this Paragraph and its actions in so doing
shall be final and conclusive.
XII FRACTIONS OF SHARES. No fractional Shares shall be issued upon
conversion of Common Units. If more than one Common Unit shall be surrendered
for conversion at one time by the same Exercising Partner, the number of full
shares of Common Stock which shall be issuable upon conversion thereof (or the
cash equivalent amount thereof if the Cash Purchase Price is paid) shall be
computed on the basis of the aggregate amount of Common Units so surrendered.
Instead of any fractional share of Common Stock which would otherwise be
issuable upon conversion of any Common Unit or Common Units, the General Partner
shall pay a cash adjustment in respect of such fraction in an amount equal to
the same fraction of the current market price per share at the close of business
on the day of closing specified in Paragraph 5.2 of this Exhibit C (or, if such
day is not a Trading Day, on the Trading Day immediately preceding such day).
XIII NOTICE OF ADJUSTMENTS OF EXCHANGE FACTOR. Whenever the Exchange
Factor is adjusted as herein provided:
(a) the General Partner shall compute the adjusted Exchange Factor in
accordance with Paragraph XI hereof and shall prepare a certificate signed
by the chief financial officer or the Treasurer of the General Partner
setting forth the adjusted Exchange Factor and showing in reasonable detail
the facts upon which such adjustment is based; and
(b) a notice stating that the Exchange Factor has been adjusted and
setting forth the adjusted Exchange Factor shall forthwith be mailed by the
General Partner to all holders of Exchange Rights at their last addresses on
record under this Agreement.
XIV NOTICE OF CERTAIN CORPORATE ACTIONS. In case:
(a) the General Partner shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash; or
(b) the General Partner shall authorize the granting to the holders of
its Common Stock of rights, options or warrants to subscribe for or purchase
any shares of stock of any class or of any other rights; or
(c) of any reclassification of the shares of Common Stock (other than a
subdivision or combination of its outstanding Common Stock, or of any
consolidation, merger or share exchange to which the General Partner is a
party and for which approval of any shareholders of the General Partner is
required), or of the sale or transfer of all or substantially all of the
assets of the General Partner; or
(d) of the voluntary or involuntary dissolution, liquidation or winding
up of the General Partner;
then the General Partner shall cause to be mailed to all holders of Exchange
Rights at their last addresses on record under this Agreement, at least 20 days
(or 12 days in any case specified in clause (a) or (b) above) prior to the
applicable record date hereinafter specified, a notice stating (i) the date on
which a record is to be taken for the purpose of such dividend, distribution,
rights, options or warrants, or, if a
Appendix F-50
<PAGE>
record is not to be taken, the date as of which the holders of shares of Common
Stock of record to be entitled to such dividend, distribution, rights, options
or warrants are to be determined, or (ii) the date on which such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of shares of Common Stock of record
shall be entitled to exchange their shares for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up.
XV PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS. In case
of any consolidation of the General Partner with, or merger of the General
Partner into, any other Person, any merger or consolidation of another Person
into the General Partner (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the General Partner), or any sale or transfer of all or
substantially all of the assets of the General Partner, the Person formed by
such consolidation or resulting from such merger or which acquires such assets
of the General Partner, as the case may be, shall execute and deliver to each
holder of Exchange Rights an agreement providing that such holder shall have the
right thereafter, during the period such Exchange Rights shall be exercisable as
specified herein, to require the conversion of Common Units for the kind and
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock into which such Common Unit might have been converted immediately
prior to such consolidation, merger, sale or transfer, assuming such holder of
shares of Common Stock is not a Person with which the General Partner
consolidated or into which the General Partner merged or which merged into the
General Partner, or to which such sale or transfer, was made, as the case may be
(a "Constituent Person"), or an Affiliate of a Constituent Person, and failed to
exercise his right of election, if any, as to the kind or amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer (PROVIDED that if the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer is not the
same for each share of Common Stock in respect of which such rights of election
shall not have been exercised ("non-electing Share"), then for the purpose of
this Paragraph XV the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by each
non-electing Share shall be deemed to be the kind and amount so receivable per
Share by a plurality of the non-electing Shares). Such agreement shall provide
for adjustments which, for events subsequent to the effective date of such
agreement, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Exhibit C. The above provisions of this
Paragraph XV shall similarly apply to successive consolidations, mergers, sales
or transfers.
Appendix F-51
<PAGE>
SCHEDULE 1
EXCHANGE EXERCISE NOTICE
To: Prime Retail, Inc.
Reference is made to that certain Agreement of Limited Partnership of Prime
Retail, L.P. dated , (the "Partnership Agreement"), pursuant to
which Prime Retail, Inc., a Maryland corporation, and certain other persons,
including the undersigned, formed a Delaware limited partnership known as Prime
Retail, L.P. (the "Partnership"). Capitalized terms used but not defined herein
shall have the meanings set forth in the Partnership Agreement. Pursuant to
Article XI and Paragraph II of Exhibit C of the Partnership Agreement, each of
the undersigned, being a limited partner of the Partnership (an "Exercising
Partner"), hereby elects to exercise its Exchange Rights as to the number of
Offered Common Units specified opposite its name below:
Dated:
- ---------------------
<TABLE>
<CAPTION>
NUMBER OF OFFERED
EXERCISING PARTNER COMMON UNITS
- -------------------------------------------------------------------------------- -----------------
<S> <C>
</TABLE>
Exercising Partners:
- ----------------------------
- ----------------------------
Appendix F-52
<PAGE>
SCHEDULE 2
ELECTION NOTICE
To: Exercising Partner(s)
Reference is made to that certain Agreement of Limited Partnership of Prime
Retail, L.P. dated , 1993 (the "Partnership Agreement"),
pursuant to which the undersigned and certain other persons, including the
Exercising Partners, formed a Delaware limited partnership known as Prime
Retail, L.P. (the "Partnership"). All capitalized terms used but not defined
herein shall have the meanings set forth in the Partnership Agreement. Pursuant
to subsection (b) of Paragraph V of Exhibit C to the Partnership Agreement, the
undersigned, being the general partner of the Partnership, hereby notifies the
Exercising Partner(s) that [(a) the Stock Purchase Price is payable by issuance
of the number of shares of Common Stock to the Existing Partner(s), as set forth
below,] [(b) it has elected to pay the Cash Purchase Price by payment of cash to
the Exercising Partner(s) for the number of Offered Common Units, as set forth
below,] (c) the computation of the [Stock Purchase Price and Cash Purchase
Price] as set forth on an attachment hereto, (d) the closing of the purchase and
sale of the Offered Common Units by payment of the [Stock Purchase Price shall
take place at the offices of on [date]] and [(e) the closing of
the payment of the Cash Purchase Price shall take place at the offices of
on [date].
<TABLE>
<CAPTION>
NUMBER OF OFFERED STOCK CASH
EXERCISING PARTNER(S) COMMON UNITS PURCHASE PRICE PURCHASE PRICE
- ---------------------------------------------------------------------- ----------------- -------------- --------------
<S> <C> <C> <C>
</TABLE>
Dated:
- ---------------------
<TABLE>
<S> <C> <C>
PRIME RETAIL, INC., a Maryland corporation
By: -----------------------------------------
Its: -----------------------------------------
</TABLE>
Appendix F-53
<PAGE>
SCHEDULE 3
REGISTRATION RIGHTS AGREEMENT
Appendix F-54
<PAGE>
EXHIBIT D
SERIES C PREFERRED RIGHTS TERMS
The Series C Preferred Rights granted by the General Partner to the Limited
Partners holding Series C Preferred Units pursuant to Section 12.1 of the
Partnership Agreement shall be subject to the following terms and conditions:
I DEFINITIONS. The following terms and phrases shall, for purposes of this
Exhibit D and the Agreement, have the meanings set forth below:
"Beneficially Own" shall mean the ownership of Series C Preferred Stock by a
Person who would be treated as an owner of such shares of Series C Preferred
Stock either directly or constructively through the application of Section 544
of the Code, as modified by Section 856(h)(1)(B) of the Code.
"Change of Control" means each occurrence of any of the following: (i) the
acquisition, directly or indirectly, by any individual or entity or group (as
such term is used in Section 13(d)(3) of the Exchange Act) of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act, except that such
individual or entity shall be deemed to have beneficial ownership of all shares
that any such individual or entity has the right to acquire, whether such right
is exercisable immediately or only after passage of time) of more than 25% of
the General Partner's outstanding capital stock with voting power, under
ordinary circumstances, to elect directors of the General Partner; (ii) other
than with respect to the election, resignation or replacement of any director
designated, appointed or elected by the holders of the Series C Preferred Stock
(each a "Preferred Director"), during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the General Partner (together with any new directors whose election
by such Board of Directors or whose nomination of or election by the
shareholders of the General Partner was approved by a vote of 66 2/3% of the
directors of the General Partner (excluding Preferred Directors) then still in
office who were either directors at the beginning of such period, or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the General Partner
then in office; and (iii) (A) the General Partner consolidating with or merging
into another entity or conveying, transferring or leasing all or substantially
all of its assets (including, but not limited to, real property investments) to
any individual or entity, or (B) any corporation consolidating with or merging
into the General Partner, which in either event (A) or (B) is pursuant to a
transaction in which the outstanding voting capital stock of the General Partner
is reclassified or changed into or exchanged for cash, securities or other
property; PROVIDED, HOWEVER, that the events described in clause (iii) shall not
be deemed to be a Change of Control (a) if the sole purpose of such event is
that the General Partner is seeking to change its domicile or to change its form
of organization from a corporation to a statutory business trust or (b) if the
holders of the exchanged securities of the General Partner immediately after
such transaction beneficially own at least a majority of the securities of the
merged or consolidated entity normally entitled to vote in elections of
directors.
"Common Stock Purchase Price" shall have the meaning set forth in Paragraph
IV hereof.
"Computation Date" shall mean the date on which an Exchange Exercise Notice
is delivered to the General Partner.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Exchange Exercise Notice" shall have the meaning set forth in Paragraph II
hereof.
"Exchange Rights" shall have the meaning set forth in Paragraph II hereof.
"Exercising Partners" shall have the meaning set forth in Paragraph II
hereof.
Appendix F-55
<PAGE>
"Offered Series C Preferred Units" shall mean the Series C Preferred Units
of the Exercising Partner(s) identified in an Exchange Exercise Notice which,
pursuant to the exercise of Exchange Rights, can be acquired by the General
Partner under the terms hereof.
"Ownership Limit" shall have the meaning set forth in Paragraph III hereof.
"Purchase Price" shall mean the Common Stock Purchase Price or the Series C
Preferred Stock Purchase Price.
"REIT Termination Event" shall mean the earliest to occur of: (i) the filing
of a federal income tax return by the General Partner for any taxable year on
which the General Partner does not elect to be taxed as a real estate investment
trust; (ii) the approval by the stockholders of the General Partner of a
proposal for the General Partner to cease to qualify as a real estate investment
trust; (iii) a determination by the Board of Directors of the General Partner,
based on the advice of counsel, that the General Partner has ceased to qualify
as a real estate investment trust; or (iv) a "determination" within the meaning
of Section 1313(a) of the Internal Revenue Code of 1986, as amended, that the
General Partner has ceased to qualify as a real estate investment trust.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor statute.
"Series C Preferred Stock Purchase Price" shall have the meaning set forth
in Paragraph IV hereof.
II DELIVERY OF EXCHANGE EXERCISE NOTICES. Any one or more Limited Partners
holding Series C Preferred Units ("Exercising Partners") may, subject to the
limitations set forth herein, deliver to the General Partner written notice (the
"Exchange Exercise Notice") pursuant to which such Exercising Partners elect to
exercise their rights to exchange (the "Exchange Rights") all or any portion of
their Series C Preferred Units for shares of Series C Preferred Stock or Common
Stock, subject to the limitations contained in Paragraph 3 below.
III LIMITATION ON EXERCISE OF EXCHANGE RIGHTS. Exchange Rights with
respect to an exchange into Series C Preferred Stock may be exercised at any
time, and Exchange Rights with respect to an exchange into Common Stock may be
exercised at any time on or after August 8, 1998 (or, if earlier, on the first
day on which a Change of Control occurs or a REIT Termination Event) and from
time to time thereafter. Any exercise of Exchange Rights shall be subject to the
limitations contained herein and in the General Partner's Articles of
Incorporation (the "Ownership Limit"). If an Exchange Exercise Notice is
delivered to the General Partner but, as a result of the Ownership Limit, the
Exchange Rights cannot be exercised in full, the Exchange Exercise Notice shall
be deemed to be modified such that the Exchange Rights shall be exercised only
to the extent permitted under the Ownership Limit; with the exercise of the
remainder of such Exchange Rights being deemed to have been withdrawn.
IV ELECTION AND COMPUTATION OF PURCHASE PRICE. The Purchase Price payable
by the General Partner to each Exercising Partner for the Offered Series C
Preferred Units shall be payable by the issuance by the General Partner of the
number of shares of its Series C Preferred Stock equal to the number of Series C
Preferred Units being converted (the "Series C Preferred Stock Purchase Price").
At the election of an Exercising Partner, the Purchase Price shall be paid by
the General Partner in shares of its Common Stock rather than in Series C
Preferred Stock (the "Common Stock Purchase Price"). The Common Stock Purchase
Price shall mean, with respect to the applicable number of Offered Series C
Preferred Units for which an Exercising Partner has elected to receive the
Common Stock Purchase Price rather than the Series C Preferred Stock Purchase
Price, the number of shares of the General Partner's Common Stock that would be
issued to the Exercising Partner if the Exercising Partner held the number of
shares of the General Partner's Series C Preferred Stock equal to the number of
Offered Series C Preferred Units and converted such shares to shares of the
General Partner's Common Stock pursuant to the terms and provisions of the
General Partner's Articles of Incorporation.
Appendix F-56
<PAGE>
V CLOSING; DELIVERY OF ELECTION NOTICE. The closing of the acquisition of
Offered Series C Preferred Units shall, unless otherwise mutually agreed, be
held at the principal office of the General Partner, on the date agreed to by
the General Partner and the Exercising Partner(s), which date shall in no event
be on the date which is the later of (i) the expiration or termination of the
waiting period applicable to each Exercising Partner, if any, under the Hart
Scott Act; and (ii) ten (10) days after receipt of the Exchange Exercise Notice
delivered in accordance with the requirements of Paragraph II hereof.
VI FURTHER LIMITATION ON EXERCISE. The Exchange Rights may not be
exercised unless the Partnership receives an opinion of counsel, which counsel
and opinion shall be reasonably satisfactory to the General Partner, that the
proposed exercise of such Exchange Rights shall not cause the Partnership to
cease to qualify as a partnership for Federal income tax purposes. This
requirement may be waived by the General Partner, and shall not apply to the
exercise by the sole remaining Limited Partner of the Exchange Rights with
respect to all of his or its Series C Preferred Units.
VII CLOSING DELIVERIES. At the closing, payment of the Purchase Price
shall be accompanied by proper instruments of transfer and assignment and by the
delivery of (i) representations and warranties of (A) the Exercising Partner
with respect to its due authority to sell all of the right, title and interest
in and to such Offered Series C Preferred Units to the General Partner and with
respect to the status of the Offered Series C Preferred Units being sold, free
and clear of all Liens, and (B) the General Partner with respect to due
authority for the purchase of such Offered Series C Preferred Units, and (ii)
(A) an opinion of counsel for the General Partner, reasonably satisfactory to
the Exercising Partner(s), to the effect that the shares of Series C Preferred
Stock (or Common Stock, in the event the Electing Partner has elected to receive
the Common Stock Purchase Price) have been duly authorized, are validly issued,
fully-paid and non-assessable, and (B) a stock certificate or certificates
evidencing the Series C Preferred Stock (or Common Stock, in the event the
Electing Partner has elected to receive the Common Stock Purchase Price) to be
issued and registered in the name of the Exercising Partner(s) or its (their)
designee.
VIII COVENANTS OF THE GENERAL PARTNER. To facilitate the General Partner's
ability to fully perform its obligations hereunder, the General Partner
covenants and agrees as follows:
8.1 At all times during the pendency of the Series C Preferred Rights,
the General Partner shall reserve for issuance such number of shares of
Series C Preferred Stock and Common Stock as may be necessary to enable the
General Partner to issue such shares in full payment of the Series C
Preferred Stock Purchase Price or Common Stock Purchase Price in regard to
all Series C Preferred Units held by Limited Partners and which are from
time to time outstanding.
8.2 As long as the General Partner shall be obligated to file periodic
reports under the Exchange Act, the General Partner will timely file such
reports in such manner as shall enable any recipient of Series C Preferred
Stock or Common Stock issued to Limited Partners hereunder in reliance upon
an exemption from registration under the Securities Act to continue to be
eligible to utilize Rule 144 promulgated by the SEC pursuant to the
Securities Act, or any successor rule or regulation or statute thereunder,
for the resale thereof.
8.3 During the pendency of the Series C Preferred Rights, the Limited
Partners holding Series C Preferred Units shall receive in a timely manner
all reports filed by the General Partner with the SEC and all other
communications transmitted from time to time by the General Partner to its
stockholders generally.
8.4 The General Partner shall cooperate with the Limited Partners
holding Series C Preferred Units and provide by certificate of appropriate
officers the factual information reasonably requested by any Limited Partner
in connection with delivery of an opinion of counsel pursuant to Section VI
of this Exhibit D.
IX LIMITED PARTNERS' COVENANTS. Each Limited Partner holding Series C
Preferred Units covenants and agrees with the General Partner that all Offered
Series C Preferred Units tendered to the General
Appendix F-57
<PAGE>
Partner in accordance with the exercise of Series C Preferred Rights herein
provided shall be delivered to the General Partner free and clear of all Liens
and should any Liens exist or arise with respect to such Offered Series C
Preferred Units, the General Partner shall be under no obligation to acquire the
same unless the Purchase Price will be sufficient to cause such existing Lien to
be discharged in full upon application of all or a part of the Purchase Price
and the General Partner is expressly authorized to apply such portion of the
Purchase Price as may be necessary to satisfy any indebtedness in full and to
discharge such Lien in full. Each Limited Partner holding Series C Preferred
Units further agrees that, in the event any state or local property transfer tax
is payable as a result of the transfer of its Offered Series C Preferred Units
to the General Partner (or its designee), such Limited Partner shall assume and
pay such transfer tax. Finally, each Limited Partner holding Series C Preferred
Units agrees that, to the extent it receives an amount of Net Cash Flow under
Section 6.2(e) in respect of subsection (a)(vii) of Section 6.2 of the
Partnership Agreement that is treated as a distribution to the General Partner
for purposes of determining the Capital Account of the General Partner, such
Limited Partner will treat such amount of Net Cash Flow for income tax purposes
as an additional amount paid by the General Partner and realized by it in
exchange for the Offered Series C Preferred Units.
X FRACTIONS OF SHARES. No fractional Shares shall be issued upon
conversion of Series C Preferred Units. If more than one Series C Preferred Unit
shall be surrendered for conversion at one time by the same Exercising Partner,
the number of full shares of Series C Preferred Stock which shall be issuable
upon conversion thereof (or Series C Preferred Stock if the Common Stock
Purchase Price is paid) shall be computed on the basis of the aggregate amount
of Series C Preferred Units so surrendered. Instead of any fractional share of
Series C Preferred Stock or Common Stock which would otherwise be issuable upon
conversion of any Series C Preferred Unit or Series C Preferred Units, the
General Partner shall pay a cash adjustment in respect of such fraction in an
amount equal to the same fraction of the current market price per share at the
close of business on the day of closing specified in Paragraph V of this Exhibit
D (or, if such day is not a Trading Day, on the Trading Day immediately
preceding such day). For the purpose of any computation pursuant to the
preceding sentence, the current market price per share of Series C Preferred
Stock on any date shall be deemed to be the average of the daily Closing Prices
for the five consecutive Trading Days selected by the General Partner commencing
not more than twenty (20) Trading Days before, and ending not later than, the
earlier of the day in question and the day before the "ex" date with respect to
the issuance or distribution requiring such computation. For purposes of this
Exhibit D, the term "Trading Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any day which securities are not traded on such
exchange or in such market and the term "'ex' date", when used in respect of any
issuance or distribution, shall mean the first date on which the shares trade
regular way on such exchange or in such market without the right to receive such
issuance or distribution.
XI PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS. In case
of any consolidation of the General Partner with, or merger +of the General
Partner into, any other Person, any merger or consolidation of another Person
into the General Partner (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Series C Preferred Stock or Common Stock of the General Partner), or any sale or
transfer of all or substantially all of the assets of the General Partner, the
Person formed by such consolidation or resulting from such merger or which
acquires such assets of the General Partner, as the case may be, shall execute
and deliver to each holder of Exchange Rights an agreement providing that such
holder shall have the right thereafter, during the period such Exchange Rights
shall be exercisable as specified herein, to require the conversion of Series C
Preferred Units for the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a holder of the
number of shares of Series C Preferred Stock or Common Stock into which such
Series C Preferred Unit might have been converted immediately prior to such
consolidation, merger, sale or transfer, assuming such holder of shares of
Series C Preferred Stock is not a Person with which the General Partner
consolidated or into which the General Partner merged or which merged into the
General Partner, or to which such sale or transfer, was made, as the case may be
(a "Constituent Person"), or an Affiliate of a Constituent Person, and failed to
exercise his right of election, if
Appendix F-58
<PAGE>
any, as to the kind or amount of securities, cash or other property receivable
upon such consolidation, merger, sale or transfer (PROVIDED that if the kind or
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer is not the same for each share of Series
C Preferred Stock in respect of which such rights of election shall not have
been exercised ("non-electing Share"), then for the purpose of this Paragraph XI
the kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by each non-electing Share shall be
deemed to be the kind and amount so receivable per Share by a plurality of the
non-electing Shares). Such agreement shall provide for adjustments which, for
events subsequent to the effective date of such agreement, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Exhibit
D. The above provisions of this Paragraph XI shall similarly apply to successive
consolidations, mergers, sales or transfers.
Appendix F-59
<PAGE>
SCHEDULE 1
EXCHANGE EXERCISE NOTICE
To: Prime Retail, Inc.
Reference is made to that certain Amended and Restated Agreement of Limited
Partnership of Prime Retail, L.P. dated , (the "Partnership
Agreement"), pursuant to which Prime Retail, Inc., a Maryland corporation, and
certain other persons, including the undersigned, continued a Delaware limited
partnership known as Prime Retail, L.P. (the "Partnership"). Capitalized terms
used but not defined herein shall have the meanings set forth in the Partnership
Agreement. Pursuant to Article XII of the Partnership Agreement and Paragraph II
of Exhibit D of the Partnership Agreement, each of the undersigned, being a
limited partner of the Partnership (an "Exercising Partner"), hereby elects to
exercise its Exchange Rights as to the number of Offered Series C Preferred
Units specified opposite its name below. Pursuant to Paragraph IV of Exhibit D
of the Partnership Agreement, the undersigned elect to receive [the Series C
Preferred Stock Purchase Price]/[the Common Stock Purchase Price].
Dated:
- ---------------------
<TABLE>
<CAPTION>
NUMBER OF OFFERED
SERIES C PREFERRED
EXERCISING PARTNER UNITS
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
</TABLE>
Exercising Partners:
- ----------------------------
- ----------------------------
Appendix F-60
<PAGE>
EXHIBIT E
SECTION 6.2(E) AGREEMENTS
1. Special Distribution and Allocation Agreement dated as of January 1, 1996
among Prime Retail, Inc., Prime Retail, L.P. and the Carpenter Family
Associates LLC.
2. Combined Service and Special Distribution and Allocation Agreement dated as
of January 1, 1996 among Prime Retail, Inc., Prime Retail, L.P. and William
H. Carpenter, Jr.
3. Special Distribution and Allocation Agreement dated as of January 1, 1996
among Prime Retail, Inc., Prime Retail, L.P. and the Rosenthal Family LLC.
4. Combined Service and Special Distribution and Allocation Agreement dated as
of January 1, 1996 among Prime Retail, Inc., Prime Retail, L.P. and Abraham
Rosenthal.
Appendix F-61
<PAGE>
EXHIBIT F
CONVERTIBLE PREFERRED RIGHTS TERMS
The Convertible Preferred Rights granted by the General Partner to the
Limited Partners holding Convertible Preferred Units pursuant to Section 11.1A
of the Partnership Agreement shall be subject to the following terms and
conditions:
1. DEFINITIONS. The following terms and phrases shall, for purposes of
this Exhibit F and the Agreement, have the meanings set forth below:
"Beneficially Own" shall mean the ownership of Convertible Preferred Stock
by a Person who would be treated as an owner of such shares of Convertible
Preferred Stock either directly or constructively through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code.
"Common Stock Purchase Price" shall have the meaning set forth in Paragraph
IV hereof.
"Computation Date" shall mean the date on which an Exchange Exercise Notice
is delivered to the General Partner.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Exchange Exercise Notice" shall have the meaning set forth in Paragraph 2
hereof.
"Exchange Rights" shall have the meaning set forth in Paragraph 2 hereof.
"Exercising Partners" shall have the meaning set forth in Paragraph 2
hereof.
"Offered Convertible Preferred Units" shall mean the Convertible Preferred
Units of the Exercising Partner(s) identified in an Exchange Exercise Notice
which, pursuant to the exercise of Exchange Rights, can be acquired by the
General Partner under the terms hereof.
"Ownership Limit" shall have the meaning set forth in Paragraph 3 hereof.
"Purchase Price" shall mean the Common Stock Purchase Price or the
Convertible Preferred Stock Purchase Price.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor statute.
"Convertible Preferred Stock Purchase Price" shall have the meaning set
forth in Paragraph 4 hereof.
2. DELIVERY OF EXCHANGE EXERCISE NOTICES. Any one or more Limited Partners
holding Convertible Preferred Units ("Exercising Partners") may, subject to the
limitations set forth herein, deliver to the General Partner written notice (the
"Exchange Exercise Notice") pursuant to which such Exercising Partners elect to
exercise their rights to convert (the "Exchange Rights") all or any portion of
their Convertible Preferred Units for shares of Convertible Preferred Stock or
Common Stock, subject to the limitations contained in Paragraph 3 below.
3. LIMITATION ON EXERCISE OF EXCHANGE RIGHTS. Exchange Rights with respect
to an exchange into Convertible Preferred Stock may be exercised at any time.
Any exercise of Exchange Rights shall be subject to the limitations contained
herein and in the General Partner's Articles of Incorporation (the "Ownership
Limit"). If an Exchange Exercise Notice is delivered to the General Partner but,
as a result of the Ownership Limit, the Exchange Rights cannot be exercised in
full, the Exchange Exercise Notice shall be deemed to be modified such that the
Exchange Rights shall be exercised only to the extent permitted under the
Ownership Limit; with the exercise of the remainder of such Exchange Rights
being deemed to have been withdrawn.
4. ELECTION AND COMPUTATION OF PURCHASE PRICE. The Purchase Price payable
by the General Partner to each Exercising Partner for the Offered Convertible
Preferred Units shall be payable by the issuance by
Appendix F-62
<PAGE>
the General Partner of the product, expressed as a whole number, of (i) the
number of shares of its Convertible Preferred Stock equal to the number of
Convertible Preferred Units being converted, multiplied by (ii) the Preferred
Exchange Factor (the "Convertible Preferred Stock Purchase Price"). At the
election of an Exercising Partner, the Purchase Price shall be paid by the
General Partner in shares of its Common Stock rather than in Convertible
Preferred Stock (the "Common Stock Purchase Price"). The Common Stock Purchase
Price shall mean, with respect to the applicable number of Offered Convertible
Preferred Units for which an Exercising Partner has elected to receive the
Common Stock Purchase Price rather than the Convertible Preferred Stock Purchase
Price, the number of shares of the General Partner's Common Stock that would be
issued to the Exercising Partner if the Exercising Partner held the number of
shares of the General Partner's Convertible Preferred Stock equal to the number
of such shares that the Exercising Partner would have received if he had
converted his Offered Convertible Preferred Units into such shares and then
converted such shares to shares of the General Partner's Common Stock pursuant
to the terms and provisions of the General Partner's Articles of Incorporation.
5. CLOSING; DELIVERY OF ELECTION NOTICE. The closing of the acquisition of
Offered Convertible Preferred Units shall, unless otherwise mutually agreed, be
held at the principal office of the General Partner, on the date agreed to by
the General Partner and the Exercising Partner(s), which date shall in no event
be on the date which is the later of (i) the expiration or termination of the
waiting period applicable to each Exercising Partner, if any, under the Hart
Scott Act; and (ii) ten (10) days after receipt of the Exchange Exercise Notice
delivered in accordance with the requirements of Paragraph II hereof.
6. FURTHER LIMITATION ON EXERCISE. The Exchange Rights may not be
exercised unless the Partnership receives an opinion of counsel, which counsel
and opinion shall be reasonably satisfactory to the General Partner, that the
proposed exercise of such Exchange Rights shall not cause the Partnership to
cease to qualify as a partnership for Federal income tax purposes. This
requirement may be waived by the General Partner, and shall not apply to the
exercise by the sole remaining Limited Partner of the Exchange Rights with
respect to all of his or its Convertible Preferred Units.
7. CLOSING DELIVERIES. At the closing, payment of the Purchase Price shall
be accompanied by proper instruments of transfer and assignment and by the
delivery of (i) representations and warranties of (A) the Exercising Partner
with respect to its due authority to sell all of the right, title and interest
in and to such Offered Convertible Preferred Units to the General Partner and
with respect to the status of the Offered Convertible Preferred Units being
sold, free and clear of all Liens, and (B) the General Partner with respect to
due authority for the purchase of such Offered Convertible Preferred Units, and
(ii) (A) an opinion of counsel for the General Partner, reasonably satisfactory
to the Exercising Partner(s), to the effect that the shares of Convertible
Preferred Stock (or Common Stock, in the event the Electing Partner has elected
to receive the Common Stock Purchase Price) have been duly authorized, are
validly issued, fully-paid and non-assessable, and (B) a stock certificate or
certificates evidencing the Convertible Preferred Stock (or Common Stock, in the
event the Electing Partner has elected to receive the Common Stock Purchase
Price) to be issued and registered in the name of the Exercising Partner(s) or
its (their) designee.
8. COVENANTS OF THE GENERAL PARTNER. To facilitate the General Partner's
ability to fully perform its obligations hereunder, the General Partner
covenants and agrees as follows:
8.1 At all times during the pendency of the Convertible Preferred Rights,
the General Partner shall reserve for issuance such number of shares of
Convertible Preferred Stock and Common Stock as may be necessary to enable the
General Partner to issue such shares in full payment of the Convertible
Preferred Stock Purchase Price or Common Stock Purchase Price in regard to all
Convertible Preferred Units held by Limited Partners and which are from time to
time outstanding.
8.2 As long as the General Partner shall be obligated to file periodic
reports under the Exchange Act, the General Partner will timely file such
reports in such manner as shall enable any recipient of Convertible Preferred
Stock or Common Stock issued to Limited Partners hereunder in reliance upon an
Appendix F-63
<PAGE>
exemption from registration under the Securities Act to continue to be eligible
to utilize Rule 144 promulgated by the SEC pursuant to the Securities Act, or
any successor rule or regulation or statute thereunder, for the resale thereof.
8.3 During the pendency of the Convertible Preferred Rights, the Limited
Partners holding Convertible Preferred Units shall receive in a timely manner
all reports filed by the General Partner with the SEC and all other
communications transmitted from time to time by the General Partner to its
stockholders generally.
8.4 The General Partner shall cooperate with the Limited Partners holding
Convertible Preferred Units and provide by certificate of appropriate officers
the factual information reasonably requested by any Limited Partner in
connection with delivery of an opinion of counsel pursuant to Section VI of this
Exhibit F.
9. LIMITED PARTNERS' COVENANTS. Each Limited Partner holding Convertible
Preferred Units covenants and agrees with the General Partner that all Offered
Convertible Preferred Units tendered to the General Partner in accordance with
the exercise of Convertible Preferred Rights herein provided shall be delivered
to the General Partner free and clear of all Liens and should any Liens exist or
arise with respect to such Offered Convertible Preferred Units, the General
Partner shall be under no obligation to acquire the same unless the Purchase
Price will be sufficient to cause such existing Lien to be discharged in full
upon application of all or a part of the Purchase Price and the General Partner
is expressly authorized to apply such portion of the Purchase Price as may be
necessary to satisfy any indebtedness in full and to discharge such Lien in
full. Each Limited Partner holding Convertible Preferred Units further agrees
that, in the event any state or local property transfer tax is payable as a
result of the transfer of its Offered Convertible Preferred Units to the General
Partner (or its designee), such Limited Partner shall assume and pay such
transfer tax. Finally, each Limited Partner holding Convertible Preferred Units
agrees that, to the extent it receives an amount of Net Cash Flow under Section
6.2(e) in respect of subsection (a)(vii) of Section 6.2 of the Partnership
Agreement that is treated as a distribution to the General Partner for purposes
of determining the Capital Account of the General Partner, such Limited Partner
will treat such amount of Net Cash Flow for income tax purposes as an additional
amount paid by the General Partner and realized by it in exchange for the
Offered Convertible Preferred Units.
10. FRACTIONS OF SHARES. No fractional Shares shall be issued upon
conversion of Convertible Preferred Units. If more than one Convertible
Preferred Unit shall be surrendered for conversion at one time by the same
Exercising Partner, the number of full shares of Convertible Preferred Stock
which shall be issuable upon conversion thereof (or Common Stock if the Common
Stock Purchase Price is paid) shall be computed on the basis of the aggregate
amount of Convertible Preferred Units so surrendered. Instead of any fractional
share of Convertible Preferred Stock or Common Stock which would otherwise be
issuable upon conversion of any Convertible Preferred Unit or Convertible
Preferred Units, the General Partner shall pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of the current market
price per share at the close of business on the day of closing specified in
Paragraph V of this Exhibit F (or, if such day is not a Trading Day, on the
Trading Day immediately preceding such day). For the purpose of any computation
pursuant to the preceding sentence, the current market price per share of
Convertible Preferred Stock on any date shall be deemed to be the average of the
daily Closing Prices for the five consecutive Trading Days selected by the
General Partner commencing not more than twenty (20) Trading Days before, and
ending not later than, the earlier of the day in question and the day before the
"ex" date with respect to the issuance or distribution requiring such
computation. For purposes of this Exhibit F, the term "Trading Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day which
securities are not traded on such exchange or in such market and the term "'ex'
date", when used in respect of any issuance or distribution, shall mean the
first date on which the shares trade regular way on such exchange or in such
market without the right to receive such issuance or distribution.
Appendix F-64
<PAGE>
11. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS. In case
of any consolidation of the General Partner with, or merger of the General
Partner into, any other Person, any merger or consolidation of another Person
into the General Partner (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Convertible Preferred Stock or Common Stock of the General Partner), or any sale
or transfer of all or substantially all of the assets of the General Partner,
the Person formed by such consolidation or resulting from such merger or which
acquires such assets of the General Partner, as the case may be, shall execute
and deliver to each holder of Exchange Rights an agreement providing that such
holder shall have the right thereafter, during the period such Exchange Rights
shall be exercisable as specified herein, to require the conversion of
Convertible Preferred Units for the kind and amount of securities, cash and
other property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Convertible Preferred Stock or Common Stock
into which such Convertible Preferred Unit might have been converted immediately
prior to such consolidation, merger, sale or transfer, assuming such holder of
shares of Convertible Preferred Stock is not a Person with which the General
Partner consolidated or into which the General Partner merged or which merged
into the General Partner, or to which such sale or transfer, was made, as the
case may be (a "Constituent Person"), or an Affiliate of a Constituent Person,
and failed to exercise his right of election, if any, as to the kind or amount
of securities, cash or other property receivable upon such consolidation,
merger, sale or transfer (PROVIDED that if the kind or amount of securities,
cash and other property receivable upon such consolidation, merger, sale or
transfer is not the same for each share of Convertible Preferred Stock in
respect of which such rights of election shall not have been exercised ("non-
electing Share"), then for the purpose of this Paragraph XI the kind and amount
of securities, cash and other property receivable upon such consolidation,
merger, sale or transfer by each non-electing Share shall be deemed to be the
kind and amount so receivable per Share by a plurality of the non-electing
Shares). Such agreement shall provide for adjustments which, for events
subsequent to the effective date of such agreement, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Exhibit
F. The above provisions of this Paragraph XI shall similarly apply to successive
consolidations, mergers, sales or transfers.
12. ANTIDILUTION PROVISIONS.
12.1 The Preferred Exchange Factor shall be subject to adjustment from time
to time effective upon the occurrence of the following events and shall be
expressed as a percentage, calculated to the nearest one-thousandth of one
percent (.001%):
(a) In case the General Partner shall pay or make a dividend or other
distribution in shares of Convertible Preferred Stock to all holders of the
Convertible Preferred Stock, the Exchange Factor in effect at the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall
be increased in proportion to the increase in outstanding shares of
Convertible Preferred Stock resulting from such dividend or other
distribution, such increase to become effective immediately after the
opening of business on the day following the record date fixed for such
dividend or other distribution.
(b) In case outstanding shares of Convertible Preferred Stock shall be
subdivided into a greater number of shares, the Exchange Factor in effect at
the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately increased, and,
conversely, in case the outstanding shares of Convertible Preferred Stock
shall be combined into a smaller number of shares, the Exchange Factor in
effect at the opening of business on the day following the day upon which
such combination becomes effective shall be proportionately reduced, such
increase or reduction, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
12.2 In case the General Partner shall issue rights, options or warrants to
all holders of its shares of Convertible Preferred Stock entitling them to
subscribe for or purchase Convertible Preferred Stock at a
Appendix F-65
<PAGE>
price per share less than the current market price per share (as determined in
the next sentence), each holder of a Convertible Preferred Unit shall be
entitled to receive such number of rights, options or warrants, as the case may
be, as he would have been entitled to receive had he converted his Convertible
Preferred Units immediately prior to the record date for such issuance by the
General Partner (except to the extent such receipt shall cause such holder to
exceed the Ownership Limit). For the purpose of any computation pursuant to the
preceding sentence, the current market price per share of Convertible Preferred
Stock on any date shall be deemed to be the average of the daily Closing Prices
for the five consecutive Trading Days selected by the General Partner commencing
not more than twenty (20) Trading Days before, and ending not later than, the
earlier of the day in question and the day before the "ex" date with respect to
the issuance or distribution requiring such computation. For purposes of this
Exhibit C, the term "Trading Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any day which securities are not traded on such
exchange or in such market and the term "'ex' date", when used in respect of any
issuance or distribution, shall mean the first date on which the shares trade
regular way on such exchange or in such market without the right to receive such
issuance or distribution.
12.3 In case the shares of Convertible Preferred Stock shall be changed into
the same or a different number of shares of any class or classes of stock,
whether by capital reorganization, reclassification, or otherwise (other than
subdivision or combination of shares or a stock dividend described in
subparagraph (a)(ii) of this Paragraph) then and in each such event the Limited
Partners shall have the right thereafter to convert their Convertible Preferred
Units into the kind and amount of shares and other securities and property which
would have been received upon such reorganization, reclassification or other
change by holders of the number of shares into which the Convertible Preferred
Units might have been converted immediately prior to such reorganization,
reclassification or change.
12.4 The General Partner may, but shall not be required to, make such
adjustments to the number of shares of Convertible Preferred Stock issuable upon
conversion of a Convertible Preferred Unit, in addition to those required by
this Paragraph 12, as the General Partner's board of directors considers to be
advisable in order that any event treated for federal income tax purposes as a
dividend of stock or stock rights shall not be taxable to the recipients. The
General Partner's board of directors shall have the power to resolve any
ambiguity or correct any error in the adjustments made pursuant to this
Paragraph and its actions in so doing shall be final and conclusive.
Appendix F-66
<PAGE>
SCHEDULE 1
EXCHANGE EXERCISE NOTICE
To: Prime Retail, Inc.
Reference is made to that certain Amended and Restated Agreement of Limited
Partnership of Prime Retail, L.P. dated , (the "Partnership
Agreement"), pursuant to which Prime Retail, Inc., a Maryland corporation, and
certain other persons, including the undersigned, continued a Delaware limited
partnership known as Prime Retail, L.P. (the "Partnership"). Capitalized terms
used but not defined herein shall have the meanings set forth in the Partnership
Agreement. Pursuant to Part B, Article XI of the Partnership Agreement and
Paragraph II of Exhibit F of the Partnership Agreement, each of the undersigned,
being a limited partner of the Partnership (an "Exercising Partner"), hereby
elects to exercise its Exchange Rights as to the number of Offered Convertible
Preferred Units specified opposite its name below. Pursuant to Paragraph IV of
Exhibit F of the Partnership Agreement, the undersigned elect to receive [the
Convertible Preferred Stock Purchase Price]/[the Common Stock Purchase Price].
Dated:
- ---------------------
<TABLE>
<CAPTION>
NUMBER OF OFFERED
CONVERTIBLE PREFERRED
EXERCISING PARTNER UNITS
- --------------------------------------------------------------------------------------- -------------------------
<S> <C>
</TABLE>
Exercising Partners:
- ----------------------------
- ----------------------------
Appendix F-67
<PAGE>
APPENDIX G
FORM OF
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HORIZON GROUP PROPERTIES, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1
DEFINED TERMS.................................................................... 1
Section 1.1 DEFINITIONS.......................................................... 1
ARTICLE 2
ORGANIZATIONAL MATTERS........................................................... 11
Section 2.1 ORGANIZATION......................................................... 11
Section 2.2 NAME................................................................. 11
Section 2.3 RESIDENT AGENT; PRINCIPAL OFFICE..................................... 11
Section 2.4 POWER OF ATTORNEY.................................................... 11
Section 2.5 TERM................................................................. 12
Section 2.6 FILINGS.............................................................. 12
ARTICLE 3
PURPOSE.......................................................................... 14
Section 3.1 PURPOSE AND BUSINESS................................................. 14
Section 3.2 POWERS............................................................... 14
Section 3.3 REPRESENTATIONS AND WARRANTIES BY THE PARTIES........................ 14
ARTICLE 4
CAPITAL FINANCINGS............................................................... 16
Section 4.1 UNITS; NO REQUIRED CAPITAL CONTRIBUTIONS BY THE PARTNERS............. 16
Section 4.2 LOANS BY THIRD PARTIES............................................... 16
Section 4.3 ADDITIONAL FUNDING AND CAPITAL CONTRIBUTIONS......................... 16
A. GENERAL.............................................................. 16
B. GENERAL PARTNER LOANS................................................ 16
C. ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS......................... 16
D. ISSUANCE OF SHARES OR OTHER SECURITIES BY THE GENERAL PARTNER........ 17
Section 4.4 SHARE INCENTIVE PLAN................................................. 17
Section 4.5 OTHER CONTRIBUTION PROVISIONS........................................ 17
Section 4.6 PURCHASE OF SHARES BY THE GENERAL PARTNER............................ 17
Section 4.7 NO INTEREST ON CAPITAL CONTRIBUTIONS................................. 18
Section 4.8 CONVERSION OR REDEMPTION OF PREFERRED UNITS.......................... 18
ARTICLE 5
DISTRIBUTIONS.................................................................... 18
Section 5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS.................... 18
Section 5.2 DISTRIBUTIONS IN KIND................................................ 18
Section 5.3 DISTRIBUTIONS UPON LIQUIDATION....................................... 19
Section 5.4 DISTRIBUTIONS TO REFLECT ISSUANCE OF ADDITIONAL PARTNERSHIP
INTERESTS.......................................................... 19
Section 5.5 DISTRIBUTIONS TO LIMITED PARTNERS EXERCISING EXCHANGE RIGHTS......... 19
ARTICLE 6
ALLOCATIONS...................................................................... 19
Section 6.1 TIMING AND AMOUNT OF ALLOCATIONS OF NET INCOME AND NET LOSS.......... 19
Section 6.2 GENERAL ALLOCATIONS.................................................. 19
A......................................................................... 19
B......................................................................... 19
C......................................................................... 20
Section 6.3 ALLOCATIONS TO REFLECT ISSUANCE OF ADDITIONAL PARTNERSHIP
INTERESTS.......................................................... 20
Section 6.4 GUARANTEED PAYMENTS.................................................. 20
Section 6.5 ALLOCATIONS WITH RESPECT TO TRANSFERRED INTERESTS.................... 20
Section 6.6 ADDITIONAL ALLOCATION PROVISIONS..................................... 20
A. REGULATORY ALLOCATIONS............................................... 20
</TABLE>
Appendix G-i
<PAGE>
<TABLE>
<S> <C> <C>
(1) MINIMUM GAIN CHARGEBACK.............................................. 20
(2) PARTNER MINIMUM GAIN CHARGEBACK...................................... 20
(3) NONRECOURSE DEDUCTIONS AND PARTNER NONRECOURSE DEDUCTIONS............ 21
(4) QUALIFIED INCOME OFFSET.............................................. 21
(5) GROSS INCOME ALLOCATION.............................................. 21
(6) LIMITATION ON ALLOCATION OF LOSS..................................... 21
(7) SECTION 754 ADJUSTMENT............................................... 21
(8) CURATIVE ALLOCATION.................................................. 22
B. NONRECOURSE LIABILITY ALLOCATION..................................... 22
C. DISTRIBUTIONS OF PROCEEDS FROM NONRECOURSE LIABILITIES............... 22
D. INTERPRETATION....................................................... 22
Section 6.7 TAX ALLOCATIONS...................................................... 22
A. IN GENERAL........................................................... 22
B. ALLOCATIONS RESPECTING SECTION 704(C)................................ 22
C. ALTERNATIVE MINIMUM TAX.............................................. 23
D. RECAPTURE GAIN....................................................... 23
ARTICLE 7
MANAGEMENT AND OPERATION OF BUSINESS............................................. 23
Section 7.1 MANAGEMENT........................................................... 23
Section 7.2 CERTIFICATE OF LIMITED PARTNERSHIP................................... 27
Section 7.3 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY.......................... 27
Section 7.4 REIMBURSEMENT OF THE GENERAL PARTNER................................. 28
Section 7.5 CONTRACTS WITH AFFILIATES............................................ 28
Section 7.6 INDEMNIFICATION...................................................... 29
Section 7.7 LIABILITY OF THE GENERAL PARTNER..................................... 31
Section 7.8 OTHER MATTERS CONCERNING THE GENERAL PARTNER......................... 31
Section 7.9 TITLE TO PARTNERSHIP ASSETS.......................................... 32
Section 7.10 RELIANCE BY THIRD PARTIES............................................ 32
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS AND GENERAL PARTNER................... 33
Section 8.1 LIMITATION OF LIABILITY.............................................. 33
Section 8.2 NO PARTICIPATION IN MANAGEMENT OF BUSINESS........................... 33
Section 8.3 OUTSIDE ACTIVITIES OF PARTNERS....................................... 33
Section 8.4 RETURN OF CAPITAL.................................................... 33
Section 8.5 RIGHTS OF PARTNERS RELATING TO THE PARTNERSHIP....................... 33
Section 8.6 GRANT OF RIGHTS...................................................... 34
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS........................................... 34
Section 9.1 RECORDS AND ACCOUNTING............................................... 34
Section 9.2 FISCAL YEAR.......................................................... 34
Section 9.3 REPORTS.............................................................. 34
ARTICLE 10
TAX MATTERS...................................................................... 35
Section 10.1 PREPARATION OF TAX RETURNS........................................... 35
Section 10.2 TAX ELECTIONS........................................................ 35
Section 10.3 TAX MATTERS PARTNER.................................................. 35
Section 10.4 ORGANIZATIONAL AND START-UP EXPENSES................................. 35
Section 10.5 WITHHOLDING.......................................................... 35
Section 10.6 LIMITATION TO PRESERVE REIT STATUS................................... 36
ARTICLE 11
TRANSFERS AND WITHDRAWALS........................................................ 37
</TABLE>
Appendix G-ii
<PAGE>
<TABLE>
<S> <C> <C>
Section 11.1 TRANSFER............................................................. 37
Section 11.2 TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST................... 37
Section 11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER................................. 38
Section 11.4 SUBSTITUTED LIMITED PARTNERS......................................... 39
Section 11.5 ASSIGNEES............................................................ 40
Section 11.6 GENERAL PROVISIONS................................................... 40
ARTICLE 12
ADMISSION OF PARTNERS............................................................ 42
Section 12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER............................... 42
Section 12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS............................. 42
Section 12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP........ 42
ARTICLE 13
DISSOLUTION AND LIQUIDATION...................................................... 43
Section 13.1 DISSOLUTION.......................................................... 43
Section 13.2 WINDING UP........................................................... 43
Section 13.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS; DEFICIT CAPITAL
ACCOUNT............................................................ 44
Section 13.4 DEEMED CONTRIBUTION AND INTEREST DISTRIBUTION........................ 44
Section 13.5 RIGHTS OF PARTNERS................................................... 45
Section 13.6 NOTICE OF DISSOLUTION................................................ 45
Section 13.7 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP................... 45
Section 13.8 REASONABLE TIME FOR WINDING-UP....................................... 45
Section 13.9 WAIVER OF PARTITION.................................................. 45
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS..................................... 45
Section 14.1 AMENDMENTS........................................................... 45
Section 14.2 ACTION BY THE PARTNERS............................................... 45
ARTICLE 15
GENERAL PROVISIONS............................................................... 46
Section 15.1 ADDRESSES AND NOTICE................................................. 46
Section 15.2 TITLES AND CAPTIONS.................................................. 46
Section 15.3 PRONOUNS AND PLURALS................................................. 46
Section 15.4 FURTHER ACTION....................................................... 46
Section 15.5 BINDING EFFECT....................................................... 46
Section 15.6 CREDITORS............................................................ 47
Section 15.7 WAIVER............................................................... 47
Section 15.8 COUNTERPARTS......................................................... 47
Section 15.9 APPLICABLE LAW....................................................... 47
Section INVALIDITY OF PROVISIONS.............................................
15.10 47
Section ENTIRE AGREEMENT.....................................................
15.11 47
Section NO RIGHTS AS SHAREHOLDERS............................................
15.12 47
</TABLE>
Appendix G-iii
<PAGE>
<TABLE>
<S> <C> <C>
EXHIBITS
- -----------------------------------------------------------------------------------
Exhibit A Schedule of Partners, Number of Units, Capital Contributions and
Capital Accounts (Section 1.1) [TO COME]
Exhibit B Rights Terms (Section 8.6)
Exhibit C Form of Common Unit Certificate
[EXHIBIT D FORM OF REGISTRATION RIGHTS AGREEMENTS]
</TABLE>
Appendix G-iv
<PAGE>
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HORIZON GROUP
PROPERTIES, L.P. (the "PARTNERSHIP"), dated as of 1998, is entered
into by and among Horizon Group Properties, Inc., a Maryland corporation (the
"COMPANY"), as the General Partner and the Persons whose names are set forth on
EXHIBIT A hereof, as the Limited Partners, together with any other Persons who
become Partners in the Partnership as provided herein.
WHEREAS, the limited partnership was formed on , 1998 with the
Company as General Partner and Horizon/Glen Outlet Centers Limited Partnership,
a Delaware limited partnership ("HGLP") as limited partner;
WHEREAS, HGLP proposes to distribute to the holders of its common units
(other than Horizon Group, Inc., which holds common units of HGLP as general
partner), pro rata in accordance with the number of common units held by such
holders, all of the interests of HGLP in this Partnership;
WHEREAS, the Partnership will issue Partnership Interests to the Limited
Partners in accordance with the foregoing transactions, and HGLP will withdraw
as a limited partner of the Partnership; and
WHEREAS, by virtue of its execution of this Agreement, the Company hereby
consents to the amendment and restatement of the original agreement of limited
partnership;
NOW, THEREFORE, BE IT RESOLVED, that for good and adequate consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
DEFINED TERMS
Section 1.1 DEFINITIONS.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ACT" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time, and any successor to such statute.
"ADDITIONAL FUNDS" shall have the meaning set forth in SECTION 4.3.A hereof.
"ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership as a
Limited Partner pursuant to SECTION 12.2 hereof and who is shown as such on the
books and records of the Partnership.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Partner, the
deficit balance, if any, in such Partner's Capital Account as of the end of the
relevant Partnership taxable year, after giving effect to the following
adjustments:
(a) decrease such deficit by any amounts which such Partner is obligated
to restore pursuant to this Agreement or is deemed to be obligated to
restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the
penultimate sentence of each of Regulations Sections 1.704-2(i)(5) and
1.704-2(g); and
(b) increase such deficit by the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall
be interpreted consistently therewith.
"ADJUSTMENT DATE" means, with respect to any Capital Contribution, the close
of business on the Business Day last preceding the date of the Capital
Contribution; PROVIDED, that if such Capital Contribution is being made by the
General Partner in respect of the proceeds from the issuance of Shares (or the
issuance of the General Partner's securities exercisable for, convertible into
or exchangeable for Shares), then the Adjustment Date shall be as of the close
of business on the day of the issuance of such securities.
Appendix G-1
<PAGE>
"ADMINISTRATIVE EXPENSES" shall mean (i) all administrative and operating
costs and expenses incurred by the Partnership, (ii) all administrative,
operating and other costs and expenses incurred by the Property Partnerships,
which expenses are being assumed by the Partnership pursuant to SECTION 7.4.B
hereof, (iii) those administrative costs and expenses of the General Partner,
including salaries paid to officers of the General Partner, and accounting and
legal expenses undertaken by the General Partner on behalf or for the benefit of
the Partnership, and (iv) to the extent not included in clause (iii) above, REIT
Expenses.
"AFFILIATE" means, with respect to any Person, any Person directly or
indirectly controlling, controlled by or under common control with such Person.
"AGREEMENT" means this Amended and Restated Agreement of Limited
Partnership, as it may be amended, modified, supplemented or restated from time
to time.
"APPRAISAL" means with respect to any assets, the opinion of an independent
third party experienced in the valuation of similar assets, selected by the
General Partner in good faith; such opinion may be in the form of an opinion by
such independent third party that the value for such asset as set by the General
Partner is fair, from a financial point of view, to the Partnership.
"ASSIGNEE" means a Person to whom one or more Units have been transferred in
a manner permitted under this Agreement, but who has not become a Substituted
Limited Partner, and who has the rights set forth in SECTION 11.5 hereof.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on which
commercial banks in Chicago, Illinois and New York, New York are authorized or
required by law to be closed.
"CAPITAL ACCOUNT" means, with respect to any Partner, the Capital Account
maintained for such Partner in accordance with the following provisions:
(a) To each Partner's Capital Account there shall be added such
Partner's Capital Contributions, such Partner's share of Net Income and any
items in the nature of income or gain which are specially allocated to such
Partner pursuant to SECTION 6.6 hereof, and the amount of any Partnership
liabilities assumed by such Partner or which are secured by any property
distributed to such Partner.
(b) From each Partner's Capital Account there shall be subtracted the
amount of cash and the Gross Asset Value of any property distributed to such
Partner pursuant to any provision of this Agreement, such Partner's
distributive share of Net Losses and any items in the nature of expenses or
losses which are specially allocated to such Partner pursuant to SECTION 6.6
hereof, and the amount of any liabilities of such Partner assumed by the
Partnership or which are secured by any property contributed by such Partner
to the Partnership.
(c) In the event any interest in the Partnership is transferred in
accordance with the terms of this Agreement (which does not result in a
termination of the Partnership for federal income tax purposes), the
transferee shall succeed to the Capital Account of the transferor to the
extent it relates to the transferred interest.
(d) In determining the amount of any liability for purposes of
subsections (a) and (b) hereof, there shall be taken into account Code
section 752(c) and any other applicable provisions of the Code and
Regulations.
The foregoing provisions and the other provisions of this Agreement relating
to the maintenance of Capital Accounts are intended to comply with Regulations
Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a
manner consistent with such Regulations. In the event the General Partner shall
determine that it is prudent to modify the manner in which the Capital Accounts,
or any debits or credits thereto (including, without limitation, debits or
credits relating to liabilities which are secured by contributed or distributed
property or which are assumed by the Partnership, the General Partner, or the
Limited Partners) are computed in order to comply with such Regulations, the
General Partner may make such modification. The General Partner also shall (i)
make any adjustments that are necessary or
Appendix G-2
<PAGE>
appropriate to comply with Regulations Section 1.704-1(b)(2)(iv)(q) and (ii)
make any appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Regulations Sections
1.704-1(b) or 1.704-2 or Section 514(c)(9).
"CAPITAL CONTRIBUTION" means, with respect to any Partner, the amount of
money and the initial Gross Asset Value of any property (other than money), net
of any liability to which such property is subject or which is secured by such
property, contributed to the Partnership by such Partner.
"CASH PURCHASE PRICE" shall have the meaning set forth in PARAGRAPH 4 of
EXHIBIT B attached hereto.
"CERTIFICATE" means the Certificate of Limited Partnership relating to the
Partnership filed in the office of the Secretary of State of Delaware on
1998, as amended or restated from time to time in accordance with
the terms hereof and the Act.
"CHARTER" means the Declaration of Trust of the General Partner filed with
the Maryland State Department of Assessments and Taxation on 1998,
as amended or restated from time to time.
"CODE" means the Internal Revenue Code of 1986, as amended from time to time
or any successor statute thereto, as interpreted by the applicable regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"COMMON SHARES" means the common shares of beneficial interest, par value
$.01 per share, of the General Partner.
"COMMON UNIT" means, with respect to any class of Partnership Interest, a
fractional, undivided share of such class of Partnership Interest issued
pursuant to SECTIONS 4.1 and 4.3 hereof. The ownership of Common Units may be
evidenced by a certificate for units substantially in the form of EXHIBIT C
hereof (including the restricted legends thereon) or as the General Partner may
determine with respect to any class of Common Units issued from time to time
under SECTIONS 4.1 and 4.3 hereof.
"CONSENT" means the consent to, approval of, or vote on a proposed action by
a Partner given in accordance with ARTICLE 14 hereof.
"CONSENT OF THE LIMITED PARTNERS" means the Consent of a Majority in
Interest of the Limited Partners, which Consent shall be obtained prior to the
taking of any action for which it is required by this Agreement and may be given
or withheld by a Majority in Interest of the Limited Partners, unless otherwise
expressly provided herein, in their sole and absolute discretion.
"CONSENT OF THE PARTNERS" means the Consent of Partners holding Units that
in the aggregate are equal to or greater than 50% of the aggregate Units of all
Partners, which Consent shall be obtained prior to the taking of any action for
which it is required by this Agreement and may be given or withheld by such
Partners, in their sole and absolute discretion.
"CONSTRUCTIVELY OWN" means ownership under the constructive ownership rules
described in EXHIBIT B hereof.
"DEBT" means, as to any Person, as of any date of determination, (a) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services; (b) all amounts owed by such Person to banks or
other Persons in respect of reimbursement obligations under letters of credit,
surety bonds and other similar instruments guaranteeing payment or other
performance of obligations by such Person; (c) all indebtedness for borrowed
money or for the deferred purchase price of property or services secured by any
lien on any property owned by such Person, to the extent attributable to such
Person's interest in such property, even though such Person has not assumed or
become liable for the payment thereof; and (d) lease obligations of such Person
which, in accordance with generally accepted accounting principles, should be
capitalized.
Appendix G-3
<PAGE>
"DEPRECIATION" means, for each Partnership taxable year or other period, an
amount equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Gross Asset
Value as the federal income tax depreciation, amortization or other cost
recovery deduction for such year or other period bears to such beginning
adjusted tax basis; PROVIDED, HOWEVER, that if the federal income tax
depreciation, amortization or other cost recovery deduction for such year is
zero, Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the General Partner.
"EFFECTIVE DATE" means the date of closing of the initial public offering of
Common Shares upon which date contributions set forth on EXHIBIT A hereof shall
become effective.
"EXCHANGE EXERCISE NOTICE" shall have the meaning set forth in PARAGRAPH 2
of EXHIBIT B attached hereto.
"EXCHANGE FACTOR" shall have the meaning set forth in EXHIBIT B attached
hereto.
"FAIR MARKET VALUE" means, with respect to any share of beneficial interest
of the General Partner, the average of the daily market price for the ten (10)
consecutive trading days immediately preceding the date with respect to which
"Fair Market Value" must be determined hereunder or, if such date is not a
Business Day, the immediately preceding Business Day. The market price for each
such trading day shall be: (a) if such shares are listed or admitted to trading
on any securities exchange or the NASDAQ National Market, the closing price,
regular way, on such day, or if no such sale takes place on such day, the
average of the closing bid and asked prices on such day, (b) if such shares are
not listed or admitted to trading on any securities exchange or the NASDAQ
National Market, the last reported sale price on such day or, if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
as reported by a reliable quotation source designated by the General Partner or
(c) if such shares are not listed or admitted to trading on any securities
exchange or the NASDAQ National Market and no such last reported sale price or
closing bid and asked prices are available, the average of the reported high bid
and low asked prices on such day, as reported by a reliable quotation source
designated by the General Partner, or if there shall be no bid and asked prices
on such day, the average of the high bid and low asked prices, as so reported,
on the most recent day (not more than 10 days prior to the date in question) for
which prices have been so reported; PROVIDED, that if there are no bid and asked
prices reported during the 10 days prior to the date in question, the Fair
Market Value of such shares shall be determined by the General Partner acting in
good faith on the basis of such quotations furnished by a professional market
maker making a market in such shares and other information as it considers, in
its reasonable judgment, appropriate. In the event such shares include rights
that a holder of such shares would be entitled to receive, then the Fair Market
Value of such rights shall be determined by the General Partner acting in good
faith on the basis of such quotations and other information as it considers, in
its reasonable judgment, appropriate; and PROVIDED FURTHER, that in connection
with determining the deemed value of the Partnership Interests for purposes of
determining the number of additional Units issuable upon a Capital Contribution
funded by an underwritten public offering of shares of beneficial interest of
the General Partner (including upon exercise of any over-allotment option
granted to the Underwriters in connection with such public offering), the Fair
Market Value of such shares shall be the public offering price per share of such
class of beneficial interest sold.
"FUNDING DEBT" means the incurrence of any Debt by or on behalf of the
General Partner for the purpose of providing funds to the Partnership.
"GENERAL PARTNER INTEREST" means a Partnership Interest held by the General
Partner or any other General Partner. The General Partner Interest shall be
expressed as a number of Units.
"GENERAL PARTNER" shall mean Repositioning Strategies, Inc., a Maryland
corporation, and its successors or assigns, if any.
Appendix G-4
<PAGE>
"GENERAL PARTNER" means the Company or its successors as General Partner of
the Partnership.
"GENERAL PARTNER LOAN" shall have the meaning set forth in SECTION 4.3.B
hereof.
"GENERAL PARTNER PAYMENT" shall have the meaning set forth in SECTION 10.6
hereof.
"GROSS ASSET VALUE" means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a Partner
to the Partnership shall be the gross fair market value of such asset, as
determined by the contributing Partner and the General Partner (as set forth
on EXHIBIT A hereof, as such Exhibit may be amended from time to time);
PROVIDED, that if the contributing Partner is the General Partner then,
except with respect to the General Partner's initial Capital Contribution
which shall be determined as set forth on EXHIBIT A hereof, or capital
contributions of cash, Shares or other shares of beneficial interest of the
General Partner, the determination of the fair market value of the
contributed asset shall be determined by (i) the price paid by the General
Partner if the asset is acquired by the General Partner contemporaneously
with its contribution to the Partnership or (ii) by Appraisal if otherwise
acquired by the General Partner.
(b) As of the times listed below, the Gross Asset Values of all
Partnership assets shall be adjusted to equal their respective gross fair
market values, as determined by the General Partner using such reasonable
method of valuation as it may adopt; PROVIDED, HOWEVER, that for such
purpose, the net value of all of the Partnership assets, in the aggregate,
shall be equal to the fair market value of all classes of Partnership
Interests then outstanding, regardless of the method of valuation adopted by
the General Partner:
(i) the acquisition of an additional interest in the Partnership by
a new or existing Partner in exchange for more than a de minimis Capital
Contribution, if the General Partner reasonably determines that such
adjustment is necessary or appropriate to reflect the relative economic
interests of the Partners in the Partnership;
(ii) the distribution by the Partnership to a Partner of more than a
de minimis amount of Partnership property as consideration for an
interest in the Partnership if the General Partner reasonably determines
that such adjustment is necessary or appropriate to reflect the relative
economic interests of the Partners in the Partnership;
(iii) the liquidation of the Partnership within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g); and
(iv) at such other times as the General Partner shall reasonably
determine necessary or advisable in order to comply with Regulations
Sections 1.704-1(b) and 1.704-2.
(c) The Gross Asset Value of any Partnership asset distributed to a
Partner shall be the gross fair market value of such asset on the date of
distribution as determined by the distributee and the General Partner or, if
the distributee and the General Partner cannot agree on such a
determination, by Appraisal.
(d) The Gross Asset Values of Partnership assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the
extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); PROVIDED,
HOWEVER, that Gross Asset Values shall not be adjusted pursuant to this
SUBPARAGRAPH (D) to the extent that the General Partner reasonably
determines that an adjustment pursuant to SUBPARAGRAPH (B) is necessary or
appropriate in connection with a transaction that would otherwise result in
an adjustment pursuant to this SUBPARAGRAPH (D).
Appendix G-5
<PAGE>
(e) If the Gross Asset Value of a Partnership asset has been determined
or adjusted pursuant to SUBPARAGRAPH (A), (B) or (D) above, such Gross Asset
Value shall thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing Net Income and Net
Losses.
"HOLDER" means either the Partner or Assignee owning a Unit.
"IMMEDIATE FAMILY" means with respect to any natural Person, such natural
Person's estate or heirs or current spouse or former spouse, parents,
parents-in-law, children, siblings and grandchildren and any trust or estate,
all of the beneficiaries of which consist of such Person or such Person's
spouse, former spouse, parents, parents-in-law, children, siblings or
grandchildren; PROVIDED, FURTHER that "IMMEDIATE FAMILY", means, with respect to
a trust, the trust's beneficiary's estate or heirs or current spouse or former
spouse, parents, parents-in-law, children, siblings and grandchildren.
"INCAPACITY" or "INCAPACITATED" means, (a) as to any individual Partner, if
any, death, total physical disability or entry by a court of competent
jurisdiction adjudicating him or her incompetent to manage his or her Person or
his or her estate; (b) as to any corporation or limited liability company, as
the case may be, which is a Partner, the filing of a certificate of dissolution,
or its equivalent, for the corporation or limited liability company, as the case
may be, or the revocation of its charter unless reinstated; (c) as to any
partnership which is a Partner, the dissolution and commencement of winding up
of the partnership; (d) as to any estate which is a Partner, the distribution by
the fiduciary of the estate's entire interest in the Partnership; (e) as to any
trustee of a trust which is a Partner, the termination of the trust (but not the
substitution of a new trustee); or (f) as to any Partner, the bankruptcy of such
Partner. For purposes of this definition, bankruptcy of a Partner shall be
deemed to have occurred when (s) the Partner commences a voluntary proceeding
seeking liquidation, reorganization or other relief under any bankruptcy,
insolvency or other similar law now or hereafter in effect, (t) the Partner is
adjudged as bankrupt or insolvent, or a final and nonappealable order for relief
under any bankruptcy, insolvency or similar law now or hereafter in effect has
been entered against the Partner, (u) the Partner executes and delivers a
general assignment for the benefit of the Partner's creditors, (v) the Partner
files an answer or other pleading admitting or failing to contest the material
allegations of a petition filed against the Partner in any proceeding of the
nature described in CLAUSE (T) above, (w) the Partner seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator for the
Partner or for all or any substantial part of the Partner's properties, (x) any
proceeding seeking liquidation, reorganization or other relief under any
bankruptcy, insolvency or other similar law now or hereafter in effect has not
been dismissed within 120 days after the commencement thereof, (y) the
appointment without the Partner's consent or acquiescence of a trustee, receiver
or liquidator has not been vacated or stayed within 90 days of such appointment,
or (z) an appointment referred to in CLAUSE (Y) above is not vacated within 90
days after the expiration of any such stay.
"INDEMNITEE" means (a) any Person subject to a claim or demand or made or
threatened to be made a party to, or involved or threatened to be involved in,
an action, suit or proceeding by reason of his or her status as (i) the General
Partner or (ii) a director, officer, member, manager, employee or agent of the
Partnership or the General Partner, and (b) such other Persons (including
Affiliates of the General Partner or the Partnership) as the General Partner may
designate from time to time, in its sole and absolute discretion.
"IRS" means the Internal Revenue Service, which administers the internal
revenue laws of the United States, and any successor agency of the United States
federal government.
"LIMITED PARTNER" means any Person named as a Limited Partner in EXHIBIT A
hereof, as such Exhibit may be amended from time to time, or any Substituted
Limited Partner or Additional Limited Partner, in such Person's capacity as a
Limited Partner in the Partnership.
Appendix G-6
<PAGE>
"LIMITED PARTNER INTEREST" means a Partnership Interest of a Limited Partner
representing part of the Partnership Interests of all Limited Partners and
includes any and all benefits to which the holder of such a Partnership Interest
may be entitled as provided in this Agreement, together with all obligations of
such Person to comply with the terms and provisions of this Agreement. A Limited
Partner Interest shall be expressed as a number of Units.
"LIQUIDATING EVENTS" shall have the meaning set forth in SECTION 13.1
hereof.
"LIQUIDATOR" shall have the meaning set forth in SECTION 13.2.A hereof.
"MAJORITY IN INTEREST OF THE LIMITED PARTNERS" means Limited Partners (other
than the General Partner and any Limited Partner 50% or more of whose equity is
owned, directly or indirectly, by the General Partner) holding Units that in the
aggregate are greater than fifty percent (50%) of the aggregate Units of all
Limited Partners (other than the General Partner and any Limited Partner 50% or
more of whose equity is owned, directly or indirectly, by the General Partner).
"NET CASH FLOW" means, with respect to the applicable period of measurement
(i.e., any period beginning on the first day of the fiscal year, quarter or
other period commencing immediately after the last day of the fiscal year,
quarter or other applicable period for purposes of the most recent calculation
of Net Cash Flow for or with respect to which a distribution has been made, and
ending on the last day of the fiscal year, quarter or other applicable period
immediately preceding the date of the calculation) the excess, if any, as of
such date, of (a) the gross cash receipts of the Partnership for such period
from all sources whatsoever, including, without limitation, the following:
(i) all rents, revenues, income and proceeds derived by the
Partnership from its operations, including, without limitation,
distributions received by the Partnership from any Person in which the
Partnership has an interest; (ii) all proceeds and revenues received by
the Partnership on account of any sales of property of the Partnership or
as a refinancing of or payments of principal, interest, costs, fees,
penalties or otherwise on account of any borrowings or loans made by the
Partnership or financings or refinancings of any property of the
Partnership; (iii) the amount of any insurance proceeds and condemnation
awards received by the Partnership; (iv) all Capital Contributions or
loans received by the Partnership from its Partners; (v) any reduction in
the cash amounts previously reserved by the Partnership and described in
SUBSECTION (B)(IX) below, if the General Partner determines that such
amounts are no longer needed; and (vi) the proceeds of liquidation of the
Partnership's property in accordance with this Agreement,
over (b) the sum of:
(i) all operating costs and expenses of the Partnership and capital
expenditures paid during such period (without deduction, however, for any
capital expenditures, charges for Depreciation or other expenses not paid
in cash or expenditures from reserves described in (ix) below); (ii) to
the extent not included in any other clause of this SUBPARAGRAPH (B), all
costs and expenses expended or paid during such period in connection with
the sale or other disposition, or financing or refinancing, of property
of the Partnership or the recovery of insurance or condemnation proceeds;
(iii) to the extent not included in any other clause of this SUBPARAGRAPH
(B), all fees provided for under this Agreement and paid by the
Partnership during such period (other than fees paid from reserves
described in SUBSECTION (B)(IX) below); (iv) to the extent not included
in any other clause of this SUBPARAGRAPH (B), all debt service, including
principal and interest, paid during such period on all indebtedness of
the Partnership; (v) all capital contributions, advances, reimbursements
or similar payments made to any Person in which the Partnership has an
interest; (vi) all loans made by the Partnership in accordance with the
terms of this Agreement; (vii) to the extent not included in any other
clause of this SUBPARAGRAPH (B), all reimbursements to the General
Partner or its Affiliates during such period, including Administrative
Expenses (exclusive of REIT Expenses) to the extent not paid or payable
by the General Partner pursuant to the third
Appendix G-7
<PAGE>
sentence of SECTION 7.4.B; (viii) any distributions pursuant to the
proviso of the second sentence of SECTION 5.1 hereof; and (ix) any
increases in reserves reasonably determined by the General Partner to be
necessary for working capital, capital improvements, payments of periodic
expenditures, debt service or other purposes for the Partnership or any
Person in which the Partnership has an interest.
"NET INCOME" or "NET LOSS" shall mean, for each fiscal year or other
applicable period, an amount equal to the Partnership's net income or loss for
such year or period as determined for federal income tax purposes by the General
Partner, determined in accordance with Section 703(a) of the Code (for this
purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Section 703(a) of the Code shall be included in taxable
income or loss), adjusted as follows: (i) by including as an item of gross
income any tax-exempt income received by the Partnership and not otherwise taken
into account in computing Net Income or Net Loss; (ii) by treating as a
deductible expense any expenditure of the Partnership described in Section
705(a)(2)(B) of the Code and not otherwise taken into account in computing Net
Income or Net Loss, including amounts paid or incurred to organize the
Partnership (unless an election is made pursuant to Section 709(b) of the Code)
or to promote the sale of interests in the Partnership; (iii) by treating
deductions for any losses incurred in connection with the sale or exchange of
Partnership property which are disallowed pursuant to Sections 267(a)(1) or
707(b) of the Code as expenditures described in Section 705(a)(2)(B) of the
Code; (iv) by taking into account Depreciation in lieu of depreciation,
depletion, amortization, and other cost recovery deductions taken into account
in computing taxable income or loss; (v) by computing gain or loss resulting
from any disposition of Partnership property with respect to which gain or loss
is recognized for federal income tax purposes by reference to the Gross Asset
Value of such property rather than its adjusted tax basis; (vi) in the event of
an adjustment of the Gross Asset Value of any Partnership asset which requires
that the Capital Accounts of the Partnership be adjusted pursuant to Sections
1.704-1(b)(2)(iv)(e), (f) and (m) of the Regulations, by taking into account the
amount of such adjustment as additional Net Income or Net Loss pursuant to
Article VI; and (vii) subject to the immediately preceding clause (vi), by
excluding the Partnership items of income, gain, loss or deduction that are
specially allocated pursuant to SECTION 6.6.
"NEW SECURITIES" means (a) any rights, options, warrants or convertible or
exchangeable securities having the right to subscribe for or purchase Common
Shares or other shares of beneficial interest of the General Partner, excluding
grants under any Share Incentive Plan or (b) any Debt issued by the General
Partner that provides any of the rights described in CLAUSE (A) hereof.
"NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Regulations
Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a
Partnership taxable year shall be determined in accordance with the rules of
Regulations Section 1.704-2(c).
"NONRECOURSE LIABILITY" shall have the meaning set forth in Regulations
Section 1.752-1(a)(2).
"PARTNER" means the General Partner or a Limited Partner, and "PARTNERS"
means the General Partner and the Limited Partners.
"PARTNER MINIMUM GAIN" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"PARTNER NONRECOURSE DEBT" shall have the meaning set forth in Regulations
Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEDUCTIONS" shall have the meaning set forth in
Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable
year shall be determined in accordance with the rules of Regulations Section
1.704-2(i)(2).
Appendix G-8
<PAGE>
"PARTNERSHIP" means the limited partnership formed under the Act and
pursuant to this Agreement, and any successor thereto.
"PARTNERSHIP INTEREST" means, an ownership interest in the Partnership of
either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. There may be one or more
classes of Partnership Interests as provided in SECTION 4.3 hereof. A
Partnership Interest within a class of Partnership Interests shall be expressed
as a number of units of such class. In the event that the Partnership has more
than one class of Partnership Interests, the Partnership Interest of a Partner
with respect to all classes of Partnership Interests shall be expressed as the
sum of each Partnership Interest owned by such Partner for each class of
Partnership Interests, weighting each such Partnership Interest for each class
based on the relative aggregate fair market value of each class. Unless
otherwise expressly provided for by the General Partner at the time of the
original issuance of any Partnership Interests, all Partnership Interests
(whether of a Limited Partner or the General Partner) shall be of the same
class.
"PARTNERSHIP MINIMUM GAIN" shall have the meaning set forth in Regulations
Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as
any net increase or decrease in Partnership Minimum Gain, for a Partnership
taxable year shall be determined in accordance with the rules of Regulations
Section 1.704-2(d).
"PARTNERSHIP PAYMENT DATE" means the payment date established by the General
Partner for the distribution of Net Cash Flow pursuant to SECTION 5.1 hereof,
which payment date shall be the same as the payment date established by the
General Partner for a distribution to its shareholders of some or all of its
portion of such distribution.
"PARTNERSHIP YEAR" means the fiscal year of the Partnership, which shall be
the calendar year.
"PERMITTED DEBT ALLOCATION METHOD" shall mean any of the following methods
of allocating the Partnership's excess nonrecourse liabilities for purposes of
Regulations Section 1.752-3(a)(3) in any Partnership taxable year:
(a) Excess nonrecourse liabilities shall be allocated in accordance with
the Partners' respective interests in Partnership profits, determined by
reference to reasonably consistent allocations of a significant item of
Partnership income or gain, not taking into account how the Partners will
share taxable income under Code Section 704(c);
(b) Excess nonrecourse liabilities shall be allocated in accordance with
how the Partners will share future Profits, taking into account as well how
the Partners will share taxable income under Code Section 704(c); or
(c) Excess nonrecourse liabilities shall be allocated in accordance with
how it is reasonably expected that items of deduction attributable to such
excess Nonrecourse Liabilities will be allocated,
In each case, as determined by the General Partner in accordance with
Regulations Section 1.752-3 and Revenue Ruling 95-41, 1995-1 C.B. 132.
"PERSON" means an individual or a corporation, partnership, limited
liability company, trust, unincorporated organization, association or other
entity.
"PLEDGE" shall have the meaning set forth in SECTION 11.3.A hereof.
"PREFERRED SHARES" means any preferred shares of beneficial interest of the
General Partner which may be issued and outstanding from time to time.
"PREFERRED UNIT" means, with respect to any preferred class of Partnership
Interest, a fractional, undivided share of such class of Partnership Interest
issued pursuant to SECTION 4.1 and 4.3 hereof. The
Appendix G-9
<PAGE>
ownership of Preferred Units may be evidenced by a certificate for preferred
units substantially in the form of EXHIBIT C hereof (including the restricted
legends thereon) or as the General Partner may determine with respect to any
class of Preferred Units issued from time to time under SECTIONS 4.1 and 4.3
hereof.
"PROPERTIES" means such interests in real property and personal property
including without limitation, fee interests, interests in ground leases,
interests in joint ventures, interests in mortgages, and Debt instruments as the
Partnership may hold from time to time.
"QUALIFIED REIT SUBSIDIARY" means any Subsidiary of the General Partner that
is a "qualified REIT subsidiary" within the meaning of Section 856(i) of the
Code.
"QUALIFIED TRANSFEREE" means an "Accredited Investor" as defined in Rule 501
promulgated under the Securities Act.
"RECAPTURE GAIN" shall have the meaning set forth in SECTION 6.7.D hereof.
"REGULATIONS" means the Income Tax Regulations promulgated under the Code,
as such regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
"REGULATORY ALLOCATIONS" shall have the meaning set forth in SECTION 6.6
hereof.
"REIT" means a real estate investment trust under Sections 856 through 860
of the Code.
"REIT EXPENSES" shall mean (i) costs and expenses relating to the formation
and continuity of existence of the General Partner and its subsidiaries, if any,
(which subsidiaries shall, for purposes of this definition be included within
the definition of General Partner), including taxes, fees and assessments
associated therewith and any and all costs, expenses or fees payable to any
director, officer or trustee of the General Partner or such subsidiaries
(including, without limitation, any costs of indemnification), (ii) costs and
expenses relating to any offer or registration of securities by the General
Partner and all statements, reports, fees and expenses incidental thereto,
including, without limitation, underwriting discounts and selling commissions
applicable to any such offer of securities and any costs and expenses associated
with any claims made by any holder of such securities or any underwriter or
placement agent therefor, (iii) costs and expenses associated with the
preparation and filing of any periodic reports by any of the General Partner
under federal, state or local laws or regulations, including filings with the
SEC, (iv) costs and expenses associated with compliance by any of the General
Partner with laws, rules and regulations promulgated by any regulatory body,
including the SEC, and (v) all other operating or administrative costs of the
General Partner incurred in the ordinary course of its business.
"REIT REQUIREMENTS" shall have the meaning set forth in SECTION 5.1 hereof.
"SEC" means the United States Securities and Exchange Commission and any
successor agency of the United States federal government.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations of the SEC promulgated thereunder.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder.
"SPECIFIED EXCHANGE DATE" means the day of receipt by the General Partner of
an Exchange Exercise Notice.
"SHARE" means a Common Share or any other class of equity security issued by
the General Partner from time to time, as the case may be.
"SHARE INCENTIVE PLAN" means any share incentive plan of the General
Partner.
Appendix G-10
<PAGE>
"SUBSIDIARY" means, with respect to any Person, any corporation or other
entity of which a majority of (a) the voting power of the voting equity
securities or (b) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"SUBSIDIARY PARTNERSHIP" means any partnership that is a Subsidiary of the
Partnership.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to SECTION 11.4 hereof.
"SURVIVING PARTNERSHIP" shall have the meaning set forth in SECTION 11.2.C
hereof.
"TAX ITEMS" shall have the meaning set forth in SECTION 6.7.A hereof.
"TENANT" means any tenant from which the General Partner derives rent either
directly or indirectly through partnerships, including the Partnership.
"TERMINATING CAPITAL TRANSACTION" means any sale or other disposition of all
or substantially all of the assets of the Partnership or a related series of
transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Partnership.
"UNIT" means either a Common Unit or a Preferred Unit, as the case may be.
ARTICLE 2
ORGANIZATIONAL MATTERS
Section 2.1 ORGANIZATION. The Partnership is a limited partnership formed
pursuant to the provisions of the Act and upon the terms and conditions set
forth in this Agreement. Except as expressly provided herein, the rights and
obligations of the Partners and the administration and termination of the
Partnership shall be governed by the Act. The Partnership Interest of each
Partner shall be personal property for all purposes.
Section 2.2 NAME. The name of the Partnership is Repositioning Strategies,
L.P. The Partnership's business may be conducted under any other name or names
deemed advisable by the General Partner, including the name of the General
Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.,"
"Ltd." or similar words or letters shall be included in the Partnership's name
where necessary for the purposes of complying with the laws of any jurisdiction
that so requires. The General Partner in its sole and absolute discretion may
change the name of the Partnership at any time and from time to time and shall
notify the Partners of such change in the next regular communication to the
Partners.
Section 2.3 RESIDENT AGENT; PRINCIPAL OFFICE. The name and address of the
resident agent of the Partnership in the State of Delaware is The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801. The address of the principal office of the Partnership in the
State of Delaware is Repositioning Strategies, L.P., c/o The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801. The principal office of the Partnership is located at 77 West Wacker
Drive, Suite 3900, Chicago, Illinois 60601, or such other place as the General
Partner may from time to time designate by notice to the Limited Partners. The
General Partner, in its sole and absolute discretion, may change the resident
agent and appoint successor resident agents. The Partnership may maintain
offices at such other place or places within or outside the State of Delaware as
the General Partner deems advisable.
Section 2.4 POWER OF ATTORNEY.
A. Each Partner and each Assignee constitutes and appoints the General
Partner, any Liquidator, and authorized officers and attorneys-in-fact of
each, and each of those acting singly, in each case with full power of
substitution, as its true and lawful agent and attorney-in-fact, with full
power and authority in its name, place and stead to:
Appendix G-11
<PAGE>
(1) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate and all amendments or restatements thereof) that the General
Partner or the Liquidator deems appropriate or necessary to form, qualify
or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the Partners have limited
liability) in the State of Delaware and in all other jurisdictions in
which the Partnership may conduct business or own property; (b) all
instruments that the General Partner or any Liquidator deems appropriate
or necessary to reflect any amendment, change, modification or
restatement of this Agreement in accordance with its terms; (c) all
conveyances and other instruments or documents that the General Partner
or any Liquidator deems appropriate or necessary to reflect the
dissolution and liquidation of the Partnership pursuant to the terms of
this Agreement, including, without limitation, a certificate of
cancellation; (d) all instruments relating to the admission, withdrawal,
removal or substitution of any Partner pursuant to, or other events
described in, ARTICLES 11, 12 and 13 hereof or the Capital Contribution
of any Partner; and (e) all certificates, documents and other instruments
relating to the determination of the rights, preferences and privileges
of Partnership Interests; and
(2) execute, swear to, acknowledge and file all ballots, consents,
approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner or
any Liquidator, to make, evidence, give, confirm or ratify any vote,
consent, approval, agreement or other action which is made or given by
the Partners hereunder or is consistent with the terms of this Agreement
or appropriate or necessary, in the sole discretion of the General
Partner or any Liquidator, to effectuate the terms or intent of this
Agreement.
Nothing contained herein shall be construed as authorizing the General Partner
or any Liquidator to amend this Agreement except in accordance with ARTICLE 14
hereof or as may be otherwise expressly provided for in this Agreement.
B. The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, in recognition of the fact that each
of the Partners will be relying upon the power of the General Partner and
any Liquidator to act as contemplated by this Agreement in any filing or
other action by it on behalf of the Partnership, and it shall survive and
not be affected by the subsequent Incapacity of any Partner or Assignee and
the transfer of all or any portion of such Partner's or Assignee's Units and
shall extend to such Partner's or Assignee's heirs, successors, assigns and
personal representatives. Each such Partner or Assignee hereby agrees to be
bound by any representation made by the General Partner or any Liquidator,
acting in good faith pursuant to such power of attorney; and each such
Partner or Assignee hereby waives any and all defenses which may be
available to contest, negate or disaffirm the action of the General Partner
or any Liquidator, taken in good faith under such power of attorney. Each
Partner or Assignee shall execute and deliver to the General Partner or any
Liquidator, within 15 days after receipt of the General Partner's or
Liquidator's request therefor, such further designation, powers of attorney
and other instruments as the General Partner or the Liquidator, as the case
may be, deems necessary to effectuate this Agreement and the purposes of the
Partnership.
Section 2.5 TERM. The term of the Partnership commenced on 1998
upon the filing of the Certificate in accordance with the Act and shall continue
until December 31, 2050 unless it is dissolved sooner pursuant to the provisions
of ARTICLE 13 hereof or as otherwise provided by law.
Section 2.6 FILINGS. A. The General Partner shall take any and all other
actions reasonably necessary to perfect and maintain the status of the
Partnership as a limited partnership under the laws of the State of Delaware.
The General Partner shall cause amendments to the Certificate to be filed
whenever required by the Act. Such amendments may be executed by the General
Partner only.
Appendix G-12
<PAGE>
B. The General Partner shall execute and cause to be filed original or
amended Certificates and shall take any and all other actions as may be
reasonably necessary to perfect and maintain the status of the Partnership
as a limited partnership or similar type of entity under the laws of any
other states or jurisdictions in which the Partnership engages in business.
C. Upon the dissolution of the Partnership, the General Partner (or, in
the event there is no remaining General Partner, the Person responsible for
winding up and dissolution of the Partnership pursuant to ARTICLE 13 hereof)
shall promptly execute and cause to be filed certificates of dissolution in
accordance with the Act and the laws of any other states or jurisdictions in
which the Partnership has filed certificates.
Appendix G-13
<PAGE>
ARTICLE 3
PURPOSE
Section 3.1 PURPOSE AND BUSINESS. The purpose and nature of the business
to be conducted by the Partnership is (A) to acquire and own real property, to
acquire, lease, own, mortgage or otherwise encumber personal property, fixtures
and real property, to operate, manage, lease (or, to the extent determined by
the General Partner to be appropriate, cause the operation, management and
leasing by independent contractors including a Partner or its Affiliates) any
Property owned by the Partnership, (B) to develop real property and to construct
improvements on real property, (C) to enter into any partnership, joint venture
or other similar arrangement to engage in any of the foregoing or to own
interests in any entity engaged, directly or indirectly, in any of the
foregoing, (D) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act and (E) otherwise deal in and
with the business and assets of the Partnership, and to do anything necessary or
incidental to the foregoing. In connection with the foregoing, the General
Partner has the right, in its sole discretion, to cease qualifying as a REIT.
However, the Partners acknowledge that the General Partner's status as a REIT
generally inures to the benefit of all the Partners and not solely to the
General Partner. The General Partner shall also be empowered to do any and all
acts and things necessary or prudent to ensure that the Partnership will not be
classified as a "publicly traded partnership" for purposes of Section 7704 of
the Code, including but not limited to, imposing restrictions on transfers,
conversions and redemptions.
Section 3.2 POWERS. The Partnership is empowered to do any and all acts
and things necessary, appropriate, proper, advisable, incidental to or
convenient for the furtherance and accomplishment of the purposes and business
described herein and for the protection and benefit of the Partnership,
including, without limitation, full power and authority, directly or through its
ownership interest in other entities, to enter into, perform and carry out
contracts of any kind, borrow money and issue evidences of indebtedness, whether
or not secured by mortgage, deed of trust, pledge or other lien, acquire and
develop real property, and manage, lease, sell, transfer and dispose of real
property.
Section 3.3 REPRESENTATIONS AND WARRANTIES BY THE PARTIES.
In addition to any representations and warranties included elsewhere in this
Agreement:
A. Each Partner represents and warrants to each other Partner that (1)
such Partner has the power and authority to enter into this Agreement and
perform such Partner's obligations hereunder, (2) the execution and delivery
of this Agreement by such Partner and the performance by such Partner of all
transactions contemplated by this Agreement to be performed by such Partner
have been duly authorized by all necessary action, including without
limitation, that of its General Partner(s), committee(s), trustee(s),
member(s), beneficiaries, directors and/or shareholder(s), as the case may
be, as required, (3) the consummation of such transactions shall not result
in a breach or violation of, or a default under, its certificate of limited
partnership, partnership agreement, trust agreement, limited liability
company operating agreement, charter, certificate or articles of
incorporation or by-laws, as the case may be, any agreement by which such
Partner or any of such Partner's properties or any of its partners,
beneficiaries, members, trustees or shareholders, as the case may be, is or
are bound, or any statute, regulation, order or other law to which such
Partner or any of its partners, trustees, beneficiaries or shareholders, as
the case may be, is or are subject, (4) such Partner is neither a "foreign
person" within the meaning of Section 1445(f) of the Code nor a "foreign
partner" within the meaning of Section 1446(e) of the Code, and (5) this
Agreement has been duly executed and delivered by such Partner and is
binding upon, and enforceable against, such Partner in accordance with its
terms.
B. Each Partner represents, warrants and agrees that it has acquired
and continues to hold its interest in the Partnership for its own account
for investment only and not for the purpose of, or with a view toward, the
resale or distribution of all or any part thereof, nor with a view toward
selling or
Appendix G-14
<PAGE>
otherwise distributing such interest or any part thereof at any particular
time or under any predetermined circumstances. Each Partner further
represents and warrants that it is a sophisticated investor, able and
accustomed to handling sophisticated financial matters for itself,
particularly real estate investments, and that it has a sufficiently high
net worth that it does not anticipate a need for the funds it has invested
in the Partnership in what it understands to be a highly speculative and
liquid investment.
C. Each Partner further represents, warrants and agrees as follows:
(1) It does not and will not, without the prior written consent of
the General Partner, actually own or Constructively Own (a) with respect
to any Tenant that is a corporation, any stock of such Tenant and (b)
with respect to any Tenant that is not a corporation, any interests in
either the assets or net profits of such Tenant; PROVIDED, HOWEVER, that
each Partner may own or Constructively Own with one or more other
Partners (x) with respect to any Tenant that is a corporation, stock of
such Tenant possessing less than ten percent (10%) of the total combined
voting power of all classes of stock entitled to vote and less than ten
percent (10%) of the total number of shares of all classes of stock of
such Tenant and (y) with respect to any Tenant that is not a corporation,
interests in such Tenant representing less than ten percent (10%) of the
assets and ten percent (10%) of the net profits of such Tenant, so long
as such actual or Constructive Ownership otherwise permitted under CLAUSE
(X) or (Y) above would not cause the General Partner to receive amounts
described in Section 856 (d)(2)(B) of the Code.
(2) [IT DOES NOT, AND AGREES THAT IT WILL NOT WITHOUT THE PRIOR
WRITTEN CONSENT OF THE GENERAL PARTNER, ACTUALLY OWN OR CONSTRUCTIVELY
OWN, ANY SHARES IN THE GENERAL PARTNER, OTHER THAN ANY COMMON SHARES OR
OTHER SHARES OF BENEFICIAL INTEREST OF THE GENERAL PARTNER SUCH PARTNER
MAY ACQUIRE (A) AS A RESULT OF AN EXCHANGE PURSUANT TO SECTION 8.6 HEREOF
OR (B) UPON THE EXERCISE OF OPTIONS GRANTED OR DELIVERY OF SHARES
PURSUANT TO ANY SHARE INCENTIVE PLAN, IN EACH CASE SUBJECT TO THE
OWNERSHIP LIMITATIONS SET FORTH IN THE GENERAL PARTNER'S CHARTER.]
(3) Upon request of the General Partner, it will disclose to the
General Partner the amount of Common Shares or other shares of beneficial
interest of the General Partner that it actually owns or Constructively
Owns.
(4) It understands that if, for any reason, (a) the representations,
warranties or agreements set forth in SUBPARAGRAPH C(1) or (2) of this
SECTION 3.3 are violated or (b) the Partnership's actual or Constructive
Ownership of the Common Shares or other shares of beneficial interest of
the General Partner violates the limitations set forth in the Charter,
then (x) some or all of the exchange rights of the Partners may become
non-exercisable, and (y) some or all of the Shares owned by the Partners
may be automatically transferred to a trust for the benefit of the
General Partner, as provided in the Charter.
D. The representations and warranties contained in SECTIONS 3.3.A, 3.3.B
and 3.3.C hereof shall survive the execution and delivery of this Agreement
by each Partner and the dissolution and winding up of the Partnership.
E. Each Partner hereby acknowledges that no representations as to
potential profit, cash flows, funds from operations or yield, if any, in
respect of the Partnership or the General Partner have been made by any
Partner or any employee or representative or Affiliate of any Partner, and
that projections and any other information, including, without limitation,
financial and descriptive information and documentation, which may have been
in any manner submitted to such Partner shall not constitute any
representation or warranty of any kind or nature, express or implied.
Appendix G-15
<PAGE>
ARTICLE 4
CAPITAL FINANCINGS
Section 4.1 UNITS; NO REQUIRED CAPITAL CONTRIBUTIONS BY THE PARTNERS. The
Partners shall own Units of the class and in the amounts set forth in EXHIBIT A
hereof, which shall be adjusted from time to time by the General Partner to the
extent necessary to accurately reflect exchanges, Capital Contributions, the
issuance of additional Units or similar events having an effect on a Partner's
number of Units. Except as required by law or as otherwise provided in SECTIONS
4.3, 4.4 and 10.5 hereof, no Partner shall be required or permitted to make any
additional Capital Contributions or loans to the Partnership.
Section 4.2 LOANS BY THIRD PARTIES. Subject to SECTION 4.3 hereof, the
Partnership may incur Debt, or enter into other similar credit, guarantee,
financing or refinancing arrangements for any purpose (including, without
limitation, in connection with any further acquisition of Properties) with any
Person that is not the General Partner upon such terms as the General Partner
determines to be appropriate.
Section 4.3 ADDITIONAL FUNDING AND CAPITAL CONTRIBUTIONS.
A. GENERAL. The General Partner may, at any time and from time to time,
determine that the Partnership requires additional funds ("ADDITIONAL
FUNDS") for the acquisition of additional Properties or for such other
Partnership purposes as the General Partner may determine. Additional Funds
may be raised by the Partnership, at the election of the General Partner, in
any manner provided in, and in accordance with, the terms of this ARTICLE 4.
No Person shall have any preemptive, preferential or similar right or rights
to subscribe for or acquire any Partnership Interest, except as set forth in
this SECTION 4.3.
B. GENERAL PARTNER LOANS. The General Partner may enter into a Funding
Debt, including, without limitation, a Funding Debt that is convertible into
Common Shares, and lend to the Partnership the net proceeds received by the
Partnership from such Funding Debt (a "GENERAL PARTNER LOAN"); PROVIDED,
HOWEVER, that the General Partner shall not be obligated to lend the net
proceeds of any Funding Debt to the Partnership in a manner that would be
inconsistent with the General Partner's ability to remain qualified as a
REIT or would trigger any indemnity obligation on the part of the General
Partner or the Partnership. If the General Partner enters into such a
Funding Debt, the General Partner Loan will consist of the net proceeds from
such Funding Debt and will be on comparable terms and conditions, including
interest rate, repayment schedule and costs and expenses, as shall be
applicable with respect to or incurred in connection with such Funding Debt.
C. ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS. The General Partner
may raise all or any portion of the Additional Funds by accepting additional
Capital Contributions, including, without limitation, the issuance of Units
for property or interests in property. In connection with any such
additional Capital Contributions (of cash or property), the General Partner
is hereby authorized to cause the Partnership from time to time to issue to
Partners (including the General Partner) or other Persons (including,
without limitation, in connection with the contribution of property to the
Partnership) additional Units or other Partnership Interests in one or more
classes, or one or more series of any of such classes, with such
designations, preferences and relative participating, optional or other
special rights, powers, and duties, including rights, powers, and duties
senior to then existing Partnership Interests, all as shall be determined by
the General Partner in its sole and absolute discretion subject to Delaware
law, and as may be set forth by amendment to this Agreement to reflect the
foregoing, including without limitation, (1) the allocations of items of
Partnership income, gain, loss, deduction, and credit to such class or
series of Partnership Interests; (2) the right of each such class or series
of Partnership Interests to share in Partnership distributions; (3) the
rights of each such class or series of Partnership Interests upon
dissolution and liquidation of the Partnership; and (4) the right to vote,
including, without limitation, the approval rights set forth in SECTION
11.2.A hereof; PROVIDED, that no such additional Units or other Partnership
Interests shall be issued to the General
Appendix G-16
<PAGE>
Partner unless either (a) the additional Partnership Interests are issued in
connection with the grant, award, or issuance of shares of the General
Partner pursuant to SECTION 4.3.D below, which shares have designations,
preferences, and other rights (except voting rights) such that the economic
interests attributable to such shares are substantially similar to the
designations, preferences and other rights of the additional Partnership
Interests issued to the General Partner in accordance with this SECTION
4.3.C, or (b) the additional Partnership Interests are issued to all
Partners holding Partnership Interests in the same class in proportion to
their respective Partnership Interests in such class; PROVIDED, HOWEVER,
that any Limited Partner Interests acquired by the General Partner, whether
pursuant to exercise by a Limited Partner of its exchange rights, or
otherwise, shall be automatically converted into the General Partner
Interest comprised of an identical number of Units of the same class. In the
event that the Partnership issues additional Partnership Interests pursuant
to this SECTION 4.3.C, the General Partner shall make such revisions to this
Agreement (including but not limited to the revisions described in SECTION
5.4, SECTION 6.2.B, and SECTION 8.6 hereof) as it determines are necessary
to reflect the issuance of such additional Partnership Interests.
D. ISSUANCE OF SHARES OR OTHER SECURITIES BY THE GENERAL PARTNER. The
General Partner shall not issue any additional Shares (other than Shares
issued pursuant to SECTION 8.6 hereof or pursuant to a dividend or
distribution (including any share split) of Shares to all of its
shareholders), other shares of beneficial interest of the General Partner or
New Securities unless the General Partner shall make a Capital Contribution
of the net proceeds from the issuance of such additional Shares, other
shares of beneficial interest or New Securities, as the case may be, and
from the exercise of the rights contained in such additional New Securities,
as the case may be and receive Units from the Partnership with rights,
preferences and terms corresponding to such Shares, other shares of
beneficial interest or New Securities, as the case may be; PROVIDED FURTHER,
that in the case of Preferred Shares or other securities senior or junior to
the Common Shares as to dividends and distributions on liquidation, the
General Partner shall contribute to the Partnership the proceeds or
consideration (including any property or other non-cash assets) received for
such securities and from any subsequent exercise, exchange or conversion
thereof (if applicable), and receive from the Partnership Preferred Units or
other interests in the Partnership in consideration therefor with the same
terms and conditions, including dividend, dividend priority and liquidation
preference, as are applicable to such securities.
Section 4.4 SHARE INCENTIVE PLAN. If at any time or from time to time the
General Partner sells or issues Shares pursuant to any Share Incentive Plan, the
General Partner shall contribute the net proceeds therefrom to the Partnership
as an additional Capital Contribution and shall receive the number of Common
Units corresponding to the number of Shares delivered by the General Partner to
such exercising party multiplied by a fraction the numerator of which is one and
the denominator of which is the Exchange Factor (as defined in EXHIBIT B hereto)
in effect on the date of such contribution.
Section 4.5 OTHER CONTRIBUTION PROVISIONS. In the event that any Partner
is admitted to the Partnership and is given a Capital Account in exchange for
services rendered to the Partnership, such transaction shall be treated by the
Partnership and the affected Partner as if the Partnership had compensated such
Partner in cash, and the Partner had contributed such cash to the capital of the
Partnership. In addition, with the written consent of the General Partner (which
may be granted or denied in its sole discretion), one or more Partners may enter
into agreements or other instruments with the Partnership which have the effect
of providing a guarantee of certain obligations of the Partnership or one or
more of its Subsidiaries.
Section 4.6 PURCHASE OF SHARES BY THE GENERAL PARTNER. In the event the
General Partner exercises its rights under the Charter to purchase Shares, then
the General Partner shall cause the Partnership to purchase from it a number of
Units of the appropriate class equal to the number of Shares so purchased
multiplied by a fraction the numerator of which is one and the denominator of
which is the Exchange Factor (as defined in EXHIBIT B hereto) in effect on the
date of such contribution, on the same terms that the General Partner purchased
such Shares.
Appendix G-17
<PAGE>
Section 4.7 NO INTEREST ON CAPITAL CONTRIBUTIONS. No interest or
additional share of Net Income shall be paid or credited to the Partners on
their Capital Accounts, or on any undistributed Net Income of funds left on
deposit with the Partnership; PROVIDED, HOWEVER, that nothing contained herein
shall be construed to prevent or prohibit the payment of interest on account of
loans made by the Partners to the Partnership. Any loans made to the Partnership
by a Partner shall not increase its Capital Contribution or interest in the Net
Income, Net Loss or Net Cash Flow of the Partnership, but shall be a debt due
from the Partnership and repaid accordingly.
Section 4.8 CONVERSION OR REDEMPTION OF PREFERRED UNITS.
A. If at any time any Preferred Shares issued by the General Partner at
any time (i) are to be converted into Common Shares or any other Shares or
(ii) are to be redeemed by the General Partner, the General Partner shall
exchange or redeem, as the case may be, an equal (subject to adjustment as
necessary to reflect changes in the capital structure of the Partnership or
the General Partner) number of Preferred Units.
B. The General Partner shall amend EXHIBIT A as applicable to reflect
each conversion of Preferred Units, and the issuance of additional Common
Units in connection therewith and each redemption of Preferred Units, if
any.
ARTICLE 5
DISTRIBUTIONS
Section 5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS. Subject to
the rights of Holders of Preferred Units, if any, except as set forth in SECTION
13.2 hereof, the General Partner shall cause the Partnership to distribute from
time to time, but not less frequently than quarterly, all, or such portion as
the General Partner may in its discretion determine, of Net Cash Flow generated
by the Partnership during such quarter to the Partners who are Partners on the
Partnership Payment Date with respect to such quarter to the holders of Common
Units, pro rata, in accordance with their respective Common Units.
Unless otherwise expressly provided for herein or in an agreement at the
time a new class of Partnership Interests is created in accordance with ARTICLE
4 hereof, no Partnership Interest shall be entitled to a distribution in
preference to any other Partnership Interest; PROVIDED, HOWEVER, that
notwithstanding any other provision in this Agreement, from time to time and at
such times as the General Partner shall determine, and prior to any
determination or distribution of Net Cash Flow pursuant to this SECTION 5.1,
there shall be distributed to the General Partner from the revenues, proceeds or
other funds of the Partnership, an amount equal to any REIT Expenses (other than
those described in clause (ii) of the definition of REIT Expenses), to the
extent not paid or payable by the General Partner from cash distributions which
it receives directly from any Property Partnerships on account of any interest
in the Property Partnership which it holds directly (as opposed to through the
Partnership). The General Partner shall take such reasonable efforts, as
determined by it in its sole and absolute discretion and consistent with its
qualification as a REIT, to cause the Partnership to distribute sufficient
amounts to enable the General Partner to pay shareholder dividends that will (X)
satisfy the requirements for qualifying as a REIT under the Code and Regulations
("REIT REQUIREMENTS") and (Y) avoid any federal income or excise tax liability
of the General Partner.
Section 5.2 DISTRIBUTIONS IN KIND. No right is given to any Partner to
demand and receive property or cash. The General Partner may determine, in its
sole and absolute discretion, to make a distribution in kind to the Partners of
Partnership assets, and such assets shall be distributed in such a fashion as to
ensure that such assets are distributed and allocated in accordance with
ARTICLES 5, 6 and 10 hereof based on the fair market value of such assets on the
date of such distribution.
Appendix G-18
<PAGE>
Section 5.3 DISTRIBUTIONS UPON LIQUIDATION. Proceeds from a Terminating
Capital Transaction shall be distributed to the Partners in accordance with
SECTION 13.2 hereof.
Section 5.4 DISTRIBUTIONS TO REFLECT ISSUANCE OF ADDITIONAL PARTNERSHIP
INTERESTS. In the event that the Partnership issues additional Partnership
Interests to the General Partner or any Additional Limited Partner pursuant to
SECTION 4.3 or 4.4 hereof, the General Partner shall make such revisions to this
ARTICLE 5 as it determines are necessary to reflect the issuance of such
additional Partnership Interests, including making preferential distributions to
certain classes of Partnership Interests.
Section 5.5 DISTRIBUTIONS TO LIMITED PARTNERS EXERCISING EXCHANGE
RIGHTS. With respect to any Limited Partner(s) from whom the General Partner
receives an Exchange Exercise Notice to exercise Rights in accordance with
SECTION 8.6 hereof for which the General Partner elects to pay the Cash Purchase
Price pursuant to EXHIBIT B, the General Partner shall cause the Partnership to
distribute to such Limited Partner(s), with respect to the Units for which the
Cash Purchase Price is paid, (i) on the Partnership Payment Date, if any,
thereafter occurring during the quarter in which the Cash Purchase Price is
paid, an amount equal to a full PRO RATA share of any Net Cash Flow to which
such Limited Partner would have been entitled to receive pursuant to SECTION 5.1
had such Limited Partner held such Units on the Partnership Payment Date
occurring in such quarter and (ii) on the Partnership Payment Date, if any,
occurring during the next succeeding quarter after such Exercise Notice is
received, an amount equal to the Net Cash Flow to which such Limited Partner
would have been entitled to receive pursuant to SECTION 5.1 had such Limited
Partner held such Units on the Partnership Payment Date, multiplied by a
fraction, the numerator of which is the number of days in the preceding quarter
(based on three 30-day months) that the Limited Partner held such Units and the
denominator of which is 90.
ARTICLE 6
ALLOCATIONS
Section 6.1 TIMING AND AMOUNT OF ALLOCATIONS OF NET INCOME AND NET
LOSS. Net Income and Net Loss of the Partnership shall be determined and
allocated with respect to each Partnership taxable year of the Partnership as of
the end of each such year. Subject to the other provisions of this ARTICLE 6, an
allocation to a Partner of a share of Net Income or Net Loss shall be treated as
an allocation of the same share of each item of income, gain, loss or deduction
that is taken into account in computing Net Income or Net Loss.
Section 6.2 GENERAL ALLOCATIONS. Except as otherwise provided herein, Net
Income and Net Loss for any Partnership taxable year or other applicable period
of the Partnership shall be allocated in the following order and priority:
A. Net Income, if any, shall be allocated among the Partners holding
Common Units in proportion to, and to the extent of, the aggregate amounts
of Net Cash Flow distributed in respect of the Partners' Common Units
pursuant to SECTION 5.1 (including those amounts of Net Cash Flow
distributed within the fiscal year or other applicable period under SECTION
5.5 that are in respect of SECTION 5.1, only if either (A) such Net Cash
Flow is distributed on or prior to the date on which the Cash Purchase Price
is paid or (B) the Partner to whom such Net Cash Flow is distributed
otherwise continues to own one or more Common Units on the date such
distribution is made),
B. Upon a Liquidating Capital Event, any remaining Net Income or Net
Loss (or remaining Partnership items of income, gain, loss and deduction
thereof), computed by including the Net Income or Net Loss resulting from
such Liquidating Capital Event, shall be allocated among the Partners
holding Common Units to the extent possible, until each Partner has a
Capital Account balance equal to the pro rata portion, based on the number
of Common Units held by each Partner, of the net positive sum of the Capital
Account balances for all Partners (determined after taking into account the
allocations required under Section 6.6).
Appendix G-19
<PAGE>
C. Any remaining Net Income or Net Loss shall be allocated to the
Partners holding Common Units pro rata in accordance with their respective
Common Units.
Section 6.3 ALLOCATIONS TO REFLECT ISSUANCE OF ADDITIONAL PARTNERSHIP
INTERESTS. In the event that the Partnership issues additional Partnership
Interests to the General Partner or any Additional Limited Partner pursuant to
SECTION 4.3 or 4.4 hereof, the General Partner shall make such revisions to this
ARTICLE 6 as it determines are necessary to reflect the terms of the issuance of
such additional Partnership Interests, including making preferential allocations
to certain classes of Partnership Interests.
Section 6.4 GUARANTEED PAYMENTS. To the extent that the General Partner
receives any reimbursement of REIT Expenses pursuant to SECTION 5.1, the General
Partner shall be allocated items of income and gain equal to the amount of such
payment.
Section 6.5 ALLOCATIONS WITH RESPECT TO TRANSFERRED INTERESTS. Unless
otherwise required by the Code and/or the Regulations or as agreed to and by the
General Partner, in its sole and absolute discretion, any Net Income or Net Loss
allocable to a Partnership Interest which has been transferred during any year
shall be allocated among the Persons who were holders of such Partnership
Interest during such year in the manner described in SECTION 11.6 below.
Section 6.6 ADDITIONAL ALLOCATION PROVISIONS.
Notwithstanding the foregoing provisions of this ARTICLE 6 the following
special allocations shall be made in the following order and priority:
A. REGULATORY ALLOCATIONS.
(1) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in
Regulations Section 1.704-2(f), notwithstanding the provisions of SECTION
6.2 hereof, or any other provision of this ARTICLE 6, if there is a net
decrease in Partnership Minimum Gain during any Partnership taxable year,
each Partner shall be specially allocated items of Partnership income and
gain for such year (and, if necessary, subsequent Partnership taxable
years) in an amount equal to such Partner's share of the net decrease in
Partnership Minimum Gain, as determined under Regulations Section
1.704-2(g). Allocations pursuant to the previous sentence shall be made
in proportion to the respective amounts required to be allocated to each
Partner pursuant thereto. The items to be allocated shall be determined
in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2).
This SECTION 6.6.A(1) is intended to qualify as a "minimum gain
chargeback" within the meaning of Regulation Section 1.704-2(f) which
shall be controlling in the event of a conflict between such Regulation
and this SECTION 6.6.A(1).
(2) PARTNER MINIMUM GAIN CHARGEBACK. Except as otherwise provided
in Regulations Section 1.704-2(i)(4), and notwithstanding the provisions
of SECTION 6.2 hereof, or any other provision of this ARTICLE 6 (except
SECTION 6.6.A(1) hereof), if there is a net decrease in Partner Minimum
Gain attributable to a Partner Nonrecourse Debt during any Partnership
taxable year, each Partner who has a share of the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance
with Regulations Section 1.704-2(i)(5), shall be specially allocated
items of Partnership income and gain for such year (and, if necessary,
subsequent Partnership taxable years) in an amount equal to such
Partner's share of the net decrease in Partner Minimum Gain attributable
to such Partner Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required
to be allocated to each General Partner and Limited Partner pursuant
thereto. The items to be so allocated shall be determined in accordance
with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This SECTION
6.6.A(2) is intended to qualify as a "chargeback of partner nonrecourse
debt minimum gain" within the meaning of Regulation Section 1.704-2(i)
which shall be controlling in the event of a conflict between such
Regulation and this SECTION 6.6.A(2).
Appendix G-20
<PAGE>
(3) NONRECOURSE DEDUCTIONS AND PARTNER NONRECOURSE DEDUCTIONS. Any
Partner Nonrecourse Deductions for any Partnership taxable year shall be
specially allocated to the Partner(s) who bears the economic risk of loss
with respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable, in accordance with Regulations
Sections 1.704-2(b)(4) and 1.704-2(i). Any Nonrecourse Deductions for any
Partnership taxable year generally shall be allocated to the Partners in
the same proportion as the Partners are allocated items of loss and
deduction not attributable to either Partnership Nonrecourse Debt or
Partner Nonrecourse Debt; PROVIDED, HOWEVER, that the General Partner may
allocate Nonrecourse Deductions in a different manner so long as such
allocation is reasonably consistent with allocations of some other
significant Partnership item attributable to the Property securing the
relevant Nonrecourse Liability that have substantial economic effect in
accordance with Regulations Section 1.702-2(e)(2).
(4) QUALIFIED INCOME OFFSET. If any Partner unexpectedly receives
an adjustment, allocation or distribution described in Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income
and gain shall be allocated, in accordance with Regulations Section
1.704-1(b)(2)(ii)(d), to the Partner in an amount and manner sufficient
to eliminate, to the extent required by such Regulations, the Adjusted
Capital Account Deficit of the Partner as quickly as possible; PROVIDED,
that an allocation pursuant to this SECTION 6.6.A(4) shall be made if and
only to the extent that such Partner would have an Adjusted Capital
Account Deficit after all other allocations provided in this ARTICLE 6
have been tentatively made as if this SECTION 6.6.A(4) were not in the
Agreement. It is intended that this SECTION 6.6.A(4) qualify and be
construed as a "qualified income offset" within the meaning of
Regulations 1.704-1(b)(2)(ii)(d), which shall be controlling in the event
of a conflict between such Regulations and this SECTION 6.6.A(4).
(5) GROSS INCOME ALLOCATION. In the event any Partner has a deficit
Capital Account at the end of any Partnership taxable year which is in
excess of the sum of (a) the amount (if any) such Partner is obligated to
restore to the Partnership, and (b) the amount such Partner is deemed to
be obligated to restore pursuant to Regulations Section
1.704-1(b)(2)(ii)(c) or the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be specially
allocated items of Partnership income and gain, pro rata, in proportion
to the amount of such excess Capital Account deficit, as quickly as
possible until no Partner has such an excess Capital Account deficit;
PROVIDED, that an allocation pursuant to this SECTION 6.6.A(5) shall be
made if and only to the extent that such Partner would have an excess
Capital Account deficit after all other allocations provided in this
ARTICLE 6 have been tentatively made as if this SECTION 6.6.A(5) and
SECTION 6.6.A(4) hereof were not in the Agreement.
(6) LIMITATION ON ALLOCATION OF LOSS. No items of loss or deduction
will be allocated to any Partner to the extent that any such allocation
would cause the Partner to have an, or increase the amount of an
existing, Capital Account deficit at the end of any Partnership taxable
year greater than the sum of (a) the amount (if any) such Partner is
obligated to restore to the Partnership, and (b) the amount such Partner
is deemed to be obligated to restore pursuant to Regulations Section
1.704-1(b)(2)(ii)(c) or the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5). All items of loss or deduction in excess
of the limitation set forth in this SECTION 6.6.A(6) will be allocated
among such other Partners, which do not have such excess Capital Account
deficit balances, pro rata, in proportion to their Partnership Interests,
until no Partner may be allocated any such items of loss or deduction
without having or increasing such an excess Capital Account deficit
balance. Thereafter, any remaining items of loss or deduction will be
allocated to the General Partner.
(7) SECTION 754 ADJUSTMENT. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Code Section
734(b) or Code Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section
1.704-1(b)(2)(iv)(m)(4), to
Appendix G-21
<PAGE>
be taken into account in determining Capital Accounts as the result of a
distribution to a Partner in complete liquidation of his interest in the
Partnership, the amount of such adjustment to the Capital Accounts shall
be treated as an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases such basis) and such gain
or loss shall be specially allocated to the Partners in accordance with
their interests in the Partnership in the event that Regulations Section
1.704-1(b)(2)(iv)(m)(2) applies, or to the Partners to whom such
distribution was made in the event that Regulations Section
1.704-1(b)(2)(iv)(m)(4) applies.
(8) CURATIVE ALLOCATION. The allocations set forth in SECTIONS
6.6.A(1), (2), (3), (4), (5), (6) and (7) hereof (the "REGULATORY
ALLOCATIONS") are intended to comply with certain regulatory
requirements, including the requirements of Regulations Sections
1.704-1(b) and 1.704-2. Notwithstanding the provisions of SECTIONS 6.1
and 6.2 hereof, the Regulatory Allocations shall be taken into account in
allocating other items of income, gain, loss and deduction among the
Partners so that, to the extent possible, the net amount of such
allocations of other items and the Regulatory Allocations to each Partner
shall be equal to the net amount that would have been allocated to each
such Partner if the Regulatory Allocations had not occurred.
Notwithstanding the preceding sentence, Regulatory Allocations relating
to (i) Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Partnership Minimum Gain,
and (ii) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner Minimum
Gain. Allocations pursuant to this SECTION 6.6A(8) shall only be made
with respect to Regulatory Allocations to the extent the General Partner
determines that such allocations shall otherwise be inconsistent with the
economic agreement among the Partners. Further, allocations pursuant to
this SECTION 6.6A(8) shall be deferred with respect to allocations
pursuant to (i) and (ii) above to the extent the General Partner
determines that such allocations are likely to be offset by subsequent
Regulatory Allocations.
B. NONRECOURSE LIABILITY ALLOCATION. For purposes of Regulations
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the amount of Partnership Minimum Gain, shall
be allocated in each Partnership taxable year in accordance with a Permitted
Debt Allocation Method.
C. DISTRIBUTIONS OF PROCEEDS FROM NONRECOURSE LIABILITIES. To the
extent permitted by Sections 1.704-2(h)(3) and 1.704-2(i)(6) of the
Regulations, the Partners shall endeavor to treat distributions of Net Cash
Flow as having been made from the proceeds of a Nonrecourse Liability or a
Partner Nonrecourse Debt only to the extent that such distribution would not
cause or increase an Adjusted Capital Account Deficit for any Partner.
D. INTERPRETATION. The foregoing provisions of this SECTION 6.6 are
intended to comply with Treasury Regulation Sections 1.704-1(b) and 1.704-2
and shall be interpreted consistently with this intention. Any terms used in
such provisions that are not specifically defined in this Agreement shall
have the meaning, if any, given such terms in the Regulations cited above.
Section 6.7 TAX ALLOCATIONS.
A. IN GENERAL. Except as otherwise provided in this SECTION 6.7, for
income tax purposes each item of income, gain, loss and deduction
(collectively, "TAX ITEMS") shall be allocated among the Partners in the
same manner as its correlative item of "book" income, gain, loss or
deduction is allocated pursuant to SECTIONS 6.2 and 6.6 hereof.
B. ALLOCATIONS RESPECTING SECTION 704(C). Notwithstanding SECTION
6.7.A hereof, Tax Items with respect to Partnership property that is
contributed to the Partnership by a Partner shall be shared among the
Partners for income tax purposes pursuant to Regulations promulgated under
Section 704(c) of the Code, so as to take into account the variation, if
any, between the adjusted tax basis of
Appendix G-22
<PAGE>
the property to the Partnership and its initial Gross Asset Value. With
respect to Partnership property that is initially contributed to the
Partnership upon its formation pursuant to SECTION 4.1 hereof, such
variation between basis and initial Gross Asset Value shall be taken into
account under the "traditional method" as described in Regulations Section
1.704-3(b). With respect to properties subsequently contributed to the
Partnership, the Partnership shall account for such variation under any
method approved under Section 704(c) of the Code and the applicable
regulations as chosen by the General Partner. In the event the Gross Asset
Value of any Partnership asset is adjusted pursuant to subparagraph (b) of
the definition of Gross Asset Value (provided in ARTICLE 1 of this
Agreement), subsequent allocations of Tax Items with respect to such asset
shall take account of the variation, if any, between the adjusted basis of
such asset and its Gross Asset Value in the same manner as under Section
704(c) of the Code and the applicable regulations consistent with the
requirements of Regulations Section 1.704-1(b)(2)(iv)(g) using any method
approved under 704(c) of the Code and the applicable regulations as chosen
by the General Partner.
C. ALTERNATIVE MINIMUM TAX. If any taxable item of income or gain is
computed differently from the taxable item of income or gain which results
for purposes of the alternative minimum tax, then to the extent possible,
without changing the overall allocations of items for purposes of either the
Partners' Capital Accounts or the regular federal income tax (i) each
Partner will be allocated items of taxable income or gain for alternative
minimum tax purposes taking into account the prior allocations of
originating tax preferences or alternative minimum tax adjustments to such
Partner (and its predecessors) and (ii) other Partnership items of income or
gain for alternative minimum tax purposes of the same character that would
have been recognized, but for the originating tax preferences or alternative
minimum tax adjustments, will be allocated away from those Partners that are
allocated amounts pursuant to clause (i) so that, to the extent possible,
the other Partners are allocated the same amount, and type, of alternative
minimum tax income and gain that would have been allocated to them had the
originating tax preferences or alternative minimum tax adjustments not
occurred.
D. RECAPTURE GAIN. If any portion of gain recognized from the
disposition of property by the Partnership represents the "recapture" of
previously allocated deductions by virtue of the application of Code Section
1245 or 1250 ("RECAPTURE GAIN"), such Recapture Gain will be allocated as
follows:
FIRST, to the Partners, PRO RATA, in proportion to the lesser of each
Partner's (i) allocable share of the total gain recognized from the disposition
of such Partnership property and (ii) share of depreciation or amortization with
respect to such property (as determined under Regulations Sections
1.1245-1(e)(2) and (3)), until each such Partner has been allocated Recapture
Gain equal to such lesser amount; and
SECOND, the balance of Recapture Gain will be allocated among the Partners
whose allocable shares of total gain exceed their shares of depreciation or
amortization with respect to such property (as determined under Regulations
Section 1.1245-1(e)(2) and (3)), in proportion to their shares of total gain
(including Recapture Gain) from the disposition of such property;
PROVIDED, HOWEVER, that no Partner will be allocated Recapture Gain under this
SECTION 6.7.D in excess of the total gain allocated to such Partner from such
disposition.
ARTICLE 7
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 MANAGEMENT.
A. Except as otherwise expressly provided in this Agreement or as
required by applicable law, all management powers over the business and
affairs of the Partnership are fully, exclusively and completely vested in
the General Partner, and no other Partner shall have any right to transact
business for, participate in the management or decisions of, or exercise
control or management power
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over the business and affairs of, the Partnership. The General Partner may
not be removed by the other Partners with or without cause, except with the
consent of the General Partner. In addition to the powers now or hereafter
granted the General Partner of a limited partnership under the Act and other
applicable law or which are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to the other
provisions hereof including SECTION 7.3, shall have full power and authority
to do all things deemed necessary or desirable by it to conduct the business
of the Partnership, to exercise all powers set forth in SECTION 3.2 hereof
and to effectuate the purposes set forth in SECTION 3.1 hereof, including,
without limitation:
(1) the making of any expenditures, the lending or borrowing of
money (including, without limitation, making prepayments on loans and
borrowing money to permit the Partnership to make distributions to its
Partners in such amounts as will permit the General Partner (so long as
the General Partner has determined to qualify as a REIT) to avoid the
payment of any federal income tax (including, for this purpose, any
excise tax pursuant to Section 4981 of the Code) and to make
distributions to its shareholders sufficient to permit the General
Partner to maintain REIT status), the assumption or guarantee of, or
other contracting for, indebtedness and other liabilities, the issuance
of evidences of indebtedness (including the securing of same by mortgage,
deed of trust or other lien or encumbrance on all or any of the
Partnership's assets) and the incurring of any obligations it deems
necessary for the conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership, the
registration of any class of securities of the Partnership under the
Securities Exchange Act of 1934, as amended, and the listing of any debt
securities of the Partnership on any exchange;
(3) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any assets of the Partnership or the merger
or other combination of the Partnership with or into another entity;
(4) the mortgage, pledge, encumbrance or hypothecation of all or any
assets of the Partnership, and the use of the assets of the Partnership
(including, without limitation, cash on hand) for any purpose consistent
with the terms of this Agreement and on any terms it sees fit, including,
without limitation, the financing of the conduct or the operations of the
General Partner or the Partnership, the lending of funds to other Persons
(including, without limitation, the General Partner (if necessary to
permit the financing or capitalization of a subsidiary of the General
Partner or the Partnership) and any Subsidiaries of the Partnership) and
the repayment of obligations of the Partnership, any of its Subsidiaries
and any other Person in which it has an equity investment;
(5) the negotiation, execution, and performance of any contracts,
leases, conveyances or other instruments that the General Partner
considers useful or necessary to the conduct of the Partnership's
operations or the implementation of the General Partner's powers under
this Agreement;
(6) the distribution of Partnership Net Cash Flow or other
Partnership assets in accordance with this Agreement;
(7) the selection and dismissal of employees of the Partnership
(including, without limitation, employees having titles such as
"president," "vice president," "secretary" and "treasurer"), and agents,
outside attorneys, accountants, consultants and contractors of the
Partnership, the determination of their compensation and other terms of
employment or hiring, including waivers of conflicts of interest and the
payment of their expenses and compensation out of the Partnership's
assets;
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(8) the maintenance of such insurance for the benefit of the
Partnership and the Partners as it deems necessary or appropriate;
(9) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general partnerships,
limited liability companies, joint ventures or other relationships that
it deems desirable (including, without limitation, the acquisition of
interests in, and the contributions of property to, any Subsidiary and
any other Person in which the Partnership has an equity investment from
time to time);
(10) the control of any matters affecting the rights and obligations
of the Partnership, including the conduct of litigation and the incurring
of legal expense and the settlement of claims and litigation, and the
indemnification of any Person against liabilities and contingencies to
the extent permitted by law;
(11) the undertaking of any action in connection with the
Partnership's direct or indirect investment in any Person (including,
without limitation, contributing or loaning Partnership funds to,
incurring indebtedness on behalf of, or guarantying the obligations of
any such Persons);
(12) subject to the other provisions in this Agreement, the
determination of the fair market value of any Partnership property
distributed in kind using such reasonable method of valuation as it may
adopt;
(13) the management, operation, leasing, landscaping, repair,
alteration, demolition or improvement of any real property or
improvements owned by the Partnership or any Subsidiary of the
Partnership or by any other Person in which the Partnership has made a
direct or indirect equity investment;
(14) holding, managing, investing and reinvesting cash and other
assets of the Partnership;
(15) the collection and receipt of revenues and income of the
Partnership;
(16) the exercise, directly or indirectly through any
attorney-in-fact acting under a general or limited power of attorney, of
any right, including the right to vote, appurtenant to any asset or
investment held by the Partnership;
(17) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of or in connection with any
Subsidiary of the Partnership or any other Person in which the
Partnership has a direct or indirect interest, or jointly with any such
Subsidiary or other Person;
(18) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of any Person, pursuant to
contractual or other arrangements between the Partnership and such
Person;
(19) the making, execution and delivery of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties, indemnities,
waivers, releases or legal instruments or other agreements in writing
necessary or appropriate in the judgment of the General Partner for the
accomplishment of any of the powers of the General Partner enumerated in
or granted by this Agreement;
(20) the amendment and restatement of EXHIBIT A to reflect accurately
at all times the Capital Contributions and Unit ownership of the Partners
as the same are adjusted from time to time to the extent necessary to
reflect redemptions, conversions, Capital Contributions, the issuance of
Units (including Preferred Units), the admission of any Additional
Limited Partner or any Substituted Limited Partner or otherwise, which
amendment and restatement, notwithstanding anything in this Agreement to
the contrary, shall not be deemed an amendment of this
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Agreement, as long as the matter or event being reflected in EXHIBIT A
otherwise is authorized by this Agreement;
(21) the maintenance of the Partnership's books and records; and
(22) the preparation and delivery, or causing to be prepared and
delivered by the Partnership's accountants, all financial and other
reports with respect to the operations of the Partnership, and the
preparation and filing of all Federal and state tax returns and reports.
B. Each of the Partners agrees that the General Partner is authorized
to execute, deliver and perform the above-mentioned agreements and
transactions on behalf of the Partnership without any further act, approval
or vote of the Partners, notwithstanding any other provisions of this
Agreement (except as provided in SECTION 7.3 hereof), the Act or any
applicable law, rule or regulation; PROVIDED, that the Partners agree that
the General Partner shall not be required to take, or refrain from taking,
any action which, in the judgment of the General Partner, in its sole and
absolute discretion, (A) could adversely affect the ability of the General
Partner to continue to qualify as a REIT, (B) could subject the General
Partner to any taxes under Section 857 or Section 4981 of the Code, or (C)
could violate any law or regulation of any governmental body or agency
having jurisdiction over the General Partner or its securities. The
execution, delivery or performance by the General Partner or the Partnership
of any agreement authorized or permitted under this Agreement shall not
constitute a breach by the General Partner of any duty that the General
Partner may owe the Partnership, any other General Partner or the Limited
Partners or any other Persons under this Agreement or of any duty stated or
implied by law or equity.
Except as otherwise provided in this Agreement, no Partner shall have
any authority to act for, bind, commit or assume any obligation or
responsibility on behalf of the Partnership, its properties or any other
Partner. No Partner, in its capacity as a Partner under this Agreement,
shall be responsible or liable for any indebtedness or obligation of another
Partner, nor shall the Partnership be responsible or liable for any
indebtedness or obligation of any Partner, incurred either before or after
the execution and delivery of this Agreement by such Partner, except as to
those responsibilities, liabilities, indebtedness or obligations incurred
pursuant to and as limited by the terms of this Agreement and the Act.
C. At all times from and after the date hereof, the General Partner may
cause the Partnership to obtain and maintain (1) casualty, liability and
other insurance on the properties of the Partnership and (2) liability
insurance for the Indemnitees hereunder.
D. At all times from and after the date hereof, the General Partner may
cause the Partnership to establish and maintain working capital and other
reserves in such amounts as the General Partner, in its sole and absolute
discretion, deems appropriate and reasonable from time to time.
E. In exercising its authority under this Agreement, the General
Partner may, but shall be under no obligation to, take into account the tax
consequences to any Partner (including the General Partner) of any action
taken by the General Partner. The General Partner, any other General Partner
and the Partnership shall not have liability to a Limited Partner under any
circumstances as a result of an income tax liability incurred by such
Limited Partner as a result of an action (or inaction) by the General
Partner pursuant to its authority under this Agreement. The Partners
expressly acknowledge that, in any action undertaken by the General Partner
or the Partnership in accordance with the terms of this Agreement, the
General Partner is acting for the benefit of the Partnership, the Limited
Partners, itself, and the General Partner's shareholders, collectively.
F. Except as otherwise provided herein, to the extent the duties of the
General Partner require expenditures of funds to be paid to third parties,
the General Partner shall not have any obligations hereunder except to the
extent that Partnership funds are reasonably available to it for the
performance of such duties, and nothing herein contained shall be deemed to
authorize or require the
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General Partner, in its capacity as such, to expend its individual funds for
payment to third parties or to undertake any individual liability or
obligation on behalf of the Partnership.
Section 7.2 CERTIFICATE OF LIMITED PARTNERSHIP. To the extent that such
action is determined by the General Partner to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate and do all the things to maintain the Partnership as a limited
partnership (or a partnership in which the limited partners have limited
liability) under the laws of the State of Delaware and to maintain the
Partnership's qualification to do business as a foreign limited partnership in
each other state, the District of Columbia or other jurisdiction, in which the
Partnership may elect to do business or own property. Subject to the terms of
SECTION 8.5.A(4) hereof, the General Partner shall not be required, before or
after filing, to deliver or mail a copy of the Certificate or any amendment
thereto to any Limited Partner. The General Partner shall use all reasonable
efforts to cause to be filed such other certificates or documents as may be
reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of Delaware, and any
other state, or the District of Columbia or other jurisdiction, in which the
Partnership may elect to do business or own property.
Section 7.3 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY.
A. The General Partner may not take any action in contravention of this
Agreement, including, without limitation:
(1) perform any act that would subject a Limited Partner to
liability as the General Partner in any jurisdiction or any other
liability except as provided herein or under the Act; or
B. The General Partner shall not, without the prior Consent of the
Partners, undertake, on behalf of the Partnership, any of the following
actions or enter into any transaction which would have the effect of such
transactions:
[(1) EXCEPT AS PROVIDED IN SECTIONS 7.1(A); 7.3.D AND ARTICLE XIV
HEREOF, AMEND, MODIFY OR TERMINATE THIS AGREEMENT OTHER THAN TO REFLECT
THE ADMISSION, SUBSTITUTION, TERMINATION OR WITHDRAWAL OF PARTNERS
PURSUANT TO ARTICLE 12 HEREOF];
(2) except as provided in SECTION 7.9, take title to any property of
the Partnership other than in the name of the Partnership or a Property
Partnership.
C. Notwithstanding SECTIONS 7.3.A and 7.3.B hereof, but subject to
SECTION 7.3.D hereof, the General Partner shall have the power, without the
Consent of the Limited Partners, to amend this Agreement as may be required
to facilitate or implement any of the following purposes:
(1) to add to the obligations of the General Partner or surrender
any right or power granted to the General Partner or any Affiliate of the
General Partner for the benefit of the other Partners;
(2) to reflect the issuance of additional Partnership Interests
pursuant to SECTIONS 4.3.C and 4.4 hereof or the admission, substitution,
termination, or withdrawal of Partners in accordance with this Agreement;
(3) to reflect a change that is of an inconsequential nature and
does not adversely affect the Partners in any material respect, or to
cure any ambiguity in, correct or supplement any provision in, or make
other changes with respect to matters arising under, this Agreement that
will not be inconsistent with law or with the provisions of this
Agreement;
(4) to satisfy any requirements, conditions, or guidelines contained
in any order, directive, opinion, ruling or regulation of a federal or
state agency or contained in federal or state law;
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(5) to reflect such changes as are reasonably necessary for the
General Partner to maintain its status as a REIT, including changes which
may be necessitated due to a change in applicable law (or an
authoritative interpretation thereof) or a ruling of the IRS; and
(6) to modify, as set forth in the definition of "Capital Account,"
the manner in which Capital Accounts are computed.
D. Notwithstanding SECTIONS 7.3.A, 7.3.B, and 7.3.C hereof, this
Agreement shall not be amended, and no action may be taken by the General
Partner, without the Consent of each Partner adversely affected if such
amendment or action would (1) convert a Limited Partner's interest in the
Partnership into the General Partner's interest (except as the result of the
General Partner acquiring such interest), (2) adversely modify the limited
liability of a Limited Partner, (3) alter rights of a Partner to receive
distributions pursuant to ARTICLE 5 or SECTION 13.2.A(3) hereof, or the
allocations specified in ARTICLE 6 (except as permitted pursuant to SECTION
4.3 and SECTION 7.3.C(2) hereof), (4) alter or modify in a material and
adverse way the rights set forth in SECTION 8.6 hereof, and related
definitions herein, (5) reduce the percentage of Partners required to
consent to any matter in this Agreement or (6) amend this SECTION 7.3.D.
Further, no amendment may alter the restrictions on the General Partner's
authority set forth elsewhere in this SECTION 7.3 without the Consent
specified in such section.
Section 7.4 REIMBURSEMENT OF THE GENERAL PARTNER.
A. Except as provided in this SECTION 7.4 and elsewhere in this
Agreement (including the provisions of ARTICLES 5 and 6 hereof regarding
distributions, payments and allocations to which it may be entitled), the
General Partner shall not be compensated for its services as General Partner
of the Partnership.
B. The Partnership shall assume and pay when due, or reimburse the
General Partner for, on a monthly basis, or such other basis as the General
Partner may determine in its sole and absolute discretion, all costs and
expenses it incurs. The Partnership shall also assume, and pay when due, all
Administrative Expenses other than REIT Expenses, but only to the extent not
paid or payable by the General Partner from cash distributions received by
the General Partner directly from any Property Partnership. The General
Partner shall use any cash distributions which it receives directly from any
Property Partnerships on account of any interest in the Property Partnership
which it holds directly (as opposed to through the Partnership) to pay REIT
Expenses. The Partners acknowledge that the General Partner's sole business
is the ownership of interests in and operation of the Partnership and that
such expenses are incurred for the benefit of the Partnership; PROVIDED,
that the General Partner shall not be reimbursed for expenses it incurs
relating to the organization of the Partnership and the General Partner or
any public offerings of Common Shares, other shares of beneficial interest
or Funding Debt by the General Partner, but shall be reimbursed for expenses
it incurs with respect to any other issuance of additional Partnership
Interests pursuant to the provisions hereof. Any amounts paid pursuant to
this SECTION 7.4 shall be in addition to, but not duplicative of, any
amounts paid to the General Partner as indemnification pursuant to SECTION
7.6 hereof.
C. Any reimbursements to the General Partner pursuant to this SECTION
7.4 which constitute gross income of the General Partner shall be reported
as distributions for purposes of computing the Partners' Capital Accounts,
and shall not be reported as guaranteed payments within the meaning of
Section 707(c) of the Code.
Section 7.5 CONTRACTS WITH AFFILIATES.
A. The Partnership may lend or contribute to Persons in which the
Partnership has an equity investment, and such Persons may borrow funds from
the Partnership, on terms and conditions established in the sole and
absolute discretion of the General Partner. The foregoing authority shall
not create any right or benefit in favor of any Person.
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B. The Partnership may transfer assets to joint ventures, limited
liability companies, other partnerships, corporations or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions consistent with this Agreement and applicable
law.
C. The General Partner, in its sole and absolute discretion and without
the approval of the Partners, may propose and adopt on behalf of the
Partnership employee benefit plans funded by the Partnership for the benefit
of employees of the General Partner, the Partnership, Subsidiaries of the
Partnership or any Affiliate of any of them in respect of services
performed, directly or indirectly, for the benefit of the Partnership, the
General Partner, or any of the Partnership's Subsidiaries. The General
Partner also is expressly authorized to cause the Partnership to issue to it
Units corresponding to Shares issued by the General Partner pursuant to its
Share Incentive Plan or any similar or successor plan and to repurchase such
Units from the General Partner to the extent necessary to permit the General
Partner to repurchase such Shares in accordance with such plan.
D. The General Partner is expressly authorized to enter into, in the
name and on behalf of the Partnership, a right of first opportunity
arrangement and other conflict avoidance agreements with various Affiliates
of the Partnership and the General Partner, on such terms as the General
Partner, in its sole and absolute discretion, believes are advisable.
E. Except as expressly permitted by this Agreement and except for those
transactions occurring on the date hereof in connection with the formation
of the Partnership and the Company, no General Partner nor any Affiliate of
the General Partner shall sell, transfer or convey any property to, or
purchase any property from, the Partnership, directly or indirectly, unless
the General Partner determines in good faith that such transactions are fair
and reasonable.
Section 7.6 INDEMNIFICATION.
A. The Partnership shall indemnify an Indemnitee from and against any
and all losses, claims, damages, liabilities, joint or several, expenses
(including reasonable legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or
investigative, that relate to the operations of the Partnership as set forth
in this Agreement in which any Indemnitee may be involved, or is threatened
to be involved, as a party or otherwise. Without limitation, the foregoing
indemnity shall extend to any liability of any Indemnitee, pursuant to a
loan guaranty or otherwise, for any indebtedness of the Partnership or any
Subsidiary of the Partnership (including, without limitation, any
indebtedness which the Partnership or any Subsidiary of the Partnership has
assumed or taken subject to), and the General Partner is hereby authorized
and empowered, on behalf of the Partnership, to enter into one or more
indemnity agreements consistent with the provisions of this SECTION 7.6 in
favor of any Indemnitee having or potentially having liability for any such
indebtedness. The termination of any proceeding by judgment, order or
settlement does not create a presumption that the Indemnitee did not meet
any requisite standard of conduct. Any indemnification pursuant to this
SECTION 7.6 shall be made only out of the assets of the Partnership, and
neither the General Partner nor any Limited Partner shall have any
obligation to contribute to the capital of the Partnership or otherwise
provide funds, to enable the Partnership to fund its obligations under this
SECTION 7.6.
B. Reasonable expenses incurred by an Indemnitee who is a party to a
proceeding may be paid or reimbursed by the Partnership in advance of the
final disposition of the proceeding upon receipt by the Partnership of (1) a
written affirmation by the Indemnitee of the Indemnitee's good faith belief
that the standard of conduct necessary for indemnification by the
Partnership as authorized in SUBPARAGRAPH A of this SECTION 7.6 has been met
and (2) a written undertaking by or on behalf of the Indemnitee to repay the
amount if it shall ultimately be determined that the standard of conduct has
not been met.
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C. The indemnification provided by this SECTION 7.6 shall be in
addition to any other rights to which an Indemnitee or any other Person may
be entitled under any agreement, pursuant to any vote of the Partners, as a
matter of law or otherwise, and shall continue as to an Indemnitee who has
ceased to serve in a capacity which affords such Person the rights of an
Indemnitee.
D. The Partnership may purchase and maintain insurance, on behalf of the
Indemnitees and such other Persons as the General Partner shall determine,
against any liability that may be asserted against or expenses that may be
incurred by any such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
E. For purposes of this SECTION 7.6, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit
plan of the General Partner or the Partnership whenever the performance by
it of its duties to the Partnership also imposes duties on, or otherwise
involves services by, it to such plan or participants or beneficiaries of
such plan; excise taxes assessed on an Indemnitee with respect to an
employee benefit plan pursuant to applicable law shall constitute fines
within the meaning of this SECTION 7.6; and actions taken or omitted by the
Indemnitee with respect to an employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Partnership.
F. In no event may an Indemnitee subject the Limited Partners or any of
the General Partner to personal liability by reason of the indemnification
provisions set forth in this Agreement.
G. An Indemnitee shall not be denied indemnification in whole or in part
under this SECTION 7.6 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
Indemnitee would otherwise be entitled to indemnification.
H. The provisions of this SECTION 7.6 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons. Any
amendment, modification or repeal of this SECTION 7.6 or any provision
hereof shall be prospective only and shall not in any way affect the
limitations on the Partnership's liability to any Indemnitee under this
SECTION 7.6 as in effect immediately prior to such amendment, modification
or repeal with respect to claims arising from or relating to matters
occurring, in whole or in part, prior to such amendment, modification or
repeal, regardless of when such claims may arise or be asserted.
I. If and to the extent any reimbursements to any General Partner
pursuant to this SECTION 7.6 constitute gross income of the General Partner
(as opposed to the repayment of advances made by the General Partner on
behalf of the Partnership) such amounts shall constitute guaranteed payments
within the meaning of Section 707(c) of the Code, shall be treated
consistently therewith by the Partnership and all Partners, and shall not be
treated as distributions for purposes of computing the Partners' Capital
Accounts.
J. Any indemnification hereunder is subject to, and limited by, the
provisions of Section 17-108 of the Act.
K. In the event the Partnership is made a party to any litigation or
otherwise incurs any loss or expense as a result of or in connection with
any Partner's personal obligations or liabilities unrelated to Partnership
business, such Partner shall indemnify and reimburse the Partnership for all
such loss and expense incurred, including legal fees, and the Partnership
Interest of such Partner may be charged therefor. The liability of a Partner
under this SECTION 7.6.K shall not be limited to such Partner's Partnership
Interest, and shall be enforceable against such Partner personally.
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Section 7.7 LIABILITY OF THE GENERAL PARTNER.
A. Notwithstanding anything to the contrary set forth in this Agreement,
to the maximum extent that Maryland law or Delaware law, as the case may be,
in effect from time to time permits limitation of the liability of trustees
and officers of a real estate investment trust or limited liability company,
as the case may be, no trustee, member, manager or officer of the General
Partner shall be liable to the Partnership or any Partner for money damages.
Neither the amendment nor repeal of this Section, nor the adoption or
amendment of any other provision of this Agreement inconsistent with this
Section, shall apply to or affect in any respect the applicability of the
preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption. In the absence of any Maryland
statute or Delaware statute, as the case may be, limiting the liability of
trustees and officers of a Maryland corporation or members or managers of a
Delaware limited liability company, as the case may be, for money damages in
a suit by or on behalf of the Partnership or by any Partner, no trustee,
member, manager or officer of the General Partner shall be liable to the
Partnership or to any Partner for money damages except to the extent that
(i) the trustee, member, manager or officer actually received an improper
benefit or profit in money, property or services, in which case the
liability shall not exceed the amount of the benefit or profit in money,
property or services actually received; or (ii) a judgment or other final
adjudication adverse to the trustee, member, manager or officer is entered
in a proceeding based on a finding in the proceeding that, the trustee's or
officer's action or failure to act was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding.
B. The Limited Partners and the General Partner expressly acknowledge
that, as stated in SECTION 7.1.E, the General Partner is acting for the
benefit of the Partnership, itself, the Limited Partners, the other General
Partner and the General Partner's shareholders collectively, and that the
General Partner is under no obligation to give priority to the separate
interests of the Limited Partners or the General Partner's shareholders
(including, without limitation, the tax consequences to the Limited
Partners, the General Partner or Assignees or to shareholders) in deciding
whether to cause the Partnership to take (or decline to take) any actions
and that the General Partner shall not be liable to the Partnership or to
any Partner for monetary damages for losses sustained, liabilities incurred,
or benefits not derived by any Partners or Partners in connection with such
decisions.
C. Subject to its obligations and duties as General Partner set forth
in SECTION 7.1.A hereof, the General Partner may exercise any of the powers
granted to it by this Agreement and perform any of the duties imposed upon
it hereunder either directly or by or through its agents.
D. Any amendment, modification or repeal of this SECTION 7.7 or any
provision hereof shall be prospective only and shall not in any way affect
the limitations on the liability of the General Partner and any of their
officers, members, managers, directors, agents and employees to the
Partnership and the Limited Partners under this SECTION 7.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
Section 7.8 OTHER MATTERS CONCERNING THE GENERAL PARTNER.
A. The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond,
debenture, or other paper or document believed by it to be genuine and to
have been signed or presented by the proper party or parties.
B. The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion of such Persons as to matters which the General
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Partner reasonably believes to be within such Person's professional or
expert competence shall be conclusively presumed to have been done or
omitted in good faith and in accordance with such opinion.
C. The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers and a duly appointed attorney or attorneys-in-fact. Each such
attorney shall, to the extent provided by the General Partner in the power
of attorney, have full power and authority to do and perform all and every
act and duty which is permitted or required to be done by the General
Partner hereunder.
D. Notwithstanding any other provisions of this Agreement or any
non-mandatory provision of the Act, any action of the General Partner on
behalf of the Partnership or any decision of the General Partner to refrain
from acting on behalf of the Partnership, undertaken in the good faith
belief that such action or omission is necessary or advisable in order (1)
to protect the ability of the General Partner to continue to qualify as a
REIT or (2) to avoid the General Partner incurring any taxes under Section
857 or Section 4981 of the Code, is expressly authorized under this
Agreement and is deemed approved by all of the Partners.
Section 7.9 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets,
whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Partnership as an entity, and no Partners,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Subject to SECTION 7.5, title to any
or all of the Partnership assets may be held in the name of the Partnership, the
General Partner or one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner. The General Partner hereby declares
and warrants that any Partnership assets for which legal title is held in the
name of the General Partner or any nominee or Affiliate of the General Partner
shall be deemed held by the General Partner or such nominee or Affiliate for the
use and benefit of the Partnership in accordance with the provisions of this
Agreement; PROVIDED, HOWEVER, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held. Any such title holder shall perform any and all of its respective
functions to the extent and upon such terms and conditions as may be determined
from time to time by the General Partner.
Section 7.10 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the
contrary in this Agreement, any Person dealing with the Partnership shall be
entitled to assume that the General Partner has full power and authority to
encumber, sell or otherwise use in any manner any and all assets of the
Partnership and to enter into any contracts on behalf of the Partnership, and
such Person shall be entitled to deal with the General Partner as if it were the
Partnership's sole party in interest, both legally and beneficially. Each
Partner hereby waives any and all defenses or other remedies which may be
available against such Person to contest, negate or disaffirm any action of the
General Partner in connection with any such dealing. In no event shall any
Person dealing with the General Partner or its representatives be obligated to
ascertain that the terms of this Agreement have been complied with or to inquire
into the necessity or expedience of any act or action of the General Partner or
its representatives. Each and every certificate, document or other instrument
executed on behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (A) at the time of the execution and
delivery of such certificate, document or instrument, this Agreement was in full
force and effect, (B) the Person executing and delivering such certificate,
document or instrument was duly authorized and empowered to do so for and on
behalf of the Partnership and (C) such certificate, document or instrument was
duly executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
Appendix G-32
<PAGE>
ARTICLE 8
RIGHTS AND OBLIGATIONS OF
LIMITED PARTNERS AND GENERAL PARTNER
Section 8.1 LIMITATION OF LIABILITY. The Limited Partners shall have no
liability under this Agreement except as expressly provided in this Agreement or
under the Act.
Section 8.2 NO PARTICIPATION IN MANAGEMENT OF BUSINESS. No Limited
Partner, or Assignee (other than the General Partner, any of its Affiliates or
any officer, director, employee, General Partner, member, manager, agent or
trustee of the General Partner, the Partnership or any of their Affiliates, in
their capacity as such) shall take part in the operations, management or control
(within the meaning of the Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by the
General Partner, any of its Affiliates or any officer, director, employee,
General Partner, agent or trustee of the General Partner, the Partnership or any
of their Affiliates, in their capacity as such, shall not affect, impair or
eliminate the limitations on the liability of the Limited Partners or Assignees
under this Agreement.
Section 8.3 OUTSIDE ACTIVITIES OF PARTNERS. Subject to any agreements
entered into by a Partner or its Affiliate with the General Partner, Partnership
or a Subsidiary, any Partner and any officer, director, employee, agent,
trustee, member, manager, Affiliate or shareholder of, or partner in, any
Partner shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership, including
business interests and activities in direct competition with the Partnership or
that are enhanced by the activities of the Partnership. Neither the Partnership
nor any Partners shall have any rights by virtue of this Agreement in any
business ventures of any Partner or Assignee. Subject to such agreements, none
of the Partners nor any other Person shall have any rights by virtue of this
Agreement or the partnership relationship established hereby in any business
ventures of any other Person, other than the Partners benefitting from the
business conducted by the Partnership in accordance with this Agreement, and
such other Person shall have no obligation pursuant to this Agreement to offer
any interest in any such business ventures to the Partnership, any Partner or
any such other Person, even if such opportunity is of a character which, if
presented to the Partnership, any Partner or such other Person, could be taken
or pursued by such other Person.
Section 8.4 RETURN OF CAPITAL. Except pursuant to the exchange rights set
forth in SECTION 8.6, no Partner shall be entitled to the withdrawal or return
of his or her Capital Contribution, except to the extent of distributions made
pursuant to this Agreement or upon termination of the Partnership as provided
herein. No Limited Partner or Assignee shall have priority over any other
Limited Partner or Assignee either as to the return of Capital Contributions,
or, except as otherwise expressly provided in this Agreement, as to profits,
losses, distributions or credits.
Section 8.5 RIGHTS OF PARTNERS RELATING TO THE PARTNERSHIP.
A. In addition to other rights provided by this Agreement or by the Act,
and except as limited by SECTION 8.5.B hereof, each Partner shall have the
right, for a purpose reasonably related to such Partner's interest as a
partner in the Partnership, upon written demand with a statement of the
purpose of such demand:
(1) to obtain a copy of the most recent annual and quarterly reports
filed with the SEC by the General Partner pursuant to the Securities
Exchange Act, and each communication sent to the shareholders of the
General Partner;
(2) to obtain a copy of the Partnership's federal, state and local
income tax returns for each Partnership taxable year;
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(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and all
amendments thereto, together with executed copies of any written powers
of attorney pursuant to which this Agreement, the Certificate and all
amendments thereto have been executed; and
(5) to obtain true and full information regarding the amount of cash
and a description and statement of any other property or services
contributed by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner.
B. Notwithstanding any other provision of this SECTION 8.5, the General
Partner may keep confidential from the Limited Partners, for such period of
time as the General Partner determines in its sole and absolute discretion
to be reasonable, any information that (1) the General Partner believes to
be in the nature of trade secrets or other information the disclosure of
which the General Partner in good faith believes is not in the best
interests of the Partnership or could damage the Partnership or (2) the
Partnership or the General Partner is required by law or by agreements with
unaffiliated third parties to keep confidential.
Section 8.6 GRANT OF RIGHTS.
A. The General Partner does hereby grant to the Limited Partners and the
Limited Partners do hereby accept the right, but not the obligations
(hereinafter such right sometimes referred to as the "RIGHTS"), to exchange
all or a portion of their Units on the terms and subject to the conditions
and restrictions contained in EXHIBIT B. The Rights granted hereunder may be
exercised by any one or more of the Limited Partners, on the terms and
subject to the conditions and restrictions contained in EXHIBIT B, upon
delivery to the General Partner of an Exchange Exercise Notice in the form
of Schedule 1 to EXHIBIT B, which notice shall specify the Units to be
exchanged by such Limited Partner. Once delivered, the Exchange Exercise
Notice shall be irrevocable, subject to payment by the General Partner of
the Purchase Price in respect of such Units in accordance with the terms
hereof.
B. The terms and provisions applicable to the Rights shall be as set
forth in EXHIBIT B.
C. Any Units acquired by the General Partner pursuant to an exercise by
any Limited Partner of the Rights shall be deemed to be acquired by and
reallocated or reissued to the General Partner. The General Partner shall
amend EXHIBIT A hereto to reflect each such exchange and reallocation or
reissuance of Units and each corresponding recalculation of the Units of the
Partners.
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1 RECORDS AND ACCOUNTING. The General Partner shall keep or
cause to be kept at the principal office of the Partnership appropriate books
and records with respect to the Partnership's business. Any records maintained
by or on behalf of the Partnership in the regular course of its business may be
kept on, or be in the form of, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; PROVIDED, that the
records so maintained are convertible into clearly legible written form within a
reasonable period of time. The books of the Partnership shall be maintained, for
financial and tax reporting purposes, on an accrual basis in accordance with
generally accepted accounting principles, consistently applied.
Section 9.2 FISCAL YEAR. The fiscal year of the Partnership shall be the
calendar year.
Section 9.3 REPORTS.
A. As soon as practicable, but in no event later than 105 days after the
close of each Partnership Year, or such earlier date as they are filed with
the SEC, the General Partner shall cause to be mailed
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<PAGE>
to each Partner as of the close of the Partnership Year, an annual report
containing financial statements of the Partnership, or of the General
Partner if such statements are prepared solely on a consolidated basis with
the General Partner, for such Partnership Year, presented in accordance with
generally accepted accounting principles, consistently applied, such
statements to be audited by a nationally recognized firm of independent
public accountants selected by the General Partner.
B. As soon as practicable, but in no event later than 45 days after the
close of each calendar quarter (except the last calendar quarter of each
year), or such earlier date as they are filed with the SEC, the General
Partner shall cause to be mailed to each Partner as of the last day of the
calendar quarter, a report containing unaudited financial statements of the
Partnership, or of the General Partner, if such statements are prepared
solely on a consolidated basis with the General Partner, presented in
accordance with the applicable law or regulation, or as the General Partner
determines to be appropriate.
ARTICLE 10
TAX MATTERS
Section 10.1 PREPARATION OF TAX RETURNS. The General Partner shall arrange
for the preparation and timely filing of all tax returns of the Partnership and
shall use all reasonable efforts to furnish, within 90 days of the close of each
taxable year, the tax information reasonably required by Partners for federal
and state income tax reporting purposes.
Section 10.2 TAX ELECTIONS. Except as otherwise provided herein, the
General Partner shall, in its sole and absolute discretion, determine whether to
make any available election pursuant to the Code, including the election under
Section 754 of the Code or electing "large partnership" status under Code
Section 775. The General Partner shall have the right to seek to revoke any such
election (including without limitation, any election under Section 754 of the
Code) upon the General Partner's determination in its sole and absolute
discretion that such revocation is the best interests of the Partners. However,
no Partner, or officer or agent of the Partnership shall file an election for
the Partnership to be taxed as a corporation under the Code without the written
consent of all the Partners.
Section 10.3 TAX MATTERS PARTNER.
A. The General Partner shall be the "tax matters partner" of the
Partnership for federal income tax purposes, and is authorized, but not
required, to take all actions within its authority as tax matters partner,
as described in subchapters C and D of Chapter 63, subtitle F of the Code.
The taking of any action and the incurring of any expense by the tax matters
partner, except to the extent required by law, is a matter in the sole and
absolute discretion of the tax matters partner and the provisions relating
to indemnification of the General Partner set forth in SECTION 7.6 hereof
shall be fully applicable to the tax matters partner in its capacity as
such.
C. The tax matters partner shall receive no compensation for its
services. All third party costs and expenses incurred by the tax matters
partner in performing its duties as such (including legal and accounting
fees) shall be borne by the Partnership. Nothing herein shall be construed
to restrict the Partnership from engaging an accounting firm or law firm to
assist the tax matters partner in discharging its duties hereunder, so long
as the compensation paid by the Partnership for such services is reasonable.
Section 10.4 ORGANIZATIONAL AND START-UP EXPENSES. The Partnership shall
elect to deduct expenses, if any, incurred by it in organizing the Partnership
ratably over a 60-month period as provided in Sections 709(b) and 195(b) of the
Code.
Section 10.5 WITHHOLDING. Each Partner hereby authorizes the Partnership
to withhold from or pay on behalf of or with respect to such Partner any amount
of federal, state, local, or foreign taxes that the
Appendix G-35
<PAGE>
General Partner determines that the Partnership is required to withhold or pay
with respect to any amount distributable or allocable to such Partner pursuant
to this Agreement, including, without limitation, any taxes required to be
withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445 or
1446 of the Code. Any amount paid on behalf of or with respect to a Partner
shall constitute a loan by the Partnership to such Partner, which loan shall be
repaid by such Partner within 15 days after notice from the General Partner that
such payment must be made unless (A) the Partnership withholds such payment from
a distribution which would otherwise be made to the Partner or (B) the General
Partner determines, in its sole and absolute discretion, that such payment may
be satisfied out of the available funds of the Partnership which would, but for
such payment, be distributed to the Partner. Any amounts withheld pursuant to
the foregoing clauses (A) or (B) shall be treated as having been distributed to
such Partner. Each Partner hereby unconditionally and irrevocably grants to the
Partnership a security interest in such Partner's Partnership Interest to secure
such Partner's obligation to pay to the Partnership any amounts required to be
paid pursuant to this SECTION 10.5. In the event that a Partner fails to pay any
amounts owed to the Partnership pursuant to this SECTION 10.5 when due, the
General Partner may, in its sole and absolute discretion, elect to make the
payment to the Partnership on behalf of such defaulting Partner, and in such
event shall be deemed to have loaned such amount to such defaulting Partner and
shall succeed to all rights and remedies of the Partnership as against such
defaulting Partner (including, without limitation, the right to receive
distributions and the holding of a security interest in such Partner's
Partnership Interest). Any amounts payable by a Partner hereunder shall bear
interest at the base rate on corporate loans at large United States money center
commercial banks, as published from time to time in the Wall Street Journal,
plus two percentage points (but not higher than the maximum lawful rate) from
the date such amount is due (i.e., 15 days after demand) until such amount is
paid in full. Each Partner shall take such actions as the Partnership or the
General Partner shall request in order to perfect or enforce the security
interest created under this SECTION 10.5.
Section 10.6 LIMITATION TO PRESERVE REIT STATUS. To the extent that any
amount paid or credited to the General Partner or its officers, directors,
employees or agents pursuant to SECTION 7.4 or 7.6 hereof would constitute gross
income to the General Partner for purposes of Sections 856 (c) (2) or 856 (c)
(3) of the Code (a "GENERAL PARTNER PAYMENT") then, notwithstanding any other
provision of this Agreement, the amount of the General Partner Payments for any
Partnership taxable year shall not exceed the lesser of:
(A) the amount of the General Partner Payments derived from sources
other than those described in subsections (A) through (H) at Section
856(c)(2) of the Code cannot exceed 5% of the total amount of the General
Partner Payments for the taxable year and;
(B) the amount of the General Partner Payments derived from sources
other than those described in subsections (A) through (I) of Section
856(c)(3) of the Code cannot exceed 25% of the total amount of the General
Partner Payments for the taxable year;
PROVIDED, HOWEVER, that General Partner Payments in excess of the amounts set
forth in subparagraphs (A) and (B) above may be made if the General Partner, as
a condition precedent, obtains an opinion of tax counsel that the receipt of
such excess amounts would not adversely affect the General Partner's ability to
qualify as a REIT. To the extent General Partner Payments may not be made in a
year due to the foregoing limitations, the General Partner Payments shall carry
over and be treated as arising in the following year; PROVIDED, HOWEVER, that
such amounts shall not carry over for more than five years, and if not paid
within such five year period, shall expire; PROVIDED FURTHER, that (a) as
General Partner Payments are made, such payments shall be applied first to carry
over amounts outstanding, if any and (b) with respect to carry over amounts for
more than one Partnership taxable year, such payments shall be applied to the
earliest Partnership taxable year first.
Appendix G-36
<PAGE>
ARTICLE 11
TRANSFERS AND WITHDRAWALS
Section 11.1 TRANSFER.
A. The term "transfer," when used in this ARTICLE 11 with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner purports to assign its General Partner Interest to another
Person or by which a Limited Partner purports to assign its Limited Partner
Interest to another Person, and includes a sale, assignment, gift (outright
or in trust), pledge, encumbrance, hypothecation, mortgage, exchange or any
other disposition by law or otherwise. The term "TRANSFER" when used in this
ARTICLE 11 does not include any exchange for Shares pursuant to SECTION 8.6
hereof. No part of the interest of a Limited Partner shall be subject to the
claims of any creditor, any spouse for alimony or support, or to legal
process, and may not be voluntarily or involuntarily alienated or
encumbered, except as may be specifically provided for in this Agreement.
B. No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this ARTICLE
11. Any transfer or purported transfer of a Partnership Interest not made in
accordance with this ARTICLE 11 shall be null and void.
Section 11.2 TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST.
A. The General Partner may not withdraw from the Partnership or transfer
or assign all or any portion of its General Partner Interest in the
Partnership (but specifically excluding a statutory merger or consolidation,
liquidation or other similar transaction) without the Consent of the
Partners, which may be given or withheld by each Partner in its sole and
absolute discretion, and only upon the admission of a successor General
Partner pursuant to SECTION 12.1 hereof. Upon any transfer of the General
Partner Interest in accordance with the provisions of this SECTION 11.2, the
transferee shall become a substitute General Partner for all purposes
herein, and shall be vested with the powers and rights of the transferor
General Partner, and shall be liable for all obligations and responsible for
all duties of the transferor General Partner, once such transferee has
executed such instruments as may be necessary to effectuate such admission
and to confirm the agreement of such transferee to be bound by all the terms
and provisions of this Agreement with respect to the General Partner
Interest so acquired. It is a condition to any transfer otherwise permitted
hereunder that the transferee assumes, by operation of law or express
agreement, all of the obligations of the transferor General Partner under
this Agreement with respect to such transferred General Partner Interest,
and no such transfer (other than pursuant to a statutory merger,
consolidation, liquidation or other similar transaction wherein all
obligations and liabilities of the transferor General Partner are assumed by
a successor entity by operation of law shall relieve the transferor General
Partner of its obligations under this Agreement without the Consent of the
Partners, in their reasonable discretion. In the event the General Partner
withdraws from the Partnership, in violation of this Agreement or otherwise,
or otherwise dissolves or terminates, or upon the Incapacity of the General
Partner, all of the remaining Partners may elect to continue the Partnership
business by selecting a substitute General Partner in accordance with the
Act. Notwithstanding anything contained herein to the contrary, neither the
Limited Partners nor the other General Partner shall have any right
whatsoever to remove the General Partner from the Partnership.
B. Neither the General Partner nor the Partnership shall engage in any
merger, consolidation or other combination with or into another person, sale
of all or substantially all of its assets or any reclassification,
recapitalization or change of its outstanding equity interests (each, a
"TERMINATION TRANSACTION"), unless (1) if the holders of the Shares approve
the Termination Transaction, the General Partner will not consummate such
Termination Transaction unless (i) the General Partner first conducts a vote
of holders of Units (including the General Partner) on the matter, (ii) the
General Partner votes the Units held by it in the same proportion as the
holders of the Shares voted
Appendix G-37
<PAGE>
on the matter at the shareholder vote and (iii) the result of such vote of
the holders of the Units (including the proportionate vote of the Units of
the General Partner) is that had such vote been a vote of holders of Shares,
the Termination Transaction would have been approved (PROVIDED, HOWEVER,
that this SECTION 11.2.B(1) shall not be interpreted to enable or require
the General Partner to engage in a Termination Transaction which requires
the approval of the holders of the Shares if the General Partner did not
receive such required approval) and (2) (x) such Termination Transaction has
been approved by a Consent of the Limited Partners or (y) except as
otherwise provided in SECTION 11.2.C hereof, in connection with such
Termination Transaction all Limited Partners either will receive or will
have the right to elect to receive for each Common Unit an amount of cash,
securities, or other property equal to the product of the number of Common
Shares into which the Common Units held by such Limited Partner are
exchangeable and the greatest amount of cash, securities or other property
paid to a holder of one Common Share in consideration of one Common Share
pursuant to the terms of the Termination Transaction; PROVIDED, that if, in
connection with the Termination Transaction, a purchase, tender or exchange
offer shall have been made to and accepted by the holders of a majority of
the outstanding Shares, each holder of Units shall receive, or shall have
the right to elect to receive, the greatest amount of cash, securities, or
other property which such holder would have received had it exercised its
Exchange Rights (as set forth in SECTION 8.6 hereof) and received Shares in
exchange for its Units immediately prior to the expiration of such purchase,
tender or exchange offer and had thereupon accepted such purchase, tender or
exchange offer and then such Termination Transaction shall have been
consummated.
C. The General Partner or the Partnership may merge, or otherwise
combine its assets, with another entity without satisfying the requirements
of SECTION 11.2.B hereof if: (1) immediately after such merger or other
combination, substantially all of the assets directly or indirectly owned by
the surviving entity, other than Units held by the General Partner, are
owned directly or indirectly by the Partnership or another limited
partnership or limited liability company which is the survivor of a merger,
consolidation or combination of assets with the Partnership (in each case,
the "SURVIVING PARTNERSHIP"); (2) the Limited Partners own a Partnership
Interest of the Surviving Partnership based on the relative fair market
value of the net assets of the Partnership (as determined pursuant to
SECTION 11.2.D hereof) and the other net assets of the Surviving Partnership
(as determined pursuant to SECTION 11.2.D hereof) immediately prior to the
consummation of such transaction; (3) the rights, preferences and privileges
of the Limited Partners in the Surviving Partnership are at least as
favorable as those in effect immediately prior to the consummation of such
transaction and as those generally applicable to limited partners or
non-managing members of the Surviving Partnership holding a comparable class
of interest; and (4) such rights of the Limited Partners include the right
to exchange their interests in the Surviving Partnership for at least one
of: (a) the consideration available to such Limited Partners pursuant to
SECTION 11.2.B hereof or (b) if the ultimate controlling person of the
Surviving Partnership has publicly traded common equity securities, such
common equity securities, with an exchange ratio based on the relative fair
market value of such securities (as determined pursuant to SECTION 11.2.D
hereof) and the Shares.
D. In connection with any transaction permitted by SECTION 11.2.B or
11.2.C hereof, the relative fair market values shall be reasonably
determined by the General Partner as of the time of such transaction and, to
the extent applicable, shall be no less favorable to the Limited Partners
than the relative values reflected in the terms of such transaction.
Section 11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER.
A. No Limited Partner shall transfer all or any portion of its
Partnership Interest to any transferee without the consent of the General
Partner, which consent may be withheld in the General Partner's sole and
absolute discretion; PROVIDED, HOWEVER, that any Limited Partner may, at any
time, without such consent, (1) transfer all or any portion of its
Partnership Interest to the General Partner, (2) transfer all or any portion
of its Partnership Interest to an Affiliate or to an Immediate Family
Appendix G-38
<PAGE>
member, subject to the provisions of SECTION 11.6 hereof, or to such Limited
Partner's shareholders, members, partners or beneficiaries, as the case may
be, (3) transfer all or any portion of its Partnership Interest to a trust
for the benefit of a charitable beneficiary or to a charitable foundation,
subject to the provisions of SECTION 11.6 hereof, (4) subject to the
provisions of SECTION 11.6 hereof, pledge or transfer (a "PLEDGE") all or
any portion of its Partnership Interest to a lender, and which is not an
Affiliate of such Limited Partner, as collateral or security for a bona fide
loan or other extension of credit or (5) to a Qualified Transferee, subject
in all cases to the provisions of SECTION 11.6 hereof.
It is a condition to any transfer otherwise permitted hereunder that the
transferee assumes by operation of law or express agreement all of the
obligations of the transferor Limited Partner under this Agreement with respect
to such transferred Partnership Interest and no such transfer (other than
pursuant to a statutory merger or consolidation wherein all obligations and
liabilities of the transferor Partner are assumed by a successor corporation by
operation of law) shall relieve the transferor Partner of its obligations under
this Agreement without the approval of the General Partner, in its reasonable
discretion; PROVIDED, HOWEVER, that such transfer shall relieve the transferor
Partner from any future obligations under this Agreement from and after the date
of the transfer. Notwithstanding the foregoing, any transferee of any
transferred Partnership Interest shall be subject to any and all ownership
limitations contained in the Charter and the representations in SECTION 3.3
hereof. Any transferee, whether or not admitted as a Substituted Limited
Partner, shall take subject to the obligations of the transferor hereunder.
Unless admitted as a Substitute Limited Partner, no transferee, whether by a
voluntary transfer, by operation of law or otherwise, shall have rights
hereunder, other than the rights of an Assignee as provided in SECTION 11.5
hereof.
B. If a Limited Partner is subject to Incapacity, the executor,
administrator, trustee, committee, guardian, conservator, or receiver of
such Limited Partner's estate shall have all the rights of a Limited
Partner, but no more rights than those enjoyed by other Limited Partners,
for the purpose of settling or managing the estate, and such power as the
Incapacitated Limited Partner possessed to transfer all or any part of his
or its interest in the Partnership. The Incapacity of a Limited Partner, in
and of itself, shall not dissolve or terminate the Partnership.
C. The General Partner may prohibit any transfer otherwise permitted
under this SECTION 11.3 by a Limited Partner of his or her Units if, in the
opinion of legal counsel to the Partnership, such transfer would require the
filing of a registration statement under the Securities Act by the
Partnership or would otherwise violate any federal or state securities laws
or regulations applicable to the Partnership or the Unit.
Section 11.4 SUBSTITUTED LIMITED PARTNERS.
A. No Limited Partner shall have the right to substitute a transferee as
a Limited Partner in place of such Limited Partner (including any transferee
permitted by SECTION 11.3 hereof). The General Partner shall, however, have
the right to consent to the admission of a permitted transferee of the
interest of a Limited Partner as a Substituted Limited Partner, pursuant to
this SECTION 11.4 hereof, which consent may be given or withheld by the
General Partner in its sole and absolute discretion. The General Partner's
failure or refusal to permit a transferee of any such interests to become a
Substituted Limited Partner shall not give rise to any cause of action
against the Partnership or any Partner.
B. A transferee who has been admitted as a Substituted Limited Partner
in accordance with this ARTICLE 11 shall have all the rights and powers and
be subject to all the restrictions and liabilities of a Limited Partner
under this Agreement. The admission of any transferee as a Substituted
Limited Partner shall be subject to (i) the transferee executing and
delivering to the Partnership an acceptance of all of the terms and
conditions of this Agreement (including without limitation, the provisions
of SECTION 2.4 hereof and such other documents or instruments as may be
required to effect the
Appendix G-39
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admission, each in form and substance satisfactory to the General Partner),
(ii) the acknowledgment by such transferee that each of the representations
and warranties set forth in SECTION 3.3 hereof are true and correct with
respect to such transferee as of the date of the transfer of the Partnership
Interest to such transferee and (iii) if requested by the General Partner,
an opinion of counsel to the transferee that favorably covers the matters
set forth in CLAUSES (1) through (12) of SECTION 11.6.E.
C. Upon the admission of a Substituted Limited Partner, the General
Partner shall amend EXHIBIT A to reflect the name, address, and number of
Units of such Substituted Limited Partner and to eliminate or adjust, if
necessary, the name, address and interest of the predecessor of such
Substituted Limited Partner.
Section 11.5 ASSIGNEES. If the General Partner, in its sole and absolute
discretion, does not consent to the admission of any permitted transferee under
SECTION 11.3 hereof as a Substituted Limited Partner, as described in SECTION
11.4 hereof, such transferee shall be considered an Assignee for purposes of
this Agreement. An Assignee shall be entitled to all the rights of an assignee
of a limited partner interest under the Act, including the right to receive
distributions from the Partnership and the share of Net Income, Net Losses, gain
and loss attributable to the Units assigned to such transferee, the rights to
transfer the Units provided in this ARTICLE 11, and the exchange rights provided
in SECTION 8.6 hereof, but shall not be deemed to be a holder of Units for any
other purpose under this Agreement, and shall not be entitled to effect a
Consent of the Partners or Consent of the Limited Partners with respect to such
Units on any matter presented to the Limited Partners for approval (such Consent
of the Partners or Consent of the Limited Partners remaining with the transferor
Limited Partner). In the event any such transferee desires to make a further
assignment of any such Units, such transferee shall be subject to all the
provisions of this ARTICLE 11 to the same extent and in the same manner as any
Limited Partner desiring to make an assignment of Units.
Section 11.6 GENERAL PROVISIONS.
A. No Limited Partner may withdraw from the Partnership other than as a
result of (1) a permitted transfer of all of such Limited Partner's Units in
accordance with this ARTICLE 11 and the transferee(s) of such Units being
admitted to the Partnership as a Substituted Limited Partner(s) or (2)
pursuant to the exercise of its exchange rights of all of such Limited
Partner's Units under SECTION 8.6 hereof.
B. Any Limited Partner who shall transfer all of such Limited Partner's
Units in a transfer permitted pursuant to this ARTICLE 11 where such
transferee was admitted as a Substituted Limited Partner or pursuant to the
exercise of its exchange rights of all of such Limited Partner's Units under
SECTION 8.6 hereof shall cease to be a Limited Partner.
C. If any Partnership Interest is transferred, assigned or exchanged
during any quarterly segment of the Partnership's taxable year in compliance
with the provisions of this ARTICLE 11 or transferred or exchanged pursuant
to SECTION 8.6 hereof on any day other than the first day of a Partnership
taxable year, then Net Income, Net Losses, each item thereof and all other
items attributable to such Partnership Interest for such Partnership taxable
year shall be divided and allocated between the transferor Partner and the
transferee Partner by taking into account their varying interests during the
Partnership taxable year in accordance with Section 706(d) of the Code,
using the pro ration method. All distributions of Net Cash Flow attributable
to such Partnership Interest with respect to which the Partnership Payment
Date is before the date of such transfer, assignment or exchange shall be
made to the transferor Partner, and all distributions of Net Cash Flow
thereafter, in the case of a transfer or assignment, shall be made to the
transferee Partner, or in the case of an exchange, the General Partner.
D. No transfer of any Units may be made to a lender to the Partnership
or any Person who is related (within the meaning of Section 1.752-4(b) of
the Regulations) to any lender to the Partnership
Appendix G-40
<PAGE>
whose loan constitutes a Nonrecourse Liability, without the consent of the
General Partner, in its sole and absolute discretion; PROVIDED, that as a
condition to such consent, the lender will be required to enter into an
arrangement with the Partnership and the General Partner to exchange for
Shares any Units in which a security interest is held simultaneously with
the time at which such lender would be deemed to be a partner in the
Partnership for purposes of allocating liabilities to such lender under
Section 752 of the Code.
E. In addition to any other restrictions on transfer herein contained,
including without limitation the provisions of this ARTICLE 11, in no event
may any transfer or assignment of a Partnership Interest by any Partner be
made (1) to any person or entity who lacks the legal right, power or
capacity to own a Partnership Interest; (2) in violation of applicable law;
(3) of any component portion of a Partnership Interest, such as the Capital
Account, or rights to distributions, separate and apart from all other
components of a Partnership Interest; (4) if the General Partner determines
that such transfer may reasonably cause a termination of the Partnership for
federal or state income tax purposes (except as a result of the exchange for
Shares of all Units held by all Partners or pursuant to a Termination
Transaction expressly permitted under SECTION 11.2 hereof); (5) if the
General Partner determines that such transfer may reasonably cause the
Partnership to cease to be classified as a partnership for federal or state
income tax purposes (except as a result of the exchange for Shares of all
Units held by all Limited Partners); (6) if such transfer would cause the
Partnership to become, with respect to any employee benefit plan subject to
Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of
ERISA) or a "disqualified person" (as defined in Section 4975(c) of the
Code); (7) if such transfer would, in the opinion of counsel to the
Partnership, cause any portion of the assets of the Partnership to
constitute assets of any employee benefit plan pursuant to Department of
Labor Regulations Section 2510.2-101; (8) if such transfer requires the
registration of such Partnership Interest pursuant to any applicable federal
or state securities laws; (9) if the General Partner determines that such
transfer may reasonably cause the Partnership to become a "Publicly Traded
Partnership," as such term is defined in Sections 469(k)(2) or 7704(b) of
the Code; (10) if such transfer subjects the Partnership to be regulated
under the Investment Company Act of 1940, the Investment Advisors Act of
1940 or the Employee Retirement Income Security Act of 1974, each as
amended; (11) if the transferee or assignee of such Partnership Interest is
unable to make the representations set forth in SECTION 3.3.D hereof or such
transfer could otherwise adversely affect the ability of the General Partner
to remain qualified as a REIT; or (12) if the General Partner determines
that such transfer may reasonably adversely affect the ability of the
General Partner to continue to qualify as a REIT or subject the General
Partner to any additional taxes under Section 857 or Section 4981 of the
Code.
F. The General Partner shall monitor the transfers of interests in the
Partnership to determine (1) if such interests are being traded on an
"established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code and (2)
whether additional transfers of interests would result in the Partnership
being unable to qualify for at least one of the "safe harbors" set forth in
Regulations Section 1.7704-1 (or such other guidance subsequently published
by the IRS setting forth safe harbors under which interests will not be
treated as "readily tradable on a secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code) (the
"SAFE HARBORS"). The General Partner may take any steps it determines in its
sole and absolute discretion to be reasonably necessary or appropriate to
prevent any trading of interests or any recognition by the Partnership of
transfers made on such markets and, except as otherwise provided herein, to
insure that at least one of the Safe Harbors is met.
Appendix G-41
<PAGE>
ARTICLE 12
ADMISSION OF PARTNERS
Section 12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor to all of
the General Partner's General Partner Interest pursuant to SECTION 11.2 hereof
who is proposed to be admitted as a successor General Partner shall be admitted
to the Partnership as the General Partner, effective upon such transfer. Any
such transferee shall carry on the business of the Partnership without
dissolution. In each case, the admission shall be subject to the successor
General Partner executing and delivering to the Partnership an acceptance of all
of the terms and conditions of this Agreement and such other documents or
instruments as may be required to effect the admission. In the case of such
admission on any day other than the first day of a Partnership taxable year, all
items attributable to the General Partner Interest for such Partnership taxable
year shall be allocated between the transferring General Partner and such
successor as provided in ARTICLE 11 hereof.
Section 12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
A. After the admission to the Partnership of the Limited Partners on the
date hereof, a Person who makes a Capital Contribution to the Partnership in
accordance with this Agreement shall be admitted to the Partnership as an
Additional Limited Partner subject to (i) the transferee executing and
delivering to the Partnership an acceptance of all of the terms and
conditions of this Agreement (including without limitation, the provisions
of SECTION 2.4 hereof and such other documents or instruments as may be
required to effect the admission, each in form and substance satisfactory to
the General Partner), (ii) [THE ACKNOWLEDGMENT BY SUCH TRANSFEREE THAT EACH
OF THE REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 3.3 HEREOF ARE
TRUE AND CORRECT WITH RESPECT TO SUCH TRANSFEREE AS OF THE DATE OF THE
TRANSFER OF THE PARTNERSHIP INTEREST TO SUCH TRANSFEREE] and (iii) if
requested by the General Partner, an opinion of counsel to the transferee
that favorably covers the matters set forth in CLAUSES (1) through (12) of
SECTION 11.6.E.
B. Notwithstanding anything to the contrary in this SECTION 12.2, no
Person shall be admitted as an Additional Limited Partner without the
consent of the General Partner, which consent may be given or withheld in
the General Partner's sole and absolute discretion. The admission of any
Person as an Additional Limited Partner shall become effective on the date
upon which the name of such Person is recorded on the books and records of
the Partnership, following the receipt of the Capital Contribution in
respect of such Limited Partner, the documents set forth in PARAGRAPH A of
this SECTION 12.2 and the consent of the General Partner to such admission.
If any Additional Limited Partner is admitted to the Partnership on any day
other than the first day of a Partnership taxable year, then Net Income, Net
Losses, each item thereof and all other items allocable among Partners and
Assignees for such Partnership taxable year shall be allocated among such
Limited Partner and all other Partners and Assignees by taking into account
their varying interests during the Partnership taxable year in accordance
with Section 706(d) of the Code, using the interim closing books method.
Solely for purposes of making such allocations, each of such items for the
calendar month in which an admission of an Additional Limited Partner occurs
shall be allocated among all the Partners and Assignees including such
Additional Limited Partner. All distributions of Net Cash Flow with respect
to which the Partnership Payment Date is before the date of such admission
shall be made solely to Partners and Assignees other than the Additional
Limited Partner (other than in its capacity as an Assignee) and except as
otherwise agreed to by the Additional Limited Partners and the General
Partner, and all distributions of Net Cash Flow thereafter shall be made to
all Partners and Assignees including such Additional Limited Partner.
Section 12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED
PARTNERSHIP. For the admission to the Partnership of any Partner, the General
Partner shall take any steps necessary and appropriate under the Act to amend
the records of the Partnership and, if necessary, to prepare as soon as
practical an amendment of this Agreement (including an amendment of EXHIBIT A
hereof) and, if required by law, shall prepare and file an amendment to the
Certificate and may for this purpose exercise the power of attorney granted
pursuant to SECTION 2.4 hereof.
Appendix G-42
<PAGE>
ARTICLE 13
DISSOLUTION AND LIQUIDATION
Section 13.1 DISSOLUTION. The Partnership shall not be dissolved by the
admission of Substituted Limited Partners or Additional Limited Partners or by
the admission of a successor General Partner in accordance with the terms of
this Agreement. Upon the withdrawal of the General Partner, any successor
General Partner (selected as described in SECTION 13.1.B hereof) shall continue
the business of the Partnership. The Partnership shall dissolve, and its affairs
shall be wound up, upon the first to occur of any of the following ("LIQUIDATING
EVENTS"):
A. the expiration of its term as provided in SECTION 2.5 hereof;
B. an event of withdrawal of the General Partner, as defined in the
Act, unless, within 90 days after the withdrawal, all of the remaining
Partners agree in writing, in their sole and absolute discretion, to
continue the business of the Partnership and to the appointment, effective
as of the date of withdrawal, of a substitute General Partner;
C. an election to dissolve the Partnership made by the General Partner;
D. entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Act;
E. the sale of all or substantially all of the assets and properties of
the Partnership unless the General Partner elects to continue the
Partnership business for the purpose of the receipt and the collection of
indebtedness or the collection of any other consideration to be received in
exchange for the assets of the Partnership (which activities shall be deemed
to be part of the winding up of the affairs of the Partnership); or
F. the Incapacity of the General Partner, unless all of the remaining
Partners in their sole and absolute discretion agree in writing to continue
the business of the Partnership and to the appointment, effective as of a
date prior to the date of such Incapacity, of a substitute General Partner.
Section 13.2 WINDING UP.
A. Upon the occurrence of a Liquidating Event, the Partnership shall
continue solely for the purposes of winding up its affairs in an orderly
manner, liquidating its assets, and satisfying the claims of its creditors
and of the Partners. No Partner shall take any action that is inconsistent
with, or not necessary to or appropriate for, the winding up of the
Partnership's business and affairs. The General Partner (or, in the event
there is no remaining General Partner, any Person elected by a Majority in
Interest of the Limited Partners) (the "LIQUIDATOR") shall be responsible
for overseeing the winding up and dissolution of the Partnership and shall
take full account of the Partnership's liabilities and assets, and the
Partnership property shall be liquidated as promptly as is consistent with
obtaining the fair value thereof, and the proceeds therefrom (which may, to
the extent determined by the General Partner, include shares of beneficial
interest of the General Partner) shall be applied and distributed in the
following order:
(1) First, to the payment and discharge of all of the Partnership's
debts and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of all of the Partnership's
debts and liabilities to the Partners; and
(3) The balance, if any, to the General Partner and Limited Partners
in accordance with their positive Capital Account balances, determined
after taking into account all Capital Account adjustments for the
Partnership taxable year during which the liquidation occurs (other than
those made as a result of the liquidating distribution set forth in this
SECTION 13.2.A(3)).
Appendix G-43
<PAGE>
The General Partner shall not receive any additional compensation for any
services performed pursuant to this ARTICLE 13 other than reimbursement of its
expenses as provided in Section 7.4 hereof.
B. Notwithstanding the provisions of SECTION 13.2.A hereof which
require liquidation of the assets of the Partnership, but subject to the
order of priorities set forth therein, if prior to or upon dissolution of
the Partnership the Liquidator determines that an immediate sale of part or
all of the Partnership's assets would be impractical or would cause undue
loss to the Partners, the Liquidator may, in its sole and absolute
discretion, defer for a reasonable time the liquidation of any assets except
those necessary to satisfy liabilities of the Partnership (including to
those Partners as creditors) and/or distribute to the Partners, in lieu of
cash, as tenants in common and in accordance with the provisions of SECTION
13.2.A hereof, undivided interests in such Partnership assets as the
Liquidator deems not suitable for liquidation. Any such distributions in
kind shall be made only if, in the good faith judgment of the Liquidator,
such distributions in kind are in the best interest of the Partners, and
shall be subject to such conditions relating to the disposition and
management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties
at such time. The Liquidator shall determine the fair market value of any
property distributed in kind using such reasonable method of valuation as it
may adopt.
Section 13.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS; DEFICIT
CAPITAL ACCOUNT. In the event the Partnership is "liquidated" within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made
pursuant to this ARTICLE 13 to the General Partner and Limited Partners who have
positive Capital Accounts in compliance with Regulations Section
1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in its Capital
Account (after giving effect to all contributions, distributions and allocations
for the taxable years, including the year during which such liquidation occurs),
such Partner shall have no obligation to make any contribution to the capital of
the Partnership with respect to such deficit, and such deficit shall not be
considered a debt owed to the Partnership or to any other Person for any purpose
whatsoever. In the discretion of the Liquidator or the General Partner, a PRO
RATA portion of the distributions that would otherwise be made to the General
Partner and Limited Partners pursuant to this ARTICLE 13 may be:
A. distributed to a trust established for the benefit of the General
Partner and Limited Partners for the purposes of liquidating Partnership
assets, collecting amounts owed to the Partnership, and paying any
contingent or unforeseen liabilities or obligations of the Partnership or of
the General Partner arising out of or in connection with the Partnership.
The assets of any such trust shall be distributed to the General Partner and
Limited Partners from time to time, in the reasonable discretion of the
Liquidator, in the same proportions and the amount distributed to such trust
by the Partnership would otherwise have been distributed to the General
Partner and Limited Partners pursuant to this Agreement; or
B. withheld to provide a reasonable reserve for Partnership liabilities
(contingent or otherwise) and to reflect the unrealized portion of any
installment obligations owed to the Partnership; PROVIDED, that such
withheld amounts shall be distributed to the General Partner and Limited
Partners as soon as practicable.
Section 13.4 DEEMED CONTRIBUTION AND INTEREST
DISTRIBUTION. Notwithstanding any other provision of this ARTICLE 13, in the
event the Partnership is liquidated within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership's
property shall not be liquidated, the Partnership's liabilities shall not be
paid or discharged, and the Partnership's affairs shall not be wound up.
Instead, the Partnership shall be deemed to have contributed the Partnership
property in kind to a new partnership which shall be deemed to have assumed and
taken such property subject to all Partnership liabilities. Immediately
thereafter, the General Partner and Limited Partners shall be deemed to have
been distributed interests in such new partnership consisting of their
Partnership Interests.
Appendix G-44
<PAGE>
Section 13.5 RIGHTS OF PARTNERS. Except as otherwise provided in this
Agreement, each Partner shall look solely to the assets of the Partnership for
the return of such Partner's Capital Contribution and shall have no right or
power to demand or receive property from the General Partner. No Partner shall
have priority over any other Partner as to the return of such Partner's Capital
Contributions, distributions or allocations.
Section 13.6 NOTICE OF DISSOLUTION. In the event a Liquidating Event
occurs, the General Partner shall, within 30 days thereafter, provide written
notice thereof to each of the Partners and to all other parties with whom the
Partnership regularly conducts business (as determined in the discretion of the
General Partner) and shall publish notice thereof in a newspaper of general
circulation in each place in which the Partnership regularly conducts business
(as determined in the discretion of the General Partner).
Section 13.7 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP. Upon the
completion of the liquidation of the Partnership cash and property as provided
in SECTION 13.2 hereof, the Partnership shall be terminated and the Certificate
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
Section 13.8 REASONABLE TIME FOR WINDING-UP. A reasonable time shall be
allowed for the orderly winding-up of the business and affairs of the
Partnership and the liquidation of its assets pursuant to SECTION 13.2 hereof,
in order to minimize any losses otherwise attendant upon such winding-up, and
the provisions of this Agreement shall remain in effect between the Partners
during the period of liquidation; PROVIDED, HOWEVER, that such winding up shall
be completed not later than 90 days after the end of the Partnership taxable
year in which the Liquidating Event occurred.
Section 13.9 WAIVER OF PARTITION. Each Partner hereby waives any right to
partition of the Partnership property.
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS
Section 14.1 AMENDMENTS.
A. The actions requiring consent or approval of the Partners or of the
Limited Partners pursuant to this Agreement, including SECTION 7.3 hereof,
or otherwise pursuant to applicable law, are subject to the procedures in
this ARTICLE 14.
B. Amendments to this Agreement requiring the consent or approval of
Limited Partners may be proposed by the General Partner, or by any Limited
Partner or Limited Partners holding, in the aggregate, 10% or more of the
Partnership Interests. Following such proposal, the General Partner shall
submit any proposed amendment to the Partners. The General Partner shall
seek the written consent or approval of the Partners or of the Limited
Partners, as applicable, on the proposed amendment or shall call a meeting
to vote thereon and to transact any other business that it may deem
appropriate. For purposes of obtaining a written consent, the General
Partner may require a response within a reasonable specified time, but not
less than 15 days, and failure to respond in such time period shall
constitute a consent which is consistent with the General Partner's
recommendation (if so recommended) with respect to the proposal; PROVIDED,
that an action shall become effective at such time as requisite consents are
received even if prior to such specified time.
Section 14.2 ACTION BY THE PARTNERS.
A. Meetings of the Partners may be called by the General Partner and
shall be called upon the receipt by the General Partner of a written request
by Partners holding 33 percent or more of the Partnership Interests held by
all Partners other than the General Partner. The call shall state the
Appendix G-45
<PAGE>
nature of the business to be transacted. Notice of any such meeting shall be
given to all Partners not less than seven days nor more than 30 days prior
to the date of such meeting. Partners may vote in person or by proxy at such
meeting. Whenever the vote of the Partnership Interests of the Partners, or
the Consent of the Partners or Consent of the Limited Partners is permitted
or required under this Agreement, such vote or Consent may be given at a
meeting of Partners or may be given in accordance with the procedure
prescribed in SECTION 14.1 hereof.
B. Any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth
the action so taken is signed by the percentage as is expressly required by
this Agreement for the action in question. Such consent may be in one
instrument or in several instruments, and shall have the same force and
effect as a vote of such percentage of the Partners (expressly required by
this Agreement). Such consent shall be filed with the General Partner. An
action so taken shall be deemed to have been taken at a meeting held on the
effective date so certified.
C. Each Partner may authorize any Person or Persons to act for such
Partner by proxy on all matters in which a Partner is entitled to
participate, including waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Partner or
such Partner's attorney-in-fact. No proxy shall be valid after the
expiration of 11 months from the date thereof unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the Partner
executing it at any time prior to the time the holder of the proxy votes or
otherwise acts pursuant to the proxy.
D. Each meeting of Partners shall be conducted by the General Partner or
such other Person as the General Partner may appoint pursuant to such rules
for the conduct of the meeting as the General Partner or such other Person
deems appropriate.
ARTICLE 15
GENERAL PROVISIONS
Section 15.1 ADDRESSES AND NOTICE. Any notice, demand, request or report
required or permitted to be given or made to a Partner or Assignee under this
Agreement shall be in writing and shall be deemed given or made when delivered
in person or when sent by certified first class United States mail, nationally
recognized overnight delivery service or facsimile transmission to the Partner
or Assignee at the address set forth in EXHIBIT A hereof or such other address
as the Partners shall notify the General Partner in writing.
Section 15.2 TITLES AND CAPTIONS. All article or section titles or
captions in this Agreement are for convenience only. They shall not be deemed
part of this Agreement and in no way define, limit, extend or describe the scope
or intent of any provisions hereof. Except as specifically provided otherwise,
references to "ARTICLES" and "SECTIONS" are to Articles and Sections of this
Agreement.
Section 15.3 PRONOUNS AND PLURALS. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
Section 15.4 FURTHER ACTION. The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action as may
be necessary or appropriate to achieve the purposes of this Agreement.
Section 15.5 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted assigns.
Appendix G-46
<PAGE>
Section 15.6 CREDITORS. Other than as expressly set forth herein with
respect to Indemnitees, none of the provisions of this Agreement shall be for
the benefit of, or shall be enforceable by, any creditor of the Partnership.
Section 15.7 WAIVER. No failure or delay by any party to insist upon the
strict performance of any covenant, duty, agreement or condition of this
Agreement or to exercise any right or remedy consequent upon any breach thereof
shall constitute waiver of any such breach or any other covenant, duty,
agreement or condition.
Section 15.8 COUNTERPARTS. This Agreement may be executed in counterparts,
all of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart. Each party shall become bound by this
Agreement immediately upon affixing its signature hereto.
Section 15.9 APPLICABLE LAW. This Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware, without
regard to the principles of conflicts of law.
Section 15.10 INVALIDITY OF PROVISIONS. If any provision of this Agreement
is or becomes invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not be affected thereby.
Section 15.11 ENTIRE AGREEMENT. This Agreement contains the entire
understanding and agreement among the Partners with respect to the subject
matter hereof and supersedes any other prior written or oral understandings or
agreements among them with respect thereto.
Section 15.12 NO RIGHTS AS SHAREHOLDERS. Nothing contained in this
Agreement shall be construed as conferring upon the holders of Units any rights
whatsoever as shareholders of the General Partner, including without limitation
any right to receive dividends or other distributions made to shareholders of
the General Partner or to vote or to consent or to receive notice as
shareholders in respect of any meeting of shareholders for the election of
directors of the General Partner or any other matter.
[SIGNATURE PAGE FOLLOWS]
Appendix G-47
<PAGE>
IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
HORIZON GROUP PROPERTIES
By:
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Name:
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Title:
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Appendix G-48
<PAGE>
LIMITED PARTNERS
(If an Individual)
--------------------------------------
Name (Print or Type):
----------------------------------------------------------------
If a corporation, trust or other
entity
--------------------------------------
State of Organization:
----------------------------------------------------------------
Type of Entity:
-----------------------------------------------------------------------
By:
--------------------------------------
Name (Print or Type):
----------------------------------------------------------------
Title:
-------------------------------------------------------------------------------
Appendix G-49
<PAGE>
EXHIBIT A
SCHEDULE OF PARTNERS, NUMBER OF UNITS,
CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS
(SECTION 1.1)
[TO COME]
Appendix G-50
<PAGE>
EXHIBIT B
RIGHTS TERMS
The Rights granted by the General Partner to the Limited Partners pursuant
to SECTION 8.6 of the Agreement shall be subject to the following terms and
conditions:
1. DEFINITIONS. The following terms and phrases shall, for purposes of
this EXHIBIT B and the Agreement, have the meanings set forth below:
"BENEFICIALLY OWN" shall mean the ownership of Common Shares by a Person
who would be treated as an owner of such Common Shares either directly or
constructively through the application of Section 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code.
"CASH PURCHASE PRICE" shall have the meaning set forth in PARAGRAPH 4
hereof.
"CHANGE OF CONTROL EVENT" means the occurrence after the date of this
Agreement of any of the following events:
(i) any person (as defined in or for purposes of Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act, or any successor provision to
either of such sections, including any "group" acting for purposes of
acquiring, holding, or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than Prime or any other
current Limited Partner or a group (as defined below) controlling,
controlled by or under common control with Prime or any other Limited
Partner, together with such persons' associates (as defined in Rule 12b-2
under the Exchange Act) and their respective affiliates (as defined in
Rule 12b-2 under the Exchange Act)
(A) shall become the beneficial owner (as defined in Rule 13d-3
under the Exchange Act) of, and shall have the right to control and
exercise, more than 10% of the total voting power of all of the
outstanding Common Shares; or
(B) shall succeed in having a sufficient number of its nominees
elected to the General Partner's board of trustees such that such
nominees so elected (whether new or continuing) shall constitute a
majority of the board of trustees of the General Partner; or
(ii) a tender offer is commenced (within the meaning of Rule 14d-2
under the Exchange Act) which, if completed, would result in the offeror
owning beneficially 20% or more of the outstanding Common Shares; or
(iii) any person or group of persons solicits a proxy (as those terms
are defined in Rule 14a-1 under the Exchange Act) for the purpose of
opposing a solicitation of proxies by management of the General Partner
with respect to any matter, including the election or removal of trustees
of the General Partner, at any annual or special meeting of shareholders.
"CLOSING PRICE" on any date shall mean the average of the daily market
price for the ten (10) consecutive trading days immediately preceding the
date with respect to which the "Closing Price" must be determined hereunder
or, if such date is not a business day, the immediately preceding business
day. The market price for each such trading day shall be: (a) if such shares
are listed or admitted to trading on any securities exchange or the NASDAQ
National Market, the closing price, regular way, on such day, or if no such
sale takes place on such day, the average of the closing bid and asked
prices on such day, (b) if such shares are not listed or admitted to trading
on any securities exchange or the NASDAQ National Market, the last reported
sale price on such day or, if no sale takes place on such day, the average
of the closing bid and asked prices on such day, as reported by a reliable
quotation source designated by the Company, or (c) if such shares are not
listed or admitted to trading on any securities exchange or the NASDAQ
National Market and no such last reported sale price or closing bid and
asked prices are available, the average of the reported high bid and low
asked
Appendix G-51
<PAGE>
prices on such day, as reported by a reliable quotation source designated by
the Company, or if there shall be no bid and asked prices on such day, the
average of the high bid and low asked prices, as so reported, on the most
recent day (not more than 10 days prior to the date in question) for which
prices have been no reported; PROVIDED, that if there are no bid and asked
prices reported during the 10 days prior to the date in question, the
Closing Price of such shares shall be determined by the Company acting in
good faith on the basis of such quotations and other information as it
considers, in its reasonable judgment, appropriate.
"COMPUTATION DATE" shall mean the date on which an Exchange Exercise
Notice is delivered to the General Partner.
"CURRENT PER SHARE MARKET PRICE" on any date shall mean the average of
the Closing Price for the five consecutive Trading Days (as defined herein)
ending on such date.
"ELECTION NOTICE" shall mean the written notice to be given by the
General Partner to the Exercising Partner(s) in response to the receipt by
the General Partner of an Exchange Exercise Notice from such Exercising
Partner(s), the form of which Election Notice is attached hereto as SCHEDULE
2.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any successor statute.
"EXCHANGE EXERCISE NOTICE" shall have the meaning set forth in PARAGRAPH
2 hereof.
"EXCHANGE FACTOR" shall mean 100%; PROVIDED, that such factor shall be
adjusted in accordance with the Antidilution Provisions of PARAGRAPH 11
hereof.
"EXCHANGE RIGHTS" shall have the meaning set forth in PARAGRAPH 2
hereof.
"EXERCISING PARTNERS" shall have the meaning set forth in PARAGRAPH 2
hereof.
"HART SCOTT ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"OFFERED COMMON UNITS" shall mean the Common Units of the Exercising
Partner(s) identified in an Exchange Exercise Notice which, pursuant to the
exercise of Exchange Rights, can be acquired by the General Partner under
the terms hereof.
"OWNERSHIP LIMIT" shall have the meaning set forth in PARAGRAPH 3
hereof.
"PURCHASE PRICE" shall mean the Cash Purchase Price or the Share
Purchase Price.
"REGISTRATION RIGHTS AGREEMENT" shall mean the agreement respecting the
registration rights attributable to Common Shares, if any, issued to Limited
Partners in accordance with the provisions hereof, the form of which is
attached hereto as SCHEDULE 3.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any successor statute.
"SHARE PURCHASE PRICE" shall have the meaning set forth in PARAGRAPH 4
hereof.
2. DELIVERY OF EXCHANGE EXERCISE NOTICES AND ELECTION NOTICES. Any one or
more Limited Partners ("EXERCISING PARTNERS") may, subject to the limitations
set forth herein, deliver to the General Partner written notice (the "EXCHANGE
EXERCISE NOTICE") pursuant to which such Exercising Partners elect to exercise
their rights to convert (the "EXCHANGE RIGHTS") all or any portion of their
Common Units into Common Shares subject to the limitations contained in
Paragraph 3 below. Within thirty (30) days after receipt by the General Partner
of the Exchange Exercise Notice, the General Partner shall deliver a notice (the
"ELECTION NOTICE")substantially in the form of Schedule 2 attached hereto,
specifying the election by the General Partner to deliver either the Share
Purchase Price or the Cash Purchase Price to the Exercising Partner(s).
Appendix G-52
<PAGE>
3. LIMITATION ON EXERCISE OF EXCHANGE RIGHTS. The Exchange Rights shall
expire with respect to any Common Units for which an Exchange Exercise Notice
has not been delivered to the General Partner on January 1, 2051. Exchange
Rights may be exercised at any time after the first anniversary of the date
hereof and from time to time thereafter prior to January 1, 2051, subject to the
limitations contained herein and in the General Partner's Declaration of Trust,
as amended (the "OWNERSHIP LIMIT"). For purposes of computing the Ownership
Limit as of any date, each Limited Partner and its Affiliates shall be deemed to
own all Common Shares issuable to such Limited Partner and its Affiliates upon
the exercise of stock options granted on or before such date under the Share
Incentive Plan. If an Exchange Exercise Notice is delivered to the General
Partner but, as a result of the Ownership Limit, the Exchange Rights cannot be
exercised in full, the Exchange Exercise Notice shall be deemed to be modified
such that the Exchange Rights shall be exercised only to the extent permitted
under the Ownership Limit, with the exercise of the remainder of such Exchange
Rights being deemed to have been withdrawn.
4. COMPUTATION OF PURCHASE PRICE/FORM OF PAYMENT. The Purchase Price
payable by the General Partner to each Exercising Partner for the Offered Common
Units shall be payable by the issuance by the General Partner of the number of
shares of its Common Shares equal to the product, expressed as a whole number,
of (i) the number of Common Units being converted, multiplied by (ii) the
Exchange Factor (the "SHARE PURCHASE PRICE"). At the election of the General
Partner exercisable by the independent trustees of the General Partner in their
sole and absolute discretion, the Purchase Price may be paid in whole (but not
in part) in cash rather than in Common Shares (the "CASH PURCHASE PRICE"). The
Cash Purchase Price shall mean, with respect to the applicable number of Offered
Common Units which are being purchased for cash upon the exercise of any
Exchange Right, an amount of cash (in immediately available funds) equal to (i)
the number of Common Shares of the General Partner that would be issued to the
Exercising Partner if the Share Purchase Price were paid for such Offered Common
Units (taking into account the adjustments required pursuant to the definition
of "Exchange Factor") multiplied by (ii) the Current Per Share Market Price
computed as of the Computation Date. The Cash Purchase Price shall, in the sole
and absolute discretion of the General Partner, be paid in the form of cash, or
cashier's or certified check, or by wire transfer of immediately available funds
to the Exercising Partner's designated account.
5. CLOSING; DELIVERY OF ELECTION NOTICE. The closing of the acquisition of
Offered Common Units shall, unless otherwise mutually agreed, be held at the
principal office of the General Partner, on the following date(s):
(a) With respect to the exercise of Exchange Rights for which the
General Partner elects to pay the Share Purchase Price, the closing shall
occur on the date agreed to by the General Partner and the Exercising
Partner(s), which date shall in no event be on or after the date which is
the later of (i) ten (10) days after the delivery of the Election Notice;
(ii) the expiration or termination of the waiting period applicable to
each Exercising Partner, if any, under the Hart Scott Act; and (iii)
forty (40) days after receipt of the Exchange Exercise Notice delivered
in accordance with the requirements of PARAGRAPH 3 hereof; and
(b) With respect to the exercise of Exchange Rights for which the
General Partner elects to pay the Cash Purchase Price, the closing shall
occur on the date agreed to by the General Partner and the Exercising
Partner(s), which date shall in no event be later than sixty (60) days
after the Computation Date for such Exchange Exercise Notice; PROVIDED,
HOWEVER, that such sixty (60) day period may be extended for an
additional period of up to thirty (30) additional days to the extent
required for the General Partner to cause additional Common Shares to be
issued to provide financing to be used to acquire the Offered Common
Units. Notwithstanding the foregoing, the General Partner agrees to use
its best efforts to cause the closing of the acquisition of Offered
Common Units hereunder to occur as quickly as possible.
Appendix G-53
<PAGE>
6. FURTHER LIMITATIONS ON EXERCISE.
(a) Any exercise of Exchange Rights shall be null and void, and
shall not be recognized by the General Partner or the Partnership for any
purpose whatsoever, to the extent that (1) the General Partner determines
that such exercise may reasonably cause either (i) a termination of the
Partnership for federal or state income tax purposes (except as a result
of the exchange for Shares of all Units held by all Partners or pursuant
to a Termination Transaction expressly permitted under SECTION 11.2 of
the Agreement); (ii) the Partnership to cease to be classified as a
partnership for federal or state income tax purposes (except as a result
of the exchange for Shares of all Units held by all Limited Partners);
(iii) the Partnership to become a "Publicly Traded Partnership," as such
term is defined in Sections 469(k)(2) or 7704(b) of the Code; (2) such
exercise could otherwise adversely affect the ability of the General
Partner to remain qualified as a REIT; or (3) such exercise would violate
the General Partner's Declaration of Trust. This requirement may be
waived by the independent trustees of the General Partner, and shall not
apply to the exercise by the sole remaining Limited Partner of the
Exchange Rights with respect to all of his or its Common Units. The
requirement in clause (3) of the first sentence of this Section 6(a)
shall not apply to the exercise by any of the Limited Partners or any of
their Affiliates if (A) all of the Limited Partners and their Affiliates
(whether or not they are beneficiaries of any pledge of Common Units by
Prime) are exercising Exchange Rights with respect to all Common Units
then held by them; (B) after the consummation of the proposed Exchange,
all Limited Partners beneficially and constructively own less than twenty
percent (20%) of the General Partner's outstanding Common Shares; or (C)
all of the Common Shares to be received by such Limited Partners or their
Affiliates as a result of such Exchange are registered under the
Securities Act for sale to the public and are sold to the public
contemporaneously with the Exchange.
(b) Each Limited Partner acknowledges and agrees that the issuance
of Common Shares pursuant to the exercise of the Exchange Rights will not
be registered under the Securities Act or any state securities laws.
Accordingly, Common Shares issued to such Limited Partner may be required
to be held indefinitely and the General Partner shall have no obligation
to register such shares under the Securities Act or any state securities
laws unless required to do so pursuant to the Registration Rights
Agreement. In addition, such Limited Partner will be required to meet
such other requirements and to provide such other information and
representations as the General Partner may require, which are required in
the opinion of its counsel to lawfully allow it to issue such Common
Shares without registration under the Securities Act and any applicable
state securities laws. Each Limited Partner acknowledges that the
certificates representing Common Shares issued will also bear a legend
with respect to any restrictions on transfer required in the opinion of
counsel for the General Partner.
(c) The Exchange Rights shall not be exercised with respect to fewer
than one thousand (1000) Common Units at any one time or all Common Units
then owned by such Person exercising such Exchange Rights.
7. CLOSING DELIVERIES. At the closing, payment of the Purchase Price shall
be accompanied by proper instruments of transfer and assignment and by the
delivery of (i) representations and warranties of (A) the Exercising Partner
with respect to its due authority to sell all of the right, title and interest
in and to such Offered Common Units to the General Partner and with respect to
the status of the Offered Common Units being sold, free and clear of all Liens
and (B) the General Partner with respect to due authority for the purchase of
such Offered Common Units, and (ii) to the extent that Common Shares are issued
in payment of the Share Purchase Price, (A) an opinion of counsel for the
General Partner, reasonably satisfactory to the Exercising Partner(s), to the
effect that such Common Shares have been duly authorized, are validly issued,
fully-paid and nonassessable and (B) a certificate or certificates evidencing
the Common Shares to be issued and registered in the name of the Exercising
Partner(s) or its (their)
Appendix G-54
<PAGE>
designee. The delivery of the Offered Common Units to the General Partner shall
be a condition to the receipt by the Exercising Partner of the Purchase Price.
8. TERM OF RIGHTS. Unless sooner terminated, the rights of the parties to
exercise the Exchange Rights shall lapse for all purposes and in all respects on
January 1, 2051; PROVIDED, HOWEVER, that the parties hereto shall continue to be
bound by an Exchange Exercise Notice delivered to the General Partner prior to
such date.
9. COVENANTS OF THE GENERAL PARTNER. To facilitate the General Partner's
ability to fully perform its obligations hereunder, the General Partner
covenants and agrees as follows:
(a) At all times during the pendency of the Exchange Rights, the
General Partner shall reserve for issuance such number of Common Shares
as may be necessary to enable the General Partner to issue such shares in
full payment of the Share Purchase Price in regard to all Common Units
held by Limited Partners and which are from time to time outstanding.
(b) As long as the General Partner shall be obligated to file
periodic reports under the Exchange Act, the General Partner will timely
file such reports in such manner as shall enable any recipient of Common
Shares issued to Limited Partners hereunder in reliance upon an exemption
from registration under the Securities Act to continue to be eligible to
utilize Rule 144 promulgated by the Securities and Exchange Commission
pursuant to the Securities Act, or any successor rule or regulation or
statute thereunder, for the resale thereof.
(c) During the pendency of the Exchange Rights, the Limited Partners
shall receive in a timely manner all reports filed by the General Partner
with the Securities and Exchange Commission and all other communications
transmitted from time to time by the General Partner to its shareholders
generally.
(d) The General Partner shall cooperate with the Limited Partners in
the exercise of their Exchange Rights hereunder.
10. LIMITED PARTNERS' COVENANTS. (a) Each Limited Partner covenants and
agrees with the General Partner that all Offered Common Units tendered to the
General Partner in accordance with the exercise of Exchange Rights herein
provided shall be delivered to the General Partner free and clear of all Liens
(or will be released from such Liens concurrently with the exchange of offered
Common Units) and should any Liens exist or arise with respect to such Offered
Common Units, the General Partner shall be under no obligation to acquire the
same unless, in connection with such acquisition, the General Partner has
elected to pay a portion of the purchase price in the form of the Cash Purchase
Price in circumstances where such Cash Purchase Price will be sufficient to
cause such existing Lien to be discharged in full upon application of all or a
part of the Cash Purchase Price and the General Partner is expressly authorized
to apply such portion of the Cash Purchase Price as may be necessary to satisfy
any indebtedness in full and to discharge such Lien in full. Each Limited
Partner further agrees that, in the event any state or local property transfer
tax is payable as a result of the transfer of its Offered Common Units to the
General Partner (or its designee), such Limited Partner shall assume and pay
such transfer tax. Finally, each Limited Partner agrees that, to the extent it
receives an amount of Net Cash Flow under SECTION 5.5 of the Agreement in
respect of SECTION 5.1 of the Agreement that is treated as a distribution to the
General Partner for purposes of determining the Capital Account of the General
Partner, such Limited Partner will treat such amount of Net Cash Flow for income
tax purposes as an additional amount paid by the General Partner and realized by
it in exchange for the Offered Common Units.
11. ANTIDILUTION PROVISIONS.
(a) The Exchange Factor shall be subject to adjustment from time to
time effective upon the occurrence of the following events and shall be
expressed as a percentage, calculated to the nearest one-thousandth of
one percent (.001%):
Appendix G-55
<PAGE>
(i) In case the General Partner shall pay or make a dividend or
other distribution in Common Shares to all holders of the Common
Shares, the Exchange Factor in effect at the opening of business on
the day following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution
shall be increased in proportion to the increase in outstanding
Common Shares resulting from such dividend or other distribution,
such increase to become effective immediately after the opening of
business on the day following the record date fixed for such dividend
or other distribution.
(ii) In case outstanding Common Shares shall be subdivided into
a greater number of shares, the Exchange Factor in effect at the
opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately increased,
and, conversely, in case the outstanding Common Shares shall be
combined into a smaller number of shares, the Exchange Factor in
effect at the opening of business on the day following the day upon
which such combination becomes effective shall be proportionately
reduced, such increase or reduction, as the case may be, to become
effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes
effective.
(b) In case the General Partner shall issue rights, options or
warrants to all holders of its Common Shares entitling them to subscribe
for or purchase Common Shares at a price per share less than the current
market price per share (as determined in the next sentence), each holder
of a Common Unit shall be entitled to receive such number of rights,
options or warrants for Common Units, as the case may be, as he would
have been entitled to receive had he converted his Common Units
immediately prior to the record date for such issuance by the General
Partner (except to the extent such receipt shall cause such holder to
exceed the Ownership Limit). For the purpose of any computation pursuant
to the preceding sentence, the current market price per share of Common
Shares on any date shall be deemed to be the average of the daily Closing
Prices for the five consecutive Trading Days selected by the General
Partner commencing not more than twenty (20) Trading Days before, and
ending not later than, the earlier of the day in question and the day
before the "ex" date with respect to the issuance or distribution
requiring such computation. For purposes of this EXHIBIT B, the term
"TRADING DAY" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day which securities are not traded on such
exchange or in such market and the term "'EX' DATE", when used in respect
of any issuance or distribution, shall mean the first date on which the
shares trade regular way on such exchange or in such market without the
right to receive such issuance or distribution.
(c) In case the Common Shares shall be changed into the same or a
different number of shares of any class or classes of shares, whether by
capital reorganization, reclassification, or otherwise (other than
subdivision or combination of shares or a share dividend described in
subparagraph (a)(ii) of this PARAGRAPH 11) then and in each such event
the Limited Partners shall have the right thereafter to convert their
Common Units into the kind and amount of shares and other securities and
property which would have been received upon such reorganization,
reclassification or other change by holders of the number of shares into
which the Common Units might have been converted immediately prior to
such reorganization, reclassification or change.
(d) The General Partner may, but shall not be required to, make such
adjustments to the number of Common Shares issuable upon conversion of a
Common Unit, in addition to those required by this PARAGRAPH 11, as the
General Partner's board of trustees considers to be advisable in order
that any event treated for federal income tax purposes as a dividend of
stock or stock rights shall not be taxable to the recipients. The General
Partner's board of trustees shall have the power to resolve any ambiguity
or correct any error in the adjustments made pursuant to this Paragraph
and its actions in so doing shall be final and conclusive.
Appendix G-56
<PAGE>
12. FRACTIONS OF SHARES. No fractional Common Shares shall be issued upon
conversion of Common Units. If more than one Common Unit shall be surrendered
for conversion at one time by the same Exercising Partner, the number of full
Common Shares which shall be issuable upon conversion thereof (or the cash
equivalent amount thereof if the Cash Purchase Price is paid) shall be computed
on the basis of the aggregate amount of Common Units so surrendered. Instead of
any fractional Common Share which would otherwise be issuable upon conversion of
any Common Unit or Common Units, the General Partner shall pay a cash adjustment
in respect of such fraction in an amount equal to the same fraction of the
current market price per share at the close of business on the day of closing
specified in PARAGRAPH 5(B) hereof (or, if such day is not a Trading Day, on the
Trading Day immediately preceding such day).
13. NOTICE OF ADJUSTMENTS OF EXCHANGE FACTOR. Whenever the Exchange Factor
is adjusted as herein provided:
(a) the General Partner shall compute the adjusted Exchange Factor
in accordance with PARAGRAPH 11 hereof and shall prepare a certificate
signed by the chief financial officer or the Treasurer of the General
Partner setting forth the adjusted Exchange Factor and showing in
reasonable detail the facts upon which such adjustment is based; and
(b) a notice stating that the Exchange Factor has been adjusted and
setting forth the adjusted Exchange Factor shall forthwith be mailed by
the General Partner to all holders of Exchange Rights at their last
addresses on record under this Agreement.
14. NOTICE OF CERTAIN CORPORATE ACTIONS. In case:
(a) the General Partner shall declare a dividend (or any other
distribution) on its Common Shares payable otherwise than in cash; or
(b) the General Partner shall authorize the granting to the holders
of its Common Shares of rights, options or warrants to subscribe for or
purchase any shares of any class or of any other rights; or
(c) of any reclassification of the Common Shares (other than a
subdivision or combination of its outstanding Common Shares, or of any
consolidation, merger or share exchange to which the General Partner is a
party and for which approval of any shareholders of the General Partner
is required), or of the sale or transfer of all or substantially all of
the assets of the General Partner; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the General Partner; then the General Partner shall cause
to be mailed to all holders of Exchange Rights at their last addresses on
record under this Agreement, at least 20 days (or 12 days in any case
specified in clause (a) or (b) above) prior to the applicable record date
hereinafter specified, a notice stating (i) the date on which a record is
to be taken for the purpose of such dividend, distribution, rights,
options or warrants, or, if a record is not to be taken, the date as of
which the holders of Common Shares of record to be entitled to such
dividend, distribution, rights, options or warrants are to be determined
or (ii) the date on which such reclassification, consolidation, merger,
share exchange, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected
that holders of Common Shares of record shall be entitled to exchange
their shares for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up.
15. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR SALE OF ASSETS. In case
of (i) any consolidation of the General Partner with, or merger of the General
Partner into, any other Person, (ii) any merger or consolidation of another
Person into the General Partner (other than a merger which does not result in
any
Appendix G-57
<PAGE>
reclassification, conversion, exchange or cancellation of outstanding Common
Shares of the General Partner), or (iii) any sale or transfer of all or
substantially all of the assets of the General Partner, the Person formed by
such consolidation or resulting from such merger or which acquires such assets
of the General Partner, as the case may be, shall execute and deliver to each
holder of Exchange Rights an agreement providing that such holder shall have the
right thereafter, during the period such Exchange Rights shall be exercisable as
specified herein, to require the conversion of Common Units for the kind and
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of Common
Shares into which such Common Unit might have been converted immediately prior
to such consolidation, merger, sale or transfer, assuming such holder of Common
Shares is not a Person with which the General Partner consolidated or into which
the General Partner merged or which merged into the General Partner, or to which
such sale or transfer, was made, as the case may be (a "CONSTITUENT PERSON"), or
an Affiliate of a Constituent Person, and failed to exercise his right of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such consolidation, merger, sale or transfer; PROVIDED, that if
the kind or amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer is not the same for each Common Share in
respect of which such rights of election shall not have been exercised (a
"NON-ELECTING SHARE"), then for the purpose of this PARAGRAPH 15 the kind and
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by each non-electing Share shall be
deemed to be the kind and amount so receivable per share by a plurality of the
non-electing Shares. Such agreement shall provide for adjustments which, for
events subsequent to the effective date of such agreement, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this EXHIBIT
B. The above provisions of this PARAGRAPH 15 shall similarly apply to successive
consolidations, mergers, sales or transfers.
Appendix G-58
<PAGE>
SCHEDULE 1
EXCHANGE EXERCISE NOTICE
To: Horizon Group Properties, Inc.
Reference is made to that certain Agreement of Limited Partnership of
Horizon Group Properties, L.P. dated , 1998 (the "PARTNERSHIP
AGREEMENT"), pursuant to which Horizon Group Properties, Inc., a Maryland
corporation, and certain other persons, including the undersigned, formed a
Delaware limited partnership known as Horizon Group Properties, L.P. (the
"Partnership"). Capitalized terms used but not defined herein shall have the
meanings set forth in the Partnership Agreement. Pursuant to SECTION 8.6 and
PARAGRAPH 2 of EXHIBIT B of the Partnership Agreement, each of the undersigned,
being a limited partner of the Partnership (an "EXERCISING PARTNER"), hereby
elects to exercise its Exchange Rights as to the number of Offered Common Units
specified opposite its name below:
Dated:
- ---------------------
<TABLE>
<CAPTION>
NUMBER OF OFFERED
NAME OF EXERCISING PARTNER COMMON UNITS
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
</TABLE>
Exercising Partners:
- ----------------------------
- ----------------------------
(Authorized Signatory)
Appendix G-59
<PAGE>
SCHEDULE 2
ELECTION NOTICE
To: Exercising Partner(s)
Reference is made to that certain Agreement of Limited Partnership of
Horizon Group Properties, L.P. dated , 1998 (the "PARTNERSHIP
AGREEMENT"), pursuant to which the undersigned and certain other persons,
including the Exercising Partners, formed a Delaware limited partnership known
as Horizon Group Properties, L.P. (the "Partnership"). All capitalized terms
used but not defined herein shall have the meanings set forth in the Partnership
Agreement. Pursuant to subsection (b) of PARAGRAPH 5 of EXHIBIT B to the
Partnership Agreement, the undersigned, being the general partner of the
Partnership, hereby notifies the Exercising Partner(s) that [(A) THE SHARE
PURCHASE PRICE IS PAYABLE BY ISSUANCE OF THE NUMBER OF COMMON SHARES TO THE
EXERCISING PARTNER(S), AS SET FORTH BELOW,] [(B) IT HAS ELECTED TO PAY THE CASH
PURCHASE PRICE BY PAYMENT OF CASH TO THE EXERCISING PARTNER(S) FOR THE NUMBER OF
OFFERED COMMON UNITS, AS SET FORTH BELOW,] (C) THE COMPUTATION OF THE [SHARE
PURCHASE PRICE AND CASH PURCHASE PRICE] IS AS SET FORTH ON AN ATTACHMENT HERETO,
(D) THE CLOSING OF THE PURCHASE AND SALE OF THE OFFERED COMMON UNITS BY PAYMENT
OF THE [SHARE PURCHASE PRICE SHALL TAKE PLACE AT THE OFFICES OF ON
[DATE]] AND [(E) THE CLOSING OF THE PAYMENT OF THE CASH PURCHASE PRICE SHALL
TAKE PLACE AT THE OFFICES OF ON [DATE].
<TABLE>
<CAPTION>
NUMBER OF OFFERED COMMON
EXERCISING PARTNER(S) UNITS SHARE PURCHASE PRICE CASH PURCHASE PRICE
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
</TABLE>
Dated: _____________________
HORIZON GROUP PROPERTIES,
INC., a Maryland corporation
By: ______________________________________
Its: ______________________________________
Appendix G-60
<PAGE>
EXHIBIT C
FORM OF SPECIMEN COMMON UNIT CERTIFICATE
COMMON UNITS
Certificate No. ___
THIS CERTIFICATE IS
TRANSFERABLE IN
CHICAGO, ILLINOIS
AT THE OFFICES OF
HORIZON GROUP PROPERTIES, L.P.
HORIZON GROUP PROPERTIES, L.P.
ORGANIZED UNDER THE LAWS
OF THE STATE OF DELAWARE
SEE THE REVERSE FOR CERTAIN RESTRICTIONS
THIS CERTIFIES THAT ________________________________________________
IS THE OWNER OF ________________________________________________
Common Units of Horizon Group Properties, L.P., a limited partnership organized
under the laws of the State of Delaware (the "Partnership"), transferable only
on the books of the Partnership by the holder hereof in person or by duly
authorized attorney upon the surrender of this Certificate properly endorsed.
The Common Units evidenced by this Certificate are subject to the Amended and
Restated Agreement of Limited Partnership of the Partnership, as amended from
time to time. The holder hereof has no interest, legal or equitable, in any
specific property of the Partnership. This Certificate is not valid unless
countersigned by the General Partner of the Partnership.
WITNESS the signatures of duly authorized officers of the General Partner of
the Partnership.
Dated: _____________________
Horizon Group Properties, Inc.
General Partner
By: _____________________
President
Attest: _____________________
Secretary
Appendix G-61
<PAGE>
HORIZON GROUP PROPERTIES, L.P.
THE PARTNERSHIP IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF UNIT. THE
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (THE "PARTNERSHIP
AGREEMENT") OF THE PARTNERSHIP ON FILE IN THE OFFICE OF THE MANAGING GENERAL
PARTNER OF THE PARTNERSHIP SETS FORTH A FULL STATEMENT OF (A) ALL OF THE
DESIGNATIONS, PREFERENCES, RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS
TO DIVIDENDS, QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTIONS, AND OTHER
RELATIVE RIGHTS OF THE UNITS OF EACH CLASS OF UNITS AUTHORIZED TO BE ISSUED AND
(B) THE AUTHORITY OF THE GENERAL PARTNER TO ISSUE ANY PREFERRED OR SPECIAL CLASS
IN SERIES, THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE
UNITS OF EACH SERIES TO THE EXTENT THEY HAVE BEEN SET AND THE AUTHORITY OF THE
MANAGING GENERAL PARTNER TO SET THE RELATIVE RIGHTS AND PREFERENCES OF
SUBSEQUENT SERIES OF PREFERRED UNITS.
[THE COMMON UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND THE UNITS
CANNOT BE SOLD UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT AND SUCH
LAWS, OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.] THE UNITS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION.
THE TRANSFER OF THESE COMMON UNITS IS RESTRICTED AS SET FORTH IN THE
PARTNERSHIP AGREEMENT AND MAY ONLY BE TRANSFERRED BY THE COMPLIANCE BY THE
TRANSFEROR AND TRANSFEREE WITH ALL THE TERMS AND CONDITIONS SET FORTH IN THE
PARTNERSHIP AGREEMENT.
All capitalized terms in this legend have the meanings defined in the
Partnership Agreement, a copy of which, including information regarding classes
of units authorized to be issued by the Partnership and the restrictions on
transfer, will be sent without charge to each unitholder on request to the
Secretary of the General Partner of the Partnership at 77 West Wacker Drive,
Suite 3900, Chicago, Illinois or at such other address as the Managing General
Partner shall direct.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with the right of survivorship and not as tenants
in common
</TABLE>
For Value Received, ____________________________ hereby sells, assigns, and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
Appendix G-62
<PAGE>
______________________________________ Common Units represented by the within
Certificate, and do hereby irrevocably constitute and appoint
______________________________________ Attorney to transfer the said shares on
the books of the within named Partnership with full power of substitution in the
premises.
Dated ____________________________
Signature:
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of the
Certificate in every particular,
without alteration or enlargement or
any change whatsoever.
Appendix G-63
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Prime Partnership's partners, affiliates and any individuals acting on their
behalf are and will be indemnified under Delaware law and the Prime Partnership
Agreement against certain liabilities. In addition, New Prime's directors and
officers (who may act on behalf of Prime Partnership) are and will be
indemnified under Maryland and Delaware law, the New Prime Charter, the New
Prime Bylaws and the Prime Partnership Agreement against certain liabilities.
The Prime Partnership Agreement provides that Prime Partnership shall
indemnify and hold harmless each partner and its affiliates and any individual
acting on their behalf from any loss, damage, expense, claim or liability,
including, but not limited to, reasonable attorneys' fees and expenses, incurred
by them by reason of the operations of Prime Partnership as set forth in the
Prime Partnership Agreement in which such partner or other person may be
involved or in enforcing the provisions of such indemnity, unless it is
established that: (i) the act or omission of such partner or other person was
material to the matter giving rise to the loss, damage, expense, claim or
liability and either was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) such partner or other person actually received an
improper personal benefit in money, property or services; or (iii) in the case
of any criminal proceeding, such partner or other person had reasonable cause to
believe that the act or omission was unlawful. Neither any partner nor any
person acting on behalf of any partner, pursuant to the Prime Partnership
Agreement, shall be liable, responsible or accountable in damages or otherwise
to Prime Partnership or to any partner of Prime Partnership for any acts or
omissions performed or omitted to be performed by them or for their errors of
judgment; PROVIDED that the partner's or such other person's conduct or omission
to act was taken in good faith. Without limitation, the foregoing indemnity
shall extend to any liability of any partner or other person, pursuant to a loan
guaranty or otherwise, for any indebtedness of Prime Partnership or any
subsidiary of Prime Partnership (including, without limitation, any indebtedness
which Prime Partnership or any subsidiary of Prime Partnership has assumed or
taken subject to), and New Prime is authorized and empowered, on behalf of Prime
Partnership, to enter into one or more indemnity agreements in favor of any
partner or other person having or potentially having liability for any such
indebtedness. Any person entitled to indemnification under the Prime Partnership
Agreement shall be entitled to receive, upon application therefor, advances to
cover the costs of defending any proceeding against such person; PROVIDED,
HOWEVER, that such advances shall be repaid to Prime Partnership if such person
is found by a final judgment not to be entitled to such indemnification.
The New Prime Charter provides that New Prime shall indemnify, to the
fullest extent permitted by Maryland law, as applicable from time to time, all
persons who at any time were or are directors or officers of New Prime for any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) relating to any action alleged to
have been taken or omitted in such capacity as a director or an officer. New
Prime shall pay or reimburse all reasonable expenses incurred by a present or
former director or officer of New Prime in connection with any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) in which the present or former director or
officer is a party, in advance of the final disposition of the proceeding, to
the fullest extent permitted by, and in accordance with the applicable
requirements of, Maryland law, as applicable from time to time. New Prime may
indemnify any other persons permitted but not required to be indemnified by
Maryland law, as applicable from time to time, if and to the extent
indemnification is authorized and determined to be appropriate, in each case in
accordance with applicable law, by the New Prime Board of Directors, the
majority of the stockholders of New Prime entitled to vote thereon or special
legal counsel appointed by the New Prime Board of Directors. New Prime Charter
also provides that no amendment of the New Prime Charter or repeal of any of its
provisions shall limit or eliminate any
II-1
<PAGE>
of the above benefits provided to directors and officers in respect of any act
or omission that occurred prior to such amendment or repeal.
The New Prime Bylaws also provide for indemnification of New Prime's
officers and directors to the same extent that indemnification is provided to
officers and directors of New Prime in the New Prime Charter.
The MGCL permits a 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. The foregoing limitations on indemnification are
expressly set forth in the New Prime Bylaws. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that a
personal benefit was improperly received, unless, in either case, a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) written statement by or on his behalf
to repay the amount paid or reimbursed by the corporation if it shall ultimately
be determined that the standard of conduct was not met.
New Prime has entered into indemnification agreements with each of its
directors and executive officers. The indemnification agreements require, among
other things, that the New Prime indemnify its directors and executive officers
to the fullest extent permitted by law and advance to the directors and
executive officers all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under these
agreements, New Prime must also indemnify and advance all expenses incurred by
directors and executive officers seeking to enforce their rights under the
indemnification agreements and may cover directors and executive officers under
New Prime's directors and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by law, as a traditional form of contract it may provide greater
assurance to directors and executive officers that indemnification will be
available.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<S> <C>
2.1 Merger Agreement (Included as Appendix A to the Prospectus contained in this
Registration Statement)
2.2 Certificate of Merger (Included as Appendix B to the Prospectus contained in this
Registration Statement)
3.1 Form of Second Amended and Restated Agreement of Limited Partnership of Prime
Retail, L.P. (Included as Appendix F to the Prospectus contained in this
Registration Statement)
4.1 Form of Certificate of Prime Partnership Common Unit
5.1 Form of Winston & Strawn opinion regarding legality of securities*
8.1a Form of Winston & Strawn opinion regarding tax aspects of the mergers and REIT
status of New Prime
8.1b Form of Opinion of Winston & Strawn regarding historical REIT status of Prime
8.1c Form of Opinion of Winston & Strawn regarding REIT status of HGP
8.1d Form of Opinion of Winston & Strawn regarding qualification of Prime Partnership as
a partnership
8.2 Form of Rudnick & Wolfe opinion regarding tax aspects of mergers
8.3 Form of Rudnick & Wolfe opinion regarding REIT status of Horizon
10.1 Contribution Agreement (Included as Appendix C to the Prospectus contained in this
Registration Statement)
10.2 Murdock Agreement (Incorporated by reference to Exhibit 10(b) to Prime's current
report on Form 8-K dated as of February 1, 1998 (SEC File No. 001-13301)
10.3 Form of Indemnity Agreement for persons to become Directors*
10.4 Form of Agreement of Limited Partnership of Horizon Group Properties, L.P. (included
as Appendix G to the Prospectus contained in this Registration Statement)
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Unit
Distributions*
23.1 Consent of Ernst & Young LLP (Baltimore)
23.2 Consent of Ernst & Young LLP (Chicago)
23.3 Consent of Winston & Strawn (included as part of Exhibits 5.1, 8.1a, 8.1b, 8.1c and
8.1d)
23.4 Consent of Rudnick & Wolfe (included as part of Exhibits 8.2 and 8.3)
23.5 Consent of Friedman, Billings, Ramsey & Co., Inc.*
23.6 Consent of Lehman Brothers*
23.7 Consents of Persons Named to Become Directors*
24.1 Power of Attorney (included in the signature pages at pages II-5 and II-7)*
24.2 Power of Attorney (Norman Perlmutter)
99.1 Form of Prime Partnership Consent Card
99.2 Form of Horizon Partnership Consent Card
99.3 Opinion of Friedman, Billings, Ramsey & Co., Inc. (Included as Appendix D to the
Prospectus contained in this Registration Statement)
99.4 Opinion of Lehman Brothers (Included as Appendix E to the Prospectus contained in
this Registration Statement)
</TABLE>
- ------------------------
* Previously filed
(B) FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements.
(C) REPORTS, OPINIONS AND APPRAISALS
II-3
<PAGE>
The fairness opinions of Friedman, Billings, Ramsey & Co., Inc. and Lehman
Brothers with respect to the transactions are set forth in Appendices D and E,
respectively, to the Prospectus contained in this Registration Statement.
ITEM 22. UNDERTAKINGS
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, such changes in
volume and price represent no more than a 20% change in the maximum
aggregated offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
each registrant's annual report pursuant to section 13(a) or 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.
(7) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
II-4
<PAGE>
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(9) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Baltimore, State of Maryland, on the 4th day of May, 1998.
<TABLE>
<S> <C> <C>
PRIME RETAIL, L.P.
By: Prime Retail, Inc., its sole general
partner
By: /s/ C. ALAN SCHROEDER
-----------------------------------------
C. Alan Schroeder
EXECUTIVE VICE PRESIDENT--GENERAL COUNSEL
AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
MICHAEL W. RESCHKE* Chairman of the Board of May 4, 1998
- ------------------------------ Directors of the general
Michael W. Reschke partner of the
Registrant
ABRAHAM ROSENTHAL* Chief Executive Officer May 4, 1998
- ------------------------------ (Principal Executive
Abraham Rosenthal Officer) and Director of
the general partner of
the Registrant
WILLIAM H. CARPENTER* President, Chief Operating May 4, 1998
- ------------------------------ Officer and Director of
William H. Carpenter, Jr. the general partner of
the Registrant
GLENN D. RESCHKE* Executive Vice President-- May 4, 1998
- ------------------------------ Development and
Glenn D. Reschke Acquisitions and
Director of the general
partner of the
Registrant
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
ROBERT P. MULREANEY* Executive Vice President-- May 4, 1998
- ------------------------------ Chief Financial Officer
Robert P. Mulreaney and Treasurer (Principal
Financial Officer and
Principal Accounting
Officer) of the general
partner of the
Registrant
TERENCE C. GOLDEN* Director of the general May 4, 1998
- ------------------------------ partner of the
Terence C. Golden Registrant
KENNETH A. RANDALL* Director of the general May 4, 1998
- ------------------------------ partner of the
Kenneth A. Randall Registrant
SHARON SHARP* Director of the general May 4, 1998
- ------------------------------ partner of the
Sharon Sharp Registrant
JAMES R. THOMPSON* Director of the general May 4, 1998
- ------------------------------ partner of the
James R. Thompson Registrant
MARVIN S. TRAUB* Director of the general May 4, 1998
- ------------------------------ partner of the
Marvin S. Traub Registrant
</TABLE>
*By: /s/ C. ALAN SCHROEDER
-------------------------
C. Alan Schroeder
ATTORNEY-IN-FACT
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Norton
Shores, State of Michigan, on the 4th day of May, 1998.
<TABLE>
<S> <C> <C>
SKY MERGER CORP.
By: /s/ JAMES S. WASSEL
-----------------------------------------
James S. Wassel
PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
NORMAN PERLMUTTER* Chairman of the Board and May 4, 1998
- ------------------------------ Director
Norman Perlmutter
ROBERT D. PERLMUTTER* Director May 4, 1998
- ------------------------------
Robert D. Perlmutter
/s/ JAMES S. WASSEL President (Principal May 4, 1998
- ------------------------------ Executive Officer and
James S. Wassel Principal Financial
Officer) and Director
RICHARD D. STEWART* Assistant Controller May 4, 1998
- ------------------------------ (Principal Accounting
Richard D. Stewart Officer)
*By: /s/ JAMES S. WASSEL
-------------------------
James S. Wassel
ATTORNEY-IN-FACT
II-8
<PAGE>
EXHIBIT 4.1
FORM OF SPECIMEN COMMON UNIT CERTIFICATE
COMMON UNITS
Certificate No.
------
THIS CERTIFICATE IS
TRANSFERABLE IN
BALTIMORE, MARYLAND
AT THE OFFICES OF
PRIME RETAIL, L.P.
PRIME RETAIL, L.P.
ORGANIZED UNDER THE LAWS
OF THE STATE OF DELAWARE
SEE THE REVERSE FOR CERTAIN RESTRICTIONS
THIS CERTIFIES THAT
---------------------------------------
IS THE OWNER OF
-------------------------------------------
Common Units of Prime Retail, L.P., a limited partnership organized under the
laws of the State of Delaware (the "Partnership"), transferable only on the
books of the Partnership by the holder hereof in person or by duly authorized
attorney upon the surrender of this Certificate properly endorsed. The Common
Units evidenced by this Certificate are subject to the Second Amended and
Restated Agreement of Limited Partnership of the Partnership, as amended from
time to time. The holder hereof has no interest, legal or equitable, in any
specific property of the Partnership. This Certificate is not valid unless
countersigned by the General Partner of the Partnership.
WITNESS the signatures of duly authorized officers of the General
Partner of the Partnership.
Dated:
----------------
Prime Retail, Inc.
General Partner
By:
-------------------
President
Attest:
---------------
Secretary
<PAGE>
PRIME RETAIL, L.P.
THE PARTNERSHIP IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF UNIT.
THE SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (THE
"PARTNERSHIP AGREEMENT") OF THE PARTNERSHIP ON FILE IN THE OFFICE OF THE
GENERAL PARTNER OF THE PARTNERSHIP SETS FORTH A FULL STATEMENT OF (A) ALL OF
THE DESIGNATIONS, PREFERENCES, RIGHTS, VOTING POWERS, RESTRICTIONS,
LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS, AND TERMS AND CONDITIONS OF
REDEMPTIONS, AND OTHER RELATIVE RIGHTS OF THE UNITS OF EACH CLASS OF UNITS
AUTHORIZED TO BE ISSUED AND (B) THE AUTHORITY OF THE GENERAL PARTNER TO ISSUE
ANY PREFERRED OR SPECIAL CLASS IN SERIES, THE DIFFERENCES IN THE RELATIVE
RIGHTS AND PREFERENCES BETWEEN THE UNITS OF EACH SERIES TO THE EXTENT THEY
HAVE BEEN SET AND THE AUTHORITY OF THE GENERAL PARTNER TO SET THE RELATIVE
RIGHTS AND PREFERENCES OF SERIES OF PREFERRED UNITS.
THE COMMON UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND
THE UNITS CANNOT BE SOLD UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES
ACT AND SUCH LAWS, OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THE
UNITS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION.
THE TRANSFER OF THESE COMMON UNITS IS RESTRICTED AS SET FORTH IN
THE PARTNERSHIP AGREEMENT AND MAY ONLY BE TRANSFERRED BY THE COMPLIANCE BY
THE TRANSFEROR AND TRANSFEREE WITH ALL THE TERMS AND CONDITIONS SET FORTH IN
THE PARTNERSHIP AGREEMENT.
All capitalized terms in this legend have the meanings defined in
the Partnership Agreement, a copy of which, including information regarding
classes of units authorized to be issued by the Partnership and the
restrictions on transfer, will be sent without charge to each unitholder on
request to the Secretary of the General Partner of the Partnership at 100
East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202 or at such
other address as the General Partner shall direct.
The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were written out
in full according to applicable laws or regulations:
TEN COM = as tenants in common
TEN ENT = as tenants by the entireties
JT TEN = as joint tenants with the right of survivorship and not
as tenants in common
<PAGE>
For Value Received, _________________________ hereby sells, assigns, and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
_____________________________________ Common Units represented by the within
Certificate, and do hereby irrevocably constitute and appoint _________________
_________________Attorney to transfer the said shares on the books of the
within named Partnership with full power of substitution in the premises.
Dated
-----------------
Signature:
---------------------------
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of
the Certificate in every particular,
without alteration or enlargement
or any change whatsoever.
<PAGE>
EXHIBIT 8.1a
[FORM OF WINSTON & STRAWN TAX OPINION]
[JUNE] ____, 1998
Prime Retail, Inc.
100 East Pratt Street
19th Floor
Baltimore, Maryland 21202
Re: Opinion as to Federal Income Tax Consequences/Joint Proxy and
Joint Consent Federal Income Tax Disclosure
Dear Ladies and Gentlemen:
We have acted as special counsel for you in connection with the
transactions contemplated by that certain Amended and Restated Agreement and
Plan of Merger among Prime Retail, Inc. ("Prime"), Prime Retail, L.P.,
Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc.
("Horizon"), Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers
Limited Partnership dated as of February 1, 1998 (the "Merger Agreement").
This opinion letter addresses the federal income tax issues on which you have
requested our opinion and is being delivered to you pursuant to Section
6.2(e) of the Merger Agreement and in connection with the Joint Proxy
Statement/Prospectus/Information Statement dated ________, 1998 (the "Joint
Proxy") and the Joint Consent Solicitation Statement/Prospectus/Information
Statement filed by Prime Partnership, Horizon Partnership, and HGP LP dated
______________, 1998 (the "Joint Consent"). Capitalized terms not defined
herein shall have the meaning set forth in the Joint Proxy or Joint Consent,
as the context requires.
In connection with our opinions herein, we have examined and relied
upon the descriptions of various entities and their respective investments,
activities, operations and governance, as set forth in the following
documents:
(a) the Merger Agreement;
(b) the Officer's Certificate, dated ________, 1998 from Prime to
Winston & Strawn, a copy of which is attached hereto;
<PAGE>
Prime Retail, Inc.
[JUNE] ___, 1998
Page 2
(c) the opinion letters of Rudnick & Wolfe, dated as of the date
hereof, described in Sections 6.2(d) and 6.3(e) of the Merger
Agreement and in "The Reincorporation Merger -- Federal Income
Tax Consequences" section of the Joint Proxy, along with the
officer's certificates of Horizon, attached thereto;
(d) the Contribution Agreement;
(e) the Tax Disaffiliation Agreement;
(f) the Delaware Certificate of Merger;
Prime Retail, Inc.
[JUNE] ___, 1998
Page
(g) the Horizon/Subsidiary Articles of Merger (Maryland);
(h) the Horizon/Subsidiary Certificate of Merger (Michigan);
(i) the Prime/Horizon Articles of Merger (Maryland);
(j) the Sky Merger Amended and Restated Articles of Incorporation;
(k) the Sky Merger Bylaws;
(l) the Amended and Restated Prime Partnership Agreement; and
(m) the Amended and Restated Registration Rights Agreement,
together with such other documents, records, and matters of law as we have
deemed relevant or necessary (the "Relevant Documents"). We have assumed the
authenticity of all documents submitted to us as originals, the conformity to
the originals of all documents submitted to us as copies, and that the
signatures on all documents examined by us are genuine.
As to any facts material to our opinions, we have, with your
consent, relied on the representations, warranties, covenants, assumptions,
and opinions made in the Relevant Documents by the respective parties
thereto. To the extent our opinions refer to the existence or absence of
facts based upon our knowledge or of which we are aware, we are referring to
the actual knowledge of Winston & Strawn attorneys who have actively
represented Prime, Prime Partnership or their affiliates during the course of
our representation of such parties with respect to these opinions. We have
not undertaken any independent investigation to determine the existence or
absence of any facts,
<PAGE>
Prime Retail, Inc.
[JUNE] ___, 1998
Page 3
and no inference as to our knowledge concerning any facts should be drawn as
a result of the representation undertaken by us. We have consequently relied
upon your factual representations that the information presented in the
Relevant Documents or otherwise furnished to us (including from your
representative, Ernst & Young, LLP) accurately and completely describes all
material facts relevant to this opinion. Any representation or statement in
any document upon which we rely that is made "to the best of knowledge" or
otherwise similarly qualified is assumed to be correct. Any alteration of
such facts may adversely affect our opinions.
In rendering these opinions, we have assumed that the transactions
contemplated by the Merger Agreement and the Joint Proxy will be consummated
in accordance with the operative documents, and such documents accurately
reflect the material facts of such transactions. In addition, the opinions
set forth herein are based on the correctness of the following specific
assumptions: (i) Prime, the Surviving Partnership, the Property
Partnerships, the Services Corporation, the Services Partnership, Finance,
Finance II, Finance III, Finance IV and the Finance Partnership will each be
operated in the manner described in the relevant partnership agreement or
other organizational documents and in the Proxy and in accordance with
applicable laws; and (ii) each partner of the Surviving Partnership, each of
the Property Partnerships, the Services Partnership, and the Finance
Partnership has acquired its respective partnership interest in reasonable
anticipation of making an economic profit apart from any federal income tax
benefits. Any alteration of such assumptions may adversely affect our
opinions.
Subject to the foregoing, we express the following opinions:
1. Each of the Corporate Merger and Reincorporation Merger will
qualify as a reorganization within the meaning of Code section 368(a) to
which Prime and Sky Merger Corp. and Horizon and Sky Merger Corp.,
respectively, will be parties to such reorganizations within the meaning of
Code section 368(b);
2. No gain or loss will be recognized by Prime as a result of
either the Corporate Merger or the Reincorporation Merger;
3. No gain or loss will be recognized by the shareholders of
Prime upon the exchange of their Prime Common Shares solely for New Prime
Common Shares pursuant to the Corporate Merger;
Page
Prime Retail, Inc.
[JUNE] ___, 1998
Page 4
4. No gain or loss will be recognized by the shareholders of
Prime upon the exchange of their Prime Series A Preferred Shares solely for
New Prime Series A Preferred Shares pursuant to the Corporate Merger;
5. No gain or loss will be recognized by the shareholders of
Prime upon the exchange of their Prime Series B Preferred Shares solely for
New Prime Series B Preferred Shares pursuant to the Corporate Merger;
6. No gain or loss will be recognized by the shareholders of Prime
upon the exchange of their Prime Series C Preferred Shares solely for New
Prime Series C Preferred Shares pursuant to the Corporate Merger;
7. The Prime Special Distribution should be respected as a
distribution made by Prime in respect of Prime Common Shares, Prime
Series B Preferred Shares and Prime Series C Preferred Shares, and should
not be treated as other property or money received in the Corporate Merger
under Code Section 356(a)(1)(B) for which either Prime Common Shareholders,
Prime Series B Preferred Shareholders or Prime Series C Preferred
Shareholders would be required to recognize any gain realized from the
Corporate Merger (including the receipt of the Prime Special Distribution);
8. Subject to the conclusion in paragraph 7 above, the initial
tax basis of New Prime Common Shares received by any Prime Common
Shareholder in exchange for Prime Common Shares pursuant to the Corporate
Merger will be the same as the adjusted tax basis of such Prime Common
Shares exchanged therefor;
9. The initial tax basis of New Prime Series A Preferred Shares
received by any Prime Series A Preferred Shareholder in exchange for Prime
Series A Preferred Shares pursuant to the Corporate Merger will be the same
as the adjusted tax basis of such Prime Series A Preferred Shares exchanged
therefor;
10. Subject to the conclusion in paragraph 7 above, the initial
tax basis of New Prime Series B Preferred Shares received by any Prime
Series B Preferred Shareholder in exchange for Prime Series B Preferred
Shares pursuant to the Corporate Merger will be the same as the adjusted
tax basis of such Prime Series B Preferred Shares exchanged therefor;
11. Subject to the conclusion in paragraph 7 above, the initial
tax basis of New Prime Series C Preferred Shares received by any Prime
Series C Preferred Shareholder in
<PAGE>
Prime Retail, Inc.
[JUNE] ___, 1998
Page 5
exchange for Prime Series C Preferred Shares pursuant to the Corporate
Merger will be the same as the adjusted tax basis of such Prime Series C
Preferred Shares exchanged therefor;
12. The holding period for New Prime Common Shares, New Prime
Series A Preferred Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares received in exchange for Prime Common
Shares, Prime Series A Preferred Shares, Prime Series B Preferred Shares
and Prime Series C Preferred Shares, respectively, pursuant to the
Corporate Merger will include the period that such Prime Common Shares,
Prime Series A Preferred shares, Prime Series B Preferred Shares and
Prime Series C Preferred Shares, respectively, were held by the holder;
13. Subsequent to the Corporate Merger, the proposed method of
operation described in the Joint Proxy and certain factual
representations made by Prime and Horizon, will enable New Prime to
satisfy the requirements under the Code to qualify as a REIT for federal
income tax purposes;
14. The discussions in the Joint Proxy under the headings "Summary
- Federal Income Tax Consequences", "New Prime Risk Factors - Status of
the Corporate Merger as a Tax-Free Reorganization", "New Prime Risk
Factors - Adverse Impact of the Failure to Continue to Qualify as a
REIT", "New Prime Risk Factors - Effect of REIT Distribution
Requirements", "New Prime Risk Factors - Penalty Tax on Prohibited
Transactions", "New Prime Risk Factors - Ownership Limit Necessary to
Maintain REIT Qualification", "New Prime Risk Factors - Tax Termination
of Prime Partnership", "HGP Risk Factors - Ownership Limit Necessary to
Maintain REIT Qualification", "HGP Risk Factors - Adverse Impact of the
Failure to Continue to Qualify as a REIT", "HGP Risk Factors - Effect of
REIT Distribution Requirements", "HGP Risk Factors - Penalty Tax on
Prohibited Transactions", "HGP Risk Factors - Taxable Nature of Certain
Distributions", "The Partnership Merger - Federal Income Tax
Consequences of the Partnership Merger", "The Reincorporation Merger -
Federal Income Tax Consequences", "The Corporate Merger - Federal Income
Tax Consequences", "Prime Partnership Agreement - Tax Matters" and
"Horizon Group Properties, Inc. - Federal Income Tax Consequences"
fairly summarize the federal income tax consequences that are likely to
be material to Prime Shareholders or Horizon Common Shareholders; and.
15. The discussions in the Joint Consent under the headings
"Summary - Federal Income Tax Consequences of the Partnership Merger",
"Prime Partnership Risk
<PAGE>
Prime Retail, Inc.
[JUNE] ___, 1998
Page 6
Factors - Federal Income Tax Consequences of the Partnership Merger",
"Prime Partnership Risk Factors - Adverse Impact of New Prime's Failure
to Continue to Qualify as a REIT", "Prime Partnership Risk Factors -
Effect of REIT Distribution Requirements", "Prime Partnership Risk
Factors - Penalty Tax on Prohibited Transactions", "Prime Partnership
Risk Factors - Ownership Limit Necessary to Maintain REIT
Qualification", "Prime Partnership Risk Factors - Restrictions upon
Transfer to Avoid Publicly Traded Partnership Status", "Prime
Partnership Risk Factors - Tax Termination of Prime Partnership", "HGP
LP Risk Factors - Adverse Impact of the Failure to Continue to Qualify
as a REIT", "HGP LP Risk Factors - Effect of REIT Distribution
Requirements", "HGP LP Risk Factors - Penalty Tax on Prohibited
Transactions", "HGP LP Risk Factors -Ownership Limit Necessary to
Maintain REIT Qualification", "HGP LP Risk Factors - Restrictions upon
Transfer to Avoid Publicly Traded Partnership Status", "HGP LP Risk
Factors - Federal Income Tax Consequences of the HGP LP Common Unit
Distribution", "The Partnership Merger - Federal Income Tax Consequences
of the Partnership Merger", "Federal Income Tax Consequences of the
Transactions" and all subsections thereunder, "Description of the
Capital Stock of New Prime -Restrictions on Ownership and Transfer",
"Comparison of Rights of Shareholders -Restrictions on the Ownership
Transfer or the Issuance of Shares", "Prime Partnership Agreement - Tax
Matters", "Comparison of Rights of the Unitholders -Transfer or Pledge
of Units", "Horizon Group Properties, L.P. - Certain Provisions of
Maryland Law and of the HGP Charter and the HGP Bylaws", "Horizon Group
Properties, L.P. - Federal Income Tax Consequences", "Horizon Group
Properties, L.P. - Federal Income Tax Consequences of Continuing
Ownership of HGP LP Common Units", "Horizon Group Properties, L.P. -
Entity Classification", "Horizon Group Properties, L.P. - Allocations of
Partnership Items", "Horizon Group Properties, L.P. - HGP LP
Distributions", "Horizon Group Properties, L.P. - Dispositions and
Exchanges/Redemptions of HGP LP Common Units", "Horizon Group
Properties, L.P. - Tax Returns and Other Tax Matters Affecting Holders
of HGP LP Common Units", "Horizon Group Properties, L.P. - Limitations
on Deductibility of Losses", and "Horizon Group Properties, L.P. -
Alternative Minimum Tax" fairly summarize the federal income tax
consequences that are likely to be material to Prime Partnership
Unitholders, Horizon Partnership Common Unitholders and HGP LP Common
Unitholders.
These opinions are rendered only as to the date hereof, and we
undertake no obligation to update these opinions. Pursuant to the analysis
described in Treasury Regulation section 1.6662-4(d)(3)(ii), our opinions are
based upon the current provisions of the Code, as amended, currently
applicable Treasury Regulations promulgated or proposed thereunder, currently
published administrative rulings, judicial decisions, and other applicable
authorities, all as in effect on the date hereof. All of the foregoing
authorities are subject to change or new interpretations, both prospectively
and retroactively, and such changes or interpretations, as well as any change
in the facts
<PAGE>
Prime Retail, Inc.
[JUNE] ___, 1998
Page 7
as they have been represented to us or assumed by us, could affect our
opinions. Our opinions are rendered only as of the date hereof, and we take
no responsibility to update these opinions after this date. Our opinions do
not foreclose the possibility of a contrary determination by the Internal
Revenue Service (the "IRS") or by a court of competent jurisdiction, or of a
contrary position by the IRS or Treasury Department in regulations or rulings
issued in the future.
New Prime's qualification and taxation as a REIT depend upon New
Prime's ability to meet on a continuing basis, through actual annual
operating and other results, the various requirements under the Code and
described in the Joint Proxy with regard to, among other things, the sources
of gross income, the composition of assets, the level of distributions to
stockholders, and the diversity of its stock ownership. Winston & Strawn
undertakes no responsibility to, and will not review New Prime's compliance
with these requirements on a continuing basis. Accordingly, no assurance can
be given that the actual results of Prime's operations, the nature of its
assets, the amount and types of its gross income, the level of its
distributions to stockholders and the diversity of its stock ownership for
any given taxable year will satisfy the requirements under the Code for
qualification and taxation as a REIT. In particular, we would note that,
although New Prime's Charter contains certain provisions which restrict the
ownership and transfer of New Prime's capital stock and which are intended to
prevent concentration of stock ownership, such provisions do not ensure that
New Prime will be able to satisfy the requirement set forth in Code section
856(a)(6) that it not be "closely held" within the meaning of Code section
856(h) for any given taxable year, primarily, though not exclusively, as a
result of fluctuations in value among the different classes of New Prime's
capital stock.
These opinions are rendered only to you and may not be quoted in
whole or in part or otherwise referred to, used by, or relied upon, nor be
filed with, or furnished to, any other person or entity other than for the
benefit of Prime shareholders in connection with the Corporate Merger,
without our prior written consent. Notwithstanding the foregoing, we hereby
consent to the use of this opinion as an Exhibit 8.1 to the
[REGISTRATION STATEMENT] and the use of our name in the Proxy under the
section entitled "The Corporate Merger -- Federal Income Tax Consequences"
and "The Reincorporation Merger -- Federal Income Tax Consequences" in the
Joint Consent under the sections entitled [ ]. In giving this consent, we do
not admit that we are included in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission.
Very truly yours,
WINSTON & STRAWN
<PAGE>
[FORM OF OFFICER'S CERTIFICATE REGARDING WINSTON & STRAWN OPINIONS SET
FORTH IN EXHIBITS 8.1a AND 8.1b]
PRIME RETAIL, INC.
OFFICER'S CERTIFICATE
Each of Prime Retail, Inc. ("Prime") or New Prime(1), as the case
may be, on behalf of itself, its shareholders, Prime Partnership, the Prime
Property Partnerships, the Prime Finance Corporations, New Prime Partnership
and the affiliates of New Prime and New Prime Partnership, as applicable,
hereby certifies and represents to Winston & Strawn as of the date hereof
solely for purposes of the legal opinions to be rendered in connection with
the transactions contemplated by the Joint Proxy Statement/Prospectus/
Information Statement (the "Joint Proxy") and the Amended and Restated
Agreement and Plan of Merger among Prime Retail, Inc., Prime Retail, L.P.,
Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc.,
Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers Limited
Partnership dated as of February 1, 1998 (the "Merger Agreement") as follows:
1. The undersigned, C. Alan Schroeder, is the duly qualified and
elected Senior Vice President-General Counsel and Secretary of Prime
Retail, Inc., a Maryland corporation ("Prime"), and as such is familiar
with the facts certified and the representations made herein and is duly
authorized to make such certifications and representations for Prime,
its shareholders, Prime Partnership, the Prime Property Partnerships,
the Prime Finance Corporations and its other affiliates (collectively,
one or more of such persons are the "Prime Affiliates"). Further, the
undersigned, C. Alan Schroeder, will be the duly qualified and elected
Senior Vice President-General Counsel and Secretary of New Prime, a
Maryland corporation, and as such is familiar with the facts certified
and the representations made herein and is duly authorized to make such
representations for New Prime, its shareholders, New Prime Partnership
and its other affiliates after the closing (collectively, one or more of
such persons are the "New Prime Affiliates").
2. The fair market value of the New Prime Common Shares, New Prime
Series A Preferred Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares received in exchange for Prime Common
Shares, Prime Series A Preferred Shares, Prime Series B Preferred Shares
and Prime Series C Preferred Shares, respectively, will equal the fair
market value of the Prime Common Shares, Prime Series A Preferred
Shares, Prime Series B Preferred Shares and Prime Series C Preferred
Shares surrendered in such exchange.
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(1) Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Joint Proxy.
<PAGE>
The aggregate fair market value of the New Prime Common Shares, New
Prime Series A Preferred Shares, New Prime Series B Preferred Shares
and New Prime Series C Preferred Shares received in exchange for the
Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares and Prime Series C Preferred Shares will represent in
excess of fifty percent of the sum of (i) the aggregate fair market
value of such New Prime Common Shares, New Prime Series A Preferred
Shares, New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares received, plus (ii) the aggregate cash distributed to
Prime Shareholders pursuant to the Prime Special Distribution.
3. There is no plan or intention by Prime Shareholders who own one
percent or more of the Prime Shares, and to the best of the knowledge of
the management of Prime, there is no plan or intention on the part of
the remaining Prime Shareholders or Sky Merger shareholders to sell,
exchange or otherwise dispose of a number of New Prime Shares received
in the Corporate Merger that would reduce either the Prime Shareholders'
or Sky Merger shareholders' ownership of New Prime Shares to a number of
shares having a fair market value, as of the date of the Corporate
Merger, of less than fifty percent of the fair market value of all of
the formerly outstanding stock of Prime as of the same date. For
purposes of this representation, Prime Series A Preferred Shares
surrendered by dissenters and Sky Merger Common Shares exchanged for
cash in lieu of fractional New Prime Shares will be treated as
outstanding Prime Series A Preferred Shares and Sky Merger shares,
respectively, on the Closing. Moreover, Prime Shares and New Prime
Shares held by Prime Shareholders and otherwise sold, redeemed or
disposed of prior or subsequent to the Closing will be considered in
making this representation.
4. New Prime has no plan or intention to reacquire any of its stock
issued in the Corporate Merger.
5. [EXCEPT TO THE EXTENT DESCRIBED IN SCHEDULE I ATTACHED HERETO,]
New Prime has no plan or intention to sell or otherwise dispose of any
of the assets of Prime acquired in the Corporate Merger, except for
dispositions made in the ordinary course of business or asset transfers
to corporations controlled by New Prime, as described in Code section
368(a)(2)(C).
6. The liabilities of Prime or the Prime Affiliates assumed by New
Prime and the liabilities to which the transferred assets of Prime are
subject were incurred by Prime or the Prime Affiliates in the ordinary
course of their businesses.
7. Following the Corporate Merger, New Prime will continue the
historic business of Prime and use a significant portion of Prime's
historic business assets in a business.
8. Prime, each of the Prime Affiliates, and to the best of the
knowledge of Prime management, New Prime, Sky Merger, and each Sky
Merger shareholders will each pay their own respective expenses, if any,
incurred in connection with the Corporate Merger.
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<PAGE>
9. There is no intercorporate indebtedness existing between Prime
and either Horizon or Sky Merger that was issued, acquired or will be
settled, at a discount.
10. Neither Prime, any Prime Affiliate, Sky Merger, Horizon or any
affiliate of Sky Merger or Horizon is under the jurisdiction of a court
in a title 11 case, a receivership, foreclosure or similar proceeding
under federal or state law for purposes of Code section 368(a)(3)(A).
11. The aggregate fair market value of the assets of Prime
transferred to the New Prime equals or exceeds the sum of the
liabilities assumed by New Prime plus the amount of liabilities, if any,
to which the transferred assets are subject.
12. Prior to and in connection with the Corporate Merger, Prime (a)
neither made nor declared any distributions to its shareholders, except
for the Prime Special Distribution, and (b) did not redeem any Prime
Shares.
13. Prior to and in connection with the Corporate Merger, no person
related to Prime purchased any Prime Shares for purposes of Temporary
Treasury Regulations section 1.368-1T(e).
14. Rudnick & Wolfe's opinions as to (i) the qualification of the
Reincorporation Merger as a valid Code section 368(a) reorganization and
(ii) the status of each of Horizon as a REIT and Horizon Partnership and
each subsidiary of Horizon Partnership, formed under relevant state law
as a partnership, joint venture or limited liability company, as a
partnership for federal income tax purposes are true and correct, and
Winston & Strawn may rely upon these Rudnick & Wolfe opinions.
15. Prime has operated in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
Prime's Amended and Restated Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate.
16. New Prime intends to operate in accordance with the Maryland
General Corporation Law and all other applicable laws of the State of
Maryland, New Prime's Article of Incorporation and Bylaws, and in the
manner described in the Joint Proxy and this Certificate.
17. Prime Partnership has operated, and intends to continue to
operate, in accordance with the Delaware Revised Uniform Limited
Partnership Act, all other applicable laws of the State of Delaware, the
Second Amended and Restated Agreement of Limited Partnership of Prime
Retail, L.P. (the "Partnership Agreement"), and in the manner described
in the Joint Proxy and this Certificate. Each of the Prime Property
Partnerships has operated, and intends to continue to operate, in
accordance with the applicable laws of the State in which it was formed,
its respective partnership agreement, and in the manner described in the
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<PAGE>
Joint Proxy and this Certificate. Prime Retail Finance Limited
Partnership (the "Finance Partnership") has operated, and intends to
continue to operate, in accordance with the Delaware Revised Uniform
Limited Partnership Act, all other applicable laws of the State of
Delaware, and its partnership agreements and in the manner described in
the Joint Proxy and this Certificate. The Partnership Agreement and the
partnership agreements for each of the Prime Property Partnerships and
the Finance Partnership have been duly executed.
18. Prime Retail Service, Inc. (the "Services Corporation") a
Maryland corporation, has operated, and intends to operate, in
accordance with the Maryland General Corporation Law and all other
applicable laws of the State of Maryland, the Services Corporation's
Articles of Incorporation, as amended, and Bylaws, as amended, and in
the manner described in the Joint Proxy and this Certificate. Neither
Prime, New Prime nor Prime Partnership has at any time owned or will own
any voting stock in the Services Corporation, and a majority of Prime's
directors and New Prime's directors could not, and will not be able to,
vote for or elect the directors of the Services Corporation.
Furthermore, a majority of Prime's directors and New Prime's directors
are not, and are not expected to be in the future, directors, officers,
shareholders or employees of the Services Corporation. The sale,
transfer or other disposition of the common stock of the Services
Corporation by the holders thereof is not subject to any restrictions.
Prime Retail Services Limited Partnership (the "Services Partnership")
has operated, and intends to continue to operate, in accordance with the
Delaware Revised Uniform Limited Partnership Act and all other
applicable laws of the State of Delaware, its Agreement of Limited
Partnership, and in the manner described in the Joint Proxy and this
Certificate. The Services Partnership currently performs, and in the
future will perform, only the activities of (i) selling coupon books
which provide (a) discounts for merchandise offered by tenants at
properties owned by Prime, New Prime, Prime Partnership or any Prime
Property Partnership and (b) discounts at area attractions; (ii)
operating informational booths at such properties; (iii) selling and
renting miscellaneous items at the informational booths to shoppers at
such properties; (iv) providing miscellaneous services at the
informational booths to shoppers at such properties; and (v) renting
"push carts" to various venders for use in common areas at such
properties. The Services Partnership will perform only activities and
services with respect to properties owned by New Prime, Prime
Partnership or any Prime Property Partnership and only such activities
and services which a real estate investment trust ("REIT") could perform
without causing amounts received from such properties to be treated as
other than "rents from real property" within the meaning of Code section
856(d). The Services Partnership has no plan or intention to perform
any activities or services other than those identified in clauses (i)
through (v) of this paragraph.
19. Prime Retail Finance, Inc. ("Finance"), a Maryland corporation,
has operated, and intends to continue to operate, in accordance with the
Maryland General Corporation Law and all other applicable laws of the
State of Maryland, its Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate. Prime Retail Finance II, Inc. ("Finance II"), a
Maryland corporation, has operated, and intends to continue to operate,
in accordance with the Maryland General Corporation Law and all other
-4-
<PAGE>
applicable laws of the State of Maryland, its Articles of Incorporation,
as amended, and Bylaws, as amended, and in the manner described in the
Joint Proxy and this Certificate. Prime Retail Finance III, Inc.
("Finance III"), a Maryland corporation, has operated, and intends to
continue to operate, in accordance with the Maryland General Corporation
Law and all other applicable laws of the State of Maryland, its Articles
of Incorporation, as amended, and Bylaws, as amended, and in the manner
described in the Joint Proxy and this Certificate. Prime Retail Finance
IV, Inc. ("Finance IV"), a Maryland corporation, has operated, and
intends to continue to operate, in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
its Articles of Incorporation, as amended, and Bylaws, as amended, and
in the manner described in the Joint Proxy and this Certificate. At all
times since the formation of Finance, Finance II, Finance III, and
Finance IV, Prime has owned 100% of their outstanding stock (both voting
and nonvoting).
20. Prime Partnership, each Prime Property Partnership, the Finance
Partnership and the Services Partnership were formed, have been
operated, and intend to continue to operate, in reasonable anticipation
of making an economic profit, not taking into account any federal income
tax benefits. The respective general partner of each of these
partnerships acts for its own account and not as an agent or dummy of
the limited partners. None of the partnership interests in Prime
Partnership, any Prime Property Partnership, the Finance Partnership or
the Services Partnership (i) are currently traded or will be traded on
any securities exchange or any local or over-the-counter market (or
other interdealer quotation system that regularly disseminates firm buy
or sell quotations by identified brokers or dealers) or (ii) are
registered or will be registered under the Securities Act of 1933 (other
than Prime Partnership Units). At no time will there be more than 500
partners in each of Prime Partnership, each Prime Property Partnership
formed prior to January 1, 1996, the Finance Partnership and the
Services Partnership (determined by treating each person who indirectly
owns an interest in Prime Units through a partnership, grantor trust or
S corporation as a separate partner). At no time will there be more
than 100 partners in each Prime Property Partnership formed after
December 31, 1995. None of Prime Partnership, any Prime Property
Partnership, the Finance Partnership and the Services Partnership have
ever received any formal or informal notice from the Internal Revenue
Service (the "Service") indicating that an examination is underway or
will be made.
21. For all taxable years ending after the Closing Date, at least 90%
of the gross income derived by Prime Partnership shall consist only of
amounts from the following sources: (A) interest, (B) dividends, (C)
real property rents, (D) gain from the sale or other disposition of real
property (including property described in section 1221(1)), (E) income
and gains derived from the exploration, development, mining or
production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any
mineral or natural resource (including fertilizer, geothermal energy and
timber) or (F) any gain from the sale or disposition of a capital asset
(or property described in section 1231(b)) held for the production of
income described in (A)-(E) of this paragraph.
-5-
<PAGE>
22. Since its formation, Prime has regularly computed its income in
keeping its books on the basis of a calendar year, and, accordingly, has
adopted and used the calendar year as its taxable year for federal
income tax purposes. Prime made the election specified in Code section
856(c) to be a REIT, effective for its taxable year ending December 31,
1994. Such election was made and filed with its federal income tax
return for the taxable year ending December 31, 1994, and such return
was properly filed with the Service on or before the due date thereof
(taking into account any extensions that may have been granted).
23. For each of its taxable years, Prime and the New Prime expect
that, and intend to take all measures within their control (including
without limitation monitoring and enforcing all restrictions of stock
ownership contained in New Prime's Articles of Incorporation), to ensure
that, (A) the beneficial ownership of Prime and New Prime has been and
will be held at all times by 100 or more persons as required by Code
section 856(a)(5) and, (B) at no time during the last half of any
taxable year after the first taxable year for which the REIT election
was made, has or will more than 50% in value of Prime's or New Prime's
outstanding stock be owned, directly or indirectly (taking into account
the constructive ownership rules of Code section 856(h)) by or for five
or fewer individuals. As of the date hereof, Prime is not aware of any
facts or circumstances that would indicate requirements (A) and (B) of
this paragraph have not been satisfied. To the best of Prime's
knowledge, no individual shareholder owns directly or indirectly more
than 9.9% of the value of Prime's outstanding stock.
24. Prime at all times has been, and the New Prime intends to be,
managed by one or more directors or trustees, and the beneficial
ownership of Prime has been, and the beneficial ownership of New Prime
will be, evidenced by transferable shares. With the exception of
restrictions imposed by Prime's Amended and Restated Articles of
Incorporation, as amended, [AND] the terms of the 1994 and 1995 Stock
Incentive Plans for certain employees and directors [AND RECENT
EMPLOYMENT OR OTHER AGREEMENTS], there are no restrictions on the
transfer of Prime's shares. Further, with the exception of certain
restrictions imposed by the New Prime's Articles of Incorporation, there
will be no restrictions on the transfer of New Prime Shares.
25. Prime has prepared an analysis for Winston & Strawn demonstrating
its compliance with the 95% and 75% gross income tests of Code section
856(c) for its taxable years ending December 31, 1994, December 31,
1995, December 31, 1996, December 31, 1997, and for the short period
taxable year from January 1, 1998 to the Closing Date (the "Short Period
Year"). Such analysis accurately shows the amounts and types of income
received by Prime, Prime Partnership, each Prime Property Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
for such taxable years. Prime does not anticipate earning in the
current taxable year or future taxable years significant gross income of
any type not reflected in this analysis. Furthermore, Prime does not
anticipate that the percentage for various categories designated in the
analysis as "Bad Income" taken as a percentage of the total revenues
expected to be earned by Prime or Prime Partnership will increase
-6-
<PAGE>
materially for the taxable year ending December 31, 1998 or any taxable
year thereafter as compared to 1994, 1995, 1996, 1997 and the Short
Period Year.
26. New Prime has prepared an analysis for Winston & Strawn
demonstrating its projected compliance with the 95% and 75% gross income
tests of Code section 856(c) for its taxable years ending December 31,
1998 and December 31, 1999. Such analysis projects the amounts and
types of income to be received by New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, Finance, Finance
II, Finance III and Finance IV for such taxable years. New Prime does
not anticipate earning in the current taxable year or future taxable
years significant gross income of any type not reflected in this
analysis. Furthermore, New Prime does not anticipate that the
percentage for various categories designated in the analysis as "Bad
Income" taken as a percentage of the total revenues expected to be
earned by New Prime or Prime Partnership will increase materially for
the taxable year ending December 31, 1998 or any taxable year thereafter
as compared to the total revenues earned by Prime or Prime Partnership
in 1994, 1995, 1996, 1997 and the Short Period Year.
27. At least 95% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III and Finance IV after the date
hereof), including for this purpose both rents
attributable to personal property that satisfies the
conditions described in paragraph 30 below and charges
for services customarily furnished or rendered in
connection with the rental of real property, whether or
not such charges are separately stated, but excluding (i)
any rents received or accrued from persons identified in
Code section 856(d)(2)(B) (as described in paragraph 31
below), (ii) any amount described in Code section
856(d)(2)(A) (discussed in paragraph 29 below) and (iii)
any rent received from a tenant to whom or with respect
to whom services are provided other than services
described in paragraph 32 below;
(B) gain realized upon the sale or other disposition of
stock, securities and real property which is not
inventory or other property held for sale to customers in
the ordinary course of business;
(C) interest, but excluding (i) interest determined in whole
or in part on the income or profits of any person, and
(ii) in the case of interest paid by any partnership in
which Prime or Prime Partnership has an interest, the
portion of the interest attributable to such ownership
interest;
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<PAGE>
(D) dividends;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
and
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6).
For purposes of this representation and all other representations
relating to the gross income of Prime or Prime Partnership, each has
been treated as receiving a pro rata share, based on its capital
interest within the meaning of Treasury Regulations section 1.856-3(g),
of all gross income derived by any partnership in which it is a partner.
Additionally, for purposes of this representation, all gross income
received by Finance, Finance II, Finance III, Finance IV or any other
subsidiary in which at all times Prime has owned 100% of its outstanding
stock, shall be treated as income of Prime. New Prime and Prime
Partnership intend to take all measures within their control to ensure
that for the current taxable year and all future taxable years, at least
95% of their gross incomes will be derived from the sources listed in
clauses (A) through (H) of this paragraph.
28. At least 75% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, Finance, Finance II, Finance III or
Finance IV after the date hereof), including for this
purpose both rents attributable to personal property that
satisfies the conditions described in paragraph 30 below
and charges for services customarily furnished or
rendered in connection with the rental of real property,
whether or not such charges are separately stated, but
excluding (i) any rents received or accrued from persons
identified in Code section 856(d)(2)(B) (as described in
paragraph 31 below), (ii) any amount described in Code
section 856(d)(2)(A) (which is discussed in paragraph 29
below) and (iii) any rent received from a tenant to whom
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or with respect to whom services are provided other than
services described in paragraph 32 below;
(B) interest on obligations secured by mortgages on real
property or interests in real property, but excluding (i)
interest determined in whole or in part based on the
profits or income of any person and (ii) in the case of
interest paid by any partnership in which Prime or Prime
Partnership has an interest, the portion of the interest
attributable to such ownership interest;
(C) gain from the sale or other disposition of real property
(including interests in real property and interests in
mortgages on real property) other than property which is
held as inventory or for sale to customers in the
ordinary course of business;
(D) dividends or other distributions on, and gain, other than
gain from a prohibited transaction within the meaning of
Code section 857(b)(6), from the sale or disposition of
transferable shares in other REITs;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6); and
(I) "qualified temporary investment income" as defined in
Code section 856(c)(6)(D).
New Prime and Prime Partnership intend to take all measures within their
control to ensure that for the current taxable year and all future
taxable years, at least 75% of their gross incomes will be derived from
the sources listed in clauses (A) through (I) of this paragraph.
29. No amounts previously paid or payable (except for a de minimis
amount representing no more than .25% of Prime's or Prime Partnership's
annual gross income) to Prime, Prime Partnership, any Prime Property
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Partnership, the Finance Partnership, the Services Partnership, Finance,
Finance II, Finance III or Finance IV in connection with the rental of
property depend in whole or in part on the income or profits derived
from any tenant (or sub-tenant) of such property (except that such
amounts may be based on a fixed percentage or percentages of receipts or
sales). Neither New Prime, Prime Partnership, any Property Partnership,
the Services Partnership, the Finance Partnership, Finance, Finance II,
Finance III, nor Finance IV expects to enter into any lease agreement or
other arrangement in connection with the rental of property under which
amounts will be paid based in whole or in part on the income or profits
derived by the tenant under such lease or arrangement, and each intends
to take all measures within its control to ensure that no such amounts
are received. As to each lease under which the tenant pays rent based
upon a fixed percentage of sales or receipts, the rental provisions
conform with normal business practice (taking into account the lease
itself and the surrounding circumstances) and are not used as means to
base the rent paid on the income or profits of the ultimate tenant.
30. Other than with respect to certain rents received by the Services
Partnership from push cart vendors, which rents are less than .25% of
the annual gross income of Prime's or Prime Partnership's gross income,
(A) less than 15% of the rent received from each of the properties has
been, and is expected to be while in New Prime's possession,
attributable to personal property (determined by the ratio of adjusted
basis of the personal property subject to a lease to the total adjusted
basis of all property subject to that lease); and (B) all personal
property contained in the properties leased by Prime, Prime Partnership,
any Prime Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III or Finance IV has been, and is anticipated to be
while in New Prime's possession, leased under or in connection with the
lease of real property.
31. No gross rental income received by Prime, New Prime or Prime
Partnership has been, or is expected to be, received or accrued
directly or indirectly from any person in which Prime or New Prime owns
(A) in the case of a corporation, 10% or more of the total combined
voting power of all classes of stock entitled to vote, or 10% or more of
the total number of shares of all classes of stock, or (B) in the case
of an entity other than a corporation, an interest in 10% or more of the
assets or net profits of such entity. For purposes of this paragraph,
ownership will be determined by taking into account the attribution
rules of Code section 318 as modified by Code section 856(d)(5).
32. Neither Prime, New Prime, Prime Partnership, any Property
Partnership, the Services Partnership, the Finance Partnership, Finance,
Finance II, Finance III nor Finance IV has provided, or intends to
provide, to any tenants of the properties any services that (i) are not
customarily rendered in connection with the rental of space for
occupancy only and (ii) are rendered primarily for the convenience of
the tenant. Based upon its experience and that of its affiliates in the
various geographic markets in which the properties are located, Prime
and New Prime expect that all services previously provided or that will
be provided to tenants of the properties directly by Prime, New Prime,
Prime Partnership, the Prime Property Partnerships, the Services
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Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV will be considered usually or customarily rendered in
connection with the rental of space of the type rented for occupancy in
the market in which the property is located. In the event that New
Prime, Prime Partnership, any Prime Property Partnerships, the Services
Partnership, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV decide in the future to provide any services to the
tenants which would not be customary as described above, all such
services will be performed by an "independent contractor" within the
meaning of Code section 856(d)(3) from whom New Prime, Prime
Partnership, the Prime Property Partnerships, the Services Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
derive no income. All independent contractors have received and are
expected to receive in the future reasonable compensation for services
rendered, and such compensation has been, or will be, established after
arm's-length negotiations. For purposes of this representation, Prime
has assumed that if and to the extent there is either (A) "concierge
services," (B) parking garage or parking lot facilities where there are
attendants present or other paid parking services or (C) construction or
"build-out" services (other than supervision of contractors), such
services have not been treated as customary within the meaning of this
paragraph; and both Prime and New Prime intend such services to be
performed by independent contractors within the meaning of Code section
856(d)(3).
33. If Prime, New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV engage in real estate activities which involve the sale or
other disposition of property held primarily for sale to customers in
the ordinary course of business and which constitute prohibited
transactions as defined in Code section 857(b)(6), such activities will
be conducted through one or more special purpose corporations in which
Prime Partnership has or will have a nonvoting stock interest. Prime
has taken, and New Prime will take, all necessary measures to ensure
that the stock interest owned by Prime Partnership in any such
corporation will not exceed 10% of the voting securities of such
corporation and that the value of the stock interest will not exceed 5%
of the value of Prime's total gross assets.
34. Prime, New Prime, Prime Partnership, the Prime Property
Partnerships, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV have derived, and intend to derive, amounts with respect
to interest on obligations secured by mortgages on real property
described above in paragraph 28(B) where the mortgages also cover
property in addition to real property only if the loan value of the real
property is at least equal to 75% of the amount of the loan.
35. Prime Partnership has received fees in consideration of the
performance of management and administration services with respect to
properties that are not owned entirely by Prime Partnership. A portion
of such management and administrative fees (corresponding to that
portion of a property owned by a third party) is treated by Prime as not
qualifying under the 75% and 95% gross income tests of Code section
856(c) for the purpose of the representations made herein. Prime
Partnership may also receive other types of income with respect to the
properties it owns that do not qualify for the 75% and 95% gross income
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tests. New Prime and Prime Partnership intend to take all measures
within their control to ensure that the aggregate amount of such fees
and Bad Income in any taxable year will not cause New Prime to exceed
the limits on nonqualifying income under the 75% or 95% gross income
tests.
36. For their 1994, 1995, 1996 and 1997 taxable years, less than 30%
of the gross incomes of Prime and Prime Partnership was derived from the
sale or other disposition of the following: (A) stock or securities held
for less than one year; (B) property in a transaction which is a
"prohibited transaction" within the meaning of Code section
856(c)(4)(B); and (C) real property (including interests in real
property and interests in mortgages on real property) held for less than
four years, other than property compulsorily or involuntarily converted
within the meaning of Code section 1033 or property which constitutes
"foreclosure property" within the meaning of Code section 856(e). Prime
understands that an interest rate swap or cap agreement which Prime uses
to hedge any variable rate indebtedness used to carry real property
constitutes a security for this 30% test. Prime and Prime Partnership
intend to take all measures within their control to ensure that for the
current taxable year and any future taxable year less than 30% of their
gross incomes will be derived from the sources described in clauses (A),
(B) and (C) of this paragraph.
37. Within two years of any acquisition by Prime, New Prime, Prime
Partnership, any Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III or Finance IV of property through
"foreclosure" (within the meaning of Code section 856(e) including space
reacquired by dispossessing defaulted tenants) or within such additional
period as Prime or New Prime may obtain by extension from the Service,
Prime, New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III or Finance IV, as
the case may be, has sold the property, or intends to take such action
necessary to ensure that the property is sold, or take such other
actions as are necessary to ensure that income derived from such
property will not cause Prime or New Prime to fail the gross income
tests set forth in Code section 856(c). With respect to any foreclosure
property, neither New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
nor Finance IV intends (i) to enter into any lease which will result in
income not qualifying under the gross income tests of Code section
856(c); (ii) to cause construction to take place on such property unless
such construction involves the completion of a building or other
improvement where more than 10% of the construction of such building was
completed before default became imminent; and (iii) within 90 days of
acquisition of any foreclosure property, to use such property in a trade
or business, other than through an independent contractor as defined in
Code section 856(d)(3) from whom New Prime and Prime Partnership derive
or receive no income.
38. Prime has properly reported and paid the appropriate tax on
income from prohibited transactions, if any, within the meaning of Code
section 857(b)(6). Since its formation, Prime has sold or caused the
sale of no more than [FOUR] outlets.
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39. Prime's federal income tax returns (which includes Finance,
Finance II, Finance III and Finance IV) and those of Prime Partnership,
each Prime Property Partnership, the Finance Partnership, the Services
Partnership and the Services Corporation have been timely filed and all
such returns accurately portray the respective incomes of all such
entities in every material respect. The copies of the federal income
tax returns provided to Winston & Strawn accurately reflect the tax
returns that have been or will be filed with the Service. Prime has
maintained all records and files necessary to comply with the
requirements of the Code and the regulations promulgated thereunder
(including without limitation Treasury Regulations section 1.856-4), and
New Prime will take all measures within its control to continue to
maintain all records and files in accordance with the requirements of
the Code and the regulations.
40. Prime, New Prime and Prime Partnership have filed, or will file,
all of their respective federal income and information tax returns for
the taxable year ended December 31, 1994 and all subsequent taxable
years, and have caused, and will cause, Castle Rock Factory Shops
Partnership and/or any direct or indirect subsidiary entity of any of
the foregoing to file all of their respective federal income and
informational tax returns for the taxable year ended December 31, 1994,
and all subsequent taxable years, in a manner consistent with the
position taken by Colorado Factory Shops Limited Partnership on its
federal income and informational tax returns for the taxable year ended
December 31, 1993 regarding the accrual for the taxable year ended
December 31, 1993 of all amounts payable under that certain Development
Agreement, dated July 26, 1991, by and between the Town of Castle Rock
and Colorado Factory Shops Limited Partnership, as amended by a First
Amendment, dated February 13, 1992, a Second Amendment, dated March 5,
1992, and a Third Amendment, dated April 9, 1992, and a Fourth
Amendment, dated April 16, 1992.
41. Amounts received, or to be received by the Arizona Factory Shops
Partnership from the City of Phoenix, Arizona in exchange for storm
drain land and storm drain improvements represent payment only for such
properties as determined after arm's-length negotiations.
42. All agreements by Prime, Prime Partnership and any Prime
Affiliate, with respect to property management fees, development fees,
construction management fees, leasing commissions or similar fees or
payments, were negotiated at arm's-length, and the amount of such fees
and payments represent reasonable amounts for the services rendered.
43. All annual amounts that Prime, New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, the Services
Partnership, Finance, Finance II, Finance III and Finance IV receive, or
will receive, under leases, contracts, or other agreements with state or
local governments or agencies or instrumentalities thereof and which
Prime takes the position are excludible from gross income for federal
income tax purposes under Code section 103 are no more than .25% of
Prime's or Prime Partnership's total annual income. All other leases,
contracts or other agreements with state or local governments or
agencies or instrumentalities thereof pursuant to which Prime directly
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or indirectly receives money or other property are entered into for the
purpose of providing Prime an abatement of real estate property taxes
and such money or other property are included in Prime's gross income.
Further, New Prime will take all appropriate measures to ensure that the
statements contained in this representation 43 remain accurate.
44. Prime (i) has not received any letter, notice or other written or
oral transmittal from the Service regarding its status as a REIT; (ii)
has not received any opinion of counsel or letter from its accountants
that indicates it may not qualify as a REIT; and (iii) is not currently
undergoing an audit by the Service.
45. At least 75% in value of Prime's total assets, including assets
held through partnerships in which it holds an interest or through
Finance, Finance II, Finance III and Finance IV has at all times
consisted of assets of the following types:
(A) land or interests therein;
(B) buildings, including wiring, plumbing systems, elevators,
escalators and other structural components thereof, but
not including any personal property associated with such
real property (such as furnishings, appliances,
draperies, equipment, machinery, etc.);
(C) loans (including accrued interest thereon) directly
secured by a duly recorded mortgage on real property of
the type described in (A) or (B) above;
(D) cash and cash items, including cash on hand, time and
demand deposits with financial institutions and
receivables arising in the ordinary course of Prime's
operations (other than those purchased from another
person) but excluding bankers' acceptances, repurchase
agreements and other similar instruments;
(E) securities (including accrued interest thereon) issued or
guaranteed by the United States or by a person controlled
or supervised by and acting as an instrumentality of the
United States, pursuant to any authority granted by
Congress, or any certificate of deposit for any of the
foregoing; and
(F) only during the one year period commencing on the date
new capital is received, stock or debt instruments sold
to the public attributable to the temporary investment of
such new capital.
New Prime intends to take all measures within its control to ensure that
in the current taxable year and all future taxable years, at least 75%
in value of its total assets will consist of the assets identified in
clauses (A) through (F) of this paragraph.
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46. At no time has more than 25% in value of Prime's total assets
been represented by, and New Prime intends to take all measures within
its control to ensure that at no time in the future will more than 25%
in value of Prime's total assets be represented by, securities other
than those described in paragraph 45 above;
47. Prime has not owned, and New Prime intends to take all measures
within its control to ensure that it will not own, at the end of any
calendar quarter securities in any corporate issuer (other than Finance,
Finance II, Finance III, Finance IV or a future wholly-owned corporation
whose stock is entirely owned by New Prime) that either (A) represent in
excess of 10% of the outstanding voting securities of any such issuer or
(B) have an aggregate value in excess of 5% of the value of the total
assets of Prime or New Prime as determined in accordance with Treasury
Regulations section 1.856-2(d)(2). For the purposes of this
representation, Prime and New Prime will be treated as owning their pro
rata share (based on its capital interest) of all securities held by
partnerships in which it holds an interest. Prime and New Prime
understand that for the purposes of this representation they are
entitled to take into consideration the provision of Code section
856(c)(5) allowing a 30 day period to correct any failure to comply with
this representation as the result of any acquisition of a security
during the calendar quarter.
48. Except as provided in paragraph 33 above, Prime has taken, and
New Prime intends to take, all actions within their control to ensure
that all properties currently held and which may later be held by Prime,
New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III and Finance IV are
held for investment purposes and not as (A) stock in trade or other
property of a kind which would properly be included in inventory if on
hand at the close of the taxable year, or (B) property held primarily
for sale to customers in the ordinary course of business.
49. Prime has furnished Winston & Strawn with access to all leases
for properties in which Prime directly or indirectly holds an ownership
interest.
50. New Prime will furnish to Winston & Strawn with access to all
leases for properties in which New Prime directly or indirectly holds
an ownership interest.
51. Prime has furnished Winston & Strawn with accurate copies of all
its audited financial statements, including the opinion of its public
accountants. Copies of all documents furnished by Prime to Winston &
Strawn have conformed to the originals.
52. Prime has taken, and New Prime intends to take, all necessary
actions within its control to ensure that, Prime, New Prime, Prime
Partnership, each Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III and Finance IV revalue their assets at
the end of each quarter of each taxable year in which securities or
other property are acquired and will eliminate within 30 days after the
end of each such quarter any discrepancy between the value of Prime's or
New Prime's various investments and the requirements of Code section
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856(c)(5) to the extent attributable in whole or in part to acquisitions
during such quarter.
53. For each of its 1994, 1995, 1996, 1997 and the Short Period Year
taxable years, Prime has distributed to shareholders within each taxable
year or within 30 days after the end of each taxable year for which a
distribution is declared and payable to shareholders of record prior to
the end of such taxable year 95% of its real estate investment trust
taxable income as such term is defined in Code section 857(b)(2). (For
purposes of the foregoing statement with respect to the Short Period
Year taxable year, Prime meets this 95% distribution requirement even if
the Prime Special Distribution is not taken into account.) Prime and
New Prime intend to take all actions within its control that are
necessary to ensure the distribution requirements of Code section 857
are satisfied for the current taxable year and all future taxable years.
54. Prime has distributed currently for each of 1994, 1995, 1996,
1997 and the Short Period Year an amount at least equal to the sum of
the following: (i) 85% of Prime's ordinary income for such taxable year,
(ii) 95% of Prime's capital gain net income for such taxable year, and
(iii) any undistributed ordinary income or capital gain net income from
prior taxable years. (For purposes of the foregoing statement with
respect to the Short Period Year taxable year, Prime meets this
distribution requirement even if the Prime Special Distribution is not
taken into account.) New Prime intends to take all necessary actions
within its control to ensure that this requirement will be met in the
current taxable year and all future taxable years.
55. All distributions have been made, and will in the future be made,
in accordance with the terms of Prime's Amended and Restated Articles of
Incorporation, as amended or New Prime's Articles of Incorporation, as
the case may be.
56. Prime has complied with the requirements of Code section
857(a)(2) and Treasury Regulations sections 1.857-8 and 1.857-9
(relating to records to be maintained concerning stock ownership and
information required to be requested from shareholders of Prime who own
greater than the applicable ownership percentage in such regulations).
Prime intends to take all actions necessary within its control to ensure
that such requirements are satisfied in the current taxable year and all
future taxable years.
57. With respect to the New Prime Series B Preferred Shares, New
Prime does not have any present plan or intention to exercise its option
to redeem the Convertible Preferred Stock before [MARCH 31, 1999].
58. Prime Partnership, the Prime Property Partnerships, Prime Retail
Finance Limited Partnership (the "Finance Partnership") and Prime Retail
Services Limited Partnership (the "Services Partnership") were formed,
have been operated, and intend to continue to operate, in reasonable
anticipation of making an economic profit, not taking into account any
federal income tax benefits. The respective general partner of each of
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these partnerships acts for its own account and not as an agent or dummy
of the limited partners.
59. Prime currently owns [ ]% of the Common Units of Prime
Partnership, [ ]% of the Preferred Units, and [ ]% of the Convertible
Preferred Units. Upon consummation of the transactions contemplated in
the Joint Proxy and the Merger Agreement, New Prime will own [ ]% of
the Common Units of Prime Partnership, [ ]% of the Preferred Units,
and [ ]% of the Convertible Preferred Units. Prime currently has
approximately $[ ] in net assets and New Prime does not intend to
significantly reduce its net assets in the foreseeable future.
60. None of the partnership interests in Prime Partnership, any Prime
Property Partnership, the Finance Partnership or the Services
Partnership (i) are currently traded or will be traded on any securities
exchange or any local or over-the-counter market (or other interdealer
quotation system that regularly disseminates firm buy or sell quotations
by identified brokers or dealers) or (ii) are registered or will be
registered under the Securities Act of 1933 (other than Prime
Partnership Units). At no time has there been or will there be more
than 500 partners in each of Prime Partnership, each Prime Property
Partnership formed prior to January 1, 1996, the Finance Partnership and
the Services Partnership (determined by treating each person who
indirectly owns an interest in Prime Units through a partnership,
grantor trust or S corporation as a separate partner). At no time has
there been or will there be more than 100 partners in each Prime
Property Partnership formed after December 31, 1995. None of Prime
Partnership, any Prime Property Partnership, the Finance Partnership and
the Services Partnership have ever received any formal or informal
notice from the Internal Revenue Service (the "Service") indicating that
an examination is underway or will be made.
61. The Prime Special Distribution will be paid from internal funds
or from proceeds from the [Nomura loan secured by Prime unlevered
properties as described in the letter agreement between Prime and Nomura
Asset Capital Corporation dated March 6, 1998] deposited with [the stock
transfer/paying agent] prior to the Mergers. Although Prime will borrow
some or all of the funds necessary to make the Prime Special
Distribution, Prime will be able to do so based on its assets and
financial condition prior to Closing. Consequently, New Prime will not
need Horizon or Sky Merger assets or operations to repay the amounts
attributable to the Prime Special Distribution.
62. The Corporate Merger, Partnership Merger and other transactions
described in the Joint Proxy are being effected for bona fide business
reasons as articulated in such Joint Proxy.
63. None of the compensation received by any shareholder-employee of
Prime will be separate consideration for, or allocable to, any of his or
her Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares or Prime Series C Preferred Shares. The compensation
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paid to any shareholder-employee of Prime will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services. None of the New Prime
Common Shares, New Prime Series A Preferred Shares, New Prime Series B
Preferred Shares and New Prime Series C Preferred Shares received by any
shareholder-employee of Prime will be in exchange for, or in
consideration of, services rendered to Prime, Prime Partnership or any
Prime Affiliate by such shareholder-employee.
64. Prime is familiar with the two Officer's Certificates given to
Winston & Strawn by Horizon dated _________, 1998 regarding the
Corporate Merger, the Reincorporation Merger, the status of each of
Horizon as a REIT, and Horizon Partnership and each subsidiary of
Horizon Partnership, formed under relevant state law as a partnership,
joint venture or limited liability company, as a partnership for federal
income tax purposes. To the extent any of the representations in such
Certificates relate to the future operations of New Prime as successor
to Sky Merger, New Prime will abide by such representations made by Sky
Merger.
65. To the extent any of the foregoing representations relate to the
future operations of New Prime, unexpected events may cause a deviation
from one or more of the intended operating principles set forth herein,
and in such case, New Prime, if it takes actions inconsistent with the
business plan reflected in such representations, intends to do so in a
manner to preserve in all events the status of New Prime as a REIT under
the Code.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on
behalf of Prime, Prime Partnership, the Prime Affiliates, New Prime and the New
Prime Affiliates this ___th day of _____, 1998.
PRIME RETAIL, Inc.
By: ______________________________
Its: Senior Vice President--
General Counsel and Secretary
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Prime Retail, Inc,
[JUNE] ____, 1998
Page
EXHIBIT 8.1b
[FORM OF WINSTON & STRAWN TAX OPINION]
[JUNE] ___, 1998
Prime Retail, Inc. Horizon Group, Inc.
100 East Pratt Street 5000 Hakes Drive
Nineteenth Floor Norton Shores, Michigan 49441
Baltimore, Maryland 21202
Re: PRIOR QUALIFICATION OF PRIME RETAIL, INC. AS A REIT
Ladies and Gentlemen:
We have acted as special counsel for Prime Retail, Inc. in connection
with the transactions contemplated by that certain Amended and Restated
Agreement and Plan of Merger among Prime Retail, Inc. ("Prime"), Prime Retail,
L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc.
("Horizon"), Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers
Limited Partnership dated as of February 1, 1998 (the "Merger Agreement"). This
opinion letter addresses the federal income Tax issues on which Prime Retail,
Inc. has requested our opinion and is being delivered to you pursuant to Section
6.3(d) of the Merger Agreement and in connection with the Joint Proxy
Statement/Prospectus/Information Statement dated ________, 1998 (the "Joint
Proxy"). Capitalized terms not defined herein shall have the meaning set forth
in the Joint proxy, as the context requires.
Prime has requested our opinion concerning whether for each of its
taxable years since formation Prime has operated and complied with the
requirements for qualification as a real estate investment trust ("REIT")
under the provisions of the Internal Revenue Code of 1986, as amended to the
date hereof (the "Code"). We will rely upon the representations, warranties
and assumptions within our opinion letter to you dated as of the date hereof
regarding the qualification of Prime Partnership and certain other affiliated
entities as partnerships for federal income tax purposes, as well as our
opinions set forth therein, in rendering this REIT opinion. In rendering
this opinion, we have examined and relied upon the descriptions of Prime,
Prime Partnership, the Prime Property Partnerships and their respective
investments, activities, operations and governance, as set forth in the
following documents:
<PAGE>
Prime Retail, Inc,
[JUNE] ____, 1998
Page 2
1. the Joint Proxy;
2. Amended and Restated Articles of Incorporation of Prime as
amended on the date hereof (the "Charter") and all prior versions of the
Charter;
3. the Agreement of Limited Partnership of Prime Partnership;
4. each of the Prime Property Partnerships' agreements as amended;
and
5. the Officer's Certificate dated as of the date hereof and
attached hereto setting forth certain representations regarding Prime and its
affiliates,
together with such other documents, records and matters of law as we have deemed
relevant or necessary (collectively, the "Relevant Documents"). We have assumed
the genuineness of all signatures on originals or copies, the legal capacity of
natural persons, the authority of any individual or individuals who executed any
such documents on behalf of any other person, the authenticity of all documents
submitted to us as originals, the accuracy of copies and the conformity to
originals or certified copies of all copies submitted to us as certified or
reproduction copies.
We have reviewed and, with your permission, are relying upon Relevant
Documents, including the Officer's Certificate dated as of the date hereof and
executed by a duly authorized officer of Prime, setting forth certain factual
representations relating to the formation, ownership, operation and compliance
with the REIT and partnership provisions of the Code of Prime, Prime
Partnership, each of the Prime Property Partnerships, Prime Retail Services,
Inc. (the "Services Corporation"), Prime Retail Stores, Inc. (the "Retail
Corporation"), Prime Retail Services Limited Partnership (the "Services
Partnership"), Prime Retail Finance, Inc. ("Finance"), Prime Retail Finance II,
Inc. ("Finance II"), Prime Retail Finance III, Inc. ("Finance III"), Prime
Retail Finance IV, Inc. ("Finance IV") and Prime Retail Finance Limited
Partnership (the "Finance Partnership"). We have further relied on and assumed
the truth and correctness of (i) Prime's representations in the Agreement of
Limited Partnership of Prime Partnership and (ii) the certificates of public
officials with respect to the formation of certain limited partnerships.
Moreover, for the purpose of rendering our opinion, we have assumed that no
partner in Prime Partnership, the Services Partnership, the Finance Partnership
or any of the Prime Property Partnerships elected to be excluded from all or
part of subchapter K of the Code.
For the purposes of rendering this opinion, we have not made an
independent investigation of the facts set forth in any of the Relevant
Documents, including without limitation, the Joint Proxy and the Officer's
Certificate. We have consequently relied upon your factual
<PAGE>
Prime Retail, Inc,
[JUNE] ____, 1998
Page 3
representations that the information presented in such documents or otherwise
furnished to us accurately and completely describes all material facts
relevant to this opinion.
In rendering this opinion, we have assumed that the transactions
contemplated by the Joint Proxy will be consummated in accordance with the
operative documents and such documents accurately reflect the material facts of
such transactions. In addition, the opinion set forth herein is based on the
correctness of the following specific assumptions: (i) each of Prime, Prime
Partnership, each Prime Property Partnership, the Services Corporation, the
Retail Corporation, the Services Partnership, Finance, Finance II, Finance III,
Finance IV and the Finance Partnership was operated in the manner described in
the relevant partnership agreement or other organizational documents and in the
Joint Proxy and in accordance with applicable laws; and (ii) each partner in
Prime Partnership, each of the Prime Property Partnerships, the Services
Partnership and the Finance Partnership and each shareholder in the Services
Corporation and the Retail Corporation was motivated in acquiring its respective
partnership interest or stock by such partner's or shareholder's anticipation of
economic rewards apart from tax considerations. Any alteration of such
assumptions may adversely affect our opinion.
Pursuant to the analysis described in Treasury Regulation section
1.6662-4(d)(3)(ii), our opinion is based upon the current provisions of the
Code, as amended, currently applicable Treasury Regulations promulgated or
proposed thereunder, currently published administrative rulings, judicial
decisions and other applicable authorities, all as in effect on the date
hereof. All of the foregoing authorities are subject to change or new
interpretations, both prospectively and retroactively and such changes or
interpretations, as well as any change in the facts as they have been
represented to us or assumed by us, could affect our opinion. Our opinion is
rendered only as of the date hereof and we take no responsibility to update
this opinion after this date. Our opinion does not foreclose the possibility
of a contrary determination by the Internal Revenue Service (the "IRS") or by
a court of competent jurisdiction, or of a contrary position by the IRS or
Treasury Department in regulations or rulings issued in the future.
Based on the foregoing and subject to the limitations, qualifications
and exceptions set forth herein, we are of the opinion that for each of its
taxable years since formation, Prime has operated and complied with the
requirements for qualification as a REIT under the Code.
Other than as expressly stated above, we express no opinion on any
issue relating to Prime, Prime Partnership, the Services Partnership, the
Services Corporation, the Retail Corporation, the Finance Partnership, Finance,
Finance II, Finance III, Finance IV or any of the Prime Property Partnerships or
to any investment therein.
<PAGE>
Prime Retail, Inc,
[JUNE] ____, 1998
Page 4
This opinion is being delivered to you solely for the benefit of Prime
and the Shareholders and for delivery to Horizon pursuant to Sections 5.1(a) and
6.3(d) of the Merger Agreement and may not be relied upon by any other person in
any manner whatsoever without our prior written consent. Notwithstanding the
foregoing, we hereby consent to the use of this opinion as an Exhibit 8.1 to the
[REGISTRATION STATEMENT] and the use of our name in the Proxy under the section
entitled "The Corporate Merger -- Federal Income Tax Consequences" and "The
Reincorporation Merger -- Federal Income Tax Consequences." In giving this
consent, we do not admit that we are included in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission.
Very truly yours,
WINSTON & STRAWN
<PAGE>
[FORM OF OFFICER'S CERTIFICATE REGARDING WINSTON & STRAWN OPINIONS SET
FORTH IN EXHIBITS 8.1a AND 8.1b]
PRIME RETAIL, INC.
OFFICER'S CERTIFICATE
Each of Prime Retail, Inc. ("Prime") or New Prime(1), as the case
may be, on behalf of itself, its shareholders, Prime Partnership, the Prime
Property Partnerships, the Prime Finance Corporations, New Prime Partnership
and the affiliates of New Prime and New Prime Partnership, as applicable,
hereby certifies and represents to Winston & Strawn as of the date hereof
solely for purposes of the legal opinions to be rendered in connection with
the transactions contemplated by the Joint Proxy Statement/Prospectus/
Information Statement (the "Joint Proxy") and the Amended and Restated
Agreement and Plan of Merger among Prime Retail, Inc., Prime Retail, L.P.,
Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc.,
Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers Limited
Partnership dated as of February 1, 1998 (the "Merger Agreement") as follows:
1. The undersigned, C. Alan Schroeder, is the duly qualified and
elected Senior Vice President-General Counsel and Secretary of Prime
Retail, Inc., a Maryland corporation ("Prime"), and as such is familiar
with the facts certified and the representations made herein and is duly
authorized to make such certifications and representations for Prime,
its shareholders, Prime Partnership, the Prime Property Partnerships,
the Prime Finance Corporations and its other affiliates (collectively,
one or more of such persons are the "Prime Affiliates"). Further, the
undersigned, C. Alan Schroeder, will be the duly qualified and elected
Senior Vice President-General Counsel and Secretary of New Prime, a
Maryland corporation, and as such is familiar with the facts certified
and the representations made herein and is duly authorized to make such
representations for New Prime, its shareholders, New Prime Partnership
and its other affiliates after the closing (collectively, one or more of
such persons are the "New Prime Affiliates").
2. The fair market value of the New Prime Common Shares, New Prime
Series A Preferred Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares received in exchange for Prime Common
Shares, Prime Series A Preferred Shares, Prime Series B Preferred Shares
and Prime Series C Preferred Shares, respectively, will equal the fair
market value of the Prime Common Shares, Prime Series A Preferred
Shares, Prime Series B Preferred Shares and Prime Series C Preferred
Shares surrendered in such exchange.
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(1) Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Joint Proxy.
<PAGE>
The aggregate fair market value of the New Prime Common Shares, New
Prime Series A Preferred Shares, New Prime Series B Preferred Shares
and New Prime Series C Preferred Shares received in exchange for the
Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares and Prime Series C Preferred Shares will represent in
excess of fifty percent of the sum of (i) the aggregate fair market
value of such New Prime Common Shares, New Prime Series A Preferred
Shares, New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares received, plus (ii) the aggregate cash distributed to
Prime Shareholders pursuant to the Prime Special Distribution.
3. There is no plan or intention by Prime Shareholders who own one
percent or more of the Prime Shares, and to the best of the knowledge of
the management of Prime, there is no plan or intention on the part of
the remaining Prime Shareholders or Sky Merger shareholders to sell,
exchange or otherwise dispose of a number of New Prime Shares received
in the Corporate Merger that would reduce either the Prime Shareholders'
or Sky Merger shareholders' ownership of New Prime Shares to a number of
shares having a fair market value, as of the date of the Corporate
Merger, of less than fifty percent of the fair market value of all of
the formerly outstanding stock of Prime as of the same date. For
purposes of this representation, Prime Series A Preferred Shares
surrendered by dissenters and Sky Merger Common Shares exchanged for
cash in lieu of fractional New Prime Shares will be treated as
outstanding Prime Series A Preferred Shares and Sky Merger shares,
respectively, on the Closing. Moreover, Prime Shares and New Prime
Shares held by Prime Shareholders and otherwise sold, redeemed or
disposed of prior or subsequent to the Closing will be considered in
making this representation.
4. New Prime has no plan or intention to reacquire any of its stock
issued in the Corporate Merger.
5. [EXCEPT TO THE EXTENT DESCRIBED IN SCHEDULE I ATTACHED HERETO,]
New Prime has no plan or intention to sell or otherwise dispose of any
of the assets of Prime acquired in the Corporate Merger, except for
dispositions made in the ordinary course of business or asset transfers
to corporations controlled by New Prime, as described in Code section
368(a)(2)(C).
6. The liabilities of Prime or the Prime Affiliates assumed by New
Prime and the liabilities to which the transferred assets of Prime are
subject were incurred by Prime or the Prime Affiliates in the ordinary
course of their businesses.
7. Following the Corporate Merger, New Prime will continue the
historic business of Prime and use a significant portion of Prime's
historic business assets in a business.
8. Prime, each of the Prime Affiliates, and to the best of the
knowledge of Prime management, New Prime, Sky Merger, and each Sky
Merger shareholders will each pay their own respective expenses, if any,
incurred in connection with the Corporate Merger.
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<PAGE>
9. There is no intercorporate indebtedness existing between Prime
and either Horizon or Sky Merger that was issued, acquired or will be
settled, at a discount.
10. Neither Prime, any Prime Affiliate, Sky Merger, Horizon or any
affiliate of Sky Merger or Horizon is under the jurisdiction of a court
in a title 11 case, a receivership, foreclosure or similar proceeding
under federal or state law for purposes of Code section 368(a)(3)(A).
11. The aggregate fair market value of the assets of Prime
transferred to the New Prime equals or exceeds the sum of the
liabilities assumed by New Prime plus the amount of liabilities, if any,
to which the transferred assets are subject.
12. Prior to and in connection with the Corporate Merger, Prime (a)
neither made nor declared any distributions to its shareholders, except
for the Prime Special Distribution, and (b) did not redeem any Prime
Shares.
13. Prior to and in connection with the Corporate Merger, no person
related to Prime purchased any Prime Shares for purposes of Temporary
Treasury Regulations section 1.368-1T(e).
14. Rudnick & Wolfe's opinions as to (i) the qualification of the
Reincorporation Merger as a valid Code section 368(a) reorganization and
(ii) the status of each of Horizon as a REIT and Horizon Partnership and
each subsidiary of Horizon Partnership, formed under relevant state law
as a partnership, joint venture or limited liability company, as a
partnership for federal income tax purposes are true and correct, and
Winston & Strawn may rely upon these Rudnick & Wolfe opinions.
15. Prime has operated in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
Prime's Amended and Restated Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate.
16. New Prime intends to operate in accordance with the Maryland
General Corporation Law and all other applicable laws of the State of
Maryland, New Prime's Article of Incorporation and Bylaws, and in the
manner described in the Joint Proxy and this Certificate.
17. Prime Partnership has operated, and intends to continue to
operate, in accordance with the Delaware Revised Uniform Limited
Partnership Act, all other applicable laws of the State of Delaware, the
Second Amended and Restated Agreement of Limited Partnership of Prime
Retail, L.P. (the "Partnership Agreement"), and in the manner described
in the Joint Proxy and this Certificate. Each of the Prime Property
Partnerships has operated, and intends to continue to operate, in
accordance with the applicable laws of the State in which it was formed,
its respective partnership agreement, and in the manner described in the
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<PAGE>
Joint Proxy and this Certificate. Prime Retail Finance Limited
Partnership (the "Finance Partnership") has operated, and intends to
continue to operate, in accordance with the Delaware Revised Uniform
Limited Partnership Act, all other applicable laws of the State of
Delaware, and its partnership agreements and in the manner described in
the Joint Proxy and this Certificate. The Partnership Agreement and the
partnership agreements for each of the Prime Property Partnerships and
the Finance Partnership have been duly executed.
18. Prime Retail Service, Inc. (the "Services Corporation") a
Maryland corporation, has operated, and intends to operate, in
accordance with the Maryland General Corporation Law and all other
applicable laws of the State of Maryland, the Services Corporation's
Articles of Incorporation, as amended, and Bylaws, as amended, and in
the manner described in the Joint Proxy and this Certificate. Neither
Prime, New Prime nor Prime Partnership has at any time owned or will own
any voting stock in the Services Corporation, and a majority of Prime's
directors and New Prime's directors could not, and will not be able to,
vote for or elect the directors of the Services Corporation.
Furthermore, a majority of Prime's directors and New Prime's directors
are not, and are not expected to be in the future, directors, officers,
shareholders or employees of the Services Corporation. The sale,
transfer or other disposition of the common stock of the Services
Corporation by the holders thereof is not subject to any restrictions.
Prime Retail Services Limited Partnership (the "Services Partnership")
has operated, and intends to continue to operate, in accordance with the
Delaware Revised Uniform Limited Partnership Act and all other
applicable laws of the State of Delaware, its Agreement of Limited
Partnership, and in the manner described in the Joint Proxy and this
Certificate. The Services Partnership currently performs, and in the
future will perform, only the activities of (i) selling coupon books
which provide (a) discounts for merchandise offered by tenants at
properties owned by Prime, New Prime, Prime Partnership or any Prime
Property Partnership and (b) discounts at area attractions; (ii)
operating informational booths at such properties; (iii) selling and
renting miscellaneous items at the informational booths to shoppers at
such properties; (iv) providing miscellaneous services at the
informational booths to shoppers at such properties; and (v) renting
"push carts" to various venders for use in common areas at such
properties. The Services Partnership will perform only activities and
services with respect to properties owned by New Prime, Prime
Partnership or any Prime Property Partnership and only such activities
and services which a real estate investment trust ("REIT") could perform
without causing amounts received from such properties to be treated as
other than "rents from real property" within the meaning of Code section
856(d). The Services Partnership has no plan or intention to perform
any activities or services other than those identified in clauses (i)
through (v) of this paragraph.
19. Prime Retail Finance, Inc. ("Finance"), a Maryland corporation,
has operated, and intends to continue to operate, in accordance with the
Maryland General Corporation Law and all other applicable laws of the
State of Maryland, its Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate. Prime Retail Finance II, Inc. ("Finance II"), a
Maryland corporation, has operated, and intends to continue to operate,
in accordance with the Maryland General Corporation Law and all other
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<PAGE>
applicable laws of the State of Maryland, its Articles of Incorporation,
as amended, and Bylaws, as amended, and in the manner described in the
Joint Proxy and this Certificate. Prime Retail Finance III, Inc.
("Finance III"), a Maryland corporation, has operated, and intends to
continue to operate, in accordance with the Maryland General Corporation
Law and all other applicable laws of the State of Maryland, its Articles
of Incorporation, as amended, and Bylaws, as amended, and in the manner
described in the Joint Proxy and this Certificate. Prime Retail Finance
IV, Inc. ("Finance IV"), a Maryland corporation, has operated, and
intends to continue to operate, in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
its Articles of Incorporation, as amended, and Bylaws, as amended, and
in the manner described in the Joint Proxy and this Certificate. At all
times since the formation of Finance, Finance II, Finance III, and
Finance IV, Prime has owned 100% of their outstanding stock (both voting
and nonvoting).
20. Prime Partnership, each Prime Property Partnership, the Finance
Partnership and the Services Partnership were formed, have been
operated, and intend to continue to operate, in reasonable anticipation
of making an economic profit, not taking into account any federal income
tax benefits. The respective general partner of each of these
partnerships acts for its own account and not as an agent or dummy of
the limited partners. None of the partnership interests in Prime
Partnership, any Prime Property Partnership, the Finance Partnership or
the Services Partnership (i) are currently traded or will be traded on
any securities exchange or any local or over-the-counter market (or
other interdealer quotation system that regularly disseminates firm buy
or sell quotations by identified brokers or dealers) or (ii) are
registered or will be registered under the Securities Act of 1933 (other
than Prime Partnership Units). At no time will there be more than 500
partners in each of Prime Partnership, each Prime Property Partnership
formed prior to January 1, 1996, the Finance Partnership and the
Services Partnership (determined by treating each person who indirectly
owns an interest in Prime Units through a partnership, grantor trust or
S corporation as a separate partner). At no time will there be more
than 100 partners in each Prime Property Partnership formed after
December 31, 1995. None of Prime Partnership, any Prime Property
Partnership, the Finance Partnership and the Services Partnership have
ever received any formal or informal notice from the Internal Revenue
Service (the "Service") indicating that an examination is underway or
will be made.
21. For all taxable years ending after the Closing Date, at least 90%
of the gross income derived by Prime Partnership shall consist only of
amounts from the following sources: (A) interest, (B) dividends, (C)
real property rents, (D) gain from the sale or other disposition of real
property (including property described in section 1221(1)), (E) income
and gains derived from the exploration, development, mining or
production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any
mineral or natural resource (including fertilizer, geothermal energy and
timber) or (F) any gain from the sale or disposition of a capital asset
(or property described in section 1231(b)) held for the production of
income described in (A)-(E) of this paragraph.
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<PAGE>
22. Since its formation, Prime has regularly computed its income in
keeping its books on the basis of a calendar year, and, accordingly, has
adopted and used the calendar year as its taxable year for federal
income tax purposes. Prime made the election specified in Code section
856(c) to be a REIT, effective for its taxable year ending December 31,
1994. Such election was made and filed with its federal income tax
return for the taxable year ending December 31, 1994, and such return
was properly filed with the Service on or before the due date thereof
(taking into account any extensions that may have been granted).
23. For each of its taxable years, Prime and the New Prime expect
that, and intend to take all measures within their control (including
without limitation monitoring and enforcing all restrictions of stock
ownership contained in New Prime's Articles of Incorporation), to ensure
that, (A) the beneficial ownership of Prime and New Prime has been and
will be held at all times by 100 or more persons as required by Code
section 856(a)(5) and, (B) at no time during the last half of any
taxable year after the first taxable year for which the REIT election
was made, has or will more than 50% in value of Prime's or New Prime's
outstanding stock be owned, directly or indirectly (taking into account
the constructive ownership rules of Code section 856(h)) by or for five
or fewer individuals. As of the date hereof, Prime is not aware of any
facts or circumstances that would indicate requirements (A) and (B) of
this paragraph have not been satisfied. To the best of Prime's
knowledge, no individual shareholder owns directly or indirectly more
than 9.9% of the value of Prime's outstanding stock.
24. Prime at all times has been, and the New Prime intends to be,
managed by one or more directors or trustees, and the beneficial
ownership of Prime has been, and the beneficial ownership of New Prime
will be, evidenced by transferable shares. With the exception of
restrictions imposed by Prime's Amended and Restated Articles of
Incorporation, as amended, [AND] the terms of the 1994 and 1995 Stock
Incentive Plans for certain employees and directors [AND RECENT
EMPLOYMENT OR OTHER AGREEMENTS], there are no restrictions on the
transfer of Prime's shares. Further, with the exception of certain
restrictions imposed by the New Prime's Articles of Incorporation, there
will be no restrictions on the transfer of New Prime Shares.
25. Prime has prepared an analysis for Winston & Strawn demonstrating
its compliance with the 95% and 75% gross income tests of Code section
856(c) for its taxable years ending December 31, 1994, December 31,
1995, December 31, 1996, December 31, 1997, and for the short period
taxable year from January 1, 1998 to the Closing Date (the "Short Period
Year"). Such analysis accurately shows the amounts and types of income
received by Prime, Prime Partnership, each Prime Property Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
for such taxable years. Prime does not anticipate earning in the
current taxable year or future taxable years significant gross income of
any type not reflected in this analysis. Furthermore, Prime does not
anticipate that the percentage for various categories designated in the
analysis as "Bad Income" taken as a percentage of the total revenues
expected to be earned by Prime or Prime Partnership will increase
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<PAGE>
materially for the taxable year ending December 31, 1998 or any taxable
year thereafter as compared to 1994, 1995, 1996, 1997 and the Short
Period Year.
26. New Prime has prepared an analysis for Winston & Strawn
demonstrating its projected compliance with the 95% and 75% gross income
tests of Code section 856(c) for its taxable years ending December 31,
1998 and December 31, 1999. Such analysis projects the amounts and
types of income to be received by New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, Finance, Finance
II, Finance III and Finance IV for such taxable years. New Prime does
not anticipate earning in the current taxable year or future taxable
years significant gross income of any type not reflected in this
analysis. Furthermore, New Prime does not anticipate that the
percentage for various categories designated in the analysis as "Bad
Income" taken as a percentage of the total revenues expected to be
earned by New Prime or Prime Partnership will increase materially for
the taxable year ending December 31, 1998 or any taxable year thereafter
as compared to the total revenues earned by Prime or Prime Partnership
in 1994, 1995, 1996, 1997 and the Short Period Year.
27. At least 95% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III and Finance IV after the date
hereof), including for this purpose both rents
attributable to personal property that satisfies the
conditions described in paragraph 30 below and charges
for services customarily furnished or rendered in
connection with the rental of real property, whether or
not such charges are separately stated, but excluding (i)
any rents received or accrued from persons identified in
Code section 856(d)(2)(B) (as described in paragraph 31
below), (ii) any amount described in Code section
856(d)(2)(A) (discussed in paragraph 29 below) and (iii)
any rent received from a tenant to whom or with respect
to whom services are provided other than services
described in paragraph 32 below;
(B) gain realized upon the sale or other disposition of
stock, securities and real property which is not
inventory or other property held for sale to customers in
the ordinary course of business;
(C) interest, but excluding (i) interest determined in whole
or in part on the income or profits of any person, and
(ii) in the case of interest paid by any partnership in
which Prime or Prime Partnership has an interest, the
portion of the interest attributable to such ownership
interest;
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<PAGE>
(D) dividends;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
and
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6).
For purposes of this representation and all other representations
relating to the gross income of Prime or Prime Partnership, each has
been treated as receiving a pro rata share, based on its capital
interest within the meaning of Treasury Regulations section 1.856-3(g),
of all gross income derived by any partnership in which it is a partner.
Additionally, for purposes of this representation, all gross income
received by Finance, Finance II, Finance III, Finance IV or any other
subsidiary in which at all times Prime has owned 100% of its outstanding
stock, shall be treated as income of Prime. New Prime and Prime
Partnership intend to take all measures within their control to ensure
that for the current taxable year and all future taxable years, at least
95% of their gross incomes will be derived from the sources listed in
clauses (A) through (H) of this paragraph.
28. At least 75% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, Finance, Finance II, Finance III or
Finance IV after the date hereof), including for this
purpose both rents attributable to personal property that
satisfies the conditions described in paragraph 30 below
and charges for services customarily furnished or
rendered in connection with the rental of real property,
whether or not such charges are separately stated, but
excluding (i) any rents received or accrued from persons
identified in Code section 856(d)(2)(B) (as described in
paragraph 31 below), (ii) any amount described in Code
section 856(d)(2)(A) (which is discussed in paragraph 29
below) and (iii) any rent received from a tenant to whom
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<PAGE>
or with respect to whom services are provided other than
services described in paragraph 32 below;
(B) interest on obligations secured by mortgages on real
property or interests in real property, but excluding (i)
interest determined in whole or in part based on the
profits or income of any person and (ii) in the case of
interest paid by any partnership in which Prime or Prime
Partnership has an interest, the portion of the interest
attributable to such ownership interest;
(C) gain from the sale or other disposition of real property
(including interests in real property and interests in
mortgages on real property) other than property which is
held as inventory or for sale to customers in the
ordinary course of business;
(D) dividends or other distributions on, and gain, other than
gain from a prohibited transaction within the meaning of
Code section 857(b)(6), from the sale or disposition of
transferable shares in other REITs;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6); and
(I) "qualified temporary investment income" as defined in
Code section 856(c)(6)(D).
New Prime and Prime Partnership intend to take all measures within their
control to ensure that for the current taxable year and all future
taxable years, at least 75% of their gross incomes will be derived from
the sources listed in clauses (A) through (I) of this paragraph.
29. No amounts previously paid or payable (except for a de minimis
amount representing no more than .25% of Prime's or Prime Partnership's
annual gross income) to Prime, Prime Partnership, any Prime Property
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<PAGE>
Partnership, the Finance Partnership, the Services Partnership, Finance,
Finance II, Finance III or Finance IV in connection with the rental of
property depend in whole or in part on the income or profits derived
from any tenant (or sub-tenant) of such property (except that such
amounts may be based on a fixed percentage or percentages of receipts or
sales). Neither New Prime, Prime Partnership, any Property Partnership,
the Services Partnership, the Finance Partnership, Finance, Finance II,
Finance III, nor Finance IV expects to enter into any lease agreement or
other arrangement in connection with the rental of property under which
amounts will be paid based in whole or in part on the income or profits
derived by the tenant under such lease or arrangement, and each intends
to take all measures within its control to ensure that no such amounts
are received. As to each lease under which the tenant pays rent based
upon a fixed percentage of sales or receipts, the rental provisions
conform with normal business practice (taking into account the lease
itself and the surrounding circumstances) and are not used as means to
base the rent paid on the income or profits of the ultimate tenant.
30. Other than with respect to certain rents received by the Services
Partnership from push cart vendors, which rents are less than .25% of
the annual gross income of Prime's or Prime Partnership's gross income,
(A) less than 15% of the rent received from each of the properties has
been, and is expected to be while in New Prime's possession,
attributable to personal property (determined by the ratio of adjusted
basis of the personal property subject to a lease to the total adjusted
basis of all property subject to that lease); and (B) all personal
property contained in the properties leased by Prime, Prime Partnership,
any Prime Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III or Finance IV has been, and is anticipated to be
while in New Prime's possession, leased under or in connection with the
lease of real property.
31. No gross rental income received by Prime, New Prime or Prime
Partnership has been, or is expected to be, received or accrued
directly or indirectly from any person in which Prime or New Prime owns
(A) in the case of a corporation, 10% or more of the total combined
voting power of all classes of stock entitled to vote, or 10% or more of
the total number of shares of all classes of stock, or (B) in the case
of an entity other than a corporation, an interest in 10% or more of the
assets or net profits of such entity. For purposes of this paragraph,
ownership will be determined by taking into account the attribution
rules of Code section 318 as modified by Code section 856(d)(5).
32. Neither Prime, New Prime, Prime Partnership, any Property
Partnership, the Services Partnership, the Finance Partnership, Finance,
Finance II, Finance III nor Finance IV has provided, or intends to
provide, to any tenants of the properties any services that (i) are not
customarily rendered in connection with the rental of space for
occupancy only and (ii) are rendered primarily for the convenience of
the tenant. Based upon its experience and that of its affiliates in the
various geographic markets in which the properties are located, Prime
and New Prime expect that all services previously provided or that will
be provided to tenants of the properties directly by Prime, New Prime,
Prime Partnership, the Prime Property Partnerships, the Services
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<PAGE>
Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV will be considered usually or customarily rendered in
connection with the rental of space of the type rented for occupancy in
the market in which the property is located. In the event that New
Prime, Prime Partnership, any Prime Property Partnerships, the Services
Partnership, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV decide in the future to provide any services to the
tenants which would not be customary as described above, all such
services will be performed by an "independent contractor" within the
meaning of Code section 856(d)(3) from whom New Prime, Prime
Partnership, the Prime Property Partnerships, the Services Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
derive no income. All independent contractors have received and are
expected to receive in the future reasonable compensation for services
rendered, and such compensation has been, or will be, established after
arm's-length negotiations. For purposes of this representation, Prime
has assumed that if and to the extent there is either (A) "concierge
services," (B) parking garage or parking lot facilities where there are
attendants present or other paid parking services or (C) construction or
"build-out" services (other than supervision of contractors), such
services have not been treated as customary within the meaning of this
paragraph; and both Prime and New Prime intend such services to be
performed by independent contractors within the meaning of Code section
856(d)(3).
33. If Prime, New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV engage in real estate activities which involve the sale or
other disposition of property held primarily for sale to customers in
the ordinary course of business and which constitute prohibited
transactions as defined in Code section 857(b)(6), such activities will
be conducted through one or more special purpose corporations in which
Prime Partnership has or will have a nonvoting stock interest. Prime
has taken, and New Prime will take, all necessary measures to ensure
that the stock interest owned by Prime Partnership in any such
corporation will not exceed 10% of the voting securities of such
corporation and that the value of the stock interest will not exceed 5%
of the value of Prime's total gross assets.
34. Prime, New Prime, Prime Partnership, the Prime Property
Partnerships, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV have derived, and intend to derive, amounts with respect
to interest on obligations secured by mortgages on real property
described above in paragraph 28(B) where the mortgages also cover
property in addition to real property only if the loan value of the real
property is at least equal to 75% of the amount of the loan.
35. Prime Partnership has received fees in consideration of the
performance of management and administration services with respect to
properties that are not owned entirely by Prime Partnership. A portion
of such management and administrative fees (corresponding to that
portion of a property owned by a third party) is treated by Prime as not
qualifying under the 75% and 95% gross income tests of Code section
856(c) for the purpose of the representations made herein. Prime
Partnership may also receive other types of income with respect to the
properties it owns that do not qualify for the 75% and 95% gross income
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<PAGE>
tests. New Prime and Prime Partnership intend to take all measures
within their control to ensure that the aggregate amount of such fees
and Bad Income in any taxable year will not cause New Prime to exceed
the limits on nonqualifying income under the 75% or 95% gross income
tests.
36. For their 1994, 1995, 1996 and 1997 taxable years, less than 30%
of the gross incomes of Prime and Prime Partnership was derived from the
sale or other disposition of the following: (A) stock or securities held
for less than one year; (B) property in a transaction which is a
"prohibited transaction" within the meaning of Code section
856(c)(4)(B); and (C) real property (including interests in real
property and interests in mortgages on real property) held for less than
four years, other than property compulsorily or involuntarily converted
within the meaning of Code section 1033 or property which constitutes
"foreclosure property" within the meaning of Code section 856(e). Prime
understands that an interest rate swap or cap agreement which Prime uses
to hedge any variable rate indebtedness used to carry real property
constitutes a security for this 30% test. Prime and Prime Partnership
intend to take all measures within their control to ensure that for the
current taxable year and any future taxable year less than 30% of their
gross incomes will be derived from the sources described in clauses (A),
(B) and (C) of this paragraph.
37. Within two years of any acquisition by Prime, New Prime, Prime
Partnership, any Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III or Finance IV of property through
"foreclosure" (within the meaning of Code section 856(e) including space
reacquired by dispossessing defaulted tenants) or within such additional
period as Prime or New Prime may obtain by extension from the Service,
Prime, New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III or Finance IV, as
the case may be, has sold the property, or intends to take such action
necessary to ensure that the property is sold, or take such other
actions as are necessary to ensure that income derived from such
property will not cause Prime or New Prime to fail the gross income
tests set forth in Code section 856(c). With respect to any foreclosure
property, neither New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
nor Finance IV intends (i) to enter into any lease which will result in
income not qualifying under the gross income tests of Code section
856(c); (ii) to cause construction to take place on such property unless
such construction involves the completion of a building or other
improvement where more than 10% of the construction of such building was
completed before default became imminent; and (iii) within 90 days of
acquisition of any foreclosure property, to use such property in a trade
or business, other than through an independent contractor as defined in
Code section 856(d)(3) from whom New Prime and Prime Partnership derive
or receive no income.
38. Prime has properly reported and paid the appropriate tax on
income from prohibited transactions, if any, within the meaning of Code
section 857(b)(6). Since its formation, Prime has sold or caused the
sale of no more than [FOUR] outlets.
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39. Prime's federal income tax returns (which includes Finance,
Finance II, Finance III and Finance IV) and those of Prime Partnership,
each Prime Property Partnership, the Finance Partnership, the Services
Partnership and the Services Corporation have been timely filed and all
such returns accurately portray the respective incomes of all such
entities in every material respect. The copies of the federal income
tax returns provided to Winston & Strawn accurately reflect the tax
returns that have been or will be filed with the Service. Prime has
maintained all records and files necessary to comply with the
requirements of the Code and the regulations promulgated thereunder
(including without limitation Treasury Regulations section 1.856-4), and
New Prime will take all measures within its control to continue to
maintain all records and files in accordance with the requirements of
the Code and the regulations.
40. Prime, New Prime and Prime Partnership have filed, or will file,
all of their respective federal income and information tax returns for
the taxable year ended December 31, 1994 and all subsequent taxable
years, and have caused, and will cause, Castle Rock Factory Shops
Partnership and/or any direct or indirect subsidiary entity of any of
the foregoing to file all of their respective federal income and
informational tax returns for the taxable year ended December 31, 1994,
and all subsequent taxable years, in a manner consistent with the
position taken by Colorado Factory Shops Limited Partnership on its
federal income and informational tax returns for the taxable year ended
December 31, 1993 regarding the accrual for the taxable year ended
December 31, 1993 of all amounts payable under that certain Development
Agreement, dated July 26, 1991, by and between the Town of Castle Rock
and Colorado Factory Shops Limited Partnership, as amended by a First
Amendment, dated February 13, 1992, a Second Amendment, dated March 5,
1992, and a Third Amendment, dated April 9, 1992, and a Fourth
Amendment, dated April 16, 1992.
41. Amounts received, or to be received by the Arizona Factory Shops
Partnership from the City of Phoenix, Arizona in exchange for storm
drain land and storm drain improvements represent payment only for such
properties as determined after arm's-length negotiations.
42. All agreements by Prime, Prime Partnership and any Prime
Affiliate, with respect to property management fees, development fees,
construction management fees, leasing commissions or similar fees or
payments, were negotiated at arm's-length, and the amount of such fees
and payments represent reasonable amounts for the services rendered.
43. All annual amounts that Prime, New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, the Services
Partnership, Finance, Finance II, Finance III and Finance IV receive, or
will receive, under leases, contracts, or other agreements with state or
local governments or agencies or instrumentalities thereof and which
Prime takes the position are excludible from gross income for federal
income tax purposes under Code section 103 are no more than .25% of
Prime's or Prime Partnership's total annual income. All other leases,
contracts or other agreements with state or local governments or
agencies or instrumentalities thereof pursuant to which Prime directly
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<PAGE>
or indirectly receives money or other property are entered into for the
purpose of providing Prime an abatement of real estate property taxes
and such money or other property are included in Prime's gross income.
Further, New Prime will take all appropriate measures to ensure that the
statements contained in this representation 43 remain accurate.
44. Prime (i) has not received any letter, notice or other written or
oral transmittal from the Service regarding its status as a REIT; (ii)
has not received any opinion of counsel or letter from its accountants
that indicates it may not qualify as a REIT; and (iii) is not currently
undergoing an audit by the Service.
45. At least 75% in value of Prime's total assets, including assets
held through partnerships in which it holds an interest or through
Finance, Finance II, Finance III and Finance IV has at all times
consisted of assets of the following types:
(A) land or interests therein;
(B) buildings, including wiring, plumbing systems, elevators,
escalators and other structural components thereof, but
not including any personal property associated with such
real property (such as furnishings, appliances,
draperies, equipment, machinery, etc.);
(C) loans (including accrued interest thereon) directly
secured by a duly recorded mortgage on real property of
the type described in (A) or (B) above;
(D) cash and cash items, including cash on hand, time and
demand deposits with financial institutions and
receivables arising in the ordinary course of Prime's
operations (other than those purchased from another
person) but excluding bankers' acceptances, repurchase
agreements and other similar instruments;
(E) securities (including accrued interest thereon) issued or
guaranteed by the United States or by a person controlled
or supervised by and acting as an instrumentality of the
United States, pursuant to any authority granted by
Congress, or any certificate of deposit for any of the
foregoing; and
(F) only during the one year period commencing on the date
new capital is received, stock or debt instruments sold
to the public attributable to the temporary investment of
such new capital.
New Prime intends to take all measures within its control to ensure that
in the current taxable year and all future taxable years, at least 75%
in value of its total assets will consist of the assets identified in
clauses (A) through (F) of this paragraph.
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<PAGE>
46. At no time has more than 25% in value of Prime's total assets
been represented by, and New Prime intends to take all measures within
its control to ensure that at no time in the future will more than 25%
in value of Prime's total assets be represented by, securities other
than those described in paragraph 45 above;
47. Prime has not owned, and New Prime intends to take all measures
within its control to ensure that it will not own, at the end of any
calendar quarter securities in any corporate issuer (other than Finance,
Finance II, Finance III, Finance IV or a future wholly-owned corporation
whose stock is entirely owned by New Prime) that either (A) represent in
excess of 10% of the outstanding voting securities of any such issuer or
(B) have an aggregate value in excess of 5% of the value of the total
assets of Prime or New Prime as determined in accordance with Treasury
Regulations section 1.856-2(d)(2). For the purposes of this
representation, Prime and New Prime will be treated as owning their pro
rata share (based on its capital interest) of all securities held by
partnerships in which it holds an interest. Prime and New Prime
understand that for the purposes of this representation they are
entitled to take into consideration the provision of Code section
856(c)(5) allowing a 30 day period to correct any failure to comply with
this representation as the result of any acquisition of a security
during the calendar quarter.
48. Except as provided in paragraph 33 above, Prime has taken, and
New Prime intends to take, all actions within their control to ensure
that all properties currently held and which may later be held by Prime,
New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III and Finance IV are
held for investment purposes and not as (A) stock in trade or other
property of a kind which would properly be included in inventory if on
hand at the close of the taxable year, or (B) property held primarily
for sale to customers in the ordinary course of business.
49. Prime has furnished Winston & Strawn with access to all leases
for properties in which Prime directly or indirectly holds an ownership
interest.
50. New Prime will furnish to Winston & Strawn with access to all
leases for properties in which New Prime directly or indirectly holds
an ownership interest.
51. Prime has furnished Winston & Strawn with accurate copies of all
its audited financial statements, including the opinion of its public
accountants. Copies of all documents furnished by Prime to Winston &
Strawn have conformed to the originals.
52. Prime has taken, and New Prime intends to take, all necessary
actions within its control to ensure that, Prime, New Prime, Prime
Partnership, each Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III and Finance IV revalue their assets at
the end of each quarter of each taxable year in which securities or
other property are acquired and will eliminate within 30 days after the
end of each such quarter any discrepancy between the value of Prime's or
New Prime's various investments and the requirements of Code section
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<PAGE>
856(c)(5) to the extent attributable in whole or in part to acquisitions
during such quarter.
53. For each of its 1994, 1995, 1996, 1997 and the Short Period Year
taxable years, Prime has distributed to shareholders within each taxable
year or within 30 days after the end of each taxable year for which a
distribution is declared and payable to shareholders of record prior to
the end of such taxable year 95% of its real estate investment trust
taxable income as such term is defined in Code section 857(b)(2). (For
purposes of the foregoing statement with respect to the Short Period
Year taxable year, Prime meets this 95% distribution requirement even if
the Prime Special Distribution is not taken into account.) Prime and
New Prime intend to take all actions within its control that are
necessary to ensure the distribution requirements of Code section 857
are satisfied for the current taxable year and all future taxable years.
54. Prime has distributed currently for each of 1994, 1995, 1996,
1997 and the Short Period Year an amount at least equal to the sum of
the following: (i) 85% of Prime's ordinary income for such taxable year,
(ii) 95% of Prime's capital gain net income for such taxable year, and
(iii) any undistributed ordinary income or capital gain net income from
prior taxable years. (For purposes of the foregoing statement with
respect to the Short Period Year taxable year, Prime meets this
distribution requirement even if the Prime Special Distribution is not
taken into account.) New Prime intends to take all necessary actions
within its control to ensure that this requirement will be met in the
current taxable year and all future taxable years.
55. All distributions have been made, and will in the future be made,
in accordance with the terms of Prime's Amended and Restated Articles of
Incorporation, as amended or New Prime's Articles of Incorporation, as
the case may be.
56. Prime has complied with the requirements of Code section
857(a)(2) and Treasury Regulations sections 1.857-8 and 1.857-9
(relating to records to be maintained concerning stock ownership and
information required to be requested from shareholders of Prime who own
greater than the applicable ownership percentage in such regulations).
Prime intends to take all actions necessary within its control to ensure
that such requirements are satisfied in the current taxable year and all
future taxable years.
57. With respect to the New Prime Series B Preferred Shares, New
Prime does not have any present plan or intention to exercise its option
to redeem the Convertible Preferred Stock before [MARCH 31, 1999].
58. Prime Partnership, the Prime Property Partnerships, Prime Retail
Finance Limited Partnership (the "Finance Partnership") and Prime Retail
Services Limited Partnership (the "Services Partnership") were formed,
have been operated, and intend to continue to operate, in reasonable
anticipation of making an economic profit, not taking into account any
federal income tax benefits. The respective general partner of each of
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these partnerships acts for its own account and not as an agent or dummy
of the limited partners.
59. Prime currently owns [ ]% of the Common Units of Prime
Partnership, [ ]% of the Preferred Units, and [ ]% of the Convertible
Preferred Units. Upon consummation of the transactions contemplated in
the Joint Proxy and the Merger Agreement, New Prime will own [ ]% of
the Common Units of Prime Partnership, [ ]% of the Preferred Units,
and [ ]% of the Convertible Preferred Units. Prime currently has
approximately $[ ] in net assets and New Prime does not intend to
significantly reduce its net assets in the foreseeable future.
60. None of the partnership interests in Prime Partnership, any Prime
Property Partnership, the Finance Partnership or the Services
Partnership (i) are currently traded or will be traded on any securities
exchange or any local or over-the-counter market (or other interdealer
quotation system that regularly disseminates firm buy or sell quotations
by identified brokers or dealers) or (ii) are registered or will be
registered under the Securities Act of 1933 (other than Prime
Partnership Units). At no time has there been or will there be more
than 500 partners in each of Prime Partnership, each Prime Property
Partnership formed prior to January 1, 1996, the Finance Partnership and
the Services Partnership (determined by treating each person who
indirectly owns an interest in Prime Units through a partnership,
grantor trust or S corporation as a separate partner). At no time has
there been or will there be more than 100 partners in each Prime
Property Partnership formed after December 31, 1995. None of Prime
Partnership, any Prime Property Partnership, the Finance Partnership and
the Services Partnership have ever received any formal or informal
notice from the Internal Revenue Service (the "Service") indicating that
an examination is underway or will be made.
61. The Prime Special Distribution will be paid from internal funds
or from proceeds from the [Nomura loan secured by Prime unlevered
properties as described in the letter agreement between Prime and Nomura
Asset Capital Corporation dated March 6, 1998] deposited with [the stock
transfer/paying agent] prior to the Mergers. Although Prime will borrow
some or all of the funds necessary to make the Prime Special
Distribution, Prime will be able to do so based on its assets and
financial condition prior to Closing. Consequently, New Prime will not
need Horizon or Sky Merger assets or operations to repay the amounts
attributable to the Prime Special Distribution.
62. The Corporate Merger, Partnership Merger and other transactions
described in the Joint Proxy are being effected for bona fide business
reasons as articulated in such Joint Proxy.
63. None of the compensation received by any shareholder-employee of
Prime will be separate consideration for, or allocable to, any of his or
her Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares or Prime Series C Preferred Shares. The compensation
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<PAGE>
paid to any shareholder-employee of Prime will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services. None of the New Prime
Common Shares, New Prime Series A Preferred Shares, New Prime Series B
Preferred Shares and New Prime Series C Preferred Shares received by any
shareholder-employee of Prime will be in exchange for, or in
consideration of, services rendered to Prime, Prime Partnership or any
Prime Affiliate by such shareholder-employee.
64. Prime is familiar with the two Officer's Certificates given to
Winston & Strawn by Horizon dated _________, 1998 regarding the
Corporate Merger, the Reincorporation Merger, the status of each of
Horizon as a REIT, and Horizon Partnership and each subsidiary of
Horizon Partnership, formed under relevant state law as a partnership,
joint venture or limited liability company, as a partnership for federal
income tax purposes. To the extent any of the representations in such
Certificates relate to the future operations of New Prime as successor
to Sky Merger, New Prime will abide by such representations made by Sky
Merger.
65. To the extent any of the foregoing representations relate to the
future operations of New Prime, unexpected events may cause a deviation
from one or more of the intended operating principles set forth herein,
and in such case, New Prime, if it takes actions inconsistent with the
business plan reflected in such representations, intends to do so in a
manner to preserve in all events the status of New Prime as a REIT under
the Code.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on
behalf of Prime, Prime Partnership, the Prime Affiliates, New Prime and the New
Prime Affiliates this ___th day of _____, 1998.
PRIME RETAIL, Inc.
By: ______________________________
Its: Senior Vice President--
General Counsel and Secretary
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EXHIBIT 8.1c
[FORM OF WINSTON & STRAWN TAX OPINION]
[JUNE] ____, 1998
Prime Retail, Inc.
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
Re: QUALIFICATION OF HORIZON GROUP PROPERTIES, INC. AS REIT
Ladies and Gentlemen:
We have acted as tax counsel to you in connection with the
transactions contemplated by the Prime Joint Proxy
Statement/Prospectus/Information Statement dated ________, 1998 (the "Joint
Proxy"). Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to such terms in the Joint Proxy. In connection with the
contemplated transactions, certain classes of New Prime Shareholders will
receive common shares of Horizon Group Properties, Inc., a Maryland corporation
("HGP"), which will elect to be treated as a real estate investment trust
("REIT") for federal income tax purposes.
You have requested our opinion concerning (i) whether HGP is organized
in conformity with the requirements for qualification as a REIT for federal
income tax purposes, (ii) whether HGP's method of operation has enabled it to
meet the requirements for qualification and taxation as a REIT under the
provisions of the Internal Revenue Code of 1986, as amended (the "Code") and
(iii) whether HGP's method of operation enables it to continue to meet the
requirements for qualification as a REIT. In rendering this opinion, we have
examined and relied upon the descriptions of HGP, HGP LP and various subsidiary
partnerships of HGP and HGP LP,(the "HGP Subsidiary Partnerships"), and their
respective investments, activities, operations and governance, as set forth in
the following documents (collectively, the "Relevant Documents"):
1. the Joint Proxy;
2. the Amended and Restated Articles of Incorporation
of HGP as amended on the date hereof (the "Charter") and all prior versions of
the Charter;
<PAGE>
Prime Retail, Inc,
________, 1998
Page 2
3. the Amended and Restated Agreement of Limited Partnership of HGP
LP;
4. each of the HGP Subsidiary Partnerships' operative agreements as
amended; and
5. the Officer's Certificate dated as of the date hereof and
attached hereto setting forth certain representations regarding HGP and its
affiliates,
together with such other documents, records and matters of law as we have deemed
relevant or necessary (the "Relevant Documents"). We have assumed the
genuineness of all signatures on originals or copies, the legal capacity of
natural persons, the authority of any individual or individuals who executed any
such documents on behalf of any other person, the authenticity of all documents
submitted to us as originals, the accuracy of copies, and the conformity to
originals or certified copies of all copies submitted to us as certified or
reproduction copies.
We have reviewed and, with your permission, are relying upon the
Relevant Documents, including the Officer's Certificate dated as of the date
hereof and executed by a duly authorized officer of HGP, setting forth certain
factual representations relating to the formation, ownership, operation and
compliance with the REIT and partnership provisions of the Code of HGP, HGP LP
and each of the HGP Subsidiary Partnerships. We have further relied on and
assumed the truth and correctness of (i) HGP's representations in the Agreement
of Limited Partnership of HGP LP and (ii) the certificates of public officials
with respect to the formation of certain limited partnerships. Moreover, for
the purpose of rendering our opinion, we have assumed that no partner in HGP LP
or any of the HGP Subsidiary Partnerships elected to be excluded from all or
part of subchapter K of the Code.
For the purposes of rendering this opinion, we have not made an
independent investigation of the facts set forth in any of the Relevant
Documents, including without limitation, the Joint Proxy and the Officer's
Certificate. We have consequently relied upon your factual representations that
the information presented in the Relevant Documents or otherwise furnished to us
accurately and completely describes all material facts relevant to this opinion.
In rendering this opinion, we have assumed that the transactions
contemplated by the Joint Proxy will be consummated in accordance with the
operative documents, and such documents accurately reflect the material facts of
such transactions. In addition, the opinion set forth herein is based on the
correctness of the following specific assumptions: (i) each of HGP, HGP LP and
each HGP Subsidiary Partnership will operate in the manner described in the
relevant partnership agreement or other organizational documents and in the
Joint Proxy and in accordance with
<PAGE>
Prime Retail, Inc,
________, 1998
Page 3
applicable laws; and (ii) each partner in HGP LP and in each of the HGP
Subsidiary Partnerships was motivated in acquiring its respective partnership
interest or stock by such partner's or shareholder's anticipation of economic
rewards apart from tax considerations. Any alteration of such assumptions
may adversely affect our opinion.
Pursuant to the analysis described in Treasury Regulation section
1.6662-4(d)(3)(ii), our opinion is based upon the current provisions of the
Code, as amended, currently applicable Treasury Regulations promulgated or
proposed thereunder, currently published administrative rulings, judicial
decisions and other applicable authorities, all as in effect on the date
hereof. All of the foregoing authorities are subject to change or new
interpretations, both prospectively and retroactively, and such changes or
interpretations, as well as any change in the facts as they have been
represented to us or assumed by us, could affect our opinion. Our opinion is
rendered only as of the date hereof and we take no responsibility to update
this opinion after this date. Our opinion does not foreclose the possibility
of a contrary determination by the Internal Revenue Service (the "IRS") or by
a court of competent jurisdiction, or of a contrary position by the IRS or
Treasury Department in regulations or rulings issued in the future.
Based on the foregoing, and subject to the limitations, qualifications
and exceptions set forth herein, we are of the opinion that HGP is organized in
conformity with the requirements for qualification as a REIT, and HGP's method
of operation has enabled it to meet the requirements for qualification and
taxation as a REIT under the Code, and its method of operation enables it to
continue to meet the requirements for qualification as a REIT.
HGP's qualification and taxation as a REIT depend upon HGP's ability
to meet on a continuing basis, through actual annual operating and other
results, the various requirements under the Code and described in the Joint
Proxy with regard to, among other things, the sources of gross income, the
composition of assets, the level of distributions to stockholders, and the
diversity of its stock ownership. Winston & Strawn undertakes no responsibility
to, and will not, review HGP's compliance with these requirements on a
continuing basis. Accordingly, no assurance can be given that the actual
results of HGP's operations, the nature of its assets, the amount and types of
its gross income, the level of its distributions to stockholders and the
diversity of its stock ownership for any given taxable year will satisfy the
requirements under the Code for qualification and taxation as a REIT. In
particular, we would note that, although HGP's Charter contains certain
provisions which restrict the ownership and transfer of HGP's capital stock and
which are intended to prevent concentration of stock ownership, such provisions
do not ensure that HGP will be able to satisfy the requirement set forth in Code
section 856(a)(6) that it not be "closely held" within the meaning of Code
section 856(h) for any given taxable year, primarily, though not exclusively, as
a result of fluctuations in value among the different classes of HGP's capital
stock.
<PAGE>
Prime Retail, Inc,
________, 1998
Page 4
Other than as expressly stated above, we express no opinion on any
issue relating to HGP, HGP LP or any of the HGP Subsidiary Partnerships or to
any investment therein.
This opinion is being delivered to you solely for the benefit of Prime
and the Shareholders and may not be relied upon by any other person in any
manner whatsoever without our prior written consent. Notwithstanding the
foregoing, we hereby consent to the use of this opinion as an Exhibit 8.1 to the
[REGISTRATION STATEMENT] and the use of our name in the Joint Proxy under the
section entitled "Federal Income Tax Consequences of the Transactions." In
giving this consent, we do not admit that we are included in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission.
Very truly yours,
WINSTON & STRAWN
<PAGE>
[FORM OF OFFICER'S CERTIFICATE REGARDING WINSTON & STRAWN TAX OPINION
SET FORTH IN EXHIBIT 8.1c]
HORIZON GROUP PROPERTIES, INC.
OFFICER'S CERTIFICATE
Horizon Group Properties, Inc. ("HGP"), on behalf of itself, its
shareholders, HGP LP (1) and the affiliated entities formed as a joint venture,
limited partnership, general partnership or limited liability company (a "HGP
Subsidiary Partnership") hereby certifies and represents to Winston & Strawn as
of the date hereof solely for purposes of the legal opinions to be rendered in
connection with the transactions contemplated by the Joint Proxy
Statement/Prospectus/Information Statement (the "Joint Proxy") and the Amended
and Restated Agreement and Plan of Merger among Prime Retail, Inc., Prime
Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties,
Inc., Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers Limited
Partnership dated as of February 1, 1998 (the "Merger Agreement") as follows:
1. The undersigned, Gary J. Skoien, is the duly qualified and elected
President and Chief Executive Officer of HGP, a Maryland corporation, and
as such is familiar with the facts certified and the representations made
herein and is duly authorized to make such certifications and
representations for HGP, its shareholders, HGP LP, the HGP Subsidiary
Partnerships and other affiliated entities (collectively, one or more of
the following are the "HGP Affiliates").
2. Rudnick & Wolfe's opinions as to (i) the qualification of the
Reincorporation Merger as a valid Code section 368(a) reorganization and
(ii) the status of Horizon as a REIT, and Horizon Partnership and each
subsidiary of Horizon Partnership, formed under relevant state law as a
partnership, joint venture or limited liability company, as a partnership
for federal income tax purposes are true and correct, and Winston & Strawn
may rely upon these Rudnick & Wolfe opinions.
3. HGP has operated in accordance with the Maryland General Corporation
Law and all other applicable laws of the State of Maryland, HGP Articles of
Incorporation and Bylaws, and in the manner described in the Joint Proxy
and this Certificate.
4. HGP LP has operated, and intends to continue to operate, in accordance
with the Delaware Revised Uniform Limited Partnership Act, all other
applicable laws of the State of
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(1) Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to such terms in the Joint Proxy.
<PAGE>
Delaware, the Amended and Restated Agreement of Limited Partnership of
Horizon Group Properties, L.P. (the "HGP LP Agreement"), and in the
manner described in the Joint Proxy and this Certificate. Each of the
HGP Subsidiary Partnerships has operated, and intends to continue to
operate, in accordance with the applicable laws of the State in which it
was formed, its respective operative agreement, and in the manner
described in the Joint Proxy and this Certificate. The HGP LP Agreement
and the operative agreements for each of the HGP Subsidiary Partnerships
have been duly executed.
5. HGP, HGP LP and each of the HGP Subsidiary Partnerships were formed,
have been operated, and intend to continue to operate, in reasonable
anticipation of making an economic profit, not taking into account any
federal income tax benefits. The respective general partner of each of
these partnerships acts for its own account and not as an agent or dummy of
the limited partners. None of the partnership interests in HGP LP or any
of the HGP Subsidiary Partnerships are currently traded or will be traded
on any securities exchange or any local or over-the-counter market (or
other interdealer quotation system that regularly disseminates firm buy or
sell quotations by identified brokers or dealers). At no time will there
be more than 100 partners in any HGP Subsidiary Partnership. Neither HGP
LP nor any of the HGP Subsidiary Partnerships have ever received any formal
or informal notice from the Internal Revenue Service (the "Service")
indicating that an examination is underway or will be made.
6. For all taxable years ending after the Closing Date, at least 90%
of the gross income derived by HGP LP shall consist only of amounts from
the following sources: (A) interest, (B) dividends, (C) real property
rents, (D) gain from the sale or other disposition of real property
(including property described in section 1221(1)), (E) income and gains
derived from the exploration, development, mining or production,
processing, refining, transportation (including pipelines transporting
gas, oil or products thereof), or the marketing of any mineral or
natural resource (including fertilizer, geothermal energy and timber),
or (F) any gain from the sale or disposition of a capital asset (or
property described in section 1231(b)) held for the production of income
described in (A)-(E) of this paragraph.
7. HGP's taxable year for federal income tax purposes is the calendar
year. HGP will make the election specified in Code section 856(c) to be a
REIT, effective for its taxable year ending December 31, 1998. Such
election will be made and filed with its federal income tax return for the
taxable year ending December 31, 1998, and such return properly filed with
the Service on or before the due date thereof (taking into account any
extensions that may have been granted).
8. For each of its taxable years, HGP expects that, and intends to take
all measures within its control (including without limitation monitoring
and enforcing all restrictions of stock ownership contained in the HGP
Articles of Incorporation), to ensure that, (A) after the first taxable
year for which the REIT election is made, the beneficial ownership of HGP
will be held at all times by 100 or more persons as required by Code
section 856(a)(5) and (B) at no time during the last half of any taxable
year after the first taxable year for which the REIT election
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<PAGE>
was made, has or will more than 50% in value of HGP's outstanding stock
be owned, directly or indirectly (taking into account the constructive
ownership rules of Code section 856(h)) by or for five or fewer
individuals. As of the date hereof, HGP is not aware of any facts or
circumstances that would indicate requirements (A) and (B) of this
paragraph have not been satisfied. To the best of HGP's knowledge, no
individual shareholder owns directly or indirectly more than 9.9% of the
value of HGP's outstanding stock.
9. HGP at all times has been, and intends to always be, managed by one or
more directors or trustees, and the beneficial ownership of HGP has been,
and the beneficial ownership of HGP will always be, evidenced by
transferable shares. With the exception of restrictions imposed by HGP's
Articles of Incorporation [AND RECENT EMPLOYMENT OR OTHER AGREEMENTS],
there are no restrictions on the transfer of HGP's shares.
10. HGP will not sell insurance, accept deposits, issue letters of
credit, regularly discount or negotiate bills of exchange, banker
acceptances, promissory notes or other similar instruments which would
cause HGP to be treated as an insurance company or financial institution
as defined in Code section 856(a)(4).
11. HGP has compiled an analysis for Winston & Strawn demonstrating its
projected compliance with the 95% and 75% gross income tests of Code
section 856(c) for its taxable years ending December 31, 1998 and December
31, 1999. Such analysis projects the amounts and types of income to be
received by HGP, HGP LP and each HGP Subsidiary Partnership for such
taxable years. HGP does not anticipate earning in the current taxable year
or future taxable years significant gross income of any type not reflected
in this analysis. Furthermore, HGP does not anticipate that the percentage
for various categories designated in the analysis as "Bad Income" taken as
a percentage of the total revenues expected to be earned by HGP or HGP LP
will differ materially for the taxable year ending December 31, 1998 or any
taxable year thereafter.
12. HGP expects, and intends to take all necessary measures within its
control to ensure, that at least 95% of the gross income derived by HGP and
HGP LP will consist of amounts derived from the following sources:
(A) income from the rental of real property (which term shall be
deemed to include for purposes of this Certificate any property
acquired by HGP, HGP LP and each HGP Subsidiary Partnership after
the date hereof), including for this purpose both rents
attributable to personal property that satisfies the conditions
described in paragraph [ ] below and charges for services
customarily furnished or rendered in connection with the rental
of real property, whether or not such charges are separately
stated, but excluding (i) any rents received or accrued from
persons identified in Code section 856(d)(2)(B) (as described in
paragraph [ ] below), (ii) any amount described in Code section
856(d)(2)(A) (discussed in paragraph [ ] below) and (iii) any
rent received from a tenant to whom or with respect to whom
services are provided other than services described in paragraph
[ ] below;
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<PAGE>
(B) gain realized upon the sale or other disposition of stock,
securities and real property which is not inventory or other
property held for sale to customers in the ordinary course of
business;
(C) interest, but excluding (i) interest determined in whole or in
part on the income or profits of any person, and (ii) in the case
of interest paid by any partnership in which HGP or HGP LP has an
interest, the portion of the interest attributable to such
ownership interest;
(D) dividends;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as defined in
Code section 856(e);
(G) amounts (other than amounts determined in whole or in part based
on the income or profits of any person) received or accrued as
consideration for entering into agreements (i) to make loans
secured by mortgages on real property or on interests in real
property or (ii) to purchase or lease real property (including
interests in real property and mortgages secured by real
property); and
(H) gain from the sale or other disposition of a real estate asset
which is not a prohibited transaction solely by reason of Code
section 857(b)(6).
For purposes of this representation and all other representations relating
to the gross income of HGP or HGP LP, each has been treated as receiving a
pro rata share, based on its capital interest within the meaning of
Treasury Regulations section 1.856-3(g), of all gross income derived by any
partnership in which it is a partner. Additionally, for purposes of this
representation, all gross income received by any other subsidiary in which
HGP owns 100% of the outstanding stock and which is treated as a "qualified
REIT subsidiary" as that term is defined in Code section 856(i)(2) shall be
treated as income of HGP.
13. HGP expects, and intends to take all necessary measures within its
control to ensure, that at least 75% of the gross income derived by HGP and
HGP LP will consist of amounts derived from the following sources:
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<PAGE>
(A) income from the rental of real property (which term shall be
deemed to include for purposes of this Certificate any property
acquired by HGP, HGP LP and each HGP Subsidiary Partnership after
the date hereof), including for this purpose both rents
attributable to personal property that satisfies the conditions
described in paragraph [30] below and charges for services
customarily furnished or rendered in connection with the rental
of real property, whether or not such charges are separately
stated, but excluding (i) any rents received or accrued from
persons identified in Code section 856(d)(2)(B) (as described in
paragraph [31] below), (ii) any amount described in Code section
856(d)(2)(A) (which is discussed in paragraph [29] below) and
(iii) any rent received from a tenant to whom or with respect to
whom services are provided other than services described in
paragraph [32] below;
(B) interest on obligations secured by mortgages on real property or
interests in real property, but excluding (i) interest determined
in whole or in part based on the profits or income of any person
and (ii) in the case of interest paid by any partnership in which
HGP or HGP LP has an interest, the portion of the interest
attributable to such ownership interest;
(C) gain from the sale or other disposition of real property
(including interests in real property and interests in mortgages
on real property) other than property which is held as inventory
or for sale to customers in the ordinary course of business;
(D) dividends or other distributions on and gain, other than gain
from a prohibited transaction within the meaning of Code section
857(b)(6), from the sale or disposition of transferable shares in
other REITs;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as defined in
Code section 856(e);
(G) amounts (other than amounts determined in whole or in part based
on the income or profits of any person) received or accrued as
consideration for entering into agreements (i) to make loans
secured by mortgages on real property or on interests in real
property or (ii) to purchase or lease real property (including
interests in real property and mortgages secured by real
property);
(H) gain from the sale or other disposition of a real estate asset
which is not a prohibited transaction solely by reason of Code
section 857(b)(6); and
<PAGE>
(I) "qualified temporary investment income" as defined in Code
section 856(c)(6)(D).
14. No amounts payable to HGP, HGP LP or any HGP Subsidiary Partnership in
connection with the rental of property depend in whole or in part on the
income or profits derived from any tenant (or sub-tenant) of such property
(except that such amounts may be based on a fixed percentage or percentages
of receipts or sales). Neither HGP, HGP LP nor any HGP Subsidiary
Partnership expects to enter into any lease agreement or other arrangement
in connection with the rental of property under which amounts will be paid
based in whole or in part on the income or profits derived by the tenant
under such lease or arrangement, and each intends to take all measures
within its control to ensure that no such amounts are received. As to each
lease under which the tenant pays rent based upon a fixed percentage of
sales or receipts, the rental provisions conform with normal business
practice (taking into account the lease itself and the surrounding
circumstances) and are not used as means to base the rent paid on the
income or profits of the ultimate tenant.
15. Less than 15% of the rent received from each of the properties is
expected to be attributable to personal property (determined by the ratio
of adjusted basis of the personal property subject to a lease to the total
adjusted basis of all property subject to that lease) and all personal
property contained in the properties leased by HGP, HGP LP and each HGP
Subsidiary Partnership is anticipated to be leased under or in connection
with the lease of real property.
16. No gross rental income received by HGP, HGP LP and any HGP Subsidiary
Partnership is expected to be received or accrued directly or indirectly
from any person in which HGP owns (A) in the case of a corporation, 10% or
more of the total combined voting power of all classes of stock entitled to
vote, or 10% or more of the total number of shares of all classes of stock,
or (B) in the case of an entity other than a corporation, an interest in
10% or more of the assets or net profits of such entity. For purposes of
this paragraph, ownership will be determined by taking into account the
attribution rules of Code section 318 as modified by Code section
856(d)(5).
17. Neither HGP, HGP LP nor any HGP Subsidiary Partnership intends to
provide to any tenants of the properties any services that (i) are not
customarily rendered in connection with the rental of space for occupancy
only and (ii) are rendered primarily for the convenience of the tenant.
Based upon its experience and that of its affiliates in the various
geographic markets in which the properties are located, HGP expects that
all services that will be provided to tenants of the properties directly by
HGP, HGP LP and each HGP Subsidiary Partnership will be considered usually
or customarily rendered in connection with the rental of space of the type
rented for occupancy in the market in which the property is located. In
the event that HGP, HGP LP and any of the HGP Subsidiary Partnerships
decide in the future to provide any services to the tenants which would not
be customary as described above, all such services will be performed by an
"independent contractor" within the meaning of Code
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<PAGE>
section 856(d)(3) from whom HGP, HGP LP and the HGP Subsidiary
Partnership derive no income. All independent contractors have received
and are expected to receive in the future reasonable compensation for
services rendered, and such compensation has been, or will be,
established after arm's-length negotiations. For purposes of this
representation, HGP has assumed that if and to the extent there is
either (A) "concierge services," (B) parking garage or parking lot
facilities where there are attendants present or other paid parking
services, or (C) construction or "build-out" services (other than
supervision of contractors), such services have not been treated as
customary within the meaning of this paragraph; and HGP intend such
services to be performed by independent contractors within the meaning
of Code section 856(d)(3).
18. If HGP, HGP LP or any HGP Subsidiary Partnership engages in real
estate activities which involve the sale or other disposition of property
held primarily for sale to customers in the ordinary course of business and
which constitute prohibited transactions as defined in Code section
857(b)(6), such activities will be conducted through one or more special
purpose corporations in which HGP LP has or will have a nonvoting stock
interest. HGP will take all necessary measures to ensure that the stock
interest owned by HGP LP in any such corporation will not exceed 10% of the
voting securities of such corporation and that the value of the stock
interest will not exceed 5% of the value of HGP's total gross assets.
19. HGP, HGP LP and each HGP Subsidiary Partnership intend to derive
amounts with respect to interest on obligations secured by mortgages on
real property described above in paragraph [ ] where the mortgages
also cover property in addition to real property only if the loan value of
the real property is at least equal to 75% of the amount of the loan.
20. HGP LP does not expect to receive fees in consideration of the
performance of management and administration services with respect to
properties that are not owned entirely by HGP LP. As to any such property
which HGP LP in the future owns a significant interest, but less than the
entire interest, a portion of such management and administrative fees
(corresponding to that portion of the property owned by a third party) will
be treated by HGP as not qualifying under the 75% and 95% gross income
tests of Code section 856(c) for the purpose of the representations made
herein. Also, the related tenant rents described in paragraph [ ] above
are treated as not qualifying under such gross income tests. HGP LP may
also receive other types of income with respect to the properties it owns
that do not qualify for the 75% and 95% gross income tests. HGP and HGP LP
intend to take all measures within their control to ensure that the
aggregate amount of such fees and Bad Income in any taxable year will not
cause HGP to exceed the limits on nonqualifying income under the 75% or 95%
gross income tests.
21. Within two years of any acquisition by HGP, HGP LP or any HGP
Subsidiary Partnership of property through "foreclosure" (within the
meaning of Code section 856(e) including space reacquired by dispossessing
defaulted tenants) or within such additional period as HGP may obtain by
extension from the Service, HGP, HGP
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<PAGE>
LP or each HGP Subsidiary Partnership as the case may be intends to take
such action necessary to ensure that the property is sold, or take such
other actions as are necessary to ensure that income derived from such
property will not cause HGP to fail the gross income tests set forth in
Code section 856(c). With respect to any foreclosure property, neither
HGP, HGP LP nor any HGP Subsidiary Partnership intends (i) to enter into
any lease which will result in income not qualifying under the gross
income tests of Code section 856(c); (ii) to cause construction to take
place on such property unless such construction involves the completion
of a building or other improvement where more than 10% of the
construction of such building was completed before default became
imminent; and (iii) within 90 days of acquisition of any foreclosure
property, to use such property in a trade or business, other than
through an independent contractor as defined in Code section 856(d)(3)
from whom HGP and HGP LP derive or receive no income.
22. HGP will properly report and pay the appropriate tax on income from
prohibited transactions, if any, within the meaning of Code section
857(b)(6). Since its formation, HGP has not sold or caused the sale of any
parcel of land or any type of inventory property.
23. HGP's federal income tax returns and those of HGP LP and each HGP
Subsidiary Partnership will be timely filed and all such returns will
accurately portray the respective incomes of all such entities in every
material respect. HGP will maintain all records and files necessary to
comply with the requirements of the Code and the regulations promulgated
thereunder (including without limitation Treasury Regulation section
1.856-4 (filing schedules with its tax returns identifying all
independent contractors and those tenants in which HGP owns directly or
indirectly any proprietary interest and the extent of such interest)),
and will take all measures within its control to continue to maintain
all records and files in accordance with the requirements of the Code
and the regulations.
24. Any joint venture partnership agreements with respect to property
management fees, development fees, construction management fees, leasing
commissions or similar fees or payments will be negotiated at arm's-length,
and the amount of such fees and payments will represent reasonable amounts
for the services rendered.
25. HGP (i) has not received any letter, notice or other written or oral
transmittal from the Service regarding its status as a REIT; (ii) has not
received any opinion of counsel or letter from its accountants that
indicates it may not qualify as a REIT; and (iii) is not currently
undergoing an audit by the Service.
26. The financial projections and analysis dated prepared by based on
information provided by HGP and provided to Winston & Strawn with
respect to HGP's qualification under the asset tests set forth in
section 856(c)(5) of the Code represent HGP's best estimates of the
assets to be held by HGP, HGP LP and each HGP Subsidiary Partnership.
Prior to the date hereof, neither HGP nor HGP LP has owned or held any
assets.
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<PAGE>
27. HGP expects, and HGP intends to take all necessary measures within its
control to ensure, that at least 75% in value of HGP's total assets,
including assets held through partnerships in which it holds an interest,
will at all times consist of assets of the following types:
(A) land or interests therein;
(B) buildings, including wiring, plumbing systems, elevators,
escalators and other structural components thereof, but not
including any personal property associated with such real
property (such as furnishings, appliances, draperies, equipment,
machinery, etc.);
(C) loans (including accrued interest thereon) directly secured by a
duly recorded mortgage on real property of the type described in
(A) or (B) above;
(D) cash and cash items, including cash on hand, time and demand
deposits with financial institutions and receivables arising in
the ordinary course of HGP's operations (other than those
purchased from another person) but excluding bankers'
acceptances, repurchase agreements and other similar instruments;
(E) securities (including accrued interest thereon) issued or
guaranteed by the United States or by a person controlled or
supervised by and acting as an instrumentality of the United
States, pursuant to any authority granted by Congress, or any
certificate of deposit for any of the foregoing; and
(F) only during the one year period commencing on the date new
capital is received, stock or debt instruments sold to the public
attributable to the temporary investment of such new capital.
28. HGP expects, and will take all necessary measures within its control
to ensure, that at no time will more than 25% in value of HGP's total
assets be represented by securities other than those described in paragraph
27 above;
29. HGP expects, and will take all necessary measures within its control
to ensure, that it will not own at the end of any calendar quarter
securities in any corporate issuer (other than any qualified REIT
subsidiary within the meaning of Code section 856(i)(2)) that either (A)
represent in excess of 10% of the outstanding voting securities of any such
issuer or (B) have an aggregate value in excess of 5% of the value of the
total assets of HGP as determined in accordance with Treasury Regulations
Section 1.856-2(d)(2). For the purposes of this representation, HGP will
be treated as owning its pro rata share (based on its capital interest) of
all securities held by partnerships in which it holds an interest. HGP
understands that for the purposes of this representation it will be
entitled to take into consideration the provision of Code Section 856(c)(5)
allowing a 30 day period to correct any failure to comply with this
representation as the result of any acquisition of a security during the
calendar quarter.
<PAGE>
30. HGP expects, and will take all necessary measures within its control
to ensure, that all properties held by HGP, HGP LP and each HGP Subsidiary
Partnership are held for investment purposes and not as (A) stock in trade
or other property of a kind which would properly be included in inventory
if on hand at the close of the taxable year, or (B) property held primarily
for sale to customers in the ordinary course of business.
31. HGP has furnished Winston & Strawn with access to all leases for
properties in which HGP directly or indirectly holds an ownership interest.
32. HGP has furnished Winston & Strawn with accurate copies of all audited
and pro forma financial statements pertaining to the anticipated activities
of HGP, HGP LP and each HGP Subsidiary Partnership. Copies of all
documents furnished by HGP to Winston & Strawn have conformed to the
originals.
33. HGP expects, and will take all necessary measures within its control
to ensure, that HGP, HGP LP and each HGP Subsidiary Partnership revalue
their assets at the end of each quarter of each taxable year in which
securities or other property are acquired and will eliminate within 30 days
after the end of each such quarter any discrepancy between the value of
HGP's various investments and the requirements of Code section 856(c)(5) of
the Code to the extent attributable in whole or in part to acquisitions
during such quarter.
REQUIREMENTS WITH RESPECT TO SHAREHOLDERS
34. For each taxable year, HGP expects to distribute to shareholders
within each calendar year or within 30 days after the end of each year for
which a distribution is declared and payable to shareholders of record
prior to the end of such year, 95% of its real estate investment trust
taxable income as such term is defined in Code section 857(b)(2). HGP
intends to take all actions within its control that are necessary to ensure
the distribution requirements of Code section 857 are satisfied for 1997
and all subsequent years.
35. HGP expects to distribute currently for each taxable year an amount at
least equal to the sum of the following: (i) 85% of HGP's ordinary income
for such calendar year, (ii) 95% of HGP's capital gain net income for such
calendar year (except to the extent HGP elects to retain and pay tax on
retained capital gains for taxable years beginning with the taxable year
ending on December 31, 1998), and (iii) any undistributed ordinary income
or capital gain net income from prior years. HGP intends to take all
necessary actions within its control to ensure that this requirement will
be met in the current year and all future years.
36. HGP expects, and will take all necessary measures to ensure, that all
distributions will be made in accordance with the terms of HGP's Articles
of Incorporation, as amended. HGP will not declare or pay any distribution
to its shareholders that would constitute a preferential dividend within
the meaning of Code section 562.
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<PAGE>
37. HGP expects, and will take all necessary measures within its control
to ensure, that it will comply with the requirements of Code section
857(a)(2) and Treasury Regulations Sections 1.857-8 and 1.857-9 (relating
to records to be maintained concerning stock ownership and information
required to be requested from shareholders of HGP who own greater than the
applicable ownership percentage in such regulations).
38. To the extent any of the foregoing representations relate to the
future operations of HGP, unexpected events may cause a deviation from one
or more of the intended operating principles set forth herein, and in such
case HGP, if it takes actions inconsistent with the business plan reflected
in such representations, intends to do so in a manner to preserve in all
events the status of HGP as a REIT under the Code.
11
<PAGE>
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on
behalf of HGP, HGP LP and the HGP Affiliates this ___th day of _____, 1998.
HORIZON GROUP PROPERTIES, INC.
By: ____________________________
Gary J. Skoien
Its ____________________________
President and Chief Executive Officer
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<PAGE>
EXHIBIT 8.1d
[FORM OF WINSTON & STRAWN OPINION]
[JUNE] __, 1998
Prime Retail, Inc. Horizon Group, Inc.
Prime Retail, L.P. 5000 Hakes Drive
100 East Pratt Street Norton Shores, Michigan
49441
Nineteenth Floor
Baltimore, Maryland 21202
Re: QUALIFICATION OF PRIME RETAIL, L.P. AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES
Ladies and Gentlemen:
We have acted as special counsel for Prime Retail, Inc. and Prime
Retail, L.P. in connection with the transactions contemplated by that certain
Amended and Restated Agreement and Plan of Merger among Prime Retail, Inc.
("Prime"), Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon
Group Properties, Inc. ("Horizon"), Horizon Group Properties, L.P. and
Horizon/Glen Outlet Centers Limited Partnership dated as of February 1, 1998
(the "Merger Agreement"). This opinion letter addresses the federal income tax
issues on which Prime Retail, Inc. has requested our opinion and is being
delivered to you pursuant to Section 6.3(d) of the Merger Agreement. All
capitalized terms used, but not defined, herein shall have the meanings
attributed to such terms in the Joint Consent Solicitation
Statement/Prospectus/Information Statement filed by Prime Partnership, Horizon
Partnership, and HGP LP dated [JUNE] __, 1998 (the "Joint Consent"), as the
context requires.
For purposes of issuing this opinion letter, we have examined and
relied upon the following instruments and documents:
<PAGE>
Prime Retail, Inc.
Prime Retail, L.P.
June __, 1998
Page 2
(a) the Merger Agreement;
(b) the Officer's Certificate dated ________, 1998 from Prime to
Winston & Strawn, a copy of which is attached hereto;
(c) the Joint Proxy Statement/Prospectus/Information Statement dated
________, 1998 (the "Joint Proxy");
(d) the opinion letters of Rudnick & Wolfe, dated as of the date
hereof, described in Sections 6.2(d) and 6.3(e) of the Merger
Agreement and in "The Reincorporation Merger -- Federal Income
Tax Consequences" section of the Joint Proxy, along with the
officer's certificates of Horizon, attached thereto;
(e) the Contribution Agreement;
(f) the Tax Disaffiliation Agreement;
(g) the Delaware Certificate of Merger;
(h) the Horizon/Subsidiary Articles of Merger (Maryland);
(i) the Horizon/Subsidiary Certificate of Merger (Michigan);
(j) the Prime/Horizon Articles of Merger (Maryland);
(k) the Sky Merger Amended and Restated Articles of Incorporation;
(l) the Sky Merger Bylaws;
(m) the Amended and Restated Prime Partnership Agreement;
(n) the Amended and Restated Registration Rights Agreement;
(o) the Certificate of Limited Partnership of Prime Partnership,
dated August 6, 1993, and filed by Prime with the Secretary of
State of Delaware pursuant to the Delaware Revised Uniform
Limited Partnership Act, as amended;
(p) the Second Amended and Restated Agreement of Limited Partnership
of Prime Retail, L.P., dated as of ________, 1998 (the "Prime
Partnership Agreement"), together with such other documents,
records, and matters of law as we have deemed relevant or
necessary; and
<PAGE>
Prime Retail, Inc.
Prime Retail, L.P.
June __, 1998
Page 3
(q) the Joint Consent,
together with such other documents, records, and matters of law as we have
deemed relevant or necessary (the "Relevant Documents"). We have assumed the
authenticity of original documents, the accuracy of copies, the genuineness of
signatures, and the capacity of each party executing a document to so execute
such document. We have also relied upon certificates of public officials.
Our opinion is based upon the facts described in Relevant Documents
listed above and upon facts as they have been represented to us. We have not
conducted any independent verification and have assumed all facts and
representations in the Relevant Documents to be true and accurate. For purposes
of our opinion, we have also relied upon the factual representations of the
Prime Partnership Limited Partners set forth in subscription agreements for
Prime Partnership Units and upon statements of Prime with respect to certain
factual determinations underlying the legal conclusions set forth herein. Any
alteration of any of the foregoing facts may adversely affect our opinion. Any
representation or statement in any document upon which we rely that is made "to
the best of knowledge" or otherwise similarly qualified is assumed to be
correct.
Our opinion assumes that Prime Partnership will be operated in
accordance with the provisions of the Prime Partnership Agreement and applicable
state law, that the Prime Partnership Agreement, when executed, will be in the
same form as that provided to us and that the Prime Partnership Agreement will
be properly executed according to applicable state law. For purposes of
rendering our opinion, we have also assumed that no Prime Partnership Limited
Partner has elected or will elect to be excluded from all or part of subchapter
K of the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"). We have not attempted to verify independently the foregoing
representations, statements and assumptions; however, we are not aware of any
facts or circumstances contrary to or inconsistent with these statements,
representations and assumptions.
Pursuant to the analysis described in Treasury Regulation section
1.6662-4(d)(3)(ii), our opinion is based upon the Code, as amended, currently
applicable Treasury Regulations promulgated or proposed under the Code,
currently published administrative positions of the Internal Revenue Service
("IRS") contained in Revenue Rulings and Revenue Procedures, judicial decisions,
and other applicable authorities, all as in effect on the date hereof. All of
the foregoing authorities are subject to change or new interpretations thereof
either prospectively or retroactively. Any such change or interpretation, as
well as any change in the facts as they have been represented to us or assumed
by us, could affect our opinion.
Based upon and specifically subject to the qualifications set forth
herein above, we express the opinion that under current federal income tax law,
Prime Partnership is for federal income tax purposes a partnership, and not an
association taxable as a corporation or a publicly traded partnership taxable as
a corporation.
<PAGE>
Prime Retail, Inc.
Prime Retail, L.P.
June __, 1998
Page 4
Each Prime Partnership partner should note that the opinion contained
herein represents only our best legal judgment and has no binding effect or
official status of any kind. Thus, in the absence of a valid ruling issued by
the IRS to Prime Partnership, there can be no assurance that the IRS or a court
will agree with our opinion. In addition, the IRS or a court or the Treasury
Department may take a contrary position in the future.
This opinion is being rendered only to Prime Retail, Inc. and Prime
Retail, L.P. and may not be quoted in whole or in part or otherwise referred to,
used by, or relied upon, nor be filed with, or furnished to, any other person or
entity other than Prime Partnership partners, Prime shareholders, and Horizon,
without our prior written consent. Notwithstanding the foregoing, we hereby
consent to the use of this opinion as an Exhibit 8.1 to the [REGISTRATION
STATEMENT] and the use of our name in the Joint Consent under the sections
entitled [ ]. In giving this consent, we do not admit that we are included in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission.
Very truly yours,
WINSTON & STRAWN
<PAGE>
[FORM OF OFFICER'S CERTIFICATE REGARDING WINSTON & STRAWN TAX OPINION
SET FORTH IN EXHIBIT 8.1d]
PRIME RETAIL, INC.
OFFICER'S CERTIFICATE
Prime Retail, Inc. ("Prime") or New Prime (1), as the case may
be, on behalf of itself, its shareholders, Prime Partnership, the Prime
Property Partnerships, the Prime Finance Corporations, New Prime Partnership
and the affiliates of New Prime and New Prime Partnership, as applicable,
hereby certifies and represents to Winston & Strawn as of the date hereof
solely for purposes of the legal opinions to be rendered in connection with
the transactions contemplated by the Joint Proxy Statement/Prospectus/
Information Statement (the "Joint Proxy"), the Joint Consent Solicitation
Statement/Prospectus/Information Statement (the "Joint Consent"), and the
Amended and Restated Agreement and Plan of Merger among Prime Retail, Inc.,
Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group
Properties, Inc., Horizon Group Properties, L.P. and Horizon/Glen Outlet
Centers Limited Partnership, dated as of February 1, 1998 (the "Merger
Agreement") as follows:
1. The undersigned, C. Alan Schroeder, is the duly qualified and elected
Senior Vice President-General Counsel and Secretary of Prime, and as such
is familiar with the facts certified and the representations made herein
and is duly authorized to make such certifications and representations for
Prime, its shareholders, Prime Partnership, each Prime Property
Partnership, the Prime Finance Corporations and its other affiliates
(collectively, one or more of such persons are the "Prime Affiliates").
Further, the undersigned, C. Alan Schroeder, will be the duly qualified and
elected Senior Vice President-General Counsel and Secretary of New Prime,
and as such is familiar with the facts certified and the representations
made herein and is duly authorized to make such representations for New
Prime, its shareholders, New Prime Partnership and its other affiliates
after the closing (collectively, one or more of such persons are the "New
Prime Affiliates").
2. Prime Partnership, the Prime Property Partnerships, Prime Retail
Finance Limited Partnership (the "Finance Partnership") and Prime Retail
Services Limited Partnership (the "Services Partnership") were formed, have
been operated, and intend to continue to operate, in reasonable
anticipation of making an economic profit, not taking into account any
federal income tax benefits. The respective general partner of each of
these partnerships acts for its own account and not as an agent or dummy of
the limited partners.
- -------------------------
(1) Capitalized terms used herein and not otherwise defined herein shall have
the meanings assigned to such terms in the Joint Proxy or Joint Consent.
<PAGE>
3. None of the partnership interests in Prime Partnership, any Prime
Property Partnership, the Finance Partnership or the Services Partnership
(i) are currently traded or will be traded on any securities exchange or
any local or over-the-counter market (or other interdealer quotation system
that regularly disseminates firm buy or sell quotations by identified
brokers or dealers) or (ii) are registered or will be registered under the
Securities Act of 1933 (other than Prime Partnership Units). At no time
will there be more than 500 partners in each of Prime Partnership, each
Prime Property Partnership formed prior to January 1, 1996, the Finance
Partnership and the Services Partnership (determined by treating each
person who indirectly owns an interest in Prime Units through a
partnership, grantor trust or S corporation as a separate partner). At no
time will there be more than 100 partners in each Prime Property
Partnership formed after December 31, 1995. None of Prime Partnership, any
Prime Property Partnership, the Finance Partnership and the Services
Partnership have ever received any formal or informal notice from the
Internal Revenue Service (the "Service") indicating that an examination is
underway or will be made.
4. For all taxable years ending after the Closing Date, at least 90% of the
gross income derived by Prime Partnership shall consist only of amounts
from the following sources: (A) interest, (B) dividends, (C) real property
rents, (D) gain from the sale or other disposition of real property
(including property described in section 1221(1)), (E) income and gains
derived from the exploration, development, mining or production,
processing, refining, transportation (including pipelines transporting gas,
oil or products thereof) or the marketing of any mineral or natural
resource (including fertilizer, geothermal energy and timber) or (F) any
gain from the sale or disposition of a capital asset (or property described
in section 1231(b)) held for the production of income described in (A)-(E)
of this paragraph.
5. Since its formation, Prime has regularly computed its income in
keeping its books on the basis of a calendar year, and, accordingly, has
adopted and used the calendar year as its taxable year for federal income
tax purposes. Prime made the election specified in Code section 856(c) to
be a REIT, effective for its taxable year ending December 31, 1994. Such
election was made and filed with its federal income tax return for the
taxable year ending December 31, 1994, and such return was properly filed
with the Service on or before the due date thereof (taking into account any
extensions that may have been granted).
6. For each of its taxable years, Prime and the New Prime expect that,
and intend to take all measures within their control (including without
limitation monitoring and enforcing all restrictions of stock ownership
contained in New Prime's Articles of Incorporation), to ensure that, (A)
the beneficial ownership of Prime and New Prime has been and will be held
at all times by 100 or more persons as required by Code section 856(a)(5)
and, (B) at no time during the last half of any taxable year after the
first taxable year for which the REIT election was made, has or will more
than 50% in value of Prime's or New Prime's outstanding stock be owned,
directly or indirectly (taking into account the constructive ownership
rules of Code section 856(h)) by or for five or fewer individuals. As of
the date hereof, Prime is not aware of any facts or circumstances that
would indicate requirements (A) and (B) of this paragraph have not been
satisfied. To the best of Prime's knowledge, no individual shareholder
owns directly or indirectly more than 9.9% of the value of Prime's
outstanding stock.
-2-
<PAGE>
7. Prime currently owns [ ]% of the Common Units of Prime Partnership,
[ ]% of the Preferred Units, and [ ]% of the Convertible Preferred
Units. Upon consummation of the transactions contemplated in the Joint
Proxy, Joint Consent and the Merger Agreement, New Prime will own [ ]%
of the Common Units of Prime Partnership, [ ]% of the Preferred Units
and [ ]% of the Convertible Preferred Units.
8. Prime currently has approximately $[ ] in net assets and New Prime
does not intend to significantly reduce its net assets in the foreseeable
future.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on
behalf of Prime, Prime Partnership, the Prime Affiliates, New Prime and the New
Prime Affiliates this ___th day of _____, 1998.
PRIME RETAIL, Inc.
By: ______________________________
Its: Senior Vice President--
General Counsel and Secretary
-3-
<PAGE>
EXHIBIT 8.2
______, 1998
(312) 368-4000
Horizon Group, Inc.
5000 Hakes Drive
Norton Shores, Michigan 49441
Re: TAX OPINION UNDER SECTION 6.3(e) OF THE MERGER AGREEMENT
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of: (1) the proposed merger (the "Reincorporation Merger") of
Horizon Group, Inc., a Michigan corporation ("Horizon"), with and into Sky
Merger, a Maryland corporation ("Sky Merger") and (2) the proposed merger (the
"Corporate Merger") of Prime Retail, Inc., a Maryland corporation ("Prime") with
and into Sky Merger (the Reincorporation Merger and the Corporate Merger are
referred to herein, collectively, as the "Mergers").
The Reincorporation Merger, the Corporate Merger and all agreements
relating to the Reincorporation Merger and the Corporate Merger (the
"Agreements") are more fully described in (A) the Joint Proxy
Statement/Prospectus/Information Statement, included in the Registration
Statement on Form S-4 (File No. 333-_________), filed by Sky Merger with the
Securities and Exchange Commission, as amended (the "Merger Registration
Statement"), and (B) the Joint Consent Solicitation Statement/Prospectus/
Information Statement included in the Registration Statement on Form S-4
(File No. 333-__________), filed by Sky Merger and Prime Retail, L.P., a
Delaware limited partnership ("Prime Partnership") (the "Partnership
Registration Statement"), (the Merger Registration Statement and the
Partnership Registration Statement are referred to herein collectively as the
"Registration Statements"). All descriptions of the Reincorporation Merger
and the Corporate Merger contained in this opinion are qualified in their
entirety by the terms of the Agreements. Terms not otherwise defined in this
letter shall have the meanings assigned to them in the Agreements and/or the
Registration Statements.
The Reincorporation Merger will be consummated pursuant to: (i) an Amended
and Restated Agreement and Plan of Merger, dated as of February 1, 1998, (the
"Merger Agreement") by and among Prime, Horizon, Sky Merger, Prime Retail, L.P.,
a Delaware, limited partnership ("Prime Partnership"), Horizon/Glen Outlet
Centers Limited Partnership, a Delaware limited partnership ("Horizon
Partnership"), Horizon Group Properties, Inc., a Maryland corporation ("HGP"),
and Horizon Group Properties, L.P., a Delaware limited partnership ("HGP LP");
(ii) the Articles of Merger, by and between Horizon and Sky Merger,
<PAGE>
Horizon Group, Inc.
_______________, 1998
Page 2
entered into in connection with the Merger Agreement (the "Reincorporation
Articles of Merger"); and (iii) the Certificate of Merger, by and between
Horizon and Sky Merger, entered into in connection with the Merger Agreement
(the "Reincorporation Certificate of Merger").
Pursuant to the Reincorporation Merger, Horizon will be merged, in
accordance with the applicable provisions of the Maryland General Corporation
Law ("MGCL") and the Michigan Business Corporation Act ("MBCA"), with and into
Sky Merger, with Sky Merger as the surviving corporation. The Reincorporation
Merger will be voted upon, as required by law, by Horizon shareholders at a
special meeting.
As of the Reincorporation Merger Effective Time, and by virtue of the
Reincorporation Merger, each issued and outstanding Sky Merger Common Share held
by Horizon shall be canceled, and each issued and outstanding Horizon Common
Share (other than Horizon Common Shares owned by Horizon or any subsidiary of
Horizon, which shall automatically be canceled and retired and all rights with
respect thereto shall cease to exist), shall be converted into one Sky Merger
Common Share.
The Corporate Merger will be consummated pursuant to (i) the Merger
Agreement, and (ii) the Articles of Merger, by and between Prime and Sky Merger,
entered into in connection therewith (the "Corporate Articles of Merger").
Pursuant to the Corporate Merger, Prime will be merged, in accordance with
the applicable provisions of the MGCL, with and into Sky Merger, with Sky Merger
as the surviving corporation to be renamed "Prime Retail, Inc." ("New Prime").
The Corporate Merger will be voted upon, as required by law, by Horizon
shareholders and Prime shareholders at special meetings.
As of the Corporate Merger Effective Time, and by virtue of the Corporate
Merger: (i) each outstanding Sky Merger Common Share (other than shares held by
Horizon or any subsidiary of Horizon) shall be converted into 0.20 of a New
Prime Series B Preferred Share and 0.597 of a New Prime Common Share; (ii) each
outstanding Prime Common Share shall be converted into one New Prime Common
Share; and (iii) each outstanding Prime Series A Preferred Share, Prime Series B
Preferred Share and Prime Series C Preferred Share shall be converted into one
New Prime Series A Preferred Share, one New Prime Series B Preferred Share, and
one New Prime Series C Preferred Share, respectively.
You have directed us to assume in preparing this opinion, and our opinion
is based on the understanding, that: (i) the Reincorporation Merger and related
transactions will be consummated in accordance with the terms, conditions and
other provisions of the Agreements; (ii) the
<PAGE>
Horizon Group, Inc.
_______________, 1998
Page 3
Corporate Merger and related transactions will be consummated in accordance
with the terms, conditions and other provisions of the Agreements, and (iii)
all of the information, descriptions, representations and assumptions of a
factual nature set forth in this letter, in the Agreements, in the letter to
us from Horizon, dated ________, 1998, attached as Exhibit A hereto, the
letter to us from Prime, dated _________, 1998, attached as Exhibit B hereto,
in the Joint Proxy Statement/Prospectus/Information Statement, and in the
Joint Consent Solicitation Statement/Prospectus/Information Statement are
accurate and complete and will be accurate and complete at the time of the
Reincorporation Merger and the Corporate Merger, respectively (the "Effective
Times"). We have not independently verified any factual matters relating to
the Reincorporation Merger and/or the Corporate Merger in connection with or
apart from our preparation of this opinion, and accordingly, our opinion does
not take into account any matters not set forth herein which might have been
disclosed by independent verification.
In connection with the rendering of this opinion, we have assumed or
obtained representations and are relying thereon (without any independent
investigation thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents (which are
authentic), and there has been (or will be as of the Effective Times) due
execution and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof;
2. Any representation or statement referred to above made "to the best of
knowledge" or otherwise similarly qualified is correct without such
verification; and
3. The Mergers will be effective under the respective applicable State
laws.
Based upon our review of the Agreements, the Joint Proxy Statement/
Prospectus/Information Statement, the Joint Consent Solicitation
Statement/Prospectus/Information Statement and such other documents as we
have deemed necessary and upon representations made to us by Horizon and
certain beneficial owners of Horizon Common Shares, we are of the opinion
that, assuming the Mergers and all other events occur as contemplated in the
Agreements and the Joint Proxy Statement/Prospectus/Information Statement,
under the United States federal income tax laws in effect on the date hereof:
I. the Reincorporation Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, and Horizon and Sky
Merger will each be a party to such reorganization within the meaning
of Section 368(b) of the Code;
(ii) no gain or loss will be recognized by either Horizon or Sky
Merger as a
<PAGE>
Horizon Group, Inc.
_______________, 1998
Page 4
result of the Reincorporation Merger;
(iii) no gain or loss will be recognized by the shareholders of
Horizon upon the exchange of their Horizon Common Shares solely for Sky
Merger Common Shares pursuant to the Reincorporation Merger;
(iv) the tax basis of the Sky Merger Common Shares received by any
holder of Horizon Common Shares in exchange for Horizon Common Shares
pursuant to the Reincorporation Merger will be the same as the tax basis of
such Horizon Common Shares exchanged therefor;
(v) the holding period for Sky Merger Common Shares received in
exchange for Horizon Common Shares pursuant to the Reincorporation Merger
will include the period that such Horizon Common Shares were held by the
holder;
(vi) the Corporate Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code, and Prime and Sky Merger will
each be a party to such reorganization within the meaning of Section 368(b)
of the Code;
(vii) no gain or loss will be recognized by Sky Merger as a result
of the Corporate Merger;
(viii) no gain or loss will be recognized by the Horizon Common
Shareholders upon the exchange of the Sky Merger Common Shares solely for
New Prime Common Shares and New Prime Series B Preferred Shares pursuant to
the Corporate Merger;
(ix) holders of fractional Sky Merger Common Shares shall recognize
gain or loss upon the exchange of such fractional shares for cash to the
extent such cash is greater than or less than such holder's adjusted tax
basis in such fractional shares;
(x) the aggregate initial tax basis of the New Prime Common Shares
and New Prime Series B Shares received by any former Horizon Common
Shareholder pursuant to the Corporate Merger will be the same as the
adjusted tax basis of the Sky Merger Common Shares exchanged therefor; this
aggregate initial tax basis will be allocated to the New Prime Common
Shares and New Prime Series B Shares received in proportion to such shares'
relative fair market values; and
(xi) the holding period for New Prime Common Shares and New Prime
Series
<PAGE>
Horizon Group, Inc.
_______________, 1998
Page 5
B Preferred Shares received by any former Horizon Common Shareholder
pursuant to the Mergers will include the period that such former Horizon
Common Shareholder held the Sky Merger Common Shares converted into New
Prime Common Shares and New Prime Series B Preferred Shares plus the period
that such former Horizon Common Shareholder held the Horizon Common Shares
exchanged therefore.
The foregoing opinion is limited to the matters specifically discussed
herein, which are the only matters to which you have requested our opinion. We
do not address any other federal income tax consequences of the Mergers or any
other matters of federal law and have not considered matters (including state or
local tax consequences) arising under the laws of any jurisdiction other than
the laws of the United States.
This opinion letter is limited to the matters stated herein, and no opinion
is implied or may be inferred beyond the matters expressly stated herein. This
opinion letter shall not be construed as or deemed to be a guaranty or insuring
agreement. You should be aware that an opinion of counsel represents only
counsel's best legal judgment, and has no binding effect or official status of
any kind, and that no assurance can be given that contrary positions may not be
taken by the Internal Revenue Service or that a court considering the issues
would not hold otherwise.
This opinion is rendered as of the date hereof based on the law and facts
in existence on the date hereof, and we do not undertake, and hereby disclaim,
any obligation to advise you of any changes in law or fact, whether or not
material, which may be brought to our attention at a later date. In rendering
this opinion, we have assumed that there will be no change in the applicable
laws of the State of Maryland, the State of Michigan, or in the Code, the
regulations promulgated thereunder by the Treasury Department, and the
interpretations of the Code and such regulations by the courts and the Internal
Revenue Service, all as they are in effect and exist at the date of this letter.
With respect to the last assumption, it should be noted that statutes,
regulations, judicial decisions, and administrative interpretations are subject
to change at any time and, in some circumstances, with retroactive effect. A
material change that is made after the date hereof in any of the foregoing bases
for our opinions could affect our conclusions. Moreover, if the facts vary from
those relied upon (including any representations, warranties, covenants or
assumptions upon which we have relied are inaccurate, incomplete, breached or
ineffective), our opinion contained herein could be inapplicable.
<PAGE>
Horizon Group, Inc.
_______________, 1998
Page 6
This opinion is rendered only to you and may not be quoted in whole or
in part or otherwise referred to, used by, or relied upon, nor be filed with,
or furnished to, any other person or entity other than Horizon Shareholders
in connection with the Mergers, without our prior written consent.
Notwithstanding the foregoing, we hereby consent to the use of this opinion
as an Exhibit 8.2 to the Partnership Registration Statement and the use of
our name in the Joint Consent Solicitation Statement/Prospectus/Information
Statement under the sections entitled "Federal Income Tax Consequences of the
Transactions," "Federal Income Tax Consequences of the Transactions--Entity
Classification," "Federal Income Tax Consequences of the
Transactions--Qualification of New Prime as a REIT," "Horizon Group
Properties, L.P.--Federal Income Tax Consequences," "Horizon Group
Properties, L.P.--Federal Income Tax Consequences of Continuing Ownership of
HGP LP Common Units," and "Horizon Group Properties, L.P.--Entity
Classification." In giving this consent, we do not admit that we are
included in the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission.
Very truly yours,
RUDNICK & WOLFE
<PAGE>
EXHIBIT A
HORIZON GROUP, INC.
5000 HAKES DRIVE
NORTON SHORES, MICHIGAN 49441
April 6, 1998
Rudnick & Wolfe Winston & Strawn
203 North LaSalle Street 35 West Wacker Drive
Suite 1800 Chicago, Illinois 60601
Chicago, Illinois 60601
Re: TAX OPINIONS FOR THE REINCORPORATION MERGER AND THE CORPORATE MERGER -
OFFICER'S CERTIFICATE
Ladies and Gentlemen:
In connection with (A) the Joint Proxy Statement/Prospectus/Information
Statement, included in the Registration Statement on Form S-4 (File No. 333-
) (the "Merger Registration Statement"), relating to: (1) the proposed merger
(the "Reincorporation Merger") of Horizon Group, Inc., a Michigan corporation
("Horizon"), with and into Sky Merger Corp., a Maryland corporation ("Sky
Merger"), and (2) the proposed merger (the "Corporate Merger") of Prime
Retail, Inc., a Maryland corporation ("Prime") with and into Sky Merger, and
(B) the Joint Consent Solicitation Statement/Prospectus/Information
Statement, contained in the Registration Statement on Form S-4 (File No. 333-
) (the "Partnership Registration Statement"), relating to the proposed
merger (the "Partnership Merger") of Horizon/Glen Outlet Centers Limited
Partnership, a Delaware limited partnership ("Horizon Partnership") with and
into Prime Retail, L.P., a Delaware limited partnership ("Prime
Partnership"), (the Merger Registration Statement and the Partnership
Registration Statement are referred to herein collectively as the
"Registration Statements"), Rudnick & Wolfe, as special counsel for Horizon
and Sky Merger, and Winston & Strawn, as special counsel for Prime, have each
been requested to render an opinion concerning certain federal income tax
consequences of: (1) the Reincorporation Merger, and (2) the Corporate Merger
(the Reincorporation Merger and the Corporate Merger are referred to herein,
collectively, as the "Mergers"). Unless otherwise specifically defined
herein, all capitalized terms have the meaning assigned to them in the
Registration Statement.
The Reincorporation Merger will be consummated pursuant to: (i) an Amended
and Restated Agreement and Plan of Merger, dated as of February 1, 1998, (the
"Merger Agreement") by and among Prime, Horizon, Sky Merger, Prime Retail, L.P.,
a Delaware, limited partnership ("Prime Partnership"), Horizon/Glen Outlet
Centers Limited Partnership, a Delaware limited partnership ("Horizon
Partnership"), Horizon Group Properties, Inc., a Maryland corporation ("HGP"),
and Horizon Group Properties, L.P., a Delaware limited partnership ("HGP LP");
(ii) the Articles of Merger, by and between Horizon and Sky Merger, entered into
in connection with the Merger Agreement (the "Reincorporation Articles of
Merger"); and (iii) the Certificate of Merger, by and between Horizon and Sky
Merger, entered
<PAGE>
____________________________, 1998
Page 2
into in connection with the Merger Agreement (the "Reincorporation
Certificate of Merger").
The Corporate Merger will be consummated pursuant to (i) the Merger
Agreement, and (ii) the Articles of Merger, by and between Prime and Sky Merger,
entered into in connection therewith (the "Corporate Articles of Merger").
In connection with the issuance of your legal opinions as described above,
Horizon, on behalf of itself, Sky Merger, and Horizon Partnership hereby makes
the following representations (intending that Rudnick & Wolfe and Winston &
Strawn will rely on such representations in rendering their opinions), each of
which will be true as of the effective times of the Reincorporation Merger and
the Corporate Merger, respectively, and thereafter, where relevant:
1. The Mergers are being effected for bona fide business reasons as
described in the Joint Proxy Statement/Prospectus/Information Statement.
2. The fair market value of the Sky Merger Common Shares received by each
holder of Horizon Common Shares will be equal to the fair market value of the
Horizon Common surrendered in the exchange pursuant to the Reincorporation
Merger.
3. The fair market value of the New Prime Common Shares and New Prime
Series B Preferred Shares will be equal to the fair market value of the Sky
Merger Common Shares converted in the Corporate Merger.
4. Sky Merger has no plan or intention to reacquire any of the Sky Merger
Common Shares to be issued in the Reincorporation Merger.
5. Sky Merger has no plan or intention to sell or otherwise dispose of
any of the assets acquired from Horizon in the Merger except for (i)
dispositions made in the ordinary course of business and (ii) transfers
described in both Section 368(a)(2)(C) of the Code and Treasury Regulation
Section 1.368-2(j)(4).
6. Following the Reincorporation Merger, Sky Merger will continue the
historic business of Horizon and will use substantially all of Horizon's
historic business assets in a the historic business of Horizon.
7. Horizon and the shareholders of Horizon will pay their respective
expenses incurred in connection with both the Reincorporation Merger and the
Corporate Merger, and will not pay the expenses of Sky Merger and/or Prime
and/or their respective shareholders, except for those expenses of Sky Merger
and/or Prime that are solely and directly related to the
<PAGE>
____________________________, 1998
Page 3
Reincorporation Merger and/or the Corporate Merger in accordance with the
guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187.
8. Sky Merger and the shareholders of Sky Merger will pay their
respective expenses incurred in connection with both the Corporate Merger and
the Reincorporation Merger, and will not pay the expenses of Horizon and/or
Prime and/or their respective shareholders, except for those expenses of Horizon
and/or Prime that are solely and directly related to the Reincorporation Merger
and/or the Corporate Merger in accordance with the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187.
9. There is no intercorporate indebtedness existing between: (i) Horizon
and Sky Merger; (ii) Horizon and Prime; or (iii) Sky Merger and Prime that was
issued, acquired or will be settled at a discount.
10. Although Horizon is an "investment company," as defined in Code
Sections 368(a)(2)(F)(iii) and (iv), Horizon is also a real estate investment
trust, as defined in Code Section 856(a), described in Code Section
368(a)(2)(F)(i).
11. Neither Horizon nor Sky Merger are under the jurisdiction of a court
in a title 11 or similar case within the meaning of Code Section 368(a)(3)(A).
12. None of the compensation received by any shareholder-employee of
Horizon will be separate consideration for, or allocable to, any of his or her
Horizon Common Shares or Sky Merger Common Shares. The compensation paid to any
shareholder-employee of Horizon will be for services actually rendered and will
be commensurate with amounts paid to third parties bargaining at arm's length
for similar services. None of the Sky Merger Common Shares, New Prime Common
Shares or New Prime Series B Preferred Shares received by any
shareholder-employee of Horizon will be in exchange for, or in consideration
of, services rendered to Horizon or any other entity by such
shareholder-employee.
13. The payment of cash in lieu of fractional shares of New Prime Common
Shares and/or New Prime Series B Preferred Shares is solely for the purpose of
avoiding the expense and inconvenience to New Prime of issuing fractional shares
and does not represent separately bargained-for consideration. The total cash
consideration that will be paid in the Corporate Merger to holders of Sky Merger
Common Shares in lieu of issuing fractional shares of New Prime Common Shares
and/or New Prime Series B Preferred Shares will not exceed one percent of the
total consideration that will be issued in the Corporate Merger to the holders
of Sky Merger Common Shares in exchange therefore. The fractional share
interests of each holder of Sky Merger Common Shares will be aggregated, and no
holder of Sky Merger Common Shares will receive cash in an amount greater than
the value of one share of New Prime Common
<PAGE>
____________________________, 1998
Page 4
Shares or New Prime Series B Preferred Shares, respectively.
14. The principal purpose of Sky Merger's assumption of liabilities and/or
acquisition of properties subject to liabilities in connection with the
Reincorporation Merger is not to avoid federal income tax, and Sky Merger has a
valid business purpose for assuming any liabilities and/or acquiring properties
subject to liabilities in connection with the Reincorporation Merger.
15. The principal purpose of Sky Merger's assumption of liabilities and/or
acquisition of properties subject to liabilities in connection with the
Corporate Merger is not to avoid federal income tax, and Sky Merger has a valid
business purpose for assuming any liabilities and/or acquiring properties
subject to liabilities in connection with the Corporate Merger.
16. Horizon has the corporate power and authority to make all of the
representations contained herein.
17. Sky Merger has the corporate power and authority to make all of the
representations contained herein.
HORIZON GROUP, INC., a Michigan
corporation
By: _______________________________
Name: ________________________
Its: ________________________
SKY MERGER CORP., a Maryland
corporation
By: _______________________________
Name:
Its:
<PAGE>
EXHIBIT B
[FORM OF OFFICER'S CERTIFICATE REGARDING WINSTON & STRAWN OPINIONS SET
FORTH IN EXHIBITS 8.1a AND 8.1b]
PRIME RETAIL, INC.
OFFICER'S CERTIFICATE
Each of Prime Retail, Inc. ("Prime") or New Prime(1), as the case
may be, on behalf of itself, its shareholders, Prime Partnership, the Prime
Property Partnerships, the Prime Finance Corporations, New Prime Partnership
and the affiliates of New Prime and New Prime Partnership, as applicable,
hereby certifies and represents to Winston & Strawn as of the date hereof
solely for purposes of the legal opinions to be rendered in connection with
the transactions contemplated by the Joint Proxy Statement/Prospectus/
Information Statement (the "Joint Proxy") and the Amended and Restated
Agreement and Plan of Merger among Prime Retail, Inc., Prime Retail, L.P.,
Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc.,
Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers Limited
Partnership dated as of February 1, 1998 (the "Merger Agreement") as follows:
1. The undersigned, C. Alan Schroeder, is the duly qualified and
elected Senior Vice President-General Counsel and Secretary of Prime
Retail, Inc., a Maryland corporation ("Prime"), and as such is familiar
with the facts certified and the representations made herein and is duly
authorized to make such certifications and representations for Prime,
its shareholders, Prime Partnership, the Prime Property Partnerships,
the Prime Finance Corporations and its other affiliates (collectively,
one or more of such persons are the "Prime Affiliates"). Further, the
undersigned, C. Alan Schroeder, will be the duly qualified and elected
Senior Vice President-General Counsel and Secretary of New Prime, a
Maryland corporation, and as such is familiar with the facts certified
and the representations made herein and is duly authorized to make such
representations for New Prime, its shareholders, New Prime Partnership
and its other affiliates after the closing (collectively, one or more of
such persons are the "New Prime Affiliates").
2. The fair market value of the New Prime Common Shares, New Prime
Series A Preferred Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares received in exchange for Prime Common
Shares, Prime Series A Preferred Shares, Prime Series B Preferred Shares
and Prime Series C Preferred Shares, respectively, will equal the fair
market value of the Prime Common Shares, Prime Series A Preferred
Shares, Prime Series B Preferred Shares and Prime Series C Preferred
Shares surrendered in such exchange.
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(1) Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Joint Proxy.
<PAGE>
The aggregate fair market value of the New Prime Common Shares, New
Prime Series A Preferred Shares, New Prime Series B Preferred Shares
and New Prime Series C Preferred Shares received in exchange for the
Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares and Prime Series C Preferred Shares will represent in
excess of fifty percent of the sum of (i) the aggregate fair market
value of such New Prime Common Shares, New Prime Series A Preferred
Shares, New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares received, plus (ii) the aggregate cash distributed to
Prime Shareholders pursuant to the Prime Special Distribution.
3. There is no plan or intention by Prime Shareholders who own one
percent or more of the Prime Shares, and to the best of the knowledge of
the management of Prime, there is no plan or intention on the part of
the remaining Prime Shareholders or Sky Merger shareholders to sell,
exchange or otherwise dispose of a number of New Prime Shares received
in the Corporate Merger that would reduce either the Prime Shareholders'
or Sky Merger shareholders' ownership of New Prime Shares to a number of
shares having a fair market value, as of the date of the Corporate
Merger, of less than fifty percent of the fair market value of all of
the formerly outstanding stock of Prime as of the same date. For
purposes of this representation, Prime Series A Preferred Shares
surrendered by dissenters and Sky Merger Common Shares exchanged for
cash in lieu of fractional New Prime Shares will be treated as
outstanding Prime Series A Preferred Shares and Sky Merger shares,
respectively, on the Closing. Moreover, Prime Shares and New Prime
Shares held by Prime Shareholders and otherwise sold, redeemed or
disposed of prior or subsequent to the Closing will be considered in
making this representation.
4. New Prime has no plan or intention to reacquire any of its stock
issued in the Corporate Merger.
5. [EXCEPT TO THE EXTENT DESCRIBED IN SCHEDULE I ATTACHED HERETO,]
New Prime has no plan or intention to sell or otherwise dispose of any
of the assets of Prime acquired in the Corporate Merger, except for
dispositions made in the ordinary course of business or asset transfers
to corporations controlled by New Prime, as described in Code section
368(a)(2)(C).
6. The liabilities of Prime or the Prime Affiliates assumed by New
Prime and the liabilities to which the transferred assets of Prime are
subject were incurred by Prime or the Prime Affiliates in the ordinary
course of their businesses.
7. Following the Corporate Merger, New Prime will continue the
historic business of Prime and use a significant portion of Prime's
historic business assets in a business.
8. Prime, each of the Prime Affiliates, and to the best of the
knowledge of Prime management, New Prime, Sky Merger, and each Sky
Merger shareholders will each pay their own respective expenses, if any,
incurred in connection with the Corporate Merger.
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<PAGE>
9. There is no intercorporate indebtedness existing between Prime
and either Horizon or Sky Merger that was issued, acquired or will be
settled, at a discount.
10. Neither Prime, any Prime Affiliate, Sky Merger, Horizon or any
affiliate of Sky Merger or Horizon is under the jurisdiction of a court
in a title 11 case, a receivership, foreclosure or similar proceeding
under federal or state law for purposes of Code section 368(a)(3)(A).
11. The aggregate fair market value of the assets of Prime
transferred to the New Prime equals or exceeds the sum of the
liabilities assumed by New Prime plus the amount of liabilities, if any,
to which the transferred assets are subject.
12. Prior to and in connection with the Corporate Merger, Prime (a)
neither made nor declared any distributions to its shareholders, except
for the Prime Special Distribution, and (b) did not redeem any Prime
Shares.
13. Prior to and in connection with the Corporate Merger, no person
related to Prime purchased any Prime Shares for purposes of Temporary
Treasury Regulations section 1.368-1T(e).
14. Rudnick & Wolfe's opinions as to (i) the qualification of the
Reincorporation Merger as a valid Code section 368(a) reorganization and
(ii) the status of each of Horizon as a REIT and Horizon Partnership and
each subsidiary of Horizon Partnership, formed under relevant state law
as a partnership, joint venture or limited liability company, as a
partnership for federal income tax purposes are true and correct, and
Winston & Strawn may rely upon these Rudnick & Wolfe opinions.
15. Prime has operated in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
Prime's Amended and Restated Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate.
16. New Prime intends to operate in accordance with the Maryland
General Corporation Law and all other applicable laws of the State of
Maryland, New Prime's Article of Incorporation and Bylaws, and in the
manner described in the Joint Proxy and this Certificate.
17. Prime Partnership has operated, and intends to continue to
operate, in accordance with the Delaware Revised Uniform Limited
Partnership Act, all other applicable laws of the State of Delaware, the
Second Amended and Restated Agreement of Limited Partnership of Prime
Retail, L.P. (the "Partnership Agreement"), and in the manner described
in the Joint Proxy and this Certificate. Each of the Prime Property
Partnerships has operated, and intends to continue to operate, in
accordance with the applicable laws of the State in which it was formed,
its respective partnership agreement, and in the manner described in the
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<PAGE>
Joint Proxy and this Certificate. Prime Retail Finance Limited
Partnership (the "Finance Partnership") has operated, and intends to
continue to operate, in accordance with the Delaware Revised Uniform
Limited Partnership Act, all other applicable laws of the State of
Delaware, and its partnership agreements and in the manner described in
the Joint Proxy and this Certificate. The Partnership Agreement and the
partnership agreements for each of the Prime Property Partnerships and
the Finance Partnership have been duly executed.
18. Prime Retail Service, Inc. (the "Services Corporation") a
Maryland corporation, has operated, and intends to operate, in
accordance with the Maryland General Corporation Law and all other
applicable laws of the State of Maryland, the Services Corporation's
Articles of Incorporation, as amended, and Bylaws, as amended, and in
the manner described in the Joint Proxy and this Certificate. Neither
Prime, New Prime nor Prime Partnership has at any time owned or will own
any voting stock in the Services Corporation, and a majority of Prime's
directors and New Prime's directors could not, and will not be able to,
vote for or elect the directors of the Services Corporation.
Furthermore, a majority of Prime's directors and New Prime's directors
are not, and are not expected to be in the future, directors, officers,
shareholders or employees of the Services Corporation. The sale,
transfer or other disposition of the common stock of the Services
Corporation by the holders thereof is not subject to any restrictions.
Prime Retail Services Limited Partnership (the "Services Partnership")
has operated, and intends to continue to operate, in accordance with the
Delaware Revised Uniform Limited Partnership Act and all other
applicable laws of the State of Delaware, its Agreement of Limited
Partnership, and in the manner described in the Joint Proxy and this
Certificate. The Services Partnership currently performs, and in the
future will perform, only the activities of (i) selling coupon books
which provide (a) discounts for merchandise offered by tenants at
properties owned by Prime, New Prime, Prime Partnership or any Prime
Property Partnership and (b) discounts at area attractions; (ii)
operating informational booths at such properties; (iii) selling and
renting miscellaneous items at the informational booths to shoppers at
such properties; (iv) providing miscellaneous services at the
informational booths to shoppers at such properties; and (v) renting
"push carts" to various venders for use in common areas at such
properties. The Services Partnership will perform only activities and
services with respect to properties owned by New Prime, Prime
Partnership or any Prime Property Partnership and only such activities
and services which a real estate investment trust ("REIT") could perform
without causing amounts received from such properties to be treated as
other than "rents from real property" within the meaning of Code section
856(d). The Services Partnership has no plan or intention to perform
any activities or services other than those identified in clauses (i)
through (v) of this paragraph.
19. Prime Retail Finance, Inc. ("Finance"), a Maryland corporation,
has operated, and intends to continue to operate, in accordance with the
Maryland General Corporation Law and all other applicable laws of the
State of Maryland, its Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate. Prime Retail Finance II, Inc. ("Finance II"), a
Maryland corporation, has operated, and intends to continue to operate,
in accordance with the Maryland General Corporation Law and all other
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<PAGE>
applicable laws of the State of Maryland, its Articles of Incorporation,
as amended, and Bylaws, as amended, and in the manner described in the
Joint Proxy and this Certificate. Prime Retail Finance III, Inc.
("Finance III"), a Maryland corporation, has operated, and intends to
continue to operate, in accordance with the Maryland General Corporation
Law and all other applicable laws of the State of Maryland, its Articles
of Incorporation, as amended, and Bylaws, as amended, and in the manner
described in the Joint Proxy and this Certificate. Prime Retail Finance
IV, Inc. ("Finance IV"), a Maryland corporation, has operated, and
intends to continue to operate, in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
its Articles of Incorporation, as amended, and Bylaws, as amended, and
in the manner described in the Joint Proxy and this Certificate. At all
times since the formation of Finance, Finance II, Finance III, and
Finance IV, Prime has owned 100% of their outstanding stock (both voting
and nonvoting).
20. Prime Partnership, each Prime Property Partnership, the Finance
Partnership and the Services Partnership were formed, have been
operated, and intend to continue to operate, in reasonable anticipation
of making an economic profit, not taking into account any federal income
tax benefits. The respective general partner of each of these
partnerships acts for its own account and not as an agent or dummy of
the limited partners. None of the partnership interests in Prime
Partnership, any Prime Property Partnership, the Finance Partnership or
the Services Partnership (i) are currently traded or will be traded on
any securities exchange or any local or over-the-counter market (or
other interdealer quotation system that regularly disseminates firm buy
or sell quotations by identified brokers or dealers) or (ii) are
registered or will be registered under the Securities Act of 1933 (other
than Prime Partnership Units). At no time will there be more than 500
partners in each of Prime Partnership, each Prime Property Partnership
formed prior to January 1, 1996, the Finance Partnership and the
Services Partnership (determined by treating each person who indirectly
owns an interest in Prime Units through a partnership, grantor trust or
S corporation as a separate partner). At no time will there be more
than 100 partners in each Prime Property Partnership formed after
December 31, 1995. None of Prime Partnership, any Prime Property
Partnership, the Finance Partnership and the Services Partnership have
ever received any formal or informal notice from the Internal Revenue
Service (the "Service") indicating that an examination is underway or
will be made.
21. For all taxable years ending after the Closing Date, at least 90%
of the gross income derived by Prime Partnership shall consist only of
amounts from the following sources: (A) interest, (B) dividends, (C)
real property rents, (D) gain from the sale or other disposition of real
property (including property described in section 1221(1)), (E) income
and gains derived from the exploration, development, mining or
production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any
mineral or natural resource (including fertilizer, geothermal energy and
timber) or (F) any gain from the sale or disposition of a capital asset
(or property described in section 1231(b)) held for the production of
income described in (A)-(E) of this paragraph.
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<PAGE>
22. Since its formation, Prime has regularly computed its income in
keeping its books on the basis of a calendar year, and, accordingly, has
adopted and used the calendar year as its taxable year for federal
income tax purposes. Prime made the election specified in Code section
856(c) to be a REIT, effective for its taxable year ending December 31,
1994. Such election was made and filed with its federal income tax
return for the taxable year ending December 31, 1994, and such return
was properly filed with the Service on or before the due date thereof
(taking into account any extensions that may have been granted).
23. For each of its taxable years, Prime and the New Prime expect
that, and intend to take all measures within their control (including
without limitation monitoring and enforcing all restrictions of stock
ownership contained in New Prime's Articles of Incorporation), to ensure
that, (A) the beneficial ownership of Prime and New Prime has been and
will be held at all times by 100 or more persons as required by Code
section 856(a)(5) and, (B) at no time during the last half of any
taxable year after the first taxable year for which the REIT election
was made, has or will more than 50% in value of Prime's or New Prime's
outstanding stock be owned, directly or indirectly (taking into account
the constructive ownership rules of Code section 856(h)) by or for five
or fewer individuals. As of the date hereof, Prime is not aware of any
facts or circumstances that would indicate requirements (A) and (B) of
this paragraph have not been satisfied. To the best of Prime's
knowledge, no individual shareholder owns directly or indirectly more
than 9.9% of the value of Prime's outstanding stock.
24. Prime at all times has been, and the New Prime intends to be,
managed by one or more directors or trustees, and the beneficial
ownership of Prime has been, and the beneficial ownership of New Prime
will be, evidenced by transferable shares. With the exception of
restrictions imposed by Prime's Amended and Restated Articles of
Incorporation, as amended, [AND] the terms of the 1994 and 1995 Stock
Incentive Plans for certain employees and directors [AND RECENT
EMPLOYMENT OR OTHER AGREEMENTS], there are no restrictions on the
transfer of Prime's shares. Further, with the exception of certain
restrictions imposed by the New Prime's Articles of Incorporation, there
will be no restrictions on the transfer of New Prime Shares.
25. Prime has prepared an analysis for Winston & Strawn demonstrating
its compliance with the 95% and 75% gross income tests of Code section
856(c) for its taxable years ending December 31, 1994, December 31,
1995, December 31, 1996, December 31, 1997, and for the short period
taxable year from January 1, 1998 to the Closing Date (the "Short Period
Year"). Such analysis accurately shows the amounts and types of income
received by Prime, Prime Partnership, each Prime Property Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
for such taxable years. Prime does not anticipate earning in the
current taxable year or future taxable years significant gross income of
any type not reflected in this analysis. Furthermore, Prime does not
anticipate that the percentage for various categories designated in the
analysis as "Bad Income" taken as a percentage of the total revenues
expected to be earned by Prime or Prime Partnership will increase
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<PAGE>
materially for the taxable year ending December 31, 1998 or any taxable
year thereafter as compared to 1994, 1995, 1996, 1997 and the Short
Period Year.
26. New Prime has prepared an analysis for Winston & Strawn
demonstrating its projected compliance with the 95% and 75% gross income
tests of Code section 856(c) for its taxable years ending December 31,
1998 and December 31, 1999. Such analysis projects the amounts and
types of income to be received by New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, Finance, Finance
II, Finance III and Finance IV for such taxable years. New Prime does
not anticipate earning in the current taxable year or future taxable
years significant gross income of any type not reflected in this
analysis. Furthermore, New Prime does not anticipate that the
percentage for various categories designated in the analysis as "Bad
Income" taken as a percentage of the total revenues expected to be
earned by New Prime or Prime Partnership will increase materially for
the taxable year ending December 31, 1998 or any taxable year thereafter
as compared to the total revenues earned by Prime or Prime Partnership
in 1994, 1995, 1996, 1997 and the Short Period Year.
27. At least 95% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III and Finance IV after the date
hereof), including for this purpose both rents
attributable to personal property that satisfies the
conditions described in paragraph 30 below and charges
for services customarily furnished or rendered in
connection with the rental of real property, whether or
not such charges are separately stated, but excluding (i)
any rents received or accrued from persons identified in
Code section 856(d)(2)(B) (as described in paragraph 31
below), (ii) any amount described in Code section
856(d)(2)(A) (discussed in paragraph 29 below) and (iii)
any rent received from a tenant to whom or with respect
to whom services are provided other than services
described in paragraph 32 below;
(B) gain realized upon the sale or other disposition of
stock, securities and real property which is not
inventory or other property held for sale to customers in
the ordinary course of business;
(C) interest, but excluding (i) interest determined in whole
or in part on the income or profits of any person, and
(ii) in the case of interest paid by any partnership in
which Prime or Prime Partnership has an interest, the
portion of the interest attributable to such ownership
interest;
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<PAGE>
(D) dividends;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
and
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6).
For purposes of this representation and all other representations
relating to the gross income of Prime or Prime Partnership, each has
been treated as receiving a pro rata share, based on its capital
interest within the meaning of Treasury Regulations section 1.856-3(g),
of all gross income derived by any partnership in which it is a partner.
Additionally, for purposes of this representation, all gross income
received by Finance, Finance II, Finance III, Finance IV or any other
subsidiary in which at all times Prime has owned 100% of its outstanding
stock, shall be treated as income of Prime. New Prime and Prime
Partnership intend to take all measures within their control to ensure
that for the current taxable year and all future taxable years, at least
95% of their gross incomes will be derived from the sources listed in
clauses (A) through (H) of this paragraph.
28. At least 75% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, Finance, Finance II, Finance III or
Finance IV after the date hereof), including for this
purpose both rents attributable to personal property that
satisfies the conditions described in paragraph 30 below
and charges for services customarily furnished or
rendered in connection with the rental of real property,
whether or not such charges are separately stated, but
excluding (i) any rents received or accrued from persons
identified in Code section 856(d)(2)(B) (as described in
paragraph 31 below), (ii) any amount described in Code
section 856(d)(2)(A) (which is discussed in paragraph 29
below) and (iii) any rent received from a tenant to whom
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<PAGE>
or with respect to whom services are provided other than
services described in paragraph 32 below;
(B) interest on obligations secured by mortgages on real
property or interests in real property, but excluding (i)
interest determined in whole or in part based on the
profits or income of any person and (ii) in the case of
interest paid by any partnership in which Prime or Prime
Partnership has an interest, the portion of the interest
attributable to such ownership interest;
(C) gain from the sale or other disposition of real property
(including interests in real property and interests in
mortgages on real property) other than property which is
held as inventory or for sale to customers in the
ordinary course of business;
(D) dividends or other distributions on, and gain, other than
gain from a prohibited transaction within the meaning of
Code section 857(b)(6), from the sale or disposition of
transferable shares in other REITs;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6); and
(I) "qualified temporary investment income" as defined in
Code section 856(c)(6)(D).
New Prime and Prime Partnership intend to take all measures within their
control to ensure that for the current taxable year and all future
taxable years, at least 75% of their gross incomes will be derived from
the sources listed in clauses (A) through (I) of this paragraph.
29. No amounts previously paid or payable (except for a de minimis
amount representing no more than .25% of Prime's or Prime Partnership's
annual gross income) to Prime, Prime Partnership, any Prime Property
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<PAGE>
Partnership, the Finance Partnership, the Services Partnership, Finance,
Finance II, Finance III or Finance IV in connection with the rental of
property depend in whole or in part on the income or profits derived
from any tenant (or sub-tenant) of such property (except that such
amounts may be based on a fixed percentage or percentages of receipts or
sales). Neither New Prime, Prime Partnership, any Property Partnership,
the Services Partnership, the Finance Partnership, Finance, Finance II,
Finance III, nor Finance IV expects to enter into any lease agreement or
other arrangement in connection with the rental of property under which
amounts will be paid based in whole or in part on the income or profits
derived by the tenant under such lease or arrangement, and each intends
to take all measures within its control to ensure that no such amounts
are received. As to each lease under which the tenant pays rent based
upon a fixed percentage of sales or receipts, the rental provisions
conform with normal business practice (taking into account the lease
itself and the surrounding circumstances) and are not used as means to
base the rent paid on the income or profits of the ultimate tenant.
30. Other than with respect to certain rents received by the Services
Partnership from push cart vendors, which rents are less than .25% of
the annual gross income of Prime's or Prime Partnership's gross income,
(A) less than 15% of the rent received from each of the properties has
been, and is expected to be while in New Prime's possession,
attributable to personal property (determined by the ratio of adjusted
basis of the personal property subject to a lease to the total adjusted
basis of all property subject to that lease); and (B) all personal
property contained in the properties leased by Prime, Prime Partnership,
any Prime Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III or Finance IV has been, and is anticipated to be
while in New Prime's possession, leased under or in connection with the
lease of real property.
31. No gross rental income received by Prime, New Prime or Prime
Partnership has been, or is expected to be, received or accrued
directly or indirectly from any person in which Prime or New Prime owns
(A) in the case of a corporation, 10% or more of the total combined
voting power of all classes of stock entitled to vote, or 10% or more of
the total number of shares of all classes of stock, or (B) in the case
of an entity other than a corporation, an interest in 10% or more of the
assets or net profits of such entity. For purposes of this paragraph,
ownership will be determined by taking into account the attribution
rules of Code section 318 as modified by Code section 856(d)(5).
32. Neither Prime, New Prime, Prime Partnership, any Property
Partnership, the Services Partnership, the Finance Partnership, Finance,
Finance II, Finance III nor Finance IV has provided, or intends to
provide, to any tenants of the properties any services that (i) are not
customarily rendered in connection with the rental of space for
occupancy only and (ii) are rendered primarily for the convenience of
the tenant. Based upon its experience and that of its affiliates in the
various geographic markets in which the properties are located, Prime
and New Prime expect that all services previously provided or that will
be provided to tenants of the properties directly by Prime, New Prime,
Prime Partnership, the Prime Property Partnerships, the Services
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Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV will be considered usually or customarily rendered in
connection with the rental of space of the type rented for occupancy in
the market in which the property is located. In the event that New
Prime, Prime Partnership, any Prime Property Partnerships, the Services
Partnership, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV decide in the future to provide any services to the
tenants which would not be customary as described above, all such
services will be performed by an "independent contractor" within the
meaning of Code section 856(d)(3) from whom New Prime, Prime
Partnership, the Prime Property Partnerships, the Services Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
derive no income. All independent contractors have received and are
expected to receive in the future reasonable compensation for services
rendered, and such compensation has been, or will be, established after
arm's-length negotiations. For purposes of this representation, Prime
has assumed that if and to the extent there is either (A) "concierge
services," (B) parking garage or parking lot facilities where there are
attendants present or other paid parking services or (C) construction or
"build-out" services (other than supervision of contractors), such
services have not been treated as customary within the meaning of this
paragraph; and both Prime and New Prime intend such services to be
performed by independent contractors within the meaning of Code section
856(d)(3).
33. If Prime, New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV engage in real estate activities which involve the sale or
other disposition of property held primarily for sale to customers in
the ordinary course of business and which constitute prohibited
transactions as defined in Code section 857(b)(6), such activities will
be conducted through one or more special purpose corporations in which
Prime Partnership has or will have a nonvoting stock interest. Prime
has taken, and New Prime will take, all necessary measures to ensure
that the stock interest owned by Prime Partnership in any such
corporation will not exceed 10% of the voting securities of such
corporation and that the value of the stock interest will not exceed 5%
of the value of Prime's total gross assets.
34. Prime, New Prime, Prime Partnership, the Prime Property
Partnerships, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV have derived, and intend to derive, amounts with respect
to interest on obligations secured by mortgages on real property
described above in paragraph 28(B) where the mortgages also cover
property in addition to real property only if the loan value of the real
property is at least equal to 75% of the amount of the loan.
35. Prime Partnership has received fees in consideration of the
performance of management and administration services with respect to
properties that are not owned entirely by Prime Partnership. A portion
of such management and administrative fees (corresponding to that
portion of a property owned by a third party) is treated by Prime as not
qualifying under the 75% and 95% gross income tests of Code section
856(c) for the purpose of the representations made herein. Prime
Partnership may also receive other types of income with respect to the
properties it owns that do not qualify for the 75% and 95% gross income
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tests. New Prime and Prime Partnership intend to take all measures
within their control to ensure that the aggregate amount of such fees
and Bad Income in any taxable year will not cause New Prime to exceed
the limits on nonqualifying income under the 75% or 95% gross income
tests.
36. For their 1994, 1995, 1996 and 1997 taxable years, less than 30%
of the gross incomes of Prime and Prime Partnership was derived from the
sale or other disposition of the following: (A) stock or securities held
for less than one year; (B) property in a transaction which is a
"prohibited transaction" within the meaning of Code section
856(c)(4)(B); and (C) real property (including interests in real
property and interests in mortgages on real property) held for less than
four years, other than property compulsorily or involuntarily converted
within the meaning of Code section 1033 or property which constitutes
"foreclosure property" within the meaning of Code section 856(e). Prime
understands that an interest rate swap or cap agreement which Prime uses
to hedge any variable rate indebtedness used to carry real property
constitutes a security for this 30% test. Prime and Prime Partnership
intend to take all measures within their control to ensure that for the
current taxable year and any future taxable year less than 30% of their
gross incomes will be derived from the sources described in clauses (A),
(B) and (C) of this paragraph.
37. Within two years of any acquisition by Prime, New Prime, Prime
Partnership, any Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III or Finance IV of property through
"foreclosure" (within the meaning of Code section 856(e) including space
reacquired by dispossessing defaulted tenants) or within such additional
period as Prime or New Prime may obtain by extension from the Service,
Prime, New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III or Finance IV, as
the case may be, has sold the property, or intends to take such action
necessary to ensure that the property is sold, or take such other
actions as are necessary to ensure that income derived from such
property will not cause Prime or New Prime to fail the gross income
tests set forth in Code section 856(c). With respect to any foreclosure
property, neither New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
nor Finance IV intends (i) to enter into any lease which will result in
income not qualifying under the gross income tests of Code section
856(c); (ii) to cause construction to take place on such property unless
such construction involves the completion of a building or other
improvement where more than 10% of the construction of such building was
completed before default became imminent; and (iii) within 90 days of
acquisition of any foreclosure property, to use such property in a trade
or business, other than through an independent contractor as defined in
Code section 856(d)(3) from whom New Prime and Prime Partnership derive
or receive no income.
38. Prime has properly reported and paid the appropriate tax on
income from prohibited transactions, if any, within the meaning of Code
section 857(b)(6). Since its formation, Prime has sold or caused the
sale of no more than [FOUR] outlets.
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39. Prime's federal income tax returns (which includes Finance,
Finance II, Finance III and Finance IV) and those of Prime Partnership,
each Prime Property Partnership, the Finance Partnership, the Services
Partnership and the Services Corporation have been timely filed and all
such returns accurately portray the respective incomes of all such
entities in every material respect. The copies of the federal income
tax returns provided to Winston & Strawn accurately reflect the tax
returns that have been or will be filed with the Service. Prime has
maintained all records and files necessary to comply with the
requirements of the Code and the regulations promulgated thereunder
(including without limitation Treasury Regulations section 1.856-4), and
New Prime will take all measures within its control to continue to
maintain all records and files in accordance with the requirements of
the Code and the regulations.
40. Prime, New Prime and Prime Partnership have filed, or will file,
all of their respective federal income and information tax returns for
the taxable year ended December 31, 1994 and all subsequent taxable
years, and have caused, and will cause, Castle Rock Factory Shops
Partnership and/or any direct or indirect subsidiary entity of any of
the foregoing to file all of their respective federal income and
informational tax returns for the taxable year ended December 31, 1994,
and all subsequent taxable years, in a manner consistent with the
position taken by Colorado Factory Shops Limited Partnership on its
federal income and informational tax returns for the taxable year ended
December 31, 1993 regarding the accrual for the taxable year ended
December 31, 1993 of all amounts payable under that certain Development
Agreement, dated July 26, 1991, by and between the Town of Castle Rock
and Colorado Factory Shops Limited Partnership, as amended by a First
Amendment, dated February 13, 1992, a Second Amendment, dated March 5,
1992, and a Third Amendment, dated April 9, 1992, and a Fourth
Amendment, dated April 16, 1992.
41. Amounts received, or to be received by the Arizona Factory Shops
Partnership from the City of Phoenix, Arizona in exchange for storm
drain land and storm drain improvements represent payment only for such
properties as determined after arm's-length negotiations.
42. All agreements by Prime, Prime Partnership and any Prime
Affiliate, with respect to property management fees, development fees,
construction management fees, leasing commissions or similar fees or
payments, were negotiated at arm's-length, and the amount of such fees
and payments represent reasonable amounts for the services rendered.
43. All annual amounts that Prime, New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, the Services
Partnership, Finance, Finance II, Finance III and Finance IV receive, or
will receive, under leases, contracts, or other agreements with state or
local governments or agencies or instrumentalities thereof and which
Prime takes the position are excludible from gross income for federal
income tax purposes under Code section 103 are no more than .25% of
Prime's or Prime Partnership's total annual income. All other leases,
contracts or other agreements with state or local governments or
agencies or instrumentalities thereof pursuant to which Prime directly
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or indirectly receives money or other property are entered into for the
purpose of providing Prime an abatement of real estate property taxes
and such money or other property are included in Prime's gross income.
Further, New Prime will take all appropriate measures to ensure that the
statements contained in this representation 43 remain accurate.
44. Prime (i) has not received any letter, notice or other written or
oral transmittal from the Service regarding its status as a REIT; (ii)
has not received any opinion of counsel or letter from its accountants
that indicates it may not qualify as a REIT; and (iii) is not currently
undergoing an audit by the Service.
45. At least 75% in value of Prime's total assets, including assets
held through partnerships in which it holds an interest or through
Finance, Finance II, Finance III and Finance IV has at all times
consisted of assets of the following types:
(A) land or interests therein;
(B) buildings, including wiring, plumbing systems, elevators,
escalators and other structural components thereof, but
not including any personal property associated with such
real property (such as furnishings, appliances,
draperies, equipment, machinery, etc.);
(C) loans (including accrued interest thereon) directly
secured by a duly recorded mortgage on real property of
the type described in (A) or (B) above;
(D) cash and cash items, including cash on hand, time and
demand deposits with financial institutions and
receivables arising in the ordinary course of Prime's
operations (other than those purchased from another
person) but excluding bankers' acceptances, repurchase
agreements and other similar instruments;
(E) securities (including accrued interest thereon) issued or
guaranteed by the United States or by a person controlled
or supervised by and acting as an instrumentality of the
United States, pursuant to any authority granted by
Congress, or any certificate of deposit for any of the
foregoing; and
(F) only during the one year period commencing on the date
new capital is received, stock or debt instruments sold
to the public attributable to the temporary investment of
such new capital.
New Prime intends to take all measures within its control to ensure that
in the current taxable year and all future taxable years, at least 75%
in value of its total assets will consist of the assets identified in
clauses (A) through (F) of this paragraph.
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46. At no time has more than 25% in value of Prime's total assets
been represented by, and New Prime intends to take all measures within
its control to ensure that at no time in the future will more than 25%
in value of Prime's total assets be represented by, securities other
than those described in paragraph 45 above;
47. Prime has not owned, and New Prime intends to take all measures
within its control to ensure that it will not own, at the end of any
calendar quarter securities in any corporate issuer (other than Finance,
Finance II, Finance III, Finance IV or a future wholly-owned corporation
whose stock is entirely owned by New Prime) that either (A) represent in
excess of 10% of the outstanding voting securities of any such issuer or
(B) have an aggregate value in excess of 5% of the value of the total
assets of Prime or New Prime as determined in accordance with Treasury
Regulations section 1.856-2(d)(2). For the purposes of this
representation, Prime and New Prime will be treated as owning their pro
rata share (based on its capital interest) of all securities held by
partnerships in which it holds an interest. Prime and New Prime
understand that for the purposes of this representation they are
entitled to take into consideration the provision of Code section
856(c)(5) allowing a 30 day period to correct any failure to comply with
this representation as the result of any acquisition of a security
during the calendar quarter.
48. Except as provided in paragraph 33 above, Prime has taken, and
New Prime intends to take, all actions within their control to ensure
that all properties currently held and which may later be held by Prime,
New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III and Finance IV are
held for investment purposes and not as (A) stock in trade or other
property of a kind which would properly be included in inventory if on
hand at the close of the taxable year, or (B) property held primarily
for sale to customers in the ordinary course of business.
49. Prime has furnished Winston & Strawn with access to all leases
for properties in which Prime directly or indirectly holds an ownership
interest.
50. New Prime will furnish to Winston & Strawn with access to all
leases for properties in which New Prime directly or indirectly holds
an ownership interest.
51. Prime has furnished Winston & Strawn with accurate copies of all
its audited financial statements, including the opinion of its public
accountants. Copies of all documents furnished by Prime to Winston &
Strawn have conformed to the originals.
52. Prime has taken, and New Prime intends to take, all necessary
actions within its control to ensure that, Prime, New Prime, Prime
Partnership, each Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III and Finance IV revalue their assets at
the end of each quarter of each taxable year in which securities or
other property are acquired and will eliminate within 30 days after the
end of each such quarter any discrepancy between the value of Prime's or
New Prime's various investments and the requirements of Code section
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<PAGE>
856(c)(5) to the extent attributable in whole or in part to acquisitions
during such quarter.
53. For each of its 1994, 1995, 1996, 1997 and the Short Period Year
taxable years, Prime has distributed to shareholders within each taxable
year or within 30 days after the end of each taxable year for which a
distribution is declared and payable to shareholders of record prior to
the end of such taxable year 95% of its real estate investment trust
taxable income as such term is defined in Code section 857(b)(2). (For
purposes of the foregoing statement with respect to the Short Period
Year taxable year, Prime meets this 95% distribution requirement even if
the Prime Special Distribution is not taken into account.) Prime and
New Prime intend to take all actions within its control that are
necessary to ensure the distribution requirements of Code section 857
are satisfied for the current taxable year and all future taxable years.
54. Prime has distributed currently for each of 1994, 1995, 1996,
1997 and the Short Period Year an amount at least equal to the sum of
the following: (i) 85% of Prime's ordinary income for such taxable year,
(ii) 95% of Prime's capital gain net income for such taxable year, and
(iii) any undistributed ordinary income or capital gain net income from
prior taxable years. (For purposes of the foregoing statement with
respect to the Short Period Year taxable year, Prime meets this
distribution requirement even if the Prime Special Distribution is not
taken into account.) New Prime intends to take all necessary actions
within its control to ensure that this requirement will be met in the
current taxable year and all future taxable years.
55. All distributions have been made, and will in the future be made,
in accordance with the terms of Prime's Amended and Restated Articles of
Incorporation, as amended or New Prime's Articles of Incorporation, as
the case may be.
56. Prime has complied with the requirements of Code section
857(a)(2) and Treasury Regulations sections 1.857-8 and 1.857-9
(relating to records to be maintained concerning stock ownership and
information required to be requested from shareholders of Prime who own
greater than the applicable ownership percentage in such regulations).
Prime intends to take all actions necessary within its control to ensure
that such requirements are satisfied in the current taxable year and all
future taxable years.
57. With respect to the New Prime Series B Preferred Shares, New
Prime does not have any present plan or intention to exercise its option
to redeem the Convertible Preferred Stock before [MARCH 31, 1999].
58. Prime Partnership, the Prime Property Partnerships, Prime Retail
Finance Limited Partnership (the "Finance Partnership") and Prime Retail
Services Limited Partnership (the "Services Partnership") were formed,
have been operated, and intend to continue to operate, in reasonable
anticipation of making an economic profit, not taking into account any
federal income tax benefits. The respective general partner of each of
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these partnerships acts for its own account and not as an agent or dummy
of the limited partners.
59. Prime currently owns [ ]% of the Common Units of Prime
Partnership, [ ]% of the Preferred Units, and [ ]% of the Convertible
Preferred Units. Upon consummation of the transactions contemplated in
the Joint Proxy and the Merger Agreement, New Prime will own [ ]% of
the Common Units of Prime Partnership, [ ]% of the Preferred Units,
and [ ]% of the Convertible Preferred Units. Prime currently has
approximately $[ ] in net assets and New Prime does not intend to
significantly reduce its net assets in the foreseeable future.
60. None of the partnership interests in Prime Partnership, any Prime
Property Partnership, the Finance Partnership or the Services
Partnership (i) are currently traded or will be traded on any securities
exchange or any local or over-the-counter market (or other interdealer
quotation system that regularly disseminates firm buy or sell quotations
by identified brokers or dealers) or (ii) are registered or will be
registered under the Securities Act of 1933 (other than Prime
Partnership Units). At no time has there been or will there be more
than 500 partners in each of Prime Partnership, each Prime Property
Partnership formed prior to January 1, 1996, the Finance Partnership and
the Services Partnership (determined by treating each person who
indirectly owns an interest in Prime Units through a partnership,
grantor trust or S corporation as a separate partner). At no time has
there been or will there be more than 100 partners in each Prime
Property Partnership formed after December 31, 1995. None of Prime
Partnership, any Prime Property Partnership, the Finance Partnership and
the Services Partnership have ever received any formal or informal
notice from the Internal Revenue Service (the "Service") indicating that
an examination is underway or will be made.
61. The Prime Special Distribution will be paid from internal funds
or from proceeds from the [Nomura loan secured by Prime unlevered
properties as described in the letter agreement between Prime and Nomura
Asset Capital Corporation dated March 6, 1998] deposited with [the stock
transfer/paying agent] prior to the Mergers. Although Prime will borrow
some or all of the funds necessary to make the Prime Special
Distribution, Prime will be able to do so based on its assets and
financial condition prior to Closing. Consequently, New Prime will not
need Horizon or Sky Merger assets or operations to repay the amounts
attributable to the Prime Special Distribution.
62. The Corporate Merger, Partnership Merger and other transactions
described in the Joint Proxy are being effected for bona fide business
reasons as articulated in such Joint Proxy.
63. None of the compensation received by any shareholder-employee of
Prime will be separate consideration for, or allocable to, any of his or
her Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares or Prime Series C Preferred Shares. The compensation
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<PAGE>
paid to any shareholder-employee of Prime will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services. None of the New Prime
Common Shares, New Prime Series A Preferred Shares, New Prime Series B
Preferred Shares and New Prime Series C Preferred Shares received by any
shareholder-employee of Prime will be in exchange for, or in
consideration of, services rendered to Prime, Prime Partnership or any
Prime Affiliate by such shareholder-employee.
64. Prime is familiar with the two Officer's Certificates given to
Winston & Strawn by Horizon dated _________, 1998 regarding the
Corporate Merger, the Reincorporation Merger, the status of each of
Horizon as a REIT, and Horizon Partnership and each subsidiary of
Horizon Partnership, formed under relevant state law as a partnership,
joint venture or limited liability company, as a partnership for federal
income tax purposes. To the extent any of the representations in such
Certificates relate to the future operations of New Prime as successor
to Sky Merger, New Prime will abide by such representations made by Sky
Merger.
65. To the extent any of the foregoing representations relate to the
future operations of New Prime, unexpected events may cause a deviation
from one or more of the intended operating principles set forth herein,
and in such case, New Prime, if it takes actions inconsistent with the
business plan reflected in such representations, intends to do so in a
manner to preserve in all events the status of New Prime as a REIT under
the Code.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on
behalf of Prime, Prime Partnership, the Prime Affiliates, New Prime and the New
Prime Affiliates this ___th day of _____, 1998.
PRIME RETAIL, Inc.
By: ______________________________
Its: Senior Vice President--
General Counsel and Secretary
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EXHIBIT 8.3
, 1998
(312) 368-4000
Prime Retail, Inc.
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
Re: TAX OPINION UNDER SECTION 6.2(d) OF THE MERGER AGREEMENT
Ladies and Gentlemen:
We are acting as special counsel to Horizon Group, Inc., a Michigan
corporation ("Horizon") and Sky Merger Corp., a Maryland Corporation ("Sky
Merger") in connection with (A) the Joint Proxy Statement/Prospectus/Information
Statement, included in the Registration Statement on Form S-4 (File
No. 333-_________) (the "Merger Registration Statement"), relating to (1) the
proposed merger (the "Reincorporation Merger") of Horizon with and into Sky
Merger, and (2) the proposed merger (the "Corporate Merger") of Prime Retail,
Inc., a Maryland corporation ("Prime"), with and into Sky Merger, and (B) the
Joint Consent Solicitation Statement/Prospectus/Information Statement,
contained in the Registration Statement on Form S-4 (File No. 333-__________)
(the "Partnership Registration Statement"), relating to the proposed merger
(the "Partnership Merger") of Horizon/Glen Outlet Centers Limited
Partnership, a Delaware limited partnership ("Horizon Partnership") with and
into Prime Retail, L.P. a Delaware limited partnership ("Prime Partnership"),
and other transactions as discussed in the Partnership Registration Statement
(the "Transactions"), (the Merger Registration Statement and the Partnership
Registration Statement are referred to herein collectively as the
"Registration Statements"). You have requested our opinion as to certain
federal income tax matters described below.
Unless otherwise specifically defined herein, all capitalized terms have
the meaning assigned to them in the Registration Statements.
The Reincorporation Merger, the Corporate Merger, and the Partnership
Merger will be consummated pursuant to: (i) an Amended and Restated Agreement
and Plan of Merger, dated as of February 1, 1998, (the "Merger Agreement") by
and among Prime, Horizon, Sky Merger, Prime Partnership, Horizon Partnership,
Horizon Group Properties, Inc., a Maryland corporation ("HGP"), and Horizon
Group Properties, L.P., a Delaware limited partnership ("HGP LP"); (ii) the
Articles of Merger, by and between Horizon and Sky Merger, entered into in
connection with the Merger Agreement (the "Reincorporation Articles of Merger");
(iii) the
<PAGE>
Prime Retail, Inc.
__________________, 1998
Page 2
Certificate of Merger, by and between Horizon and Sky Merger, entered
into in connection with the Merger Agreement (the "Reincorporation Certificate
of Merger"); (iv) the Articles of Merger, by and between Prime and Sky Merger,
entered into in connection with the Merger Agreement (the "Corporate Articles of
Merger"); and (v) the Certificate of Merger by and between Horizon Partnership
and Prime Partnership, entered into in connection with the Merger Agreement (the
"Partnership Certificate of Merger").
Pursuant to the Partnership Merger, Horizon Partnership will be merged, in
accordance with the applicable provisions of the Delaware Revised Uniform
Limited Partnership Act ("DRULPA"), with and into Prime Partnership, with Prime
Partnership as the surviving partnership. The Partnership Merger will be voted
upon, as required by law, by the partners of Horizon Partnership and the
partners of Prime Partnership at special meetings.
As of the effective time of the Partnership Merger, each of the issued and
outstanding Horizon Partnership Units (other than units held by Horizon or any
Horizon Subsidiary) shall be converted by the Partnership Merger into the right
to receive 0.9193 of a Prime Partnership Common Unit. Each outstanding common
and preferred unit of Prime Partnership will continue to represent a unit of the
same class and series of partnership interest in the surviving partnership.
Pursuant to the Reincorporation Merger, Horizon will be merged, in
accordance with the applicable provisions of the Maryland General Corporation
Law ("MGCL") and the Michigan Business Corporation Act ("MBCA"), with and into
Sky Merger, with Sky Merger as the surviving corporation. The Reincorporation
Merger will be voted upon, as required by law, by Horizon shareholders at a
special meeting.
As of the Reincorporation Merger Effective Time, and by virtue of the
Reincorporation Merger, each issued and outstanding Sky Merger Common Share held
by Horizon shall be canceled, and each issued and outstanding Horizon Common
Share (other than Horizon Common Shares owned by Horizon or any subsidiary of
Horizon, which shall automatically be canceled and retired and all rights with
respect thereto shall cease to exist), shall be converted into one Sky Merger
Common Share.
Pursuant to the Corporate Merger, Prime will be merged, in accordance with
the applicable provisions of the MGCL, with and into Sky Merger, with Sky Merger
as the surviving corporation to be renamed "Prime Retail, Inc." ("New Prime").
The Corporate Merger will be voted upon, as required by law, by Horizon
shareholders and Prime shareholders at special meetings.
<PAGE>
Prime Retail, Inc.
__________________, 1998
Page 3
As of the Corporate Merger Effective Time, and by virtue of the Corporate
Merger: (i) each outstanding Sky Merger Common Share (other than shares held by
Horizon or any subsidiary of Horizon) shall be converted into 0.20 of a New
Prime Series B Preferred Share and 0.597 of a New Prime Common Share; (ii) each
outstanding Prime Common Share shall be converted into one New Prime Common
Share; and (iii) each outstanding Prime Series A Preferred Share, Prime Series B
Preferred Share and Prime Series C Preferred Share shall be converted into one
New Prime Series A Preferred Share, one New Prime Series B Preferred Share, and
one New Prime Series C Preferred Share, respectively.
In connection with rendering the opinions expressed below, we have examined
originals (or copies identified to our satisfaction as true copies of the
originals) of the following documents (collectively, the "Reviewed Documents"):
(a) The Amended and Restated Agreement of Limited Partnership of
Horizon/Glen Outlet Centers Limited Partnership, dated as of
____________, 19___, as amended (the "Horizon Partnership Agreement");
(b) The Amended and Restated Articles of Incorporation of Horizon, as
amended on the date hereof (the "Charter") and all prior versions of
the Charter;
(c) Each Partnership Agreement (as defined below) of the Horizon
Subsidiary Partnerships (as defined below), as amended;
(d) The Registration Statements;
(e) Such other documents as may have been presented to us by Horizon from
time to time.
In addition, we have relied upon Horizon's certificate, dated
__________, 1998 (the "Horizon Officer's Certificate"), executed by a duly
appointed officer of Horizon, which is attached hereto as Exhibit A, setting
forth certain factual representations relating to the organization and
operation of Horizon, Sky Merger and Horizon Partnership before the Mergers.
Furthermore, we have relied upon Prime's certificate, dated __________, 1998
(the "Prime Officer's Certificate"), executed by a duly appointed officer of
Prime, which is attached hereto as Exhibit B. For purposes of our opinion,
we have not made an independent investigation of the facts set forth in the
documents we reviewed. We consequently have relied upon your factual
representations that the information presented in the documents we reviewed
or otherwise furnished to us (including from your representative, Ernst &
Young, LLP) accurately and completely describes all material facts relevant
to our opinions. Any representation or statement in any document upon which we
rely that is made "to the best of knowledge" or otherwise similarly qualified
is assumed to be correct. Any alteration of such facts may adversely affect
our opinions. In the course of our representation of Horizon and Sky Merger,
no information has come to our attention that would cause us to question the
accuracy or
<PAGE>
Prime Retail, Inc.
__________________, 1998
Page 4
completeness of the factual representations contained in the Horizon
Officer's Certificate or of the Reviewed Documents in a material way.
In our review, we have assumed, with your consent, that all of the
representations and statements set forth in the documents we reviewed are true
and correct, and all of the obligations imposed by any such documents on the
parties thereto have been and will be performed or satisfied in accordance with
their terms. We have also assumed the genuineness of all signatures, the proper
execution of all documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of documents submitted to us as copies,
and the authenticity of the originals from which any copies were made.
In rendering these opinions, we have assumed that the transactions
contemplated by the Reviewed Documents will be consummated in accordance with
the terms and provisions of such documents, and that such documents accurately
reflect the material facts of such transactions. In addition, the opinions are
based on the correctness of the following specific assumptions: (i) at all
times prior to the Partnership Merger, Horizon Partnership and the subsidiaries
of Horizon that were formed as partnerships, joint ventures or limited liability
companies (the "Horizon Subsidiary Partnerships") each have been operated in the
manner described in the Horizon Partnership Agreement, and the respective
partnership agreements, operating agreements and other organizational documents
of each respective Horizon Subsidiary Partnership, respectively (hereinafter,
the "Partnership Agreements"), or other organizational documents of each such
entity, in the Joint Proxy Statement/Prospectus/Information Statement and the
Joint Consent Solicitation Statement/Prospectus/Information Statement, and
all terms and provisions of such agreements and documents have been complied
with by all parties thereto; (ii) at all times prior to the Reincorporation
Merger, Horizon and Sky Merger each have been operated in the manner
described in the Horizon Articles of Incorporation and the Sky Merger
Articles of Incorporation or other organizational documents of each such
entity, respectively, in the Joint Proxy Statement/Prospectus/Information
Statement and the Joint Consent Solicitation Statement/Prospectus/Information
Statement, and all terms and provisions of such agreements and documents will
be complied with by all parties thereto; (iii) at all times prior to the
Corporate Merger, Sky Merger will be operated in the manner described in the
Sky Merger Articles of Incorporation or other organizational documents of
such entity, in the Joint Proxy Statement/Prospectus/Information Statement
and the Joint Consent Solicitation Statement/Prospectus/Information
Statement, and all terms and provisions of such agreements and documents will
be complied with by all parties thereto; (iv) Horizon is a duly formed
corporation under the laws of the State of Michigan; (v) Sky Merger is a duly
formed corporation under the laws of the State of Maryland; and (vi) there
has been no change in the applicable laws of the States of Michigan,
Maryland, or Delaware, or in the Code, the regulations promulgated
thereunder by the Treasury Department, and the interpretations of the
<PAGE>
Prime Retail, Inc.
__________________, 1998
Page 5
Code and such regulations by the courts and the Internal Revenue Service, all
as they are in effect and exist at the date of this letter. With respect to
the last assumption, it should be noted that statutes, regulations, judicial
decisions, and administrative interpretations are subject to change at any
time and, in some circumstances, with retroactive effect. A material change
that is made after the date hereof in any of the foregoing bases for our
opinions could affect our conclusions. Moreover, with respect to Horizon's
taxable years ending after December 31, 1997, the qualification and taxation
of Horizon as a REIT depends upon its ability to meet, through actual annual
operating results, distribution levels and diversity of share ownership and
the various qualification tests imposed under the Code, the results of which
will not be reviewed by the undersigned. No assurance can be given that the
actual results of the operations of Horizon for any one taxable year will
satisfy such requirements.
Based upon and subject to the foregoing, it is our opinion that:
(i) Horizon, for each of its taxable years ending after December 31, 1993,
was organized in conformity with the requirements for qualification
and taxation as a real estate investment trust (a "REIT") under
Section 856 of the Code, and its method of operation has enabled it
(and will enable it up to the Reincorporation Merger Effective Time)
to continue to meet the requirements for qualification and taxation as
a REIT under the Code;
(ii) Horizon Partnership has, since its formation, and continues to be as
of the date of this opinion, classified as a partnership for federal
income tax purposes, and not a corporation or association, taxable as
a corporation or a publicly traded partnership under Code Section 7704
taxable as a corporation;
(iii) Each Horizon Subsidiary Partnership has, since its formation, and
continues to be as of the date of this opinion, classified as a
partnership for federal income tax purposes, and not a
corporation or association, taxable as a corporation or a
publicly traded partnership under Code Section 7704 taxable as a
corporation; and
(iv) The statement of federal income tax matters and consequences
described in the Joint Consent Solicitation
Statement/Prospectus/Information Statement under the headings
"Summary--Federal Income Tax Consequences of the Partnership
Merger," "Prime Partnership Risk Factors--Federal Income Tax
Consequences of the Partnership Merger," "Prime Partnership Risk
Factors--Adverse Impact of New Prime's Failure to Continue to
Qualify as a REIT," "Prime Partnership Risk Factors--Effect of REIT
Distribution Requirements," "Prime Partnership Risk
Factors--Penalty Tax on Prohibited Transactions," "Prime
Partnership Risk Factors--Ownership Limit Necessary to Maintain
REIT Qualification," "Prime Partnership Risk Factors--Restrictions
upon Transfer to Avoid Publicly Traded Partnership Status,"
<PAGE>
Prime Retail, Inc.
__________________, 1998
Page 6
"Prime Partnership Risk Factors--Tax Termination of Prime
Partnership," "HGP LP Risk Factors--Adverse Impact of the
Failure to Continue to Qualify as a REIT," "HGP LP Risk
Factors--Ownership Limit Necessary to Maintain REIT Qualification,"
"HGP LP Risk Factors--Effect of REIT Distribution Requirements," "HGP
LP Risk Factors--Penalty Tax on Prohibited Transactions," "HGP LP Risk
Factors--Restrictions Upon Transfer to Avoid Publicly Traded
Partnership Status," "HGP LP Risk Factors--Federal Income Tax
Consequences of the HGP LP Common Unit Distribution," "The Partnership
Merger--Federal Income Tax Consequences of the Partnership Merger,"
"Federal Income Tax Consequences of the Transactions" and all
subsections thereunder, "Description of the Capital Stock of New
Prime--Restrictions on Ownership and Transfer," "Comparison of Rights
of Shareholders--Restrictions on the Ownership Transfer or the
Issuance of Shares," "Prime Partnership Agreement--Tax Matters,"
"Horizon Group Properties, L.P.--Federal Income Tax Consequences,"
"Horizon Group Properties, L.P.--Federal Income Tax Consequences of
Continuing Ownership of HGP LP Common Units," "Horizon Group
Properties, L.P.--Entity Classification," "Horizon Group Properties,
L.P.--Allocations of Partnership Items," "Horizon Group Properties,
L.P.--HGP LP Distributions," "Horizon Group Properties,
L.P.--Dispositions and Exchanges/Redemptions of HGP LP Common Units,"
"Horizon Group Properties, L.P.--Tax Returns and Other Tax Matters
Affecting Holders of HGP LP Common Units," "Horizon Group Properties,
L.P.--Limitations on Deductibility of Losses," and "Horizon Group
Properties, L.P.--Alternative Minimum Tax," respectively, to the
extent that it constitutes matters of law or legal conclusions, is
accurate in all material respects.
Other than as expressly stated above, we express no opinion on any issue
relating to Horizon, Sky Merger, Horizon Partnership, or the Horizon Subsidiary
Partnerships or to any investment therein.
For a discussion relating the law to the facts and the legal analysis
underlying the opinion set forth in this letter, we incorporate by reference
the discussions of federal income tax issues, which we assisted in preparing,
in the Joint Proxy Statement/Prospectus/Information Statement and the Joint
Consent Solicitation Statement/Prospectus/Information Statement. We assume
no obligation to advise you of any changes in the foregoing subsequent to the
date of this opinion letter, and we are not undertaking to update the opinion
letter from time to time.
This opinion is rendered only to you and may not be quoted in whole or in
part or otherwise referred to, used by, or relied upon, nor be filed with, or
furnished to, any other
<PAGE>
Prime Retail, Inc.
__________________, 1998
Page 7
person or entity other than Prime Shareholders in connection with the
Corporate Merger, without our prior written consent. Notwithstanding the
foregoing, we hereby consent to the use of this opinion as an Exhibit 8.3 to
the Merger Registration Statement and the use of our name in the Joint
Consent Solicitation Statement/Prospectus/Information Statement under the
sections entitled "Federal Income Tax Consequences of the Transactions,"
"Federal Income Tax Consequences of the Transactions--Entity Classification,"
"Federal Income Tax Consequences of the Transactions--Qualification of New
Prime as a REIT," "Horizon Group Properties, L.P.--Federal Income Tax
Consequences," "Horizon Group Properties, L.P.--Federal Income Tax
Consequences of Continuing Ownership of HGP LP Common Units," and "Horizon
Group Properties, L.P.--Entity Classification." In giving this consent, we
do not admit that we are included in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission.
Very truly yours,
RUDNICK & WOLFE
<PAGE>
EXHIBIT A
HORIZON GROUP, INC.
5000 HAKES DRIVE
NORTON SHORES, MICHIGAN 49441
, 1998
Rudnick & Wolfe
203 North LaSalle Street
Suite 1800
Chicago, Illinois 60601
Re: TAX OPINION FOR STATUS AS A REAL ESTATE INVESTMENT
TRUST/PARTNERSHIP CLASSIFICATION - OFFICER'S CERTIFICATE
Ladies and Gentlemen:
In connection with (A) the Joint Proxy Statement/Prospectus/Information
Statement, included in the Registration Statement on Form S-4 (File No. 333- )
(the "Merger Registration Statement"), relating to: (1) the proposed merger
(the "Reincorporation Merger") of Horizon Group, Inc., a Michigan corporation
("Horizon"), with and into Sky Merger Corp., a Maryland corporation ("Sky
Merger"), and (2) the proposed merger (the "Corporate Merger") of Prime Retail,
Inc., a Maryland corporation ("Prime") with and into Sky Merger, and (B) the
Joint Consent Solicitation Statement/Prospectus/Information Statement,
contained in the Registration Statement on Form S-4 (File No. 333- ) (the
"Partnership Registration Statement"), relating to the proposed merger (the
"Partnership Merger") of Horizon/Glen Outlet Centers Limited Partnership, a
Delaware limited partnership ("Horizon Partnership") with and into Prime
Retail, L.P., a Delaware limited partnership ("Prime Partnership"), (the
Merger Registration Statement and the Partnership Registration Statement are
referred to herein collectively as the "Registration Statements"), we have
requested your opinion concerning (i) the qualification and taxation of
Horizon as a real estate investment trust (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"), for its taxable years ending
after December 31, 1993, and (ii) the classification of Horizon Partnership
and each subsidiary of Horizon formed as a partnership, joint venture or
limited liability company (the "Horizon Subsidiary Partnerships"), as
partnerships for federal income tax purposes. Unless otherwise specifically
defined herein or in Exhibit I attached hereto, all capitalized terms have
the meaning assigned to them in the Registration Statements.
In connection with the issuance of your legal opinion as described above,
Horizon, Sky Merger, and/or Horizon Partnership hereby make the following
representations (intending that Rudnick & Wolfe will rely on such
representations in rendering its opinion); all representations made by Horizon,
Sky Merger and Horizon Partnership are made for all periods of their existence
(or such other periods of time as may be specifically set forth below):
1. No interests in Horizon Partnership held by a general partner or
limited partner have ever been or will be traded on an established
securities market or exchange
<PAGE>
____________________, 1998
Page 2
(including an over-the-counter market). For purposes of Section
7704 of the Code the interests of Horizon Partnership are
beneficially held by less than 500 partners.
2. No interests in any Horizon Subsidiary Partnership held by a general
partner or limited partner of the respective Horizon Subsidiary
Partnership will be traded on an established securities market or
exchange (including an over-the-counter market) or the substantial
equivalent thereof.
3. Commencing with its first taxable year ending after December 31, 1993,
Horizon timely and properly filed an election to be taxed as a "Real
Estate Investment Trust." Horizon has not revoked such election and
has no present intention to revoke such election.
4. At all times during each of Horizon's taxable years ending after
December 31, 1993, Horizon has been managed by one or more of its
trustees.
5. At all times during each of Horizon's taxable years ending after
December 31, 1993, beneficial ownership in Horizon has been evidenced
by transferable shares.
6. At no time during the last half of any taxable year of Horizon have
more than 50% in value of Horizon's outstanding beneficial interests
been owned, directly or indirectly, by or for five or fewer
individuals as determined by applying the Attribution Rules.
7. Beneficial ownership in Horizon was held by 100 or more persons during
at least 335 days for the taxable year ending December 31, 1994 (or
during a proportionate part of such taxable year if such taxable year
was less than twelve months) and for all periods thereafter.
8. Commencing with Horizon's taxable year ended December 31, 1994, and
for each of Horizon's taxable years thereafter, at least ninety-five
percent (95%) of the gross income of Horizon (excluding gross income
from Prohibited Transactions) has been and is expected to be derived
from (i) dividends, (ii) interest, (iii) rents from real property,
(iv) gain from the sale or other disposition of stock, securities and
real property (including Interests in Real Property and interests on
mortgages on real property), but excluding gain on real property which
is Code Section 1221(1) Property, (v) abatements and refunds of taxes
on real property, (vi) income and gain derived from Foreclosure
Property, (vii) amounts (other than amounts, the determination of
which depends in whole or in part on income or profits of any person)
received or accrued as consideration for
<PAGE>
____________________, 1998
Page 3
entering into agreements (A) to make loans secured by mortgages on
real property or on Interests in Real Property, or (B) to purchase
or lease real property (including Interests in Real Property and
interests in mortgages on real property), and (viii) gain from the
sale or other disposition of Real Estate Assets that is not a
Prohibited Transaction.
9. Commencing with Horizon's taxable year ended December 31, 1994, and
for each of Horizon's taxable years thereafter, at least seventy-five
(75%) of the gross income of Horizon (excluding gross income from
Prohibited Transactions) has been and is expected to be derived from
(i) rents from real property, (ii) interest on obligations secured by
mortgages on real property or on Interests in Real Property, (iii)
gain from the sale or disposition of real property (including
Interests in Real Property and interests in mortgages on real
property), but excluding gain from real property which is Code Section
1221(1) Property, (iv) dividends or other distributions on, and gain
(other than gain from Prohibited Transactions) from the sale or other
disposition of, transferable shares or beneficial certificates in
other Real Estate Investment Trusts, (v) abatements and refunds of
taxes on real property, (vi) income and gain derived from Foreclosure
Property, (vii) amounts (other than amounts, the determination of
which depends in whole or in part on the income or profits of any
person) received or accrued as consideration for entering into
agreements (A) to make loans secured by mortgages on real property or
on Interests in Real Property or (B) to purchase or lease real
property (including Interests in Real Property and interests in
mortgages on real property), (viii) gain from the sale or other
disposition of a Real Estate Asset which is not a Prohibited
Transaction, and (ix) Qualified Temporary Investment Income.
10. Less than 30% of the gross income of Horizon in its taxable years
ending December 31, 1994, 1995, 1996, and 1997 was derived from the
sale or other disposition of (i) stock or securities held for less
than one year; (ii) property in a Prohibited Transaction; and
(iii) real property (including Interests in Real Property and
interests in mortgages on real property) held for less than four years
other than property compulsorily or involuntarily converted (by means
of destruction, theft, seizure, requisition, condemnation or threat of
imminence thereof) and Foreclosure Property.
11. Neither Horizon nor the Horizon Partnership has entered into any
agreement or arrangement (and each has taken all measures within its
control to ensure that no subsidiary of Horizon classified as a
Qualified REIT Subsidiary ("QRS") and no Related Partnership, has
entered into any agreement or arrangement) in connection with the
rental of real property under which amounts payable to
<PAGE>
____________________, 1998
Page 4
Horizon, the Horizon Partnership, any Related Partnership or QRS are
dependent in whole or in part on the income or profits derived from
any tenant (or subtenant) of such properties (except that such amounts
may be based on a fixed percentage or percentages of gross receipts
or sales).
12. Neither Horizon nor the Horizon Partnership has rendered services
themselves or through the Horizon Partnership, a Related Partnership,
or any other affiliate in regard to a real property in which Horizon,
directly or through the Horizon Partnership or a Related Partnership,
had an interest that is less than or equal to 50% unless Horizon
(i) obtained either a ruling from the Internal Revenue Service or an
opinion of counsel that the provision of such services would not
disqualify the income from such real property as rents from real
property or (ii) determined that, if the income from such real
property did not qualify as rents from real property, such income
(along with other nonqualifying income) would not cause Horizon to
fail to meet the tests described in representations (8) and (9) above.
13. For the taxable years ending December 31, 1994, 1995, 1996, and 1997
(i) less than 15% of the rent received by Horizon, the Horizon
Partnership, any Related Partnership or QRS in regard to each of the
real properties owned directly or indirectly and/or leased by any of
them (the "Properties") was attributable to personal property; and
(ii) all personal property contained in the Properties was leased
under or in connection with a lease of the real property contained in
the Properties.
14. Horizon and the Horizon Partnership expect that, and each will take
all measures within its control to ensure that, for any taxable year
ending after December 31, 1997, (i) less than 15% of the rent received
by Horizon, Horizon Partnership, any Related Partnership or QRS in
regard to each of the Properties will be attributable to personal
property; and (ii) all personal property contained in the Properties
will be leased under or in connection with a lease of real property
contained in the Properties.
15. For its taxable years ending December 31, 1994, 1995, 1996, and 1997
no more than a DE MINIMIS amount of rent received by Horizon, the
Horizon Partnership or any Related Partnership for the Properties was
received or accrued directly or indirectly from any person in which
Horizon owns (i) in the case of a corporation, 10% or more of the
total combined voting power of all classes of stock entitled to vote,
or 10% or more of the total number shares of all classes of stock; or
(ii) in the case of an entity other than a corporation, an interest of
10% or more in the assets or net profits of such entity. For purposes
of this representation, ownership
<PAGE>
____________________, 1998
Page 5
will be determined by taking into account the Modified Attribution
Rules.
16. Horizon and Horizon Partnership each will take all measures within its
control to ensure that, for any of its taxable years ending after
December 31, 1997, no more than a DE MINIMIS amount of rent received
by Horizon, Horizon Partnership, any Related Partnership or QRS for
the Properties will be received or accrued directly or indirectly from
any person in which Horizon owns (i) in the case of a corporation, 10%
or more of the total combined voting power of all classes of stock
entitled to vote, or 10% or more of the total number of shares of all
classes of stock; or (ii) in the case of an entity other than a
corporation, an interest of 10% or more in the assets or net profits
of such entity. For purposes of this representation, ownership will
be determined by taking into account the Modified Attribution Rules.
17. Neither Horizon, Horizon Partnership, nor any Related Partnership or
QRS or affiliate of any of them has entered into any agreement or
arrangement for the performance of services to tenants of the
Properties, other than an agreement or arrangement for services not
rendered primarily for the convenience of the tenants of the
Properties and customarily furnished or rendered in connection with
the rental of real property, pursuant to which (i) an entity that
fails to qualify as an Independent Contractor will furnish any
services to tenants of the Properties or (ii) Horizon, the Horizon
Partnership or a Related Partnership, QRS or affiliate of any of them
derives any income from an entity providing services to Property
tenants that is required to qualify as an Independent Contractor.
18. At the close of each quarter during its existence as a REIT, at least
75% of the value of the Total Assets of Horizon consisted of Real
Estate Assets, cash and cash items (including receivables which arise
in the ordinary course of Horizon's operation but not receivables
purchased from another person) and government securities, and not more
than 25% of the value of its assets was represented by securities
(other than government securities).
19. Horizon will take all measures within its control to ensure that, at
the close of each quarter during each of its taxable years ending
after December 31, 1997, at least 75% of the value of the Total Assets
of Horizon will consist of Real Estate Assets, cash and cash items
(including receivables which arise in the ordinary course of Horizon's
operations but not receivables purchased from another person) and
government securities, and not more than 25% of the value of Horizon's
respective assets was represented by securities (other than government
securities).
<PAGE>
____________________, 1998
Page 6
20. At the close of each quarter in each of Horizon's taxable years ending
after December 31, 1993, Horizon has not owned (either directly or
indirectly through Horizon Partnership, or any Related Partnership or
other affiliate) securities in any one issuer having an aggregate
value in excess of 5% of the value of the Total Assets of Horizon.
21. Horizon will take all measures within its control to ensure that, at
the close of each quarter of each taxable year ending after its
taxable year ended December 31, 1997, it does not own (either directly
or indirectly through Horizon Partnership, Prime Partnership, or any
Related Partnership or other affiliate) securities in any one issuer
having an aggregate value in excess of 5% of the value of the Total
Assets of Horizon.
22. At no time has Horizon owned (either directly or indirectly through
the Horizon Partnership or any Related Partnership or other affiliate)
any securities in any issuer representing in excess of 10% of the
outstanding voting securities of such issuer, unless such issuer is a
Qualified REIT Subsidiary.
23. Horizon will take all measures within its control to ensure that, at
the close of each quarter of each taxable year ending after December
31, 1997, it will not own (either directly, or indirectly, through
Horizon Partnership, or any Related Partnership or other affiliate)
any securities in any issuer representing in excess of 10% of the
outstanding voting securities of such issuer, unless such issuer is a
Qualified REIT Subsidiary.
24. Horizon, the Horizon Partnership and any Related Partnerships have at
all times during their existence held the Properties (and all other
assets) for investment purposes and not as (i) stock in trade or other
property of a kind which would properly be included in inventory if on
hand at the close of the taxable year, or (ii) property held primarily
for sale to customers in the ordinary course of its trade or business.
25. Commencing with Horizon's taxable year ending December 31, 1994, and
for each of Horizon's taxable years thereafter, Horizon has paid and
expects to pay dividends (without regard to capital gains dividends)
equal to or in excess of the sum of (i) ninety-five percent (95%) of
Horizon's REIT Taxable Income for the year (determined without regard
to the deduction for dividends paid and by excluding any net capital
gain), and (ii) ninety-five percent (95%) of the net income from
Foreclosure Property (after the tax imposed thereon by Section
857(b)(4)(A) of the Code), minus (iii) any Excess Noncash Income.
<PAGE>
____________________, 1998
Page 7
26. As required by Regulation Section 1.857-8, for each year commencing
with Horizon's first taxable year ending after December 31, 1993,
Horizon (i) has maintained and will maintain the necessary records
relating to the actual ownership of its stock, (ii) has made and will
make the requisite information requests of its shareholders regarding
stock ownership, and (iii) has maintained and will maintain a list of
the persons failing or refusing to comply in whole or in part with
Horizon's demand for statements regarding stock ownership.
27. Horizon has adopted a calendar year accounting period and has not
changed nor sought the consent of the Secretary of the Treasury or his
delegate to change Horizon's accounting period and has taken all
measures within its control to retain a calendar year accounting
period.
28. Any representations herein as to the Properties will also be true with
respect to properties acquired by Horizon Partnership or any Related
Partnership or other affiliate after the date hereof.
29. None of the liabilities incurred by Horizon, Sky Merger, Horizon
Partnership or any Related Partnership during the two-year period
immediately preceding the date hereof were incurred in anticipation of
any of the transactions described in the Registration Statement.
30. The undersigned is familiar with the requirements for qualification as
a REIT under the Code and believes that (i) Horizon has satisfied such
requirements for all periods of since its initial election to be taxed
as a REIT and (ii) Horizon will satisfy such requirements for all
periods after its taxable year ending December 31, 1997.
31. Horizon has operated in accordance with the Michigan Business
Corporation Act and all other laws of the State of Michigan, the
Horizon Amended and Restated Articles of Incorporation, the Horizon
Bylaws and in the manner described in the Registration Statements.
32. Sky Merger has operated in accordance with the Maryland General
Corporation Law and all other laws of the State of Maryland, the Sky
Merger Amended and Restated Articles of Incorporation, the Sky Merger
Bylaws and in the manner described in the Registration Statements.
33. Sky Merger has not nor will it own any assets or conduct any business
until the Corporate Merger Effective Time.
<PAGE>
____________________, 1998
Page 8
34. Neither Horizon, Sky Merger, Horizon Partnership, nor any Related
Partnership or other affiliate was notified by the IRS in writing on
or before May 8, 1996, that the entity's classification was under
examination.
35. The undersigned is a duly elected officer of Horizon, and will be a
duly elected officer of Horizon as of the effective time of the
Reincorporation Merger Effective Time, and is a duly elected officer
of Sky Merger as of the Corporate Merger Effective Time. In such
capacity, the undersigned has access to relevant information regarding
each of the factual matters set forth above and has consulted with
other employees and officers of Horizon and the Horizon Partnership
regarding such factual matters, none of whom have disagreed in any
respect with any of the representations set forth above.
36. Horizon has advised you of any matter of which it has been advised by
independent legal counsel or accounting advisors or of which Horizon
or its employees is aware that could, if adversely decided, adversely
affect Horizon's ability to satisfy the requirement for continued
taxation as a REIT under the Code.
The foregoing is provided in connection with the preparation of your
opinion. We understand that your opinion will be premised on the basis that all
of the facts, representations and assumptions on which you are relying, whether
contained herein or elsewhere, are accurate and complete and will be accurate
and complete on the date the Registration Statement is filed.
Very truly yours,
HORIZON GROUP, INC., a Michigan
corporation
By: _______________________________
Name: ______________________
Its: ________________________
SKY MERGER CORP., a Maryland
corporation
By: _______________________________
Name: ______________________
Its: ______________________
<PAGE>
EXHIBIT I
DEFINITIONS
"ATTRIBUTION RULES": the rules of ownership described in Section 856(h) of
the Code.
"CONSTRUCTIVE" or "CONSTRUCTIVELY": the constructive stock ownership rules
of Section 318 of the Code, as modified by Section 856(d)(5) of the Code.
"EXCESS NONCASH INCOME": the excess of (i) the sum of (A) all interest,
original issue discount and other income includible in income with respect to
debt instruments received upon the sale of property over the money and fair
market value of property received with respect to such instruments and (B)
income recognized upon the disposition of real estate if there is a
determination that Section 1031 of the Code (like-kind exchanges) does not apply
to the disposition and the failure to satisfy the requirements of Section 1031
of the Code was due to reasonable cause and not willful neglect, over (ii) five
percent (5%) of REIT Taxable Income (without regard for the deduction for
dividends paid and excluding any net capital gain).
"FORECLOSURE PROPERTY": any real property (including Interests in Real
Property), and personal property incident to such real property, acquired by
Horizon and/or its affiliates as a result of Horizon and/or its affiliates
having bid in such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of law, after there
was default (or default was imminent) on a lease of such property or on an
indebtedness which such property secured; provided that an election for
foreclosure property status under Section 856(e)(5) of the Code is in effect
with respect to such property and such election has not been terminated under
Section 856(e)(4) of the Code. Such term does not include property acquired by
Horizon and/or its affiliates as a result of indebtedness arising from the sale
or other disposition of property of Horizon and/or its affiliates which is
Section 1221(1) Property which was not originally acquired as foreclosure
property.
"INDEPENDENT CONTRACTOR": means any person other than (i) any person
owning (actually or Constructively) more than 35% of the shares of Horizon; (ii)
any corporation in which persons owning 35% or more of the shares of Horizon own
(actually or Constructively) more than 35% of the voting power with respect to
the stock of such corporation; or (iii) any entity other than a corporation in
which persons owning 35% or more of the shares of Horizon own actually or
Constructively) more than a 35% interest in the assets or net profits of such
entity.
"INTERESTS IN REAL PROPERTY": includes fee ownership and co-ownership of
land or improvements thereon, leaseholders of land or improvements thereon,
options to acquire land or improvements thereon, and options to acquire
leaseholds of land or improvements thereon, but does not include mineral, oil or
gas royalty interests.
I-1
<PAGE>
"MODIFIED ATTRIBUTION RULES": the rules of ownership described in Code
Section 318 as modified by Code Section 856(d)(5).
"PROHIBITED TRANSACTION": the sale or other disposition of Section 1221(1)
Property, other than Foreclosure Property, unless (i) the property sold was a
Real Estate Asset; (ii) Horizon and/or its affiliates held the Real Estate Asset
for at least four years; (iii) the aggregate expenditures made by Horizon and/or
its affiliates during the four (4) year period preceding the date of the sale
which are includible in the basis of the Real Estate Asset does not exceed
thirty percent (30%) of the net selling price of such asset; (iv) (A) during the
taxable year Horizon and/or its affiliates did not make more than seven sales of
property (other than Foreclosure Property) or (B) the aggregate adjusted bases
(as determined for purposes of computing earnings and profits) of the REIT's
property (other than Foreclosure Property) sold during the taxable year does not
exceed ten percent (10%) of the aggregate adjusted bases (as so determined) of
all the assets of the REIT as of the beginning of the taxable year; (v) in the
case of property, which consists of land or improvements, not acquired through
foreclosure (or deed in lieu of foreclosure), or lease termination, Horizon
and/or its affiliates has held the property for not less than four (4) years for
production of rental income; and (vi) if the requirement of clause (iv)(A) is
not satisfied, substantially all of the marketing and development expenditures
with respect to the property were made through an Independent Contractor from
whom Horizon and/or its affiliates does not directly or indirectly derive gross
income (including but not limited to dividends). For purposes of clause (iv)(B)
of the preceding sentence, the REIT will be treated as owning its proportionate
share of the adjusted bases of assets owned by its affiliates.
"QUALIFIED REIT SUBSIDIARY": any corporation if 100 percent of the stock
of such corporation is held by Horizon.
"QUALIFIED TEMPORARY INVESTMENT INCOME": any income which (i) is
attributable to stock, or a bond, debenture, note, certificate or other evidence
of indebtedness (excluding any annuity contract which depends (in whole or in
substantial part) on the life expectancy of one or more individuals, or is
issued by an insurance company subject to tax under subchapter L of the Code
(1) in a transaction in which there is no consideration other than cash or
another annuity contract meeting the requirements of this definition, (2)
pursuant to the exercise of an election under an insurance contract by a
beneficiary owner thereof on the death of the insured party under such contract,
or (3) in a transaction involving a qualified pension or employee benefit plan),
(ii) is attributable to the temporary investment of new capital (amounts
received upon the issuance of stock of Horizon or upon a public offering of debt
obligations of Horizon having maturities of at least five years) received by
Horizon and (iii) is received or accrued during the one year period beginning on
the date Horizon received such capital.
"REAL ESTATE ASSET": real property (including Interests in Real Property
and interests in mortgages on real property) and shares (or transferable
certificates of beneficial interest) in other
I-2
<PAGE>
Real Estate Investment Trusts. Such term also includes any property (not
otherwise a Real Estate Asset) attributable to the temporary investment of
new capital (amounts received upon the issuance of stock of Horizon or upon a
public offering of debt obligations of Horizon having maturities of at least
five years), but only if such property is stock or a debt instrument, and
only for the one-year period beginning on the date Horizon receives such
capital.
"REAL ESTATE INVESTMENT TRUST": a real estate investment trust which meets
the requirements of Sections 856 through 860 of the Code.
"REIT TAXABLE INCOME": "Real estate investment trust taxable income" as
defined in Section 857(b) of the Code, which generally equals the taxable income
of Horizon, computed with the dividends-paid deduction as defined in Section 561
of the Code (except that the portion of such deduction attributable to net
income from Foreclosure Property is excluded), excluding any net income from
Foreclosure Property, and computed with a deduction for any tax imposed under
Section 857(b)(5) of the Code (I.E., tax on the failure to meet the seventy-five
percent (75%) or ninety-five percent (95%) income tests).
"RELATED PARTNERSHIP": any entity classified as a partnership for federal
tax purposes in which Horizon or the Horizon Partnership, directly or indirectly
owns an interest.
"SECTION 1221(1) PROPERTY": stock in trade of Horizon and/or its
affiliates or other property of a kind which would properly be included in
inventory of Horizon and/or its affiliates if on hand at the close of the
taxable year, or property held by Horizon and/or its affiliates primarily for
sale to customers in the ordinary course of its trade or business.
"TOTAL ASSETS": the gross assets of Horizon determined in accordance with
generally accepted accounting principles.
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EXHIBIT B
[FORM OF OFFICER'S CERTIFICATE REGARDING WINSTON & STRAWN OPINIONS SET
FORTH IN EXHIBITS 8.1a AND 8.1b]
PRIME RETAIL, INC.
OFFICER'S CERTIFICATE
Each of Prime Retail, Inc. ("Prime") or New Prime(1), as the case
may be, on behalf of itself, its shareholders, Prime Partnership, the Prime
Property Partnerships, the Prime Finance Corporations, New Prime Partnership
and the affiliates of New Prime and New Prime Partnership, as applicable,
hereby certifies and represents to Winston & Strawn as of the date hereof
solely for purposes of the legal opinions to be rendered in connection with
the transactions contemplated by the Joint Proxy Statement/Prospectus/
Information Statement (the "Joint Proxy") and the Amended and Restated
Agreement and Plan of Merger among Prime Retail, Inc., Prime Retail, L.P.,
Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc.,
Horizon Group Properties, L.P. and Horizon/Glen Outlet Centers Limited
Partnership dated as of February 1, 1998 (the "Merger Agreement") as follows:
1. The undersigned, C. Alan Schroeder, is the duly qualified and
elected Senior Vice President-General Counsel and Secretary of Prime
Retail, Inc., a Maryland corporation ("Prime"), and as such is familiar
with the facts certified and the representations made herein and is duly
authorized to make such certifications and representations for Prime,
its shareholders, Prime Partnership, the Prime Property Partnerships,
the Prime Finance Corporations and its other affiliates (collectively,
one or more of such persons are the "Prime Affiliates"). Further, the
undersigned, C. Alan Schroeder, will be the duly qualified and elected
Senior Vice President-General Counsel and Secretary of New Prime, a
Maryland corporation, and as such is familiar with the facts certified
and the representations made herein and is duly authorized to make such
representations for New Prime, its shareholders, New Prime Partnership
and its other affiliates after the closing (collectively, one or more of
such persons are the "New Prime Affiliates").
2. The fair market value of the New Prime Common Shares, New Prime
Series A Preferred Shares, New Prime Series B Preferred Shares and New
Prime Series C Preferred Shares received in exchange for Prime Common
Shares, Prime Series A Preferred Shares, Prime Series B Preferred Shares
and Prime Series C Preferred Shares, respectively, will equal the fair
market value of the Prime Common Shares, Prime Series A Preferred
Shares, Prime Series B Preferred Shares and Prime Series C Preferred
Shares surrendered in such exchange.
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(1) Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Joint Proxy.
<PAGE>
The aggregate fair market value of the New Prime Common Shares, New
Prime Series A Preferred Shares, New Prime Series B Preferred Shares
and New Prime Series C Preferred Shares received in exchange for the
Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares and Prime Series C Preferred Shares will represent in
excess of fifty percent of the sum of (i) the aggregate fair market
value of such New Prime Common Shares, New Prime Series A Preferred
Shares, New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares received, plus (ii) the aggregate cash distributed to
Prime Shareholders pursuant to the Prime Special Distribution.
3. There is no plan or intention by Prime Shareholders who own one
percent or more of the Prime Shares, and to the best of the knowledge of
the management of Prime, there is no plan or intention on the part of
the remaining Prime Shareholders or Sky Merger shareholders to sell,
exchange or otherwise dispose of a number of New Prime Shares received
in the Corporate Merger that would reduce either the Prime Shareholders'
or Sky Merger shareholders' ownership of New Prime Shares to a number of
shares having a fair market value, as of the date of the Corporate
Merger, of less than fifty percent of the fair market value of all of
the formerly outstanding stock of Prime as of the same date. For
purposes of this representation, Prime Series A Preferred Shares
surrendered by dissenters and Sky Merger Common Shares exchanged for
cash in lieu of fractional New Prime Shares will be treated as
outstanding Prime Series A Preferred Shares and Sky Merger shares,
respectively, on the Closing. Moreover, Prime Shares and New Prime
Shares held by Prime Shareholders and otherwise sold, redeemed or
disposed of prior or subsequent to the Closing will be considered in
making this representation.
4. New Prime has no plan or intention to reacquire any of its stock
issued in the Corporate Merger.
5. [EXCEPT TO THE EXTENT DESCRIBED IN SCHEDULE I ATTACHED HERETO,]
New Prime has no plan or intention to sell or otherwise dispose of any
of the assets of Prime acquired in the Corporate Merger, except for
dispositions made in the ordinary course of business or asset transfers
to corporations controlled by New Prime, as described in Code section
368(a)(2)(C).
6. The liabilities of Prime or the Prime Affiliates assumed by New
Prime and the liabilities to which the transferred assets of Prime are
subject were incurred by Prime or the Prime Affiliates in the ordinary
course of their businesses.
7. Following the Corporate Merger, New Prime will continue the
historic business of Prime and use a significant portion of Prime's
historic business assets in a business.
8. Prime, each of the Prime Affiliates, and to the best of the
knowledge of Prime management, New Prime, Sky Merger, and each Sky
Merger shareholders will each pay their own respective expenses, if any,
incurred in connection with the Corporate Merger.
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9. There is no intercorporate indebtedness existing between Prime
and either Horizon or Sky Merger that was issued, acquired or will be
settled, at a discount.
10. Neither Prime, any Prime Affiliate, Sky Merger, Horizon or any
affiliate of Sky Merger or Horizon is under the jurisdiction of a court
in a title 11 case, a receivership, foreclosure or similar proceeding
under federal or state law for purposes of Code section 368(a)(3)(A).
11. The aggregate fair market value of the assets of Prime
transferred to the New Prime equals or exceeds the sum of the
liabilities assumed by New Prime plus the amount of liabilities, if any,
to which the transferred assets are subject.
12. Prior to and in connection with the Corporate Merger, Prime (a)
neither made nor declared any distributions to its shareholders, except
for the Prime Special Distribution, and (b) did not redeem any Prime
Shares.
13. Prior to and in connection with the Corporate Merger, no person
related to Prime purchased any Prime Shares for purposes of Temporary
Treasury Regulations section 1.368-1T(e).
14. Rudnick & Wolfe's opinions as to (i) the qualification of the
Reincorporation Merger as a valid Code section 368(a) reorganization and
(ii) the status of each of Horizon as a REIT and Horizon Partnership and
each subsidiary of Horizon Partnership, formed under relevant state law
as a partnership, joint venture or limited liability company, as a
partnership for federal income tax purposes are true and correct, and
Winston & Strawn may rely upon these Rudnick & Wolfe opinions.
15. Prime has operated in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
Prime's Amended and Restated Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate.
16. New Prime intends to operate in accordance with the Maryland
General Corporation Law and all other applicable laws of the State of
Maryland, New Prime's Article of Incorporation and Bylaws, and in the
manner described in the Joint Proxy and this Certificate.
17. Prime Partnership has operated, and intends to continue to
operate, in accordance with the Delaware Revised Uniform Limited
Partnership Act, all other applicable laws of the State of Delaware, the
Second Amended and Restated Agreement of Limited Partnership of Prime
Retail, L.P. (the "Partnership Agreement"), and in the manner described
in the Joint Proxy and this Certificate. Each of the Prime Property
Partnerships has operated, and intends to continue to operate, in
accordance with the applicable laws of the State in which it was formed,
its respective partnership agreement, and in the manner described in the
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Joint Proxy and this Certificate. Prime Retail Finance Limited
Partnership (the "Finance Partnership") has operated, and intends to
continue to operate, in accordance with the Delaware Revised Uniform
Limited Partnership Act, all other applicable laws of the State of
Delaware, and its partnership agreements and in the manner described in
the Joint Proxy and this Certificate. The Partnership Agreement and the
partnership agreements for each of the Prime Property Partnerships and
the Finance Partnership have been duly executed.
18. Prime Retail Service, Inc. (the "Services Corporation") a
Maryland corporation, has operated, and intends to operate, in
accordance with the Maryland General Corporation Law and all other
applicable laws of the State of Maryland, the Services Corporation's
Articles of Incorporation, as amended, and Bylaws, as amended, and in
the manner described in the Joint Proxy and this Certificate. Neither
Prime, New Prime nor Prime Partnership has at any time owned or will own
any voting stock in the Services Corporation, and a majority of Prime's
directors and New Prime's directors could not, and will not be able to,
vote for or elect the directors of the Services Corporation.
Furthermore, a majority of Prime's directors and New Prime's directors
are not, and are not expected to be in the future, directors, officers,
shareholders or employees of the Services Corporation. The sale,
transfer or other disposition of the common stock of the Services
Corporation by the holders thereof is not subject to any restrictions.
Prime Retail Services Limited Partnership (the "Services Partnership")
has operated, and intends to continue to operate, in accordance with the
Delaware Revised Uniform Limited Partnership Act and all other
applicable laws of the State of Delaware, its Agreement of Limited
Partnership, and in the manner described in the Joint Proxy and this
Certificate. The Services Partnership currently performs, and in the
future will perform, only the activities of (i) selling coupon books
which provide (a) discounts for merchandise offered by tenants at
properties owned by Prime, New Prime, Prime Partnership or any Prime
Property Partnership and (b) discounts at area attractions; (ii)
operating informational booths at such properties; (iii) selling and
renting miscellaneous items at the informational booths to shoppers at
such properties; (iv) providing miscellaneous services at the
informational booths to shoppers at such properties; and (v) renting
"push carts" to various venders for use in common areas at such
properties. The Services Partnership will perform only activities and
services with respect to properties owned by New Prime, Prime
Partnership or any Prime Property Partnership and only such activities
and services which a real estate investment trust ("REIT") could perform
without causing amounts received from such properties to be treated as
other than "rents from real property" within the meaning of Code section
856(d). The Services Partnership has no plan or intention to perform
any activities or services other than those identified in clauses (i)
through (v) of this paragraph.
19. Prime Retail Finance, Inc. ("Finance"), a Maryland corporation,
has operated, and intends to continue to operate, in accordance with the
Maryland General Corporation Law and all other applicable laws of the
State of Maryland, its Articles of Incorporation, as amended, and
Bylaws, as amended, and in the manner described in the Joint Proxy and
this Certificate. Prime Retail Finance II, Inc. ("Finance II"), a
Maryland corporation, has operated, and intends to continue to operate,
in accordance with the Maryland General Corporation Law and all other
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applicable laws of the State of Maryland, its Articles of Incorporation,
as amended, and Bylaws, as amended, and in the manner described in the
Joint Proxy and this Certificate. Prime Retail Finance III, Inc.
("Finance III"), a Maryland corporation, has operated, and intends to
continue to operate, in accordance with the Maryland General Corporation
Law and all other applicable laws of the State of Maryland, its Articles
of Incorporation, as amended, and Bylaws, as amended, and in the manner
described in the Joint Proxy and this Certificate. Prime Retail Finance
IV, Inc. ("Finance IV"), a Maryland corporation, has operated, and
intends to continue to operate, in accordance with the Maryland General
Corporation Law and all other applicable laws of the State of Maryland,
its Articles of Incorporation, as amended, and Bylaws, as amended, and
in the manner described in the Joint Proxy and this Certificate. At all
times since the formation of Finance, Finance II, Finance III, and
Finance IV, Prime has owned 100% of their outstanding stock (both voting
and nonvoting).
20. Prime Partnership, each Prime Property Partnership, the Finance
Partnership and the Services Partnership were formed, have been
operated, and intend to continue to operate, in reasonable anticipation
of making an economic profit, not taking into account any federal income
tax benefits. The respective general partner of each of these
partnerships acts for its own account and not as an agent or dummy of
the limited partners. None of the partnership interests in Prime
Partnership, any Prime Property Partnership, the Finance Partnership or
the Services Partnership (i) are currently traded or will be traded on
any securities exchange or any local or over-the-counter market (or
other interdealer quotation system that regularly disseminates firm buy
or sell quotations by identified brokers or dealers) or (ii) are
registered or will be registered under the Securities Act of 1933 (other
than Prime Partnership Units). At no time will there be more than 500
partners in each of Prime Partnership, each Prime Property Partnership
formed prior to January 1, 1996, the Finance Partnership and the
Services Partnership (determined by treating each person who indirectly
owns an interest in Prime Units through a partnership, grantor trust or
S corporation as a separate partner). At no time will there be more
than 100 partners in each Prime Property Partnership formed after
December 31, 1995. None of Prime Partnership, any Prime Property
Partnership, the Finance Partnership and the Services Partnership have
ever received any formal or informal notice from the Internal Revenue
Service (the "Service") indicating that an examination is underway or
will be made.
21. For all taxable years ending after the Closing Date, at least 90%
of the gross income derived by Prime Partnership shall consist only of
amounts from the following sources: (A) interest, (B) dividends, (C)
real property rents, (D) gain from the sale or other disposition of real
property (including property described in section 1221(1)), (E) income
and gains derived from the exploration, development, mining or
production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any
mineral or natural resource (including fertilizer, geothermal energy and
timber) or (F) any gain from the sale or disposition of a capital asset
(or property described in section 1231(b)) held for the production of
income described in (A)-(E) of this paragraph.
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<PAGE>
22. Since its formation, Prime has regularly computed its income in
keeping its books on the basis of a calendar year, and, accordingly, has
adopted and used the calendar year as its taxable year for federal
income tax purposes. Prime made the election specified in Code section
856(c) to be a REIT, effective for its taxable year ending December 31,
1994. Such election was made and filed with its federal income tax
return for the taxable year ending December 31, 1994, and such return
was properly filed with the Service on or before the due date thereof
(taking into account any extensions that may have been granted).
23. For each of its taxable years, Prime and the New Prime expect
that, and intend to take all measures within their control (including
without limitation monitoring and enforcing all restrictions of stock
ownership contained in New Prime's Articles of Incorporation), to ensure
that, (A) the beneficial ownership of Prime and New Prime has been and
will be held at all times by 100 or more persons as required by Code
section 856(a)(5) and, (B) at no time during the last half of any
taxable year after the first taxable year for which the REIT election
was made, has or will more than 50% in value of Prime's or New Prime's
outstanding stock be owned, directly or indirectly (taking into account
the constructive ownership rules of Code section 856(h)) by or for five
or fewer individuals. As of the date hereof, Prime is not aware of any
facts or circumstances that would indicate requirements (A) and (B) of
this paragraph have not been satisfied. To the best of Prime's
knowledge, no individual shareholder owns directly or indirectly more
than 9.9% of the value of Prime's outstanding stock.
24. Prime at all times has been, and the New Prime intends to be,
managed by one or more directors or trustees, and the beneficial
ownership of Prime has been, and the beneficial ownership of New Prime
will be, evidenced by transferable shares. With the exception of
restrictions imposed by Prime's Amended and Restated Articles of
Incorporation, as amended, [AND] the terms of the 1994 and 1995 Stock
Incentive Plans for certain employees and directors [AND RECENT
EMPLOYMENT OR OTHER AGREEMENTS], there are no restrictions on the
transfer of Prime's shares. Further, with the exception of certain
restrictions imposed by the New Prime's Articles of Incorporation, there
will be no restrictions on the transfer of New Prime Shares.
25. Prime has prepared an analysis for Winston & Strawn demonstrating
its compliance with the 95% and 75% gross income tests of Code section
856(c) for its taxable years ending December 31, 1994, December 31,
1995, December 31, 1996, December 31, 1997, and for the short period
taxable year from January 1, 1998 to the Closing Date (the "Short Period
Year"). Such analysis accurately shows the amounts and types of income
received by Prime, Prime Partnership, each Prime Property Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
for such taxable years. Prime does not anticipate earning in the
current taxable year or future taxable years significant gross income of
any type not reflected in this analysis. Furthermore, Prime does not
anticipate that the percentage for various categories designated in the
analysis as "Bad Income" taken as a percentage of the total revenues
expected to be earned by Prime or Prime Partnership will increase
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materially for the taxable year ending December 31, 1998 or any taxable
year thereafter as compared to 1994, 1995, 1996, 1997 and the Short
Period Year.
26. New Prime has prepared an analysis for Winston & Strawn
demonstrating its projected compliance with the 95% and 75% gross income
tests of Code section 856(c) for its taxable years ending December 31,
1998 and December 31, 1999. Such analysis projects the amounts and
types of income to be received by New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, Finance, Finance
II, Finance III and Finance IV for such taxable years. New Prime does
not anticipate earning in the current taxable year or future taxable
years significant gross income of any type not reflected in this
analysis. Furthermore, New Prime does not anticipate that the
percentage for various categories designated in the analysis as "Bad
Income" taken as a percentage of the total revenues expected to be
earned by New Prime or Prime Partnership will increase materially for
the taxable year ending December 31, 1998 or any taxable year thereafter
as compared to the total revenues earned by Prime or Prime Partnership
in 1994, 1995, 1996, 1997 and the Short Period Year.
27. At least 95% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III and Finance IV after the date
hereof), including for this purpose both rents
attributable to personal property that satisfies the
conditions described in paragraph 30 below and charges
for services customarily furnished or rendered in
connection with the rental of real property, whether or
not such charges are separately stated, but excluding (i)
any rents received or accrued from persons identified in
Code section 856(d)(2)(B) (as described in paragraph 31
below), (ii) any amount described in Code section
856(d)(2)(A) (discussed in paragraph 29 below) and (iii)
any rent received from a tenant to whom or with respect
to whom services are provided other than services
described in paragraph 32 below;
(B) gain realized upon the sale or other disposition of
stock, securities and real property which is not
inventory or other property held for sale to customers in
the ordinary course of business;
(C) interest, but excluding (i) interest determined in whole
or in part on the income or profits of any person, and
(ii) in the case of interest paid by any partnership in
which Prime or Prime Partnership has an interest, the
portion of the interest attributable to such ownership
interest;
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(D) dividends;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
and
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6).
For purposes of this representation and all other representations
relating to the gross income of Prime or Prime Partnership, each has
been treated as receiving a pro rata share, based on its capital
interest within the meaning of Treasury Regulations section 1.856-3(g),
of all gross income derived by any partnership in which it is a partner.
Additionally, for purposes of this representation, all gross income
received by Finance, Finance II, Finance III, Finance IV or any other
subsidiary in which at all times Prime has owned 100% of its outstanding
stock, shall be treated as income of Prime. New Prime and Prime
Partnership intend to take all measures within their control to ensure
that for the current taxable year and all future taxable years, at least
95% of their gross incomes will be derived from the sources listed in
clauses (A) through (H) of this paragraph.
28. At least 75% of the gross income derived by Prime and Prime
Partnership for taxable years 1994, 1995, 1996, 1997 and the Short
Period Year has consisted of amounts derived by Prime and Prime
Partnership from the following sources:
(A) income from the rental of real property (which term shall
be deemed to include for purposes of this Certificate any
property acquired by Prime, Prime Partnership, any Prime
Property Partnership, Finance, Finance II, Finance III or
Finance IV after the date hereof), including for this
purpose both rents attributable to personal property that
satisfies the conditions described in paragraph 30 below
and charges for services customarily furnished or
rendered in connection with the rental of real property,
whether or not such charges are separately stated, but
excluding (i) any rents received or accrued from persons
identified in Code section 856(d)(2)(B) (as described in
paragraph 31 below), (ii) any amount described in Code
section 856(d)(2)(A) (which is discussed in paragraph 29
below) and (iii) any rent received from a tenant to whom
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or with respect to whom services are provided other than
services described in paragraph 32 below;
(B) interest on obligations secured by mortgages on real
property or interests in real property, but excluding (i)
interest determined in whole or in part based on the
profits or income of any person and (ii) in the case of
interest paid by any partnership in which Prime or Prime
Partnership has an interest, the portion of the interest
attributable to such ownership interest;
(C) gain from the sale or other disposition of real property
(including interests in real property and interests in
mortgages on real property) other than property which is
held as inventory or for sale to customers in the
ordinary course of business;
(D) dividends or other distributions on, and gain, other than
gain from a prohibited transaction within the meaning of
Code section 857(b)(6), from the sale or disposition of
transferable shares in other REITs;
(E) abatements and refunds of real property taxes;
(F) income and gain derived from "foreclosure property" as
defined in Code section 856(e);
(G) amounts (other than amounts determined in whole or in
part based on the income or profits of any person)
received or accrued as consideration for entering into
agreements (i) to make loans secured by mortgages on real
property or on interests in real property or (ii) to
purchase or lease real property (including interests in
real property and mortgages secured by real property);
(H) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction solely by
reason of Code section 857(b)(6); and
(I) "qualified temporary investment income" as defined in
Code section 856(c)(6)(D).
New Prime and Prime Partnership intend to take all measures within their
control to ensure that for the current taxable year and all future
taxable years, at least 75% of their gross incomes will be derived from
the sources listed in clauses (A) through (I) of this paragraph.
29. No amounts previously paid or payable (except for a de minimis
amount representing no more than .25% of Prime's or Prime Partnership's
annual gross income) to Prime, Prime Partnership, any Prime Property
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Partnership, the Finance Partnership, the Services Partnership, Finance,
Finance II, Finance III or Finance IV in connection with the rental of
property depend in whole or in part on the income or profits derived
from any tenant (or sub-tenant) of such property (except that such
amounts may be based on a fixed percentage or percentages of receipts or
sales). Neither New Prime, Prime Partnership, any Property Partnership,
the Services Partnership, the Finance Partnership, Finance, Finance II,
Finance III, nor Finance IV expects to enter into any lease agreement or
other arrangement in connection with the rental of property under which
amounts will be paid based in whole or in part on the income or profits
derived by the tenant under such lease or arrangement, and each intends
to take all measures within its control to ensure that no such amounts
are received. As to each lease under which the tenant pays rent based
upon a fixed percentage of sales or receipts, the rental provisions
conform with normal business practice (taking into account the lease
itself and the surrounding circumstances) and are not used as means to
base the rent paid on the income or profits of the ultimate tenant.
30. Other than with respect to certain rents received by the Services
Partnership from push cart vendors, which rents are less than .25% of
the annual gross income of Prime's or Prime Partnership's gross income,
(A) less than 15% of the rent received from each of the properties has
been, and is expected to be while in New Prime's possession,
attributable to personal property (determined by the ratio of adjusted
basis of the personal property subject to a lease to the total adjusted
basis of all property subject to that lease); and (B) all personal
property contained in the properties leased by Prime, Prime Partnership,
any Prime Property Partnership, the Finance Partnership, Finance,
Finance II, Finance III or Finance IV has been, and is anticipated to be
while in New Prime's possession, leased under or in connection with the
lease of real property.
31. No gross rental income received by Prime, New Prime or Prime
Partnership has been, or is expected to be, received or accrued
directly or indirectly from any person in which Prime or New Prime owns
(A) in the case of a corporation, 10% or more of the total combined
voting power of all classes of stock entitled to vote, or 10% or more of
the total number of shares of all classes of stock, or (B) in the case
of an entity other than a corporation, an interest in 10% or more of the
assets or net profits of such entity. For purposes of this paragraph,
ownership will be determined by taking into account the attribution
rules of Code section 318 as modified by Code section 856(d)(5).
32. Neither Prime, New Prime, Prime Partnership, any Property
Partnership, the Services Partnership, the Finance Partnership, Finance,
Finance II, Finance III nor Finance IV has provided, or intends to
provide, to any tenants of the properties any services that (i) are not
customarily rendered in connection with the rental of space for
occupancy only and (ii) are rendered primarily for the convenience of
the tenant. Based upon its experience and that of its affiliates in the
various geographic markets in which the properties are located, Prime
and New Prime expect that all services previously provided or that will
be provided to tenants of the properties directly by Prime, New Prime,
Prime Partnership, the Prime Property Partnerships, the Services
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Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV will be considered usually or customarily rendered in
connection with the rental of space of the type rented for occupancy in
the market in which the property is located. In the event that New
Prime, Prime Partnership, any Prime Property Partnerships, the Services
Partnership, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV decide in the future to provide any services to the
tenants which would not be customary as described above, all such
services will be performed by an "independent contractor" within the
meaning of Code section 856(d)(3) from whom New Prime, Prime
Partnership, the Prime Property Partnerships, the Services Partnership,
the Finance Partnership, Finance, Finance II, Finance III and Finance IV
derive no income. All independent contractors have received and are
expected to receive in the future reasonable compensation for services
rendered, and such compensation has been, or will be, established after
arm's-length negotiations. For purposes of this representation, Prime
has assumed that if and to the extent there is either (A) "concierge
services," (B) parking garage or parking lot facilities where there are
attendants present or other paid parking services or (C) construction or
"build-out" services (other than supervision of contractors), such
services have not been treated as customary within the meaning of this
paragraph; and both Prime and New Prime intend such services to be
performed by independent contractors within the meaning of Code section
856(d)(3).
33. If Prime, New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
or Finance IV engage in real estate activities which involve the sale or
other disposition of property held primarily for sale to customers in
the ordinary course of business and which constitute prohibited
transactions as defined in Code section 857(b)(6), such activities will
be conducted through one or more special purpose corporations in which
Prime Partnership has or will have a nonvoting stock interest. Prime
has taken, and New Prime will take, all necessary measures to ensure
that the stock interest owned by Prime Partnership in any such
corporation will not exceed 10% of the voting securities of such
corporation and that the value of the stock interest will not exceed 5%
of the value of Prime's total gross assets.
34. Prime, New Prime, Prime Partnership, the Prime Property
Partnerships, the Finance Partnership, Finance, Finance II, Finance III
and Finance IV have derived, and intend to derive, amounts with respect
to interest on obligations secured by mortgages on real property
described above in paragraph 28(B) where the mortgages also cover
property in addition to real property only if the loan value of the real
property is at least equal to 75% of the amount of the loan.
35. Prime Partnership has received fees in consideration of the
performance of management and administration services with respect to
properties that are not owned entirely by Prime Partnership. A portion
of such management and administrative fees (corresponding to that
portion of a property owned by a third party) is treated by Prime as not
qualifying under the 75% and 95% gross income tests of Code section
856(c) for the purpose of the representations made herein. Prime
Partnership may also receive other types of income with respect to the
properties it owns that do not qualify for the 75% and 95% gross income
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<PAGE>
tests. New Prime and Prime Partnership intend to take all measures
within their control to ensure that the aggregate amount of such fees
and Bad Income in any taxable year will not cause New Prime to exceed
the limits on nonqualifying income under the 75% or 95% gross income
tests.
36. For their 1994, 1995, 1996 and 1997 taxable years, less than 30%
of the gross incomes of Prime and Prime Partnership was derived from the
sale or other disposition of the following: (A) stock or securities held
for less than one year; (B) property in a transaction which is a
"prohibited transaction" within the meaning of Code section
856(c)(4)(B); and (C) real property (including interests in real
property and interests in mortgages on real property) held for less than
four years, other than property compulsorily or involuntarily converted
within the meaning of Code section 1033 or property which constitutes
"foreclosure property" within the meaning of Code section 856(e). Prime
understands that an interest rate swap or cap agreement which Prime uses
to hedge any variable rate indebtedness used to carry real property
constitutes a security for this 30% test. Prime and Prime Partnership
intend to take all measures within their control to ensure that for the
current taxable year and any future taxable year less than 30% of their
gross incomes will be derived from the sources described in clauses (A),
(B) and (C) of this paragraph.
37. Within two years of any acquisition by Prime, New Prime, Prime
Partnership, any Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III or Finance IV of property through
"foreclosure" (within the meaning of Code section 856(e) including space
reacquired by dispossessing defaulted tenants) or within such additional
period as Prime or New Prime may obtain by extension from the Service,
Prime, New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III or Finance IV, as
the case may be, has sold the property, or intends to take such action
necessary to ensure that the property is sold, or take such other
actions as are necessary to ensure that income derived from such
property will not cause Prime or New Prime to fail the gross income
tests set forth in Code section 856(c). With respect to any foreclosure
property, neither New Prime, Prime Partnership, any Prime Property
Partnership, the Finance Partnership, Finance, Finance II, Finance III
nor Finance IV intends (i) to enter into any lease which will result in
income not qualifying under the gross income tests of Code section
856(c); (ii) to cause construction to take place on such property unless
such construction involves the completion of a building or other
improvement where more than 10% of the construction of such building was
completed before default became imminent; and (iii) within 90 days of
acquisition of any foreclosure property, to use such property in a trade
or business, other than through an independent contractor as defined in
Code section 856(d)(3) from whom New Prime and Prime Partnership derive
or receive no income.
38. Prime has properly reported and paid the appropriate tax on
income from prohibited transactions, if any, within the meaning of Code
section 857(b)(6). Since its formation, Prime has sold or caused the
sale of no more than [FOUR] outlets.
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39. Prime's federal income tax returns (which includes Finance,
Finance II, Finance III and Finance IV) and those of Prime Partnership,
each Prime Property Partnership, the Finance Partnership, the Services
Partnership and the Services Corporation have been timely filed and all
such returns accurately portray the respective incomes of all such
entities in every material respect. The copies of the federal income
tax returns provided to Winston & Strawn accurately reflect the tax
returns that have been or will be filed with the Service. Prime has
maintained all records and files necessary to comply with the
requirements of the Code and the regulations promulgated thereunder
(including without limitation Treasury Regulations section 1.856-4), and
New Prime will take all measures within its control to continue to
maintain all records and files in accordance with the requirements of
the Code and the regulations.
40. Prime, New Prime and Prime Partnership have filed, or will file,
all of their respective federal income and information tax returns for
the taxable year ended December 31, 1994 and all subsequent taxable
years, and have caused, and will cause, Castle Rock Factory Shops
Partnership and/or any direct or indirect subsidiary entity of any of
the foregoing to file all of their respective federal income and
informational tax returns for the taxable year ended December 31, 1994,
and all subsequent taxable years, in a manner consistent with the
position taken by Colorado Factory Shops Limited Partnership on its
federal income and informational tax returns for the taxable year ended
December 31, 1993 regarding the accrual for the taxable year ended
December 31, 1993 of all amounts payable under that certain Development
Agreement, dated July 26, 1991, by and between the Town of Castle Rock
and Colorado Factory Shops Limited Partnership, as amended by a First
Amendment, dated February 13, 1992, a Second Amendment, dated March 5,
1992, and a Third Amendment, dated April 9, 1992, and a Fourth
Amendment, dated April 16, 1992.
41. Amounts received, or to be received by the Arizona Factory Shops
Partnership from the City of Phoenix, Arizona in exchange for storm
drain land and storm drain improvements represent payment only for such
properties as determined after arm's-length negotiations.
42. All agreements by Prime, Prime Partnership and any Prime
Affiliate, with respect to property management fees, development fees,
construction management fees, leasing commissions or similar fees or
payments, were negotiated at arm's-length, and the amount of such fees
and payments represent reasonable amounts for the services rendered.
43. All annual amounts that Prime, New Prime, Prime Partnership, each
Prime Property Partnership, the Finance Partnership, the Services
Partnership, Finance, Finance II, Finance III and Finance IV receive, or
will receive, under leases, contracts, or other agreements with state or
local governments or agencies or instrumentalities thereof and which
Prime takes the position are excludible from gross income for federal
income tax purposes under Code section 103 are no more than .25% of
Prime's or Prime Partnership's total annual income. All other leases,
contracts or other agreements with state or local governments or
agencies or instrumentalities thereof pursuant to which Prime directly
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<PAGE>
or indirectly receives money or other property are entered into for the
purpose of providing Prime an abatement of real estate property taxes
and such money or other property are included in Prime's gross income.
Further, New Prime will take all appropriate measures to ensure that the
statements contained in this representation 43 remain accurate.
44. Prime (i) has not received any letter, notice or other written or
oral transmittal from the Service regarding its status as a REIT; (ii)
has not received any opinion of counsel or letter from its accountants
that indicates it may not qualify as a REIT; and (iii) is not currently
undergoing an audit by the Service.
45. At least 75% in value of Prime's total assets, including assets
held through partnerships in which it holds an interest or through
Finance, Finance II, Finance III and Finance IV has at all times
consisted of assets of the following types:
(A) land or interests therein;
(B) buildings, including wiring, plumbing systems, elevators,
escalators and other structural components thereof, but
not including any personal property associated with such
real property (such as furnishings, appliances,
draperies, equipment, machinery, etc.);
(C) loans (including accrued interest thereon) directly
secured by a duly recorded mortgage on real property of
the type described in (A) or (B) above;
(D) cash and cash items, including cash on hand, time and
demand deposits with financial institutions and
receivables arising in the ordinary course of Prime's
operations (other than those purchased from another
person) but excluding bankers' acceptances, repurchase
agreements and other similar instruments;
(E) securities (including accrued interest thereon) issued or
guaranteed by the United States or by a person controlled
or supervised by and acting as an instrumentality of the
United States, pursuant to any authority granted by
Congress, or any certificate of deposit for any of the
foregoing; and
(F) only during the one year period commencing on the date
new capital is received, stock or debt instruments sold
to the public attributable to the temporary investment of
such new capital.
New Prime intends to take all measures within its control to ensure that
in the current taxable year and all future taxable years, at least 75%
in value of its total assets will consist of the assets identified in
clauses (A) through (F) of this paragraph.
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<PAGE>
46. At no time has more than 25% in value of Prime's total assets
been represented by, and New Prime intends to take all measures within
its control to ensure that at no time in the future will more than 25%
in value of Prime's total assets be represented by, securities other
than those described in paragraph 45 above;
47. Prime has not owned, and New Prime intends to take all measures
within its control to ensure that it will not own, at the end of any
calendar quarter securities in any corporate issuer (other than Finance,
Finance II, Finance III, Finance IV or a future wholly-owned corporation
whose stock is entirely owned by New Prime) that either (A) represent in
excess of 10% of the outstanding voting securities of any such issuer or
(B) have an aggregate value in excess of 5% of the value of the total
assets of Prime or New Prime as determined in accordance with Treasury
Regulations section 1.856-2(d)(2). For the purposes of this
representation, Prime and New Prime will be treated as owning their pro
rata share (based on its capital interest) of all securities held by
partnerships in which it holds an interest. Prime and New Prime
understand that for the purposes of this representation they are
entitled to take into consideration the provision of Code section
856(c)(5) allowing a 30 day period to correct any failure to comply with
this representation as the result of any acquisition of a security
during the calendar quarter.
48. Except as provided in paragraph 33 above, Prime has taken, and
New Prime intends to take, all actions within their control to ensure
that all properties currently held and which may later be held by Prime,
New Prime, Prime Partnership, any Prime Property Partnership, the
Finance Partnership, Finance, Finance II, Finance III and Finance IV are
held for investment purposes and not as (A) stock in trade or other
property of a kind which would properly be included in inventory if on
hand at the close of the taxable year, or (B) property held primarily
for sale to customers in the ordinary course of business.
49. Prime has furnished Winston & Strawn with access to all leases
for properties in which Prime directly or indirectly holds an ownership
interest.
50. New Prime will furnish to Winston & Strawn with access to all
leases for properties in which New Prime directly or indirectly holds
an ownership interest.
51. Prime has furnished Winston & Strawn with accurate copies of all
its audited financial statements, including the opinion of its public
accountants. Copies of all documents furnished by Prime to Winston &
Strawn have conformed to the originals.
52. Prime has taken, and New Prime intends to take, all necessary
actions within its control to ensure that, Prime, New Prime, Prime
Partnership, each Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III and Finance IV revalue their assets at
the end of each quarter of each taxable year in which securities or
other property are acquired and will eliminate within 30 days after the
end of each such quarter any discrepancy between the value of Prime's or
New Prime's various investments and the requirements of Code section
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<PAGE>
856(c)(5) to the extent attributable in whole or in part to acquisitions
during such quarter.
53. For each of its 1994, 1995, 1996, 1997 and the Short Period Year
taxable years, Prime has distributed to shareholders within each taxable
year or within 30 days after the end of each taxable year for which a
distribution is declared and payable to shareholders of record prior to
the end of such taxable year 95% of its real estate investment trust
taxable income as such term is defined in Code section 857(b)(2). (For
purposes of the foregoing statement with respect to the Short Period
Year taxable year, Prime meets this 95% distribution requirement even if
the Prime Special Distribution is not taken into account.) Prime and
New Prime intend to take all actions within its control that are
necessary to ensure the distribution requirements of Code section 857
are satisfied for the current taxable year and all future taxable years.
54. Prime has distributed currently for each of 1994, 1995, 1996,
1997 and the Short Period Year an amount at least equal to the sum of
the following: (i) 85% of Prime's ordinary income for such taxable year,
(ii) 95% of Prime's capital gain net income for such taxable year, and
(iii) any undistributed ordinary income or capital gain net income from
prior taxable years. (For purposes of the foregoing statement with
respect to the Short Period Year taxable year, Prime meets this
distribution requirement even if the Prime Special Distribution is not
taken into account.) New Prime intends to take all necessary actions
within its control to ensure that this requirement will be met in the
current taxable year and all future taxable years.
55. All distributions have been made, and will in the future be made,
in accordance with the terms of Prime's Amended and Restated Articles of
Incorporation, as amended or New Prime's Articles of Incorporation, as
the case may be.
56. Prime has complied with the requirements of Code section
857(a)(2) and Treasury Regulations sections 1.857-8 and 1.857-9
(relating to records to be maintained concerning stock ownership and
information required to be requested from shareholders of Prime who own
greater than the applicable ownership percentage in such regulations).
Prime intends to take all actions necessary within its control to ensure
that such requirements are satisfied in the current taxable year and all
future taxable years.
57. With respect to the New Prime Series B Preferred Shares, New
Prime does not have any present plan or intention to exercise its option
to redeem the Convertible Preferred Stock before [MARCH 31, 1999].
58. Prime Partnership, the Prime Property Partnerships, Prime Retail
Finance Limited Partnership (the "Finance Partnership") and Prime Retail
Services Limited Partnership (the "Services Partnership") were formed,
have been operated, and intend to continue to operate, in reasonable
anticipation of making an economic profit, not taking into account any
federal income tax benefits. The respective general partner of each of
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<PAGE>
these partnerships acts for its own account and not as an agent or dummy
of the limited partners.
59. Prime currently owns [ ]% of the Common Units of Prime
Partnership, [ ]% of the Preferred Units, and [ ]% of the Convertible
Preferred Units. Upon consummation of the transactions contemplated in
the Joint Proxy and the Merger Agreement, New Prime will own [ ]% of
the Common Units of Prime Partnership, [ ]% of the Preferred Units,
and [ ]% of the Convertible Preferred Units. Prime currently has
approximately $[ ] in net assets and New Prime does not intend to
significantly reduce its net assets in the foreseeable future.
60. None of the partnership interests in Prime Partnership, any Prime
Property Partnership, the Finance Partnership or the Services
Partnership (i) are currently traded or will be traded on any securities
exchange or any local or over-the-counter market (or other interdealer
quotation system that regularly disseminates firm buy or sell quotations
by identified brokers or dealers) or (ii) are registered or will be
registered under the Securities Act of 1933 (other than Prime
Partnership Units). At no time has there been or will there be more
than 500 partners in each of Prime Partnership, each Prime Property
Partnership formed prior to January 1, 1996, the Finance Partnership and
the Services Partnership (determined by treating each person who
indirectly owns an interest in Prime Units through a partnership,
grantor trust or S corporation as a separate partner). At no time has
there been or will there be more than 100 partners in each Prime
Property Partnership formed after December 31, 1995. None of Prime
Partnership, any Prime Property Partnership, the Finance Partnership and
the Services Partnership have ever received any formal or informal
notice from the Internal Revenue Service (the "Service") indicating that
an examination is underway or will be made.
61. The Prime Special Distribution will be paid from internal funds
or from proceeds from the [Nomura loan secured by Prime unlevered
properties as described in the letter agreement between Prime and Nomura
Asset Capital Corporation dated March 6, 1998] deposited with [the stock
transfer/paying agent] prior to the Mergers. Although Prime will borrow
some or all of the funds necessary to make the Prime Special
Distribution, Prime will be able to do so based on its assets and
financial condition prior to Closing. Consequently, New Prime will not
need Horizon or Sky Merger assets or operations to repay the amounts
attributable to the Prime Special Distribution.
62. The Corporate Merger, Partnership Merger and other transactions
described in the Joint Proxy are being effected for bona fide business
reasons as articulated in such Joint Proxy.
63. None of the compensation received by any shareholder-employee of
Prime will be separate consideration for, or allocable to, any of his or
her Prime Common Shares, Prime Series A Preferred Shares, Prime Series B
Preferred Shares or Prime Series C Preferred Shares. The compensation
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<PAGE>
paid to any shareholder-employee of Prime will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services. None of the New Prime
Common Shares, New Prime Series A Preferred Shares, New Prime Series B
Preferred Shares and New Prime Series C Preferred Shares received by any
shareholder-employee of Prime will be in exchange for, or in
consideration of, services rendered to Prime, Prime Partnership or any
Prime Affiliate by such shareholder-employee.
64. Prime is familiar with the two Officer's Certificates given to
Winston & Strawn by Horizon dated _________, 1998 regarding the
Corporate Merger, the Reincorporation Merger, the status of each of
Horizon as a REIT, and Horizon Partnership and each subsidiary of
Horizon Partnership, formed under relevant state law as a partnership,
joint venture or limited liability company, as a partnership for federal
income tax purposes. To the extent any of the representations in such
Certificates relate to the future operations of New Prime as successor
to Sky Merger, New Prime will abide by such representations made by Sky
Merger.
65. To the extent any of the foregoing representations relate to the
future operations of New Prime, unexpected events may cause a deviation
from one or more of the intended operating principles set forth herein,
and in such case, New Prime, if it takes actions inconsistent with the
business plan reflected in such representations, intends to do so in a
manner to preserve in all events the status of New Prime as a REIT under
the Code.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on
behalf of Prime, Prime Partnership, the Prime Affiliates, New Prime and the New
Prime Affiliates this ___th day of _____, 1998.
PRIME RETAIL, Inc.
By: ______________________________
Its: Senior Vice President--
General Counsel and Secretary
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated January 23, 1998, with respect to the statements
of revenue and certain expenses of Prime Transferred Properties, and January
23, 1998 (except for Note 12, as to which the date is February 1, 1998), with
respect to the consolidated financial statements and schedule of Prime
Retail, L.P., in Amendment No. 1 to the Registration Statement (Form S-4) of
Prime Retail, L.P. and Sky Merger Corp. and related Joint Consent
Solicitation Statement/Prospectus/Information Statement and to the
incorporation by reference therein of our report dated January 23, 1998
(except for Note 15, as to which the date is February 1, 1998), with respect
to the consolidated financial statements and schedule of Prime Retail, Inc.,
included in its Annual Report (Form 10-K) for the year ended December 31,
1997 filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
May 1, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and the
use of our reports dated March 13, 1998 (except for the second paragraph of
Note 3 and the fourth and fifth paragraphs of Note 4, as to which the date is
April 1, 1998) with respect to the consolidated financial statements and
schedule of Horizon/Glen Outlet Centers Limited Partnership and April 3, 1998
with respect to the combined financial statements and schedule of Horizon
Group Properties, L.P., in Amendment No. 1 to the Registration Statement
(Form S-4) of Prime Retail, L.P. and Sky Merger Corp. and related Joint
Consent Solicitation Statement/Prospectus/Information Statement, and to the
incorporation by reference therein of our report dated March 13, 1998, with
respect to the consolidated financial statements and schedule of Horizon
Group, Inc., included in its Annual Report (Form 10-K) for the year ended
December 31, 1997, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
May 1, 1998
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints James S. Wassel as his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to Registration Statement No.
333-50139, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary in connection with such matters as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
/s/ Norman Perlmutter
---------------------------------------
Norman Perlmutter
Chairman of the Board and Director
<PAGE>
EXHIBIT 99.1
CONSENT OF LIMITED PARTNER OF
PRIME RETAIL, L.P.
This Consent is solicited on behalf of Prime Retail, Inc. ("Prime"),
the General Partner of Prime Retail, L.P., a Delaware limited partnership
("Prime Partnership").
Instructions: To Consent, withhold consent or abstain with respect to
the proposal set forth below, please check the appropriate box.
The undersigned, a holder of units of limited partnership interests of
Prime Partnership, acting with respect to all of the units held by the
undersigned, hereby:
/ / Consents
/ / Withholds Consent
/ / Abstains
to the merger of Prime Partnership with and into Horizon/Glen Outlet
Centers, L.P. ("Horizon Partnership") and the other transactions contemplated by
a merger agreement between Prime Partnership, Prime, Horizon Group, Inc.,
Horizon Partnership and certain wholly-owned subsidiaries of Horizon Group, Inc.
on the terms and conditions stated therein.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT CONSENT SOLICITATION
STATMENT/PROSPECTUS/INFORMATION STATEMENT DATED ______________.
The undersigned hereby revokes any consent or consents given with respect to the
subject matter of this consent.
Date:_______________, 1998 By:__________________________________
Signature
____________________________________
Please Print Name
If held jointly:
By:__________________________________
Signature
____________________________________
Please Print Name
THIS CONSENT WHEN PROPERLY EXECUTED, WILL BE ACTED UPON IN THE MANNER DIRECTED
HEREIN BY THE LIMITED PARTNER. A SIGNED BUT UNMARKED CONSENT CARD WILL BE
DEEMED TO CONSENT TO THE PROPOSAL SET FORTH ABOVE.
Please sign exactly as you hold your Prime Partnership units. When signing as
an attorney, administrator, trustee or guardian, please give your full title.
If an interest is jointly held, each holder should sign.
Please sign and date and return promptly in the enclosed envelope by
______________. No postage need be affixed if mailed in the United States.
<PAGE>
EXHIBIT 99.2
CONSENT OF LIMITED PARTNER OF
HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP
THIS CONSENT IS SOLICITED ON BEHALF OF HORIZON GROUP, INC. ("HORIZON"),
THE GENERAL PARTNER OF HORIZON/GLEN OUTLET CENTERS LIMITED PARTNERSHIP, A
DELAWARE LIMITED PARTNERSHIP ("HORIZON PARTNERSHIP").
INSTRUCTIONS: TO CONSENT, WITHHOLD CONSENT OR ABSTAIN WITH RESPECT TO THE
PROPOSAL SET FORTH BELOW, PLEASE CHECK THE APPROPRIATE BOX.
The undersigned, a holder of units of limited partnership interests of
Horizon Partnership, acting with respect to all of the units held by the
undersigned, hereby:
/ / Consents
/ / Withholds Consent
/ / Abstains
to the merger of Horizon Partnership with and into Prime Retail, L.P.
("Prime Partnership") and the other transactions contemplated by a merger
agreement between Horizon Partnership, Horizon, Prime Retail, Inc., Prime
Partnership and certain wholly-owned subsidiaries of Horizon on the terms and
conditions stated therein.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT CONSENT SOLICITATION
STATEMENT/PROSPECTUS/INFORMATION STATEMENT DATED _________________.
THE UNDERSIGNED HEREBY REVOKES ANY CONSENT OR CONSENTS GIVEN WITH RESPECT TO
THE SUBJECT MATTER OF THIS CONSENT.
Date:_______________, 1998 By:__________________________________
Signature
____________________________________
Please Print Name
If held jointly:
By:__________________________________
Signature
____________________________________
Please Print Name
THIS CONSENT, WHEN PROPERLY EXECUTED, WILL BE ACTED UPON IN THE MANNER
DIRECTED HEREIN BY THE LIMITED PARTNER. A SIGNED BUT UNMARKED CONSENT CARD
WILL BE DEEMED TO CONSENT TO THE
<PAGE>
PROPOSAL SET FORTH ABOVE.
Please sign exactly as you hold your Horizon Partnership units. When signing
as an attorney, administrator, trustee or guardian, please give your full
title. If an interest is jointly held, each holder should sign.
Please sign and date and return promptly in the enclosed envelope by
________________. No postage need be affixed if mailed in the United States.
