<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1998
REGISTRATION NO. 333-51285
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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
------------------------
SKY MERGER CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 6798 38-3405229
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
5000 HAKES DRIVE
NORTON SHORES, MICHIGAN 49441
(616) 798-9100
(Address, including ZIP code, and telephone number, including
area code, of registrant's principal executive offices)
JAMES S. WASSEL
PRESIDENT
5000 HAKES DRIVE
NORTON SHORES, MICHIGAN 49441
(616) 798-9100
(Name, address, including ZIP Code, and telephone number, including area code,
of agent for service)
------------------------
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. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PRIME RETAIL, INC.
100 EAST PRATT STREET
NINETEENTH FLOOR
BALTIMORE, MARYLAND 21202
May 14, 1998
Dear Shareholder:
You are cordially invited to attend a meeting of shareholders of Prime
Retail, Inc., a Maryland corporation ("Prime"), to be held at 100 East Pratt
Street, 12 Floor Conference Room, Baltimore, Maryland, on June 12, 1998, at
11:00 a.m., local time (the "Prime Shareholders Meeting").
At the Prime Shareholders Meeting, you will be asked to vote on the merger
of Prime and Horizon Group, Inc. ("Horizon") and the other transactions
contemplated by the agreement and plan of merger between such parties. The name
of the surviving company in the merger will be "Prime Retail, Inc." You will
also be asked to elect three directors of the Prime Board of Directors, approve
the Prime Retail, Inc. Nonemployee Director Stock Option Plan, approve the Prime
Retail, Inc. 1998 Long-Term Stock Incentive Plan, ratify the appointment of
Prime's independent accountants, and transact such other business as may
properly come before the Prime Shareholders Meeting.
Pursuant to the merger, each shareholder of Horizon will receive 0.597 of a
share of common stock and 0.20 of a share of Series B preferred stock of the
surviving company in exchange for each outstanding share of Horizon common
stock. Each outstanding share of common and preferred stock of Prime will
continue to represent a share of the same class and series of stock in the
surviving company. In addition, each holder of Series C preferred shares and
common shares of Prime prior to the merger will receive a special cash
distribution of $0.50 per share and each holder of Series B preferred shares of
Prime prior to the merger will receive a special cash distribution of $0.60 per
share.
As a result of the merger and certain related transactions, Prime will add
22 of Horizon'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's common and convertible preferred shareholders and Horizon's
shareholders will also receive, through a taxable distribution, shares of common
stock in Horizon Group Properties, Inc. ("HGP"). HGP 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, Horizon and
HGP are contained in the attached Joint Proxy Statement/Prospectus/Information
Statement, which you are encouraged to read carefully.
Your Board of Directors believes that the proposed merger will benefit Prime
and its shareholders by (i) enabling Prime to complement and expand its existing
portfolio of properties through the selective acquisition of 22 of Horizon's
best performing outlet centers, (ii) positioning the surviving company to meet
competitive challenges by substantially increasing its size and market
capitalization and thereby enabling it to achieve greater economies of scale and
to improve its access to capital and (iii) providing Prime's common and
convertible preferred shareholders with the opportunity to benefit from the
continuing business and operations of HGP through ownership of common stock in
such company.
<PAGE>
Your Board of Directors 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 in connection with such transactions is fair to Prime and its
shareholders from a financial point of view. YOUR BOARD OF DIRECTORS 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
AND ITS SHAREHOLDERS AND RECOMMENDS THAT ALL SHAREHOLDERS VOTE FOR APPROVAL OF
SUCH TRANSACTIONS. The Prime Board of Directors also has unanimously approved
the other matters described in the enclosed proxy statement that are to be
considered at the Prime Shareholders Meeting and recommends that all
shareholders vote FOR approval of such matters.
The proposed merger with Horizon and the other transactions contemplated by
the merger agreement require the affirmative vote of Prime shareholders owning
(i) two-thirds of the outstanding shares of Prime common stock and (ii)
two-thirds of the outstanding shares of Prime Series C preferred stock. The
election of directors of the Prime Board of Directors requires the majority of
votes cast by holders of Prime common stock entitled to vote at the Prime
Shareholders Meeting. The approval of the Prime Retail, Inc. Nonemployee
Director Stock Plan and the Prime Retail, Inc. 1998 Long-Term Stock Incentive
Plan and the appointment of independent auditors of Prime requires the
affirmative vote of a majority of the votes cast on such matters by holders of
Prime common stock.
Accordingly, whether or not you plan to attend the Prime Shareholders
Meeting, please complete, sign and date the accompanying proxy card and return
it in the enclosed prepaid envelope. You may revoke your proxy in the manner
described in the accompanying Joint Proxy Statement/Prospectus/ Information
Statement at any time before it has been voted at the Prime Shareholders
Meeting. If you attend the Prime Shareholders Meeting, you may vote in person
even if you have previously returned your proxy card. Your prompt cooperation
will be greatly appreciated. This solicitation is made on behalf of the Board of
Directors of Prime.
THE ACCOMPANYING NOTICE OF MEETING OF SHAREHOLDERS AND JOINT PROXY
STATEMENT/PROSPECTUS/INFORMATION STATEMENT, AND THE ANNEXES THERETO, PROVIDE
DETAILED INFORMATION CONCERNING MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS
MEETING, THE REASONS FOR YOUR BOARD OF DIRECTORS' RECOMMENDATION OF THE MERGER
AND THE MERGER AGREEMENT AND CERTAIN ADDITIONAL INFORMATION, INCLUDING, WITHOUT
LIMITATION, INFORMATION ON PRIME, HORIZON AND HGP. YOU ARE URGED TO CAREFULLY
CONSIDER ALL OF THE INFORMATION.
Sincerely,
[/S/ MICHAEL W. RESCHKE]
Michael W. Reschke
CHAIRMAN OF THE BOARD
<PAGE>
PRIME RETAIL, INC.
NOTICE OF MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a meeting of shareholders ("Prime Shareholders
Meeting") of Prime Retail, Inc., a Maryland corporation ("Prime"), will be held
at 100 East Pratt Street, 12th Floor Conference Room, Baltimore, Maryland, on
June 12, 1998 at 11:00 a.m., local time, to consider and vote on the following
matters:
(i) The merger of Prime and Horizon Group, Inc. and the other transactions
contemplated by the agreement and plan of merger between such parties;
(ii) The election of three directors of the Prime Board of Directors;
(iii) The approval of the Prime Retail, Inc. Nonemployee Director Stock
Plan;
(iv) The approval of the Prime Retail, Inc. 1998 Long-Term Stock Incentive
Plan;
(v) The ratification of the appointment of Ernst & Young LLP as independent
auditors of Prime for the fiscal year ending December 31, 1998; and
(vi) The transaction of such other business as may properly come before the
Prime Shareholders Meeting or any adjournment(s) or postponement(s)
thereof, including an adjournment to solicit additional proxies in the
event that a quorum is not present at the meeting or in the event
sufficient proxies voted in favor of the approval of the proposals have
not been received.
Only holders of record of Prime's (i) common stock, $0.01 par value per
share and (ii) Series C Cumulative Convertible Redeemable Preferred Stock, $0.01
par value per share ("Prime Series C Preferred Shares"), at the close of
business on April 24, 1998 will be entitled to vote at the Prime Shareholders
Meeting. Holders of record of Prime Series C Preferred Shares have appraisal
rights under Maryland Law. In order to preserve this right, such holders must
carefully comply with certain procedures as set forth in Appendix H to the
attached Joint Proxy Statement/Prospectus/Information Statement. Holders of
Prime Common Shares will be entitled to vote with respect to all matters to be
acted upon at the Prime Shareholders Meeting. Holders of Prime Series C
Preferred Shares will be entitled to vote only on the proposal described in item
(i) above.
By Order of the Board of Directors,
[/S/ C. ALAN SCHROEDER]
C. Alan Schroeder
SECRETARY
Baltimore, Maryland
May 14, 1998
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PLEASE DATE, SIGN AND RETURN YOUR PRIME PROXY PROMPTLY IN THE ENCLOSED,
SELF-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
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<PAGE>
May 14, 1998
HORIZON GROUP, INC.
To Our Shareholders:
You are cordially invited to attend a special meeting of shareholders of
Horizon Group, Inc. ("Horizon") to be held at Rudnick & Wolfe, 203 N. LaSalle,
Suite 1800, Chicago, Illinois, on June 12, 1998 at 10:00 a.m., local time. At
the special meeting, you will be asked to vote on a merger agreement between
Horizon and Prime Retail, Inc. ("Prime"). As a result of the proposed merger,
each shareholder of Horizon will receive 0.597 of a share of Prime common stock
and 0.20 of a share of Prime Series B preferred stock in exchange for each
outstanding share of Horizon common stock. In addition, each Horizon shareholder
will, after the merger, receive 0.08362 of a share of common stock for each
share of Horizon held prior to the merger in a newly formed company, Horizon
Group Properties, Inc.
In February of 1997, your Board of Directors set in motion a series of
events which led Horizon to explore strategic alternatives, adopt a revised
business plan for the Company, bring in new senior management, refinance a large
portion of the Company's debt and eliminate the burden of the Company's Dole
Cannery Project.
In November of 1997, your Board of Directors approved entering into a merger
agreement with Prime to form the largest outlet center business in the United
States.
The proposed merger will combine 22 of Horizon's best performing outlet
centers with 26 of Prime'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 GLA as of December 31, 1997. Horizon's
lesser performing properties, together with two of Prime's properties, will be
combined into a separate company, Horizon Group Properties, Inc., whose common
stock will be distributed to all shareholders of the surviving company following
the consummation of the merger.
Your Board of Directors 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 holders of Horizon common stock in
the merger is fair from a financial point of view. ACCORDINGLY, THE BOARD OF
DIRECTORS HAS DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE IN THE
BEST INTERESTS OF HORIZON AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMEND THAT
YOU VOTE IN FAVOR OF THE MERGER AGREEMENT AT THE SPECIAL MEETING.
The merger agreement requires the affirmative vote of the record holders of
at least two-thirds of the Horizon Common Shares entitled to vote. Accordingly,
whether or not you plan to attend the Horizon special meeting, please complete,
sign and date the Company proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the accompanying
Joint Proxy Statement/Prospectus/Information Statement at any time before it has
been voted at the Horizon special meeting. If you attend the Horizon special
meeting, you may vote in person even if you have previously returned your proxy
card. Your prompt cooperation will be greatly appreciated. This solicitation is
made on behalf of the Board of Directors of Horizon.
Sincerely,
[/S/ JAMES S. WASSEL]
James S. Wassel
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
HORIZON GROUP, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a special meeting of shareholders ("Horizon
Special Meeting") of Horizon Group, Inc. ("Horizon"), a Michigan corporation,
will be held at Rudnick & Wolfe, 203 N. LaSalle, Suite 1800, Chicago, Illinois,
on June 12, 1998 at 10:00 a.m., local time, to consider and vote on the approval
and adoption of an agreement and plan of merger between Horizon and Prime
Retail, Inc., a Maryland corporation ("Prime"), and certain subsidiaries of
Horizon and Prime, and the transactions contemplated thereby, including the
approval of a plan of merger relating to the merger of Horizon with and into Sky
Merger Corp., a Maryland corporation, all as described in the attached Joint
Proxy Statement/Prospectus/Information Statement.
Only shareholders of record at the close of business on April 24, 1998 will
be entitled to vote at the Horizon Special Meeting.
By Order of the Board of Directors,
Amy L. Essex
SECRETARY
Norton Shores, Michigan
May 14, 1998.
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PLEASE DATE, SIGN AND RETURN YOUR HORIZON PROXY PROMPTLY IN THE ENCLOSED,
SELF-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES.
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<PAGE>
PRIME RETAIL, INC.
AND
HORIZON GROUP, INC.
JOINT PROXY STATEMENT
----------------
SKY MERGER CORP.
(TO BE RENAMED PRIME RETAIL, INC.)
PROSPECTUS
----------------
HORIZON GROUP PROPERTIES, INC.
INFORMATION STATEMENT
This Joint Proxy Statement/Prospectus/Information Statement is being
furnished to the shareholders of Prime Retail, Inc., a Maryland corporation
("Prime"), in connection with the solicitation of proxies on behalf of the Board
of Directors of Prime ("Prime Board of Directors") for use at a meeting (the
"Prime Shareholders Meeting") of the holders of (i) shares of common stock,
$0.01 par value per share, of Prime ("Prime Common Shares") and (ii) shares of
Series C Cumulative Convertible Redeemable Preferred Stock, $0.01 par value per
share, of Prime ("Prime Series C Preferred Shares") to be held on June 12, 1998,
at the time and place set forth in the accompanying notice and at any
adjournment or postponement thereof. At the Prime Shareholders Meeting, holders
of Prime Common Shares ("Prime Common Shareholders") and Prime Series C
Preferred Shares ("Prime Series C Preferred Shareholders" and together, with the
Prime Common Shareholders, the "Prime Voting Shareholders") will be asked to
consider the matters set forth in the Notice of the Prime Shareholders Meeting,
including the approval of the merger (the "Corporate Merger") of Prime into Sky
Merger Corp., a Maryland corporation ("Sky Merger") and the successor to Horizon
Group, Inc., a Michigan corporation ("Horizon"), 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 Retail, L.P., a Delaware limited partnership
("Prime Partnership"), Horizon, Sky Merger, Horizon Group Properties, Inc., a
Maryland corporation ("HGP"), Horizon Group Properties, L.P., a Delaware limited
partnership ("HGP LP"), and Horizon/Glen Outlet Centers Limited Partnership, a
Delaware limited partnership ("Horizon Partnership"). A copy of the Merger
Agreement is attached hereto as Appendix A. The name of the surviving company
("New Prime") in the Corporate Merger will be "Prime Retail, Inc." As a result
of the Transactions, Prime will add 22 of Horizon'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 245.
This Joint Proxy Statement/Prospectus/Information Statement also is being
furnished to the shareholders of Horizon in connection with the solicitation of
proxies on behalf of the Board of Directors of Horizon ("Horizon Board of
Directors") for use at a special meeting (the "Horizon Special Meeting" and,
together with the Prime Shareholders Meeting, the "Meetings of Shareholders") of
the holders of common shares, $0.01 par value per share, of Horizon ("Horizon
Common Shares") to be held on June 12, 1998 at the time and place set forth in
the accompanying notice and at any adjournment or postponement thereof. At the
Horizon Special Meeting, holders of Horizon Common Shares ("Horizon Common
Shareholders") will be asked to consider and vote on the approval and adoption
of the Merger Agreement and the transactions contemplated thereby, including the
Reincorporation Merger.
I-1
<PAGE>
This Joint Proxy Statement/Prospectus/Information Statement also is being
furnished to Horizon Common Shareholders, Prime Voting Shareholders and the
holders ("Prime Series B Preferred Shareholders") of Prime's 8.5% Series B
Cumulative Participating Convertible Preferred Stock, $0.01 par value per share
("Prime Series B Preferred Shares"), to provide them with information regarding
HGP. The Transactions contemplate that HGP, through HGP LP, will own and operate
a portfolio consisting 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 shareholders of
Prime and Horizon voting thereon should consider, in addition to the other
information in this Joint Proxy Statement/Prospectus/ Information Statement, the
matters discussed under "New Prime Risk Factors." Such matters include:
- The distribution declared on a Horizon Common Share for each of the first
three quarters of 1997 was $0.35 and the distribution declared on each
Prime Share Equivalent was $0.07 lower, or $0.28 for each such quarter.
There can be no assurance that New Prime will make distributions equal to
or in excess of those historically paid to shareholders of Prime.
- In the event the Transactions are not consummated, Horizon plans to
reevaluate its distribution policy and may reduce or eliminate the
quarterly distribution payable to Horizon Common Shareholders.
- Possible fluctuations in share prices, including (a) a potential change in
the relative market prices of Prime Common Shares, Prime Series B
Preferred 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 and Horizon 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.
- The Horizon Common Shareholders, Prime Common Shareholders and Prime
Series B Preferred Shareholders are not entitled to exercise appraisal
rights under Maryland or Michigan law in connection with the Transactions.
- New Prime will be subject to the risks normally associated with debt or
preferred equity financings, including the risk that New Prime's cash flow
will be insufficient to meet required payments of principal, interest and
distributions.
Horizon Common Shareholders, Prime Voting Shareholders and Prime Series B
Preferred Shareholders should also consider the matters discussed under "HGP
Risk Factors". Such matters include:
- HGP does not have an operating history as a separate company. The
historical and pro forma results for HGP contained elsewhere in this Joint
Proxy Statement/Prospectus/Information Statement may not be indicative of
its results for future periods.
- The initial assets of HGP consist of properties formerly owned by Horizon
and Prime which have performed poorly relative to other properties owned
by Horizon and Prime. As of December 31,
I-2
<PAGE>
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 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 will represent approximately 75.8%
of HGP's total capitalization. The degree to which HGP will be leveraged
could have adverse consequences, including limiting HGP's ability to
obtain additional financing and that a substantial portion of HGP's cash
flow is expected to be required to be dedicated to debt service.
- Implementation of HGP's business plan will require substantial working
capital. HGP does not have any commitments for working capital financing,
and there is no assurance that HGP will have working capital sufficient to
execute its business plan.
- There can be no assurance as to the value, if any, of the HGP Common
Shares to be distributed in connection with the Transactions or that an
active market will develop in respect of such shares. There is no prior
trading market for HGP Common Shares, and there can be no assurance that
such a market will develop.
- HGP does not plan to pay a distribution in the foreseeable future, and
there can be no assurance that HGP 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.
This Joint Proxy Statement/Prospectus/Information Statement also relates to
the shares of Common Stock, $0.01 par value per share, of New Prime (each, a
"New Prime Common Share") and the shares of 8.5% Series B Cumulative
Participating Convertible Preferred Stock, $0.01 par value per share, of New
Prime (each, a "New Prime Series B Preferred Share") issuable upon consummation
of the Transactions.
On May 8, 1998, the last reported sales price of a Prime Common Share and
Prime Series B Preferred Share on the New York Stock Exchange ("NYSE") was
$13.625 and $23.00, respectively. On May 8, 1998, the last reported sales price
of a Horizon Common Share on the NYSE was $11.625.
This Joint Proxy Statement/Prospectus/Information Statement and the forms of
proxy are first being mailed to shareholders of Prime and Horizon on or about
May 14, 1998.
SEE "NEW PRIME RISK FACTORS" BEGINNING ON PAGE 33 AND "HGP RISK FACTORS"
BEGINNING ON PAGE 46 FOR A DISCUSSION OF MATERIAL FACTORS WHICH SHOULD BE
CONSIDERED BY SHAREHOLDERS OF PRIME AND HORIZON.
---------------------
THE SECURITIES TO WHICH THIS JOINT PROXY 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 PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus/Information Statement is May
14, 1998.
I-3
<PAGE>
AVAILABLE INFORMATION
New Prime has 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 New
Prime Common Shares and New Prime Series B Preferred Shares to be issued in
connection with the Corporate Merger. As permitted by the rules and regulations
of the Commission, this Joint Proxy 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
Securities Exchange Act of 1934, as amended (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 HGP Common Share Distribution, HGP will also be 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. The shares of common stock, $0.01 par value per share, of HGP
(the "HGP Common Shares") have been authorized for quotation in The Nasdaq
National Market ("Nasdaq") under the trading symbol "HGPI."
All information contained in this Joint Proxy
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 has been supplied by HGP.
No person is authorized to give any information or to make any
representation not contained in this Joint Proxy
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 Proxy
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
Proxy Statement/Prospectus/Information Statement, or the solicitation of a
proxy, in any jurisdiction where or from any person to whom it is unlawful to
make such offer, or solicitation of an offer, or proxy solicitation. Neither the
delivery of this Joint Proxy Statement/Prospectus/Information Statement nor any
distribution of the securities offered pursuant to this Joint Proxy
Statement/Prospectus/Information Statement shall, under any circumstances,
create an implication that there has been no change in the affairs of Prime,
Horizon or HGP since the date of this Joint Proxy
Statement/Prospectus/Information Statement.
All documents that are incorporated by reference in this Joint Proxy
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 June 1, 1998.
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INFORMATION INCORPORATED BY REFERENCE
IN THIS JOINT PROXY 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 Proxy
Statement/Prospectus/Information Statement by reference:
1. Prime's annual report on Form 10-K and Form 10-K/A 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 and Amendment No. 1 on Form 10-K/A 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 Proxy Statement/Prospectus/Information
Statement to the extent that a statement contained in this Joint Proxy
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
Proxy 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 Proxy
Statement/ Prospectus/Information Statement.
* File No. 0-23616
** File No. 1-12424
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JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT
TABLE OF CONTENTS
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SUMMARY.................................................................................................... 1
Parties to the Transactions.............................................................................. 2
The Transactions......................................................................................... 3
New Prime Risk Factors................................................................................... 8
HGP Risk Factors......................................................................................... 8
Merger Consideration and Distributions Payable Pursuant to the Transactions.............................. 9
Advantages and Disadvantages of the Transactions; Recommendation of the Prime Board of Directors......... 12
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 Corporate Merger and Closing Date.................................................. 15
Conditions to the Mergers; Waiver and Amendment.......................................................... 15
Appraisal Rights......................................................................................... 15
Federal Income Tax Consequences.......................................................................... 15
Shares Available for Resale.............................................................................. 16
Termination.............................................................................................. 17
Break-up Fee and Expenses................................................................................ 17
Anticipated Accounting Treatment......................................................................... 17
Conduct of Business Pending the Mergers.................................................................. 17
No Solicitation of Other Transactions.................................................................... 17
Conversion of Shares; Exchange of Certificates........................................................... 17
Comparison of Rights of Shareholders..................................................................... 18
Management and Operation of New Prime after the Transactions............................................. 20
The Meetings of Shareholders; Record Dates; Votes Required............................................... 20
New Prime and HGP Summary Unaudited Pro Forma Financial Data............................................. 21
Prime Retail, Inc. Summary Historical Financial Data..................................................... 24
Horizon Group, Inc. Summary Historical Financial Data.................................................... 27
Comparative Per Share Data............................................................................... 29
Comparative Share Prices................................................................................. 30
NEW PRIME RISK FACTORS..................................................................................... 33
Risks to Horizon Common Shareholders..................................................................... 33
Potential Change in Relative Stock Prices; Share Price Fluctuations after the Transactions............... 33
Adverse Effects of Combining the Companies............................................................... 34
Possibility That the Expected Benefits of the Transactions Will Not Be Realized.......................... 34
Conflicts of Interest Arising from Benefits to Certain Directors and Officers of Horizon................. 34
Conflicts of Interest Relating to Lehman Brothers........................................................ 36
Influence of PGI and Mr. Reschke......................................................................... 36
Appraisal Rights......................................................................................... 36
Adverse Consequences of Debt Financing................................................................... 37
Loss Upon Disposition of the Prime Transferred Properties................................................ 37
Obligations with Respect to HGP Credit Facilities; Modification of HGP Credit Facility................... 37
Status of the Corporate Merger as a Tax-Free Reorganization.............................................. 38
Adverse Impact of New Prime's Failure to Continue to Qualify as a REIT................................... 38
Effect of REIT Distribution Requirements................................................................. 38
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Penalty Tax on Prohibited Transactions................................................................... 39
Ownership Limit Necessary to Maintain REIT Qualification................................................. 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.......................................................................... 41
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
HGP RISK FACTORS........................................................................................... 46
Lack of Operating History as Separate Entity; Limited Relevance of Historical Financial Information...... 46
Declining Operating Results of HGP Properties............................................................ 46
Adverse Consequences of Debt Financing................................................................... 46
Lack of Working Capital.................................................................................. 48
No Prior Public Market; No Assurance of Value............................................................ 48
Absence of Distributions................................................................................. 48
Novelty of Transaction Structure to the Factory Outlet Industry.......................................... 48
Change in Business Strategy.............................................................................. 49
Financings May Not Be Successful......................................................................... 49
Limited Experience of HGP's Management in Factory Outlet Center Industry................................. 49
Conflicts of Interests of Common Directors............................................................... 49
Dependence on Rental Income from Real Property........................................................... 49
Adverse Impact of the Failure to Continue to Qualify as a REIT........................................... 50
Effect of REIT Distribution Requirements................................................................. 50
Penalty Tax on Prohibited Transactions................................................................... 50
Ownership Limit Necessary to Maintain REIT Qualification................................................. 51
Nasdaq Maintenance Requirements; Possible Delisting of HGP Common Shares from Nasdaq..................... 52
SEC Penny Stock Regulations.............................................................................. 52
Taxable Nature of the HGP Common Share Distribution...................................................... 53
Limits on Changes in Control............................................................................. 53
Changes in Policies without Shareholder Approval......................................................... 54
General Real Estate Risks................................................................................ 54
Operating Risks.......................................................................................... 54
Uninsured Loss........................................................................................... 55
Potential Environmental Liability Related to the HGP Properties.......................................... 55
Costs of Compliance with the Americans with Disabilities Act and Similar Laws............................ 56
Other Laws............................................................................................... 56
MEETINGS OF SHAREHOLDERS................................................................................... 57
Prime.................................................................................................... 57
Horizon.................................................................................................. 58
THE TRANSACTIONS........................................................................................... 60
Parties to the Transactions.............................................................................. 60
Summary of the Transactions.............................................................................. 62
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THE CONTRIBUTION AGREEMENT................................................................................. 72
Background............................................................................................... 72
Contributed Assets....................................................................................... 72
Retained Assets.......................................................................................... 72
Assumed and Retained Liabilities......................................................................... 73
Indemnification.......................................................................................... 73
THE PARTNERSHIP MERGER..................................................................................... 74
Proxy Solicitation; Vote Required........................................................................ 74
Partnership Merger Consideration......................................................................... 74
Partnership Merger Effective Time........................................................................ 74
Federal Income Tax Consequences of the Partnership Merger................................................ 74
THE REINCORPORATION MERGER................................................................................. 75
Terms of the Reincorporation Merger...................................................................... 75
Reincorporation Merger Consideration; Treatment of Stock Options......................................... 75
Federal Income Tax Consequences.......................................................................... 76
Limited Appraisal Rights Under Michigan Law.............................................................. 77
THE CORPORATE MERGER....................................................................................... 77
Terms of the Corporate Merger............................................................................ 77
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....... 87
Opinion of Financial Advisor--Prime...................................................................... 89
Opinion of Financial Advisor--Horizon.................................................................... 93
Effective Time of the Corporate Merger................................................................... 98
Representations and Warranties; Conditions to the Mergers................................................ 99
Limited Appraisal Rights under Maryland Law.............................................................. 100
Regulatory Matters....................................................................................... 100
Termination Provisions................................................................................... 100
Break-up Fee and Expenses................................................................................ 101
No Solicitation of Other Transactions.................................................................... 103
Conversion of Shares..................................................................................... 103
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................................................................................... 109
Anticipated Accounting Treatment......................................................................... 109
Shares Available for Resale.............................................................................. 110
Federal Income Tax Consequences.......................................................................... 110
Registration Rights Agreement............................................................................ 121
Stock Purchase Agreement................................................................................. 122
Shareholder Litigation................................................................................... 122
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS........................................................... 124
Benefits to Certain Directors and Officers............................................................... 124
Amendments to Agreements with Certain Shareholders....................................................... 125
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Agreements with Certain Executive Officers and Key Employees............................................. 125
Agreements Relating to Finger Lakes...................................................................... 126
Retention Program........................................................................................ 126
Indemnification of Directors and Officers................................................................ 126
NEW PRIME AND HGP
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA.............................................................. 127
PRIME RETAIL, INC.
SELECTED HISTORICAL FINANCIAL DATA....................................................................... 129
HORIZON GROUP, INC.
SELECTED HISTORICAL FINANCIAL DATA....................................................................... 132
POLICIES OF NEW PRIME WITH RESPECT TO CERTAIN ACTIVITIES................................................... 134
Investment Objectives and Policies....................................................................... 134
Distribution and Dividend Policy......................................................................... 134
Financing Policies....................................................................................... 135
Conflict of Interest Policies............................................................................ 135
Working Capital Reserves................................................................................. 136
New Prime's Relationship with HGP........................................................................ 136
Policies with Respect to Other Activities................................................................ 137
LIQUIDITY AND CAPITAL RESOURCES OF NEW PRIME FOLLOWING THE TRANSACTIONS.................................... 137
Planned Development...................................................................................... 137
Nomura Loan Facilities................................................................................... 138
Debt Repayments and Preferred Stock Dividends............................................................ 138
Short-Term and Long-Term Liquidity Requirements.......................................................... 139
Year 2000................................................................................................ 139
MANAGEMENT AND OPERATION OF NEW PRIME AFTER THE TRANSACTIONS............................................... 140
General.................................................................................................. 140
Directors and Executive Officers......................................................................... 140
Committees of the New Prime Board of Directors........................................................... 145
Compensation of Directors................................................................................ 146
Headquarters............................................................................................. 146
DESCRIPTION OF THE CAPITAL STOCK OF NEW PRIME.............................................................. 146
Authorized Shares........................................................................................ 146
New Prime Series A Preferred Shares...................................................................... 147
New Prime Series B Preferred Shares...................................................................... 151
New Prime Series C Preferred Shares...................................................................... 156
New Prime Common Shares.................................................................................. 163
Restrictions on Ownership and Transfer................................................................... 164
COMPARISON OF RIGHTS OF SHAREHOLDERS....................................................................... 168
Prime Shareholders and New Prime Shareholders............................................................ 168
Authorized and Issued Shares............................................................................. 168
Amendment to Articles and Bylaws......................................................................... 168
Voting Rights............................................................................................ 169
Special Meetings......................................................................................... 171
Boards of Directors...................................................................................... 171
General.................................................................................................. 172
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Shareholder Inspection Rights............................................................................ 172
Mergers, Consolidations, Dissolution and Sale of Substantially All Assets................................ 172
Restrictions on the Ownership Transfer or the Issuance of Shares......................................... 173
Appraisal or Dissenter's Rights.......................................................................... 177
Advance Notice Provision for Shareholder Nomination and Shareholder Proposals............................ 177
Transactions With Directors and Officers................................................................. 177
CERTAIN PROVISIONS OF MARYLAND LAW AND THE NEW PRIME CHARTER AND BYLAWS.................................... 178
Classification of the New Prime Board of Directors....................................................... 178
Removal of Directors..................................................................................... 179
Business Combinations.................................................................................... 179
Control Share Acquisitions............................................................................... 179
Amendment to the New Prime Charter....................................................................... 180
Advance Notice of Director Nominations and New Business.................................................. 180
PRIME PARTNERSHIP AGREEMENT................................................................................ 181
Formation................................................................................................ 181
Capitalization........................................................................................... 181
Management............................................................................................... 181
Transferability of Interests............................................................................. 181
Additional Funds......................................................................................... 181
Registration Rights...................................................................................... 182
Tax Matters.............................................................................................. 182
Operations............................................................................................... 182
Distributions............................................................................................ 182
Prime Partnership Limited Partner Exchange Rights........................................................ 183
Conversion............................................................................................... 183
Redemption............................................................................................... 184
Indemnification.......................................................................................... 184
Duties and Conflicts..................................................................................... 184
Term..................................................................................................... 184
Voting................................................................................................... 185
Amendment................................................................................................ 185
Books and Reports........................................................................................ 185
Power of Attorney........................................................................................ 185
HORIZON GROUP PROPERTIES, INC.............................................................................. 186
General.................................................................................................. 186
Business Strategy........................................................................................ 186
HGP Distribution Policy.................................................................................. 187
HGP Capitalization....................................................................................... 188
Horizon Group Properties, Inc. Selected Financial Data................................................... 188
HGP Management's Discussion and Analysis of Results of Operations and Financial Condition................ 190
Year 2000................................................................................................ 194
Funds From Operations.................................................................................... 194
Inflation................................................................................................ 194
Properties............................................................................................... 195
Lease Information........................................................................................ 197
Tenant Information....................................................................................... 198
Competition.............................................................................................. 198
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Legal Proceedings........................................................................................ 199
Policies with Respect to Certain Activities.............................................................. 199
Management............................................................................................... 200
Committees of the HGP Board of Directors................................................................. 201
Compensation of Directors................................................................................ 202
Indemnification of Directors and Officers................................................................ 202
Principal Shareholders of HGP............................................................................ 202
Description of Capital Stock of HGP...................................................................... 204
Executive Compensation of HGP Management................................................................. 206
The HGP 1998 Long-Term Stock Incentive Plan.............................................................. 206
Employment Agreements.................................................................................... 208
Certain Relationships and Related Transactions........................................................... 209
Certain Provisions of Maryland Law and of HGP's Charter and Bylaws....................................... 209
Federal Income Tax Consequences.......................................................................... 213
Description of HGP LP Partnership Agreement.............................................................. 219
OTHER PRIME SHAREHOLDERS MEETING MATTERS................................................................... 221
Security Ownership of Certain Beneficial Owners and Management........................................... 221
Election of Directors.................................................................................... 224
Nominees for Election.................................................................................... 225
Information Regarding Meetings and Committees of the Prime Board of Directors............................ 225
Approval of Prime Retail, Inc. Nonemployee Director Stock Plan........................................... 226
Approval of Prime Retail, Inc. 1998 Long-Term Stock Incentive Plan....................................... 228
Ratification of Independent Auditors..................................................................... 232
Compensation of Executive Officers....................................................................... 233
Option Grants in Last Fiscal Year........................................................................ 234
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values........................ 234
Employment Agreements and Change of Control Agreements................................................... 235
Executive Compensation Committee Interlocks and Insider Participation.................................... 236
Report of Executive Compensation Committee............................................................... 237
Performance Graph........................................................................................ 241
Certain Relationships and Related Transactions........................................................... 242
Other Information........................................................................................ 243
LEGAL MATTERS.............................................................................................. 244
EXPERTS.................................................................................................... 244
SHAREHOLDER PROPOSALS...................................................................................... 244
GLOSSARY................................................................................................... 245
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
REINCORPORATION ARTICLES OF MERGER........................................ Appendix B-1
APPENDIX C
REINCORPORATION CERTIFICATE OF MERGER..................................... Appendix C-1
APPENDIX D
CORPORATE ARTICLES OF MERGER.............................................. Appendix D-1
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APPENDIX E
Appendix
CONTRIBUTION AGREEMENT................................................................................... E-1
APPENDIX F
Appendix
OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO., INC......................................................... F-1
APPENDIX G
Appendix
OPINION OF LEHMAN BROTHERS............................................................................... G-1
APPENDIX H
Appendix
MARYLAND STATUTES REGARDING STOCKHOLDER APPRAISAL RIGHTS................................................. H-1
APPENDIX I
Appendix
PRIME NONEMPLOYEE DIRECTOR STOCK OPTION PLAN............................................................. I-1
APPENDIX J
Appendix
PRIME 1998 LONG-TERM STOCK INCENTIVE PLAN................................................................ J-1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THE SUMMARY AND UNDER CAPTIONS "NEW PRIME RISK
FACTORS," "HGP RISK FACTORS," "THE CORPORATE MERGER--REASONS FOR THE CORPORATE
MERGER; 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 PROXY 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 RETAIL, INC. OR HORIZON
GROUP, INC. 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 PROXY
STATEMENT/PROSPECTUS/INFORMATION STATEMENT AND THE DOCUMENTS INCORPORATED HEREIN
BY REFERENCE. SEE "NEW PRIME 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 PROXY 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 PROXY
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 PROXY STATEMENT/ PROSPECTUS/INFORMATION STATEMENT. AS USED IN THIS JOINT
PROXY 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 PROXY 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." UNLESS OTHERWISE INDICATED, ALL
INFORMATION RELATING TO THE PROPERTIES OF PRIME, HORIZON, NEW PRIME AND HGP IS
PRESENTED AS OF DECEMBER 31, 1997.
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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 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's executive offices are located
at 100 East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202 and its
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's executive offices are located at 5000 Hakes Drive,
Norton Shores, Michigan 49441 and its 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's executive offices will be
located at 100 East Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202
and its telephone number will be (410) 234-0782.
2
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HGP. Upon consummation of the Transactions, HGP will 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 payments from HGP LP in order to meet its financial
obligations. HGP is a Maryland corporation that was incorporated on January 21,
1998, and will commence operations on the Closing Date upon consummation of the
Transactions. HGP's executive offices will be located at 5000 Hakes Drive,
Norton Shores, Michigan 49441 and its telephone number will be (616) 798-9100.
HGP's management plans to create and maximize shareholder value over time
through repositioning its properties and concentrating on remerchandising and
leasing its existing centers, enhancing operating performance at its existing
centers through intensive tenant and property management and selectively
expanding its 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.
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<PAGE>
- 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
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") with the Secretary of State of Delaware
(the "Delaware Secretary") to effectuate the partnership merger (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 separate 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 holders (the
"Prime Partnership Consenting Unitholders") of common units of Prime Partnership
(each, a "Prime Partnership Common Unit" and, together with the Prime Common
Shares, the "Prime Common Securities") and Series C preferred units of Prime
Partnership (each, a "Prime Partnership Series C Preferred Unit" and, together
with the Prime Series C Preferred Shares, the "Prime Series C Securities")
(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 holders (the "Horizon Partnership Unitholders") of limited
partnership units of Horizon Partnership (each, a "Horizon Partnership Unit").
The Prime Partnership 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) a
majority of the outstanding Horizon Partnership Units. 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 Horizon Partnership Unitholders.
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<PAGE>
THE REINCORPORATION MERGER
Following consummation of the Partnership Merger, Horizon and Sky Merger
will file (i) articles of merger (the "Reincorporation Articles of Merger"), a
copy of which is attached hereto as Appendix B, 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"),
a copy of which is attached hereto as Appendix C, 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 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"), a copy of
which is attached hereto as Appendix D, 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."
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.
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."
5
<PAGE>
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.
7
<PAGE>
NEW PRIME RISK FACTORS
In considering whether to approve the Transactions, the shareholders of
Prime and Horizon voting thereon should consider, in addition to the other
information in this Joint Proxy Statement/Prospectus/ Information Statement, the
matters discussed under "New Prime Risk Factors." Such matters include:
- The distribution declared on a Horizon Common Share for each of the first
three quarters of 1997 was $0.35 and the distribution declared on each
Prime Share Equivalent was $0.07 lower, or $0.28 for each such quarter.
There can be no assurance that New Prime will make distributions equal to
or in excess of those historically paid to shareholders of Prime.
- In the event the Transactions are not consummated, Horizon plans to
reevaluate its distribution policy and may reduce or eliminate the
quarterly distribution payable to Horizon Common Shareholders.
- Possible fluctuations in share prices, including: (a) a potential change
in the relative market prices of Prime Common Shares, Prime Series B
Preferred 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 and Horizon 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.
- The Horizon Common Shareholders, Prime Common Shareholders and Prime
Series B Preferred Shareholders are not entitled to exercise appraisal
rights under Maryland or Michigan law in connection with the Transactions.
- New Prime will be subject to the risks normally associated with debt or
preferred equity financings, including the risk that New Prime's cash flow
will be insufficient to meet required payments of principal, interest and
distributions.
HGP RISK FACTORS
In addition to the general investment and real estate risks and those
factors set forth elsewhere in this Joint Proxy Statement/Prospectus/Information
Statement under "HGP Risk Factors" in connection with HGP's business activities,
Horizon Common Shareholders, Prime Common Shareholders, Prime Series B Preferred
Shareholders and Prime Series C Preferred Shareholders should be aware of, among
other things, the following factors:
- HGP does not have an operating history as a separate company. The
historical and pro forma results for HGP contained elsewhere in this Joint
Proxy Statement/Prospectus/Information Statement may not be indicative of
its results for future periods.
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<PAGE>
- The initial assets of HGP consist of properties formerly owned by Horizon
and Prime which have performed poorly relative to other properties owned
by Horizon and Prime. 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 will be leveraged
could have adverse consequences, including limiting HGP's ability to
obtain additional financing and that a substantial portion of HGP's cash
flow is expected to be required to be dedicated to debt service.
- Implementation of HGP's business plan will require substantial working
capital. HGP does not have any commitments for working capital financing,
and there is no assurance that HGP will have working capital sufficient to
execute its business plan.
- There can be no assurance as to the value, if any, of the HGP Common
Shares to be distributed in connection with the Transactions or that an
active market will develop in respect of such shares. There is no prior
trading market for HGP Common Shares, and there can be no assurance that
such a market will develop.
- HGP does not plan to pay a distribution in the foreseeable future, and
there can be no assurance that HGP 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 is to seek to expand the occupancy of its real
estate assets to include non-factory outlet center tenants, which would
require HGP to compete in new markets. There is no assurance that HGP 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 0.597 of a New Prime Common
Share and 0.20 of a New Prime Series B Preferred Share payable in respect of
each Horizon Common Share pursuant to the Corporate Merger 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. The consideration payable to each Prime Shareholder in the
Corporate Merger will convert outstanding shares of Prime into the same number
of shares of New Prime with substantially identical rights and preferences.
The distribution ratio of one HGP Common Share for every 20 New Prime Common
Shares was determined by Prime based on HGP's pro forma capitalization and
shareholders' equity as of December 31, 1997. This ratio is expected to result
in the issuance of approximately 2,770,000 HGP Common Shares pursuant to the HGP
Common Share Distribution (3,389,000 shares assuming the conversion of all HGP
LP Common Units to be distributed in the HGP LP Common Unit Distribution). The
distribution
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<PAGE>
ratios of 1.19617 HGP Common Shares for every 20 New Prime Series B Preferred
Shares and one HGP Common Share for every 20 New Prime Series C Preferred Shares
reflect the provisions of the New Prime Charter which require New Prime to
distribute (i) an amount per New Prime Series B Preferred Share equal to 1.19617
times the amount distributed in respect of a New Prime Common Share in any
special distribution (such as the HGP Common Share Distribution) and (ii) an
amount per New Prime Series C Preferred Share equal to the amount of any special
distribution made in respect of a New Prime Common Share. These provisions
enable holders of New Prime Series B Preferred Shares and New Prime Series C
Preferred Shares, which are convertible into New Prime Common Shares on a
1.19617 to one and a one for one basis, respectively, to participate in
distributions made in respect of New Prime Common Shares on an as converted
basis.
The aggregate amount of the Prime Special Distribution was negotiated in
connection with the Merger Agreement. The amount of cash distributed in respect
of each share of Prime is based on the provisions of the Prime Charter that
enable holders of Prime Series B Preferred Shares and Prime Series C Preferred
Shares to participate in special cash distributions made in respect of the Prime
Common Shares on an as converted basis.
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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
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)
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)
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)
HORIZON PARTNERSHIP
Common Unit..................... 0.9193 of a Prime Partnership Common Unit
0.04597 of an HGP LP Common Unit (3)
</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.
(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.
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<PAGE>
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 and its shareholders. THE PRIME BOARD OF DIRECTORS UNANIMOUSLY APPROVED
THE CORPORATE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT AND THE PRIME BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
HOLDERS OF PRIME COMMON SHARES AND PRIME SERIES C PREFERRED SHARES VOTE FOR THE
CORPORATE 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 and its
shareholders.
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 New Prime 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; (iii) the Transactions likely would provide significant cost
savings and operating efficiencies for New Prime; (iv) the impact of the
Transactions on New Prime'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 believes the terms of the Merger Agreement were fair;
(viii) the Corporate Merger will be tax-free for Prime for federal income tax
purposes; (ix) the HGP Common Shares to be distributed as a dividend and would
enable common and convertible shareholders to benefit from the continuing
operations of HGP; 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 Corporate Merger: (i)
the significant costs involved in connection with consummating the Transactions;
(ii) the substantial management time and effort required to effectuate the
Transactions and integrate the Prime Acquired Properties; (iii) the increase in
New Prime'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 and its
shareholders. ACCORDINGLY, HORIZON'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
REINCORPORATION MERGER, AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF
HORIZON VOTE FOR THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE REINCORPORATION MERGER. 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.
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<PAGE>
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, New Prime
would be better positioned to compete in the outlet shopping center industry;
(ii) the Transactions would enhance New Prime'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 New Prime's ability to raise
capital at reasonable rates; (iv) the Transactions would provide Horizon with a
partner that has a stronger capital base; (v) 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 shareholders to maximize Horizon shareholder 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, no other prospective
purchasers were reasonably expected to make a proposal superior to that made by
Prime in the Transactions; (vii) based upon management's analysis of Horizon'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 Corporate
Merger will be tax-free for federal income tax purposes with respect to the
Horizon Common Shareholders, which the Horizon Board of Directors viewed as
favorable because no gain or loss would be recognized by a shareholder of
Horizon. 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's shareholders
is fair from a financial point of view to such shareholders.
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 Common Share was $0.35 and the distribution
declared on 0.20 of a Prime Series B Preferred Share and 0.597 of a Prime Common
Share into which one Horizon Common Share is exchangeable pursuant to the terms
of the Corporate Merger (the "Prime Share Equivalent") was $0.07 lower, or
$0.28; (iii) the possibility that the market price of Prime Common Shares and
Prime Series B Preferred Shares, and thus the consideration to be paid the
Horizon shareholders, 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
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<PAGE>
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 F. 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 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 G. 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
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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 CORPORATE MERGER AND CLOSING DATE
The closing ("Closing") of the Corporate Merger will take place at 10:00
a.m. on 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 (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 Corporate Merger will become
effective (the "Corporate Merger Effective Time") immediately after the
effectiveness of the Reincorporation Merger at 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). It is currently anticipated that the
Corporate Merger Effective Time will be on or about June 15, 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 described in "The Corporate
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 Common Shareholders, Prime Common Shareholders, Prime Series A
Preferred Shareholders and Prime Series B Preferred Shareholders are not
entitled to a statutory right of appraisal. The Prime Series C Preferred
Shareholders have appraisal rights under Maryland law upon compliance with all
necessary procedures. See "The Corporate Merger--Limited Appraisal Rights under
Maryland Law."
FEDERAL INCOME TAX CONSEQUENCES
The Reincorporation Merger is intended to qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), such that neither Horizon nor its shareholders would
recognize taxable gain as a result of the Reincorporation Merger. The Corporate
Merger is also intended to qualify as a tax-free reorganization under Section
368(a) of the Code, such that neither Prime, Sky Merger nor their respective
shareholders would recognize taxable gain as a result of the Corporate Merger.
Each of Winston & Strawn, counsel to Prime in connection with the Corporate
Merger, and Rudnick & Wolfe, counsel to Horizon in connection with the Mergers,
has rendered its opinion to Prime and Horizon, respectively, as to the federal
income tax consequences of the Corporate Merger. Further, Rudnick & Wolfe, as
counsel to Horizon, has rendered its opinion to Horizon as to the federal income
tax consequences of the Reincorporation Merger and the prior qualification of
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Horizon as a REIT. Finally, Winston & Strawn, as counsel to Prime, has rendered
its opinion to Prime as to the prior qualification of Prime as a REIT, and the
qualification of each of New Prime and HGP as a REIT. See "The Corporate
Merger--Federal Income Tax Consequences."
The Prime Special 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 before the Partnership Merger
should be respected as a separate transaction from the Corporate Merger, and, as
such, will be a taxable dividend to such Prime Shareholders to the extent that
Prime has current or accumulated earnings and profits for its taxable year
ending with the Corporate Merger allocable to such class of shares. Any such
dividend will be taxable as ordinary income.
To the extent that Prime has current or accumulated earnings and profits
allocable to the Prime Special Distribution to a class of Prime shares which are
less than the full amount of such distribution to such class of Prime shares
(and respecting such distribution as separate from the Corporate Merger), then
such portion of the Prime Special Distribution that is not taxed as a dividend
will be treated first as a return of the recipient Prime Shareholder's adjusted
tax basis in its Prime Series B Preferred Shares, Prime Series C Preferred
Shares and Prime Common Shares, as applicable, and then the balance of the Prime
Special Distribution will be recognized as capital gain to such Prime
Shareholder.
New Prime will report the HGP Common Share Distribution of the HGP Common
Shares to holders of New Prime Common Shares, New Prime Series B Preferred
Shares and New Prime Series C Preferred Shares as a taxable distribution, and
not a tax-free spin-off, and, as such, the HGP Common Share Distribution will be
a fully taxable dividend to holders of New Prime Common Shares, New Prime Series
B Preferred Shares and New Prime Series C Preferred Shares in an amount equal to
the fair market value of such HGP Common Shares, to the extent New Prime has
current or accumulated earnings and profits allocable to such distribution to
each such class of shares of New Prime. This dividend income will be taxed as
ordinary income.
To the extent that New Prime has current or accumulated earnings and profits
allocable to such HGP Common Share Distribution to each such class of New Prime
shares which is less than the full fair market value of such HGP Common Shares
distributed to such class of New Prime Shares (and respecting the treatment of
such distribution as a taxable distribution, and not a tax-free spin-off), then
such portion of the HGP Common Share Distribution that is not taxed as a
dividend will be treated first as a return of the recipient holder's adjusted
tax basis in its New Prime Common Shares, New Prime Series B Preferred Shares
and New Prime Series C Preferred Shares, as applicable, and then the balance of
the HGP Common Share Distribution will be recognized as capital gain to such
holder.
The aggregate initial tax basis of the HGP Common Shares received by any New
Prime Shareholder should be equal to the fair market value of such HGP Common
Shares at the time of the HGP Common Share Distribution, and the holding period
for HGP Common Shares received by any New Prime Shareholder should begin upon
such shareholder's receipt of such HGP Common Shares (respecting the treatment
of the HGP Common Share Distribution as a taxable distribution, and not a
tax-free spin-off). See "The Corporate Merger--Federal Income Tax Consequences."
SHARES AVAILABLE FOR RESALE
The New Prime Common Shares and New Prime Series B Preferred Shares issued
upon consummation of the Corporate Merger to the shareholders of Horizon 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 Proxy 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,
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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."
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 Corporate Merger and the other
transactions contemplated by the Merger Agreement by the shareholders of Prime
and Horizon. 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."
CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
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 and Prime Series C Preferred Shares will, without any action on
the part of the holder thereof, thereafter represent the same
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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 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, all Horizon Common Shares shall no longer be outstanding and shall
automatically be canceled and retired and all rights with respect thereto shall
cease to exist, and each holder of a certificate representing a Horizon Common
Share shall cease to have any rights with respect thereto, except the right to
receive certificates representing the New Prime Common Shares and New Prime
Series B Preferred Shares, any dividend, other distributions or cash paid in
lieu of fractional shares to which such holder is entitled. See "The Corporate
Merger-- Conversion of Shares."
As soon as reasonably practicable after the Corporate Merger Effective Time,
American Stock Transfer & Trust Company (the "Exchange Agent") shall mail to
each holder of a Horizon Common Share
a letter of transmittal. Upon surrender of certificates for Horizon Common
Shares (which, by virtue of the Reincorporation Merger, represent Sky Merger
Common Shares) for cancellation to the Exchange Agent, together with the letter
of transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Horizon Common Share shall be
entitled to receive the Corporate Merger Consideration, 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. See "The Corporate
Merger--Exchange of Certificates."
COMPARISON OF RIGHTS OF SHAREHOLDERS
The following discussion summarizes certain significant differences between
the rights of the shareholders under the Michigan Business Corporation Act
("MBCA"), the Amended and Restated Articles of Incorporation of Horizon (the
"Horizon Articles") and the Amended and Restated Bylaws of Horizon (the "Horizon
Bylaws") and the Maryland General Corporation Law, as amended ("MGCL"), the
Articles of Incorporation of New Prime (the "New Prime Charter") and the bylaws
of New Prime (the "New Prime Bylaws"). See "Comparison of Rights of
Shareholders."
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) 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 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.
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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 while the New Prime Charter
requires 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.
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. 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.
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. Except as provided in the MGCL or
the New Prime Charter, a majority of the holders of the New Prime Series B
Preferred Shares outstanding is required to 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 or amend, alter or repeal the provisions
of the New Prime Charter. The New Prime Series B Preferred Shareholders do not
have any voting rights except as provided in the limited circumstances provided
in the MGCL or New Prime Charter. See "Description of the Capital Stock of New
Prime--New Prime Series B Preferred Shares."
SPECIAL MEETINGS
The Horizon Bylaws provide that special meetings of the shareholders of
Horizon may be called by a majority of the board of directors pursuant to a
resolution adopted by a majority of the members of the board of directors then
in office or by the chairman of the board of directors, the co-chairman of the
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 25%
of all of the outstanding shares of Horizon entitled to vote at such meeting.
The New Prime Bylaws provide that special meetings of such stockholders may
be called only by the board of directors and shall be called by the chairman of
the board of directors or the secretary at the request in writing of the board
of directors.
BOARDS OF DIRECTORS
NUMBER OF DIRECTORS. The Horizon Bylaws provide that the number of directors
of Horizon which constitute the board of directors will be nine. The New Prime
Charter provides that the number of directors of New Prime shall consist of that
number of members determined by the board of directors, but in no event less
than three.
REMOVAL. While the Horizon Articles and Horizon Bylaws provide that any
director may be removed for cause by the vote of a majority of the voting power
of all shares of capital stock of Horizon, 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.
VACANCIES. The Horizon Articles and Horizon Bylaws and the New Prime Charter
and New Prime Bylaws provide that vacancies shall be filled by the majority vote
of the board of directors.
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SHAREHOLDER INSPECTION RIGHTS
The Horizon Articles provide that the Horizon Board of Directors is
expressly authorized to determine whether the accounts and books of Horizon will
be open to inspection of Horizon shareholders. The New Prime Charter is silent
with respect to shareholder inspection rights.
MERGERS, CONSOLIDATIONS, DISSOLUTION AND SALE OF SUBSTANTIALLY ALL ASSETS
The Horizon Articles require that at least two-thirds of Horizon's equity
stock entitled to vote approve any action to merge or consolidate with or into
any other corporation. The New Prime Charter does not address mergers,
consolidations, dissolution and sales of assets. However, 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.
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
stockholders of Prime have the same appraisal rights under the Horizon Articles
and Horizon Bylaws as they have under the New Prime Charter and New Prime
Bylaws, respectively.
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. 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."
THE MEETINGS OF SHAREHOLDERS; RECORD DATES; VOTES REQUIRED
PRIME. The Prime Shareholders Meeting has been called to consider and vote
on (i) the approval and adoption of the Corporate Merger and the other
transactions contemplated by the Merger Agreement; (ii) the election of three
directors of the Prime Board of Directors; (iii) the approval and adoption of
the Prime Retail, Inc. Nonemployee Director Stock Plan; (iv) the approval and
adoption of the Prime Retail, Inc. 1998 Long-Term Stock Incentive Plan; (v) the
ratification of the appointment of Prime's independent accountants; and (vi) the
transaction of such other business as may properly come before the Prime
Shareholders Meeting or any adjournment(s) or postponement(s) thereof, including
an adjournment to solicit additional proxies in the event that a quorum is not
present at the meeting or in the event sufficient proxies voted in favor of the
approval of the proposals have not been received. The Prime Shareholders Meeting
will be held on June 12, 1998 at 11:00 a.m., local time, at 100 East Pratt
Street, 19th Floor, Baltimore, Maryland.
Only holders of record of Prime Common Shares and Prime Series C Preferred
Shares at the close of business on April 24, 1998 (the "Prime Record Date") will
be entitled to vote at the Prime Shareholders Meeting. Each holder of Prime
Common Shares and Prime Series C Preferred Shares is entitled to one
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vote per share. Holders of Prime Common Shares will be entitled to vote with
respect to all matters to be acted upon at the Prime Shareholders Meeting.
Holders of Prime Series C Preferred Shares will be entitled to vote only with
respect to the approval and adoption of the Corporate Merger and the other
transactions contemplated by the Merger Agreement. As of the close of business
on April 24, 1998, Prime had outstanding (i) 27,294,951 Prime Common Shares and
(ii) 3,636,363 Prime Series C Preferred Shares. Approval of the Corporate Merger
and the other transactions contemplated by the Merger Agreement requires the
affirmative vote of Prime shareholders owning two-thirds of the outstanding
Prime Series C Preferred Shares and the outstanding Prime Common Shares, each
voting separately as a class. Approval of the election of directors of the Prime
Board of Directors requires the majority of votes cast by holders of Prime
Common Shares entitled to vote at the Prime Shareholders Meeting. Approval of
the Prime Retail, Inc. Nonemployee Director Stock Plan and the Prime Retail,
Inc. 1998 Long-Term Stock Incentive Plan and the appointment of independent
auditors of Prime requires the affirmative vote of a majority of votes cast on
such matters by holders of Prime Common Shares. Prime shareholders may revoke
their proxies at any time prior to the voting thereof by giving written notice
of such revocation to Prime, by executing and delivering a proxy bearing a later
date, or by attending the Prime Shareholders Meeting and voting in person.
HORIZON. The Horizon Special Meeting has been called to consider and vote
on the approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Reincorporation Merger. The Horizon Special
Meeting will be held on June 12, 1998, at 10:00 a.m., local time, at Rudnick &
Wolfe, 203 N. LaSalle, Suite 1800, Chicago, Illinois. Only holders of record of
Horizon Common Shares at the close of business on April 15, 1998 (the "Horizon
Record Date") will be entitled to notice of and to vote at the Horizon Special
Meeting. Each Horizon Common Shareholder is entitled to one vote per share. As
of the close of business on April 24, 1998, Horizon had outstanding 24,177,506
Horizon Common Shares. Approval of the Reincorporation Merger and the other
transactions contemplated by the Merger Agreement requires the affirmative vote
of two-thirds of the Horizon Common Shareholders. Horizon Common Shareholders
may revoke their proxies at any time prior to the voting thereof by giving
written notice of such revocation to Horizon, by executing and delivering a
proxy bearing a later date, or by attending the Horizon Special Meeting and
voting in person.
On February 1, 1998, Horizon and Prime entered into an agreement (the
"Murdock Agreement") with Mr. David H. Murdock, Chairman and Chief Executive
Officer of Castle & Cooke, and certain of his affiliates pursuant to which Mr.
Murdock and such affiliates have agreed to vote their Horizon Common Shares in
favor of the Transactions. Based on representations in the Murdock Agreement,
Mr. Murdock and such affiliates own 1,099,800, or approximately 4.6%, of the
outstanding Horizon Common Shares.
NEW PRIME AND HGP SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following tables set forth the summary unaudited pro forma financial
data for New Prime and HGP 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 Proxy
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 respective historical audited
financial statements and notes thereto of Prime and Horizon incorporated by
reference into this Joint Proxy Statement/Prospectus/Information Statement and
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the unaudited pro forma financial statements and notes thereto included
elsewhere in this Joint Proxy 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 and Horizon or HGP 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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NEW PRIME AND HGP
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
YEAR ENDED DECEMBER 31,
1997
---------------------------
NEW PRIME HGP
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE INFORMATION)
<S> <C> <C>
OPERATING DATA:
REVENUES
Base rents........................................................................ $ 175,545 $ 27,416
Percentage rents.................................................................. 8,140 151
Tenant reimbursements............................................................. 66,732 9,341
Income from investment partnerships............................................... 243 --
Interest and other................................................................ 15,634 2,638
------------- ------------
Total revenues................................................................ 266,294 39,546
EXPENSES
Property operating................................................................ 51,261 7,862
Real estate taxes................................................................. 19,655 3,782
Depreciation and amortization..................................................... 61,649 4,489
General and administrative........................................................ 13,523 3,500
Interest.......................................................................... 81,210 10,034
Impairment and severance.......................................................... -- 6,949
Other charges..................................................................... 7,112 2,696
------------- ------------
Total expenses................................................................ 234,410 39,312
------------- ------------
INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM........................... 31,884 234
(Income) loss allocated to minority interests..................................... (3,247) 43
------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM.................................................. 28,637 191
Income allocated to preferred shareholders........................................ 22,976 --
------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM APPLICABLE TO COMMON SHARES...................... $ 5,661 $ 191
------------- ------------
------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE--BASIC AND DILUTED.............. $ 0.17 $ 0.07
------------- ------------
------------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................................ 33,587 2,770
------------- ------------
------------- ------------
<CAPTION>
DECEMBER 31, 1997
BALANCE SHEET DATA: ---------------------------
(at end of period) NEW PRIME HGP
- ---------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Investment in rental property, net................................................ $ 1,736,493 $ 157,099
Total assets...................................................................... 1,844,368 176,749
Total debt........................................................................ 1,095,841 127,387
Minority interests................................................................ 65,300 7,409
Shareholders' equity.............................................................. 628,578 33,156
</TABLE>
23
<PAGE>
PRIME RETAIL, INC. 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 year ended December 31,
1993 are derived from the consolidated financial statements of Prime and the
combined financial statements of Prime Retail Properties (the "Prime
Predecessor"). Combined financial statements for the year ended December 31,
1993 and the period January 1, 1994 to March 21, 1994 are included for Prime
Predecessor. The combined financial statements for Prime 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
The Prime Group, Inc., an Illinois corporation, and certain of its affiliates
(collectively, "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 the financial statements, notes thereto and other financial information
included elsewhere in this Joint Proxy Statement/Prospectus/Information
Statement.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRIME
PRIME RETAIL, INC. PREDECESSOR
-------------------------------------------------- ------------
PERIOD FROM PERIOD FROM
YEAR ENDED MARCH 22 JANUARY 1
DECEMBER 31 TO TO
---------------------------------- DECEMBER 31, MARCH 21,
1997 1996 1995 1994 1994
---------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues........................................ $ 129,130 $ 89,040 $ 77,398 $ 45,369 $ 6,330
Operating expense..................................... 38,909 25,709 22,366 12,414 2,424
---------- ---------- ---------- -------------- ------------
Operating income...................................... 90,221 63,331 55,032 32,955 3,906
Other expenses(1)..................................... 71,674 56,345 42,226 23,501 6,314
---------- ---------- ---------- -------------- ------------
Income (loss) before minority interests............... 18,547 6,986 12,806 9,454 (2,408)
(Income) loss allocated to minority interests......... (10,581) 2,092 5,364 5,204 --
---------- ---------- ---------- -------------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............... 7,966 9,078 18,170 14,658 (2,408)
Extraordinary item.................................... (2,061) (1,017) -- -- --
---------- ---------- ---------- -------------- ------------
NET INCOME (LOSS)..................................... 5,905 8,061 18,170 14,658 (2,408)
Income allocated to preferred shareholders............ 12,726 14,236 20,944 16,290 --
---------- ---------- ---------- -------------- ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS............ $ (6,821) $ (6,175) $ (2,774) $ (1,632) $ (2,408)
---------- ---------- ---------- -------------- ------------
---------- ---------- ---------- -------------- ------------
NET LOSS PER COMMON SHARE OUTSTANDING--BASIC AND
DILUTED(2).......................................... $ (0.36) $ (0.75) $ (0.96) $ (0.57)
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............ 19,189 8,221 2,875 2,850
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
BALANCE SHEET DATA:
Rental property (before accumulated depreciation)..... $ 904,782 $ 640,759 $ 454,480 $ 376,181 $ 180,170
Total assets.......................................... 904,183 666,803 462,405 385,930 186,034
Total liabilities..................................... 549,730 527,594 326,465 233,236 198,244
SUPPLEMENTAL DATA:
Funds from operations(3).............................. $ 46,718 $ 33,768 $ 27,996 $ 21,476 $ 139
Ratio of earnings to combined fixed charges and
preferred stock dividends(4)........................ 1.04x -- -- -- --
Excess of combined fixed charges and preferred stock
dividends over earnings(4).......................... $ -- $ (10,629) $ (11,312) $ (8,185) $ (2,366)
Net cash provided by (used in) operating activities... $ 49,856 $ 45,191 $ 36,399 $ 17,458 $ (1,873)
Net cash used in investing activities................. $ (229,956) $ (232,290) $ (81,978) $ (149,435) $ (1,239)
Net cash provided by financing activities............. $ 182,549 $ 176,096 $ 57,547 $ 134,936 $ 4,087
Factory outlet GLA (square feet)...................... 7,217 5,780 4,331 3,382 1,839
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
--------------
<S> <C>
Total revenues........................................ $ 21,800
Operating expense..................................... 6,604
--------------
Operating income...................................... 15,196
Other expenses(1)..................................... 19,069
--------------
Income (loss) before minority interests............... (3,873)
(Income) loss allocated to minority interests......... --
--------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............... (3,873)
Extraordinary item.................................... --
--------------
NET INCOME (LOSS)..................................... (3,873)
Income allocated to preferred shareholders............ --
--------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS............ $ (3,873)
--------------
--------------
NET LOSS PER COMMON SHARE OUTSTANDING--BASIC AND
DILUTED(2)..........................................
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............
BALANCE SHEET DATA:
Rental property (before accumulated depreciation)..... $ 185,394
Total assets.......................................... 190,685
Total liabilities..................................... 197,400
SUPPLEMENTAL DATA:
Funds from operations(3).............................. $ 4,351
Ratio of earnings to combined fixed charges and
preferred stock dividends(4)........................ --
Excess of combined fixed charges and preferred stock
dividends over earnings(4).......................... $ (4,423)
Net cash provided by (used in) operating activities... $ 14,450
Net cash used in investing activities................. $ (54,210)
Net cash provided by financing activities............. $ 39,907
Factory outlet GLA (square feet)...................... 1,839
</TABLE>
24
<PAGE>
- ------------------------------
NOTES:
(1) Other expenses includes depreciation and amortization expenses, corporate
general and administrative expense, interest expense, and other charges.
(2) Net loss per common share outstanding is net of applicable preferred
dividends. Prime adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" on December 31, 1997. The adoption of
SFAS No. 128 had no impact on Prime's earnings per share computations for
all periods presented, and therefore, no restatement of prior period
computations was required. As a result, Prime's basic and diluted earnings
per share are the same as previously reported earnings per share amounts.
(3) Prime's management believes that in order to facilitate a clear
understanding of the consolidated historical operating results of Prime,
Funds from Operations ("FFO") should be considered in conjunction with net
income (loss) as presented in the financial statements included in this
Joint Proxy 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. 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 has adopted the
NAREIT definition of FFO, Prime cautions that the calculation of FFO may
vary from entity to entity and as such the presentation of FFO by Prime 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'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
PRIME RETAIL, INC. PREDECESSOR
-------------------------------------------- -----------
PERIOD PERIOD
YEAR ENDED MARCH 22 JAN. 1
DECEMBER 31, TO TO
------------------------------- DEC. 31, MARCH 21,
1997 1996 1995 1994 1994
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income (loss) before allocations to minority interests and
preferred shareholders........................................ $ 18,547 $ 13,117(i) $ 12,806 $ 9,454 $ (2,408)
FFO ADJUSTMENTS
Depreciation and amortization................................... 26,413 18,703 14,884 9,508 2,173
Unconsolidated joint venture adjustments (ii)................... 1,758 1,948 306 2,514 374
--------- --------- --------- ----------- -----------
FFO before allocation to minority interests and preferred
shareholders.................................................. $ 46,718 $ 33,768 $ 27,996 $ 21,476 $ 139
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
--------------
<S> <C>
Income (loss) before allocations to minority interests and
preferred shareholders........................................ $ (3,873)
FFO ADJUSTMENTS
Depreciation and amortization................................... 7,504
Unconsolidated joint venture adjustments (ii)................... 720
--------------
FFO before allocation to minority interests and preferred
shareholders.................................................. $ 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 for the period from March 22, 1994 to December 31,
1994, respectively.
25
<PAGE>
(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 stock
dividends consist of interest costs whether expensed or capitalized and
amortization of debt issuance costs and preferred stock dividends. For the
years ended December 31, 1996, 1995, 1994 and 1993, Prime's earnings were
inadequate to cover fixed charges and preferred stock distributions. A
reconciliation of income (loss) before minority interests to excess of
combined fixed charges and preferred stock distributions and dividends over
earnings is as follows:
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
---------------------------------------------------------- PRIME PREDECESSOR
----------------------------
YEAR ENDED PERIOD FROM PERIOD FROM
DECEMBER 31, MARCH 22 TO JANUARY 1 TO YEAR ENDED
------------------------------------------- DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before minority
interests..................... $ 18,547 $ 6,986 $ 12,806 $ 9,454 $ (2,408) $ (3,873)
Interest incurred............... 39,078 26,806 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...................... 57,755 34,203 36,611 19,553 914 5,216
------------- ------------- ------------- ------------- ------------- -------------
Interest incurred............... 39,078 26,806 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 stock distributions
and dividends................. 12,726 14,236 20,944 16,290 -- --
------------- ------------- ------------- ------------- ------------- -------------
Combined Fixed Charges and
Preferred Stock
Distributions and
Dividends................... 55,524 44,832 47,923 27,738 3,280 9,639
------------- ------------- ------------- ------------- ------------- -------------
Excess of Combined Fixed Charges
and Preferred Stock
Distributions and Dividends
over Earnings................. $ -- $ (10,629) $ (11,312) $ (8,185) $ (2,366) $ (4,423)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Distributions and
Dividends..................... 1.04x -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
26
<PAGE>
HORIZON GROUP, INC. SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data for
Horizon. The summary historical financial data for each of the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 are derived from the audited
financial statements of Horizon as reported in its Annual Reports on Form 10-K.
The summary historical financial data should be read in conjunction with, and is
qualified in its entirety by, the historical financial statements and notes
thereto of Horizon incorporated by reference into this Joint Proxy
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(1)
--------- --------- --------- --------- ---------
<CAPTION>
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue.......................................................... $ 155,726 $ 153,786 $ 93,929 $ 43,267 $ 22,247
Expenses......................................................... 153,220 123,929 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............................. (5,292) (35,498) 27,371 17,194 2,973
Gain on sale of real estate...................................... 8 563 776 287 272
--------- --------- --------- --------- ---------
Net income (loss) before minority interests and extraordinary
charge......................................................... (5,284) (34,935) 28,147 17,481 3,245
Minority interests............................................... 993 8,080 (6,776) (2,940) (2,702)
Extraordinary charge............................................. (3,293) (419) -- -- --
--------- --------- --------- --------- ---------
Net income (loss)................................................ $ (7,584) $ (27,274) $ 21,371 $ 14,541 $ 543
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common share 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 common share (2)........................... $ (0.32) $ (1.34) $ 1.52 $ 1.42 $ 0.06
Dividends declared per common share (3).......................... $ 1.050 $ 2.095 $ 2.131 $ 1.755 $ 0.247
BALANCE SHEET DATA:
Real estate, net of accumulated depreciation..................... $1,009,599 $ 972,334 $1,023,745 $ 287,833 $ 176,512
Total assets..................................................... 1,072,666 1,059,539 1,059,090 300,043 218,146
Total mortgages and other debt................................... 626,097 557,672 503,246 96,929 24,888
Total shareholders' equity....................................... 351,234 363,881 341,896 148,849 152,165
OTHER DATA:
Funds from operations before minority interests (4) (5).......... $ 43,406 $ 66,258 $ 47,549 $ 25,656 $ 6,860
Cash flows provided by (used in):
Operating activities........................................... 46,010 29,947 35,719 26,713 9,557
Investing activities (5)....................................... (75,126) (59,535) (150,916) (114,330) (93,663)
Financing activities........................................... 24,743 39,485 117,592 56,105 118,965
Total gross leasable area (square feet).......................... 9,907 9,369 8,464 3,124 2,215
</TABLE>
27
<PAGE>
- ------------------------------
NOTES:
(1) The selected financial data includes: for the period up to and including
November 7, 1993, the combined financial statements of Horizon 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.
(2) The earnings per share 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. There is
no difference between basic and diluted earnings per share.
(3) Included in 1995 is a special one-time dividend of $0.111 per common share,
declared in connection with the merger with McArthur/Glen Realty Corp., a
Delaware corporation and a predecessor to Horizon ("McArthur/Glen").
(4) Horizon's management believes that in order to facilitate a clear
understanding of the consolidated historical operating results of Horizon,
FFO should be considered in conjunction with net income (loss) as presented
in the financial statements included in this Joint Proxy
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. In March 1995, NAREIT issued a clarification of its definition of
FFO. Although Horizon has adopted the NAREIT definition of FFO, Horizon
cautions that the calculation of FFO may vary from entity to entity and as
such the presentation of FFO by Horizon 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'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 to FFO is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) before minority interests and extraordinary charge............. $ (5,284) $ (34,935) $ 28,147 $ 17,481
FFO ADJUSTMENTS:
Depreciation and amortization.................................................. 39,634 36,367 20,178 8,462
Impairment and severance....................................................... 7,798 65,355 -- --
Merger expenses................................................................ 1,001 -- -- --
Gain on sale of assets......................................................... (8) (563) (776) (287)
Joint venture adjustments...................................................... 265 34 -- --
--------- --------- --------- ---------
Total FFO adjustments........................................................ 48,690 101,193 19,402 8,175
--------- --------- --------- ---------
Funds From Operations.......................................................... $ 43,406 $ 66,258 $ 47,549 $ 25,656
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1993
---------
<S> <C>
Net income (loss) before minority interests and extraordinary charge............. $ 3,245
FFO ADJUSTMENTS:
Depreciation and amortization.................................................. 3,887
Impairment and severance....................................................... --
Merger expenses................................................................ --
Gain on sale of assets......................................................... (272)
Joint venture adjustments...................................................... --
---------
Total FFO adjustments........................................................ 3,615
---------
Funds From Operations.......................................................... $ 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
shareholders' equity.
28
<PAGE>
COMPARATIVE PER SHARE DATA
The following summary presents selected comparative unaudited per share
information for Prime and Horizon on an historical basis and New Prime and HGP
on a pro forma basis assuming the Transactions had been effective throughout the
periods presented. Horizon pro forma equivalent per share amounts are presented
with respect to such pro forma information. Such per share amounts allow
comparison of historical information with respect to one Horizon Common Share to
the corresponding information for the Prime Corporate Merger Consideration
payable in respect of each such share pursuant to the Corporate Merger.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-------------
<S> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE (1)
Prime............................................................................................... $ (0.25)
Horizon............................................................................................. (0.18)
HGP (pro forma) (2)................................................................................. 0.07
New Prime (pro forma) (3)........................................................................... 0.17
Horizon pro forma equivalent (4).................................................................... 0.10
CASH DISTRIBUTIONS DECLARED
Prime
Per Prime Series B Preferred Share................................................................ $ 2.125
Per Prime Common Share (5)........................................................................ 1.180
Per Horizon Common Share (6)........................................................................ 1.050
Per HGP Common Share (pro forma).................................................................... --
New Prime (pro forma) (3)
Per New Prime Series B Preferred Share............................................................ 2.125
Per New Prime Common Share........................................................................ 1.180
Horizon pro forma equivalent
Per 0.20 of a New Prime Series B Preferred Share.................................................. $ 0.425
Per 0.597 of a New Prime Common Share............................................................. 0.704
------
Total............................................................................................. $ 1.129
------
------
SHAREHOLDERS' EQUITY PER COMMON SHARE
Prime............................................................................................... $ 5.95
Horizon............................................................................................. 14.59
HGP (pro forma) (2)................................................................................. 11.97
New Prime (pro forma) (3)........................................................................... 7.82
Horizon pro forma equivalent (4).................................................................... 4.67
</TABLE>
- ------------------------
NOTES:
(1) Amounts were computed based on net income (loss) per share from continuing
operations and, accordingly, such amounts exclude historical losses from
extraordinary items.
(2) The pro forma Net Income Per Common Share for HGP has been prepared assuming
that in the HGP Common Share Distribution one HGP Common Share will be
distributed for every 20 shares of New Prime Common Shares and New Prime
Series C Preferred Shares, respectively, and that approximately 1.196 HGP
Common Shares will be distributed for every 20 New Prime Series B Preferred
Shares, resulting in a total weighted average outstanding HGP Common Shares
of 2,770,000 for the year ended December 31, 1997. For the Shareholders'
Equity per Common Share data, total outstanding HGP Common Shares was
2,770,000 as of December 31,1997.
(3) The pro forma Net Income (Loss) Per Common Share and Cash Distributions
Declared data for the New Prime has been prepared assuming that in the
Corporate Merger each Horizon Common Share is converted into 0.597 of a New
Prime Common Share and 0.20 of a New Prime Series B Preferred Share,
resulting in total weighted average outstanding New Prime Common Shares of
33,587,000 for
29
<PAGE>
the year ended December 31, 1997. For the Shareholders' Equity Per Common
Share data, total outstanding New Prime Common Shares was 41,693,000 as of
December 31, 1997.
(4) The Horizon pro forma equivalent is determined by multiplying 0.597 by the
New Prime pro forma per common share amounts.
(5) The 1996 amount excludes a special cash distribution of $0.145 per common
share paid by Prime in July 1996.
(6) Pursuant to the Merger Agreement, Horizon agreed to forego the payment of
its 1997 fourth quarter distribution which would customarily have been paid
in January 1998.
COMPARATIVE SHARE PRICES
PRIME.
The Prime Common Shares and Prime Series B Preferred Shares commenced
trading on the NYSE on August 27, 1997 under the symbols "PRT" and "PRT prb",
respectively. From March 15, 1994 through August 26, 1997, the Prime Common
Shares and Prime Series B Preferred Shares were quoted in the Nasdaq National
Market under the trading symbols "PRME" and "PRMEP", respectively.
The following table sets forth the quarterly high and low sales prices per
Prime Common Share reported on the NYSE and in Nasdaq, 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
--------- --------- -------------
<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(1)
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 May 8, 1998)............................................ 15.00 13.50 --(2)
</TABLE>
- ------------------------
NOTES:
(1) Includes a special cash distribution of $0.145 per Prime Common Share paid
by Prime in July 1996.
(2) 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.
30
<PAGE>
The following table sets forth the quarterly high and low sales prices per
Prime Series B Preferred Share reported on the NYSE and in Nasdaq, 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
--------- --------- ------------
<S> <C> <C> <C>
1996
First Quarter................................................................... $ 18.50 $ 16.25 $ 0.53125
Second Quarter.................................................................. 19.00 16.50 0.53125
Third Quarter................................................................... 20.75 17.75 0.53125
Fourth Quarter.................................................................. 22.00 20.25 0.53125
1997
First Quarter................................................................... 23.13 21.75 0.53125
Second Quarter.................................................................. 24.00 22.13 0.53125
Third Quarter................................................................... 24.25 23.00 0.53125
Fourth Quarter.................................................................. 25.13 24.00 0.53125
1998
First Quarter................................................................... 24.88 23.88 0.53125
Second Quarter (through May 8, 1998)............................................ 24.25 23.00 --(1)
</TABLE>
- ------------------------
NOTE:
(1) On March 18, 1998, the Prime Board of Directors declared a distribution of
$0.53125 per share payable on May 15, 1998 to holders of record of Prime
Series B Preferred 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 and a Prime Series B Preferred Share on the NYSE was $14.81 per share and
$24.50 per share, respectively. 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 and
Prime Series B Preferred Share on the NYSE was $13.31 and $24.63, respectively.
As of March 13, 1998, Prime's transfer agent reported 226 record holders of
Prime Common Shares and Prime Series B Preferred Shareholders and 23 record
holders of Prime Series B Preferred Shares.
31
<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
--------- --------- -------------
<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(1)
Second Quarter (through May 8, 1998)............................................ 12.75 11.25 --(2)
</TABLE>
- ------------------------
NOTE:
(1) 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.
(2) 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, Horizon's transfer agent reported 745 record
holders of Horizon Common Shares.
BECAUSE THE CORPORATE MERGER CONSIDERATION IS FIXED AND THE MARKET PRICE OF
A PRIME SERIES B PREFERRED SHARE AND A PRIME COMMON SHARE IS SUBJECT TO
FLUCTUATION, THE MARKET VALUE OF NEW PRIME SERIES B PREFERRED SHARES AND NEW
PRIME COMMON SHARES THAT HORIZON COMMON SHAREHOLDERS WILL RECEIVE IN THE
CORPORATE MERGER MAY INCREASE OR DECREASE PRIOR TO AND FOLLOWING THE CORPORATE
MERGER. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR PRIME
SERIES B PREFERRED SHARES, PRIME COMMON SHARES AND HORIZON COMMON SHARES.
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<PAGE>
NEW PRIME RISK FACTORS
In considering whether to approve the Transactions, the shareholders of
Prime and Horizon should consider, in addition to the other information in this
Proxy Statement/Prospectus/Information Statement, the matters described in this
section.
RISKS TO HORIZON COMMON SHAREHOLDERS
HORIZON DISTRIBUTIONS. The distribution declared on a Horizon Common Share
for each of the first three quarters of 1997 was $0.35 and the distribution
declared on the Prime Share Equivalent was $0.07 lower, or $0.28 for each such
quarter. There can be no assurance that New Prime will make distributions or, if
distributions are made, that they will be equal to or in excess of those
historically paid to shareholders of Prime.
REDUCTION OR ELIMINATION OF DISTRIBUTION IF THE TRANSACTIONS FAIL TO
OCCUR. Due to the decline in Horizon's operating results and its continuing
liquidity needs, in the event that the Transactions are not consummated, Horizon
plans to reevaluate its distribution policy and may reduce or eliminate its
quarterly distribution paid to holders of Horizon Common Shares.
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 Common Shareholders will own approximately 34.53% of the New Prime
Common Shares and 61.80% of the New Prime Series B Preferred Shares and will not
have separate approval rights with respect to any actions or decisions of New
Prime.
POTENTIAL CHANGE IN RELATIVE STOCK PRICES; SHARE PRICE FLUCTUATIONS AFTER THE
TRANSACTIONS
In considering whether to approve the Transactions, shareholders of Horizon
and Prime should consider the risks associated with (a) a potential change in
the relative stock prices of Prime Common Shares, Prime Series B Preferred
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 and New Prime Series B Preferred Shares following the
Transactions, due to future sales of New Prime Common Shares and New Prime
Series B Preferred 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 prices of the Prime Series B Preferred Shares and the Prime Common
Shares.
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<PAGE>
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 market prices 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. In addition, the different forms of consideration
payable pursuant to the Mergers to the holders of Horizon Common Shares and
Horizon Partnership Units also will result in 0.04181 of an HGP Common Share
being distributed in respect of each Horizon Common Share compared to 0.045965
of an HGP Common Unit being distributed in respect of each Horizon Partnership
Unit.
ADVERSE EFFECTS OF COMBINING THE COMPANIES
Prime and Horizon 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 is retaining in the Transactions, thereby increasing the
GLA under New Prime's management from 7.2 million square feet to 13.4 million
square feet. If New Prime is unable to control and manage the integration of
these two portfolios effectively, the Mergers could have a material adverse
effect on New Prime. 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
Management has identified approximately $3.9 million of general and
administrative expenses which are anticipated to be eliminated or reduced as a
result of the Transactions. However, no assurance can be given that these
anticipated savings will be realized or that the Transactions will not have a
dilutive effect on New Prime's earnings per share. If anticipated savings are
not realized or if the Transactions have a dilutive effect, New Prime might be
unable to pay expected distributions to shareholders.
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN DIRECTORS AND OFFICERS OF
HORIZON
In considering whether to approve the Transactions, shareholders 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 Horizon shareholders generally 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. 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
34
<PAGE>
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 (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 the management of Horizon, as individuals, and the
shareholders of Horizon 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 Transactions, 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 L.
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
35
<PAGE>
Corporation, an affiliate of Heitman Financial Ltd., of which Norman 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
Shareholders 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 by
its terms 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
New Prime. PGI owns substantial interests in income producing properties
unrelated to New Prime'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.
APPRAISAL RIGHTS
Horizon Common Shareholders, Prime Common Shareholders, Prime Series A
Preferred Shareholders and Prime Series B Preferred Shareholders are not
entitled to dissenting shareholders' appraisal rights under Maryland or Michigan
law. Neither Maryland nor Michigan law provides appraisal rights to shareholders
of a corporation in connection with a merger if their shares are listed on a
national securities exchange, such as the NYSE, on the record date for
determining shareholders entitled to vote on such merger. All of the Prime
Common Shares, Prime Series A Preferred Shares, Prime Series B Preferred Shares
and Horizon Common Shares outstanding on the record date for determining the
shareholders entitled to vote on the Transactions were listed on the NYSE. Such
shareholders of Prime and Horizon will not have the ability to demand and
receive payment of the fair value of their shares in lieu of the consideration
otherwise payable to such shareholders pursuant to the Transactions. The holders
of Prime
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<PAGE>
Series C Preferred Shares have appraisal rights under Maryland law upon
compliance with all necessary procedures. See "The Corporate Merger--Limited
Appraisal Rights under Maryland Law."
ADVERSE CONSEQUENCES OF DEBT FINANCING
New Prime is subject to the risks normally associated with debt or preferred
equity financing, including the risk that New Prime'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, New Prime will be more leveraged
than Prime was before such consummation. As of December 31, 1997, New Prime's
pro forma ratio of debt to total market capitalization was 50.5%, as compared to
an historical debt to total market capitalization ratio of 42.4% for Prime as of
such date. If New Prime were unable to refinance its indebtedness on acceptable
terms, or at all, New Prime might be forced to dispose of one or more of the
properties on disadvantageous terms, which might result in losses to New Prime
and might adversely affect the cash available for distributions to shareholders.
If interest rates or other factors at the time of the refinancing result in
higher interest rates upon refinancing, New Prime's interest expense would
increase, which would affect New Prime's ability to make distributions to its
shareholders. Furthermore, if a property is mortgaged to secure payment of
indebtedness and New Prime 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 New Prime. Foreclosures could also create taxable
income without accompanying cash proceeds, thereby hindering New Prime's ability
to meet the REIT distribution requirements of the Code.
LOSS UPON DISPOSITION OF PRIME TRANSFERRED PROPERTIES
Upon consummation of the Transactions, New Prime will recognize a loss of
$15,000,000 relating to the sale of the New Prime Properties to HGP.
OBLIGATIONS WITH RESPECT TO HGP CREDIT FACILITIES; MODIFICATION OF HGP CREDIT
FACILITY
New Prime will guarantee (the "Prime Guarantee") up to $10.0 million 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 New Prime to make payments under the guarantee. In addition, upon
consummation of the Transactions, HGP will assume Horizon's obligations under a
$4.0 million revolving credit facility which was fully drawn as of December 31,
1997. New Prime has agreed to lend HGP the funds necessary to repay in full its
obligations under this facility upon its maturity on August 1, 1998.
Accordingly, if and to the extent HGP is otherwise unable to repay this facility
at maturity, New Prime may be required to lend funds to HGP in an amount
sufficient to enable HGP to make such repayment. 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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STATUS OF THE CORPORATE MERGER AS A TAX-FREE REORGANIZATION
The Corporate Merger is intended to qualify as a tax-free reorganization
under Section 368(a) of the Code, such that neither the shareholders of Prime
nor the shareholders of Sky Merger would recognize taxable gain as a result of
the Corporate Merger (except to the extent of any cash paid to Sky Merger
shareholders for fractional shares). However, in the event that the Corporate
Merger did not qualify as a tax-free reorganization under Section 368(a) of the
Code, each shareholder of Prime and Sky Merger would recognize gain equal to the
amount, if any, by which the value of the stock and other consideration received
by such person in the Corporate Merger exceeds such person's adjusted tax basis
in its Prime or Sky Merger shares exchanged in the Corporate Merger.
Further, even if the Corporate Merger does qualify as a tax-free
reorganization, to the extent the Prime Special Distribution is treated as part
of the Corporate Merger (and not a separate transaction), then the recipients of
such distribution would be required, in lieu of treating such distribution as a
dividend, to recognize any gain realized by them upon the Corporate Merger, in
an amount not in excess of the Prime Special Distribution received. See "The
Corporate Merger--Federal Income Tax Consequences."
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
"The Corporate Merger--Federal Income Tax Consequences."
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.
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<PAGE>
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 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 "The Corporate Merger--
Federal Income Tax Consequences."
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 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
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<PAGE>
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 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
fewer 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.
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
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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.
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 New Prime 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 New Prime's outlet centers are located in relatively
undeveloped areas, there are often other potential sites near New Prime's outlet
centers that may be developed into outlet centers by competitors. As of December
31, 1997, 13 projects in New Prime'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 New Prime'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 New Prime'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, New Prime'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 New Prime'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 (the "Court")
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. On May 4, 1998, the Court approved a
class action settlement the terms of which are contained in a Memorandum of
Understanding among counsel for the parties dated as of May 7, 1998. Such
settlement is subject to certain conditions which may not be satisfied. See "The
Corporate Merger--Shareholder Litigation."
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RISKS OF ACQUISITION ACTIVITIES
New Prime intends to pursue acquisitions of factory outlet centers in the
United States. New Prime 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 New Prime's acquisition strategy will be determined
by numerous factors, including New Prime's ability to identify suitable
acquisition opportunities, the degree of competition for such acquisitions, New
Prime's ability to finance such acquisitions on acceptable terms, the financial
performance of the properties following acquisition and the ability of New Prime
to effectively integrate the operations of acquired properties. The failure by
New Prime to achieve its acquisition plans or to integrate or operate acquired
facilities effectively may have a material adverse effect on New Prime's
business, financial condition and results of operations, and such failure may
adversely affect the ability of New Prime to pay expected distributions to
shareholders.
ADVERSE EFFECT OF INABILITY TO PURSUE DEVELOPMENT ACTIVITIES; DEVELOPMENTS MAY
NOT BE PROFITABLE
New Prime intends to pursue development activities as opportunities arise.
New Prime 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 New Prime 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 New Prime may be unable to obtain any required governmental approvals or
permits. The occurrence of any of the foregoing may adversely affect the ability
of New Prime to pay expected distributions to shareholders.
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. New Prime
intends to continue Prime's existing policy. There can be no assurance, however,
that this policy will not be further modified to enable New Prime to become more
highly leveraged. Moreover, the organizational documents of New Prime will not
contain any limitation on the amount of indebtedness New Prime might incur. If
New Prime were to become more highly leveraged, the resulting increase in New
Prime's debt service obligations could adversely affect New Prime's available
cash flow and ability to make expected distributions to shareholders and
increase the risk of default on New Prime's obligations, including financial
covenants contained in New Prime's debt instruments.
GENERAL REAL ESTATE INVESTMENT RISKS
GENERAL. Investments in New Prime 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 New Prime 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,
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
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income from the investment. If any of New Prime'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 New Prime to
convert the center to an attractive alternative use or to sell the center to
recoup New Prime's investment may be limited. Should such an event occur, New
Prime'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 New Prime, New Prime's financial condition and results
of operations would be adversely affected if a significant number of New Prime's
merchants were unable to meet their lease obligations and if, following such
defaults, New Prime 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, New Prime 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. New Prime will be subject to the
risks that, upon expiration of leases for space located in 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 New Prime'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 New Prime's outlet centers have been constructed or
assumed during the past five years, New Prime 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 New Prime's outlet centers. If New Prime 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 New Prime's reserves for
renovations and concessions proved inadequate, then New Prime's cash flow and,
consequently, New Prime's ability to make expected distributions to shareholders
may be adversely affected.
UNINSURED LOSS. New Prime 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, New
Prime 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 the 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.
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
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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 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
New Prime's ability to pay distributions to shareholders.
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 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
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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 New Prime's
assessments do not reveal all environmental liabilities or that there are
material liabilities of which New Prime 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 New
Prime. If compliance with the various laws and regulations, now existing or
hereafter adopted, exceeds New Prime's budget for such items, New Prime'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 profits, the partnership terminates for federal income
tax purposes. Treasury Regulations under Code Section 708(b)(1)(B) (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
(and each Prime Property Partnership) under Code Section 708(b)(1)(B).
Accordingly, under the Section 708 Regulations, all of the assets of Prime
Partnership (and each Prime Property Partnership) will be deemed to be
contributed to a new partnership in return for interests in such new
partnership, and the partners of Prime Partnership, including New Prime (and
each Prime Property Partnership), would be deemed to be distributed interests in
such new partnership in exchange for their present interests in Prime
Partnership (or such Prime Property 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 New Prime) generally end on the same
date (i.e., December 31), as does New 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 Prime Properties to be depreciated as if they were newly acquired,
probably resulting in lower annual depreciation deductions to Prime Partnership
unitholders (including New Prime) for federal income tax purposes after the
Mergers. See "The Corporate Merger--Federal Income Tax Consequences."
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HGP RISK FACTORS
Ownership of HGP Common Shares involves various risks. In addition to
general risks of ownership of HGP Common Shares and those factors set forth
elsewhere in this Joint Proxy Statement/Prospectus/ Information Statement,
holders of HGP Common Shares 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 will own and operate the HGP
Properties. HGP does not have an operating history as a separate company, and
management has historically been able to rely on the earnings, assets and cash
flow of Prime or Horizon in managing the HGP Properties. In addition, HGP has
not operated as an independent public company, and following consummation of the
Transactions will incur costs and expenses associated with the management of a
public company. Furthermore, HGP will be a substantially smaller company than
either Horizon or Prime 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. As a result of the foregoing, historical and pro forma results for HGP
contained elsewhere in this Joint Proxy 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 consist of Horizon and Prime properties which have
performed poorly relative to other properties owned by Horizon and Prime 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'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 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, Inc."
ADVERSE CONSEQUENCES OF DEBT FINANCING
Upon consummation of the Transactions and after making expected borrowings
under the HGP Credit Facility (as hereinafter defined), HGP will have
substantial indebtedness and debt service obligations. On a pro forma basis,
HGP'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 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.
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The degree to which HGP is leveraged could have important consequences to
holders of HGP Common Shares, including the following: (i) HGP's 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'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 for other purposes, including operations and future business opportunities;
(iii) HGP's debt instruments could impose significant financial and operating
restrictions on HGP and its subsidiaries which, if violated, could permit HGP's
creditors to accelerate payments thereunder and foreclose on the collateral
securing such debt instruments; (iv) HGP's flexibility to adjust to changing
market conditions and to withstand competitive pressures could be limited by its
leveraged position and the covenants contained in its debt instruments, thus
putting HGP at a competitive disadvantage; (v) HGP may be vulnerable to a
downturn in general economic conditions or in its business or be unable to carry
out spending that is important to the maintenance of its business; (vi)
borrowings under certain of HGP's debt instruments are at variable rates of
interest, exposing HGP to the risk of increased interest rates; and (vii) HGP'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 effect on HGP.
Upon consummation of the Transactions, HGP will assume Horizon's obligations
under a $4.0 million credit facility which was fully drawn as of December 31,
1997. New Prime has agreed to lend HGP the funds necessary to repay in full its
obligations under this facility upon its maturity on August 1, 1998 in the event
HGP is otherwise unable to satisfy such obligations.
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 even more
highly leveraged, resulting in an increase in debt service that could increase
the risk of default on HGP's indebtedness.
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LACK OF WORKING CAPITAL
HGP 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 will be required to make improvements to its properties,
including constructing tenant build-outs and redesigning or reconfiguring
certain retail space. HGP does not anticipate that it will be able to implement
its business plan without obtaining additional financing. HGP's debt
instruments, including the HGP Credit Facility, restrict HGP's ability to incur
additional indebtedness and may prevent HGP from adequately repositioning the
HGP Properties. HGP does not have any commitments for working capital financing
and there is no assurance that HGP will have sufficient working capital in the
foreseeable future to execute its business plan. The failure by HGP to obtain
adequate working capital financing may have a material adverse effect on HGP'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. 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'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, Inc.--HGP Management's Discussion and Financial
Analysis--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."
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CHANGE IN BUSINESS STRATEGY
The initial assets of HGP have historically been operated as factory outlet
centers. As part of its business plan, HGP may expand its leasing efforts to
include a broader array of tenants, including local, regional and national
retailers. See "Horizon Group Properties, Inc.--Business Strategy". This change
in business strategy, if implemented, entails numerous risks, including the risk
that HGP 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's current factory outlet center tenants and tenant
sales at HGP'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 will be able to acquire additional properties on terms and
conditions that would be accretive to its shareholders or suitable for
repositioning.
FINANCINGS MAY NOT BE SUCCESSFUL
In order to obtain financing necessary to execute its business plan, HGP
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 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 and the holders of HGP Common Shares. The failure by
HGP to obtain additional equity financing on favorable terms may have a material
adverse effect on HGP'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 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'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 was unable to lease a
significant amount of space on economically favorable terms. In the event of a
default by a lessee, HGP 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 41.0% of the GLA in the HGP Properties were scheduled to expire
prior to 2001. If HGP 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's reserves for renovations and concessions proved inadequate, then HGP's
cash flow and operations may be adversely affected.
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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 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 (i.e., the forfeiture of) on 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
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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.
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.
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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.
NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF HGP COMMON SHARES FROM
NASDAQ
The HGP Common Shares have been authorized for quotation in Nasdaq, and HGP
intends to list such shares in Nasdaq. 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, 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 quoted 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, 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 quoted 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 on penny stocks, the market liquidity for HGP
Common Shares could be severely adversely affected.
In addition, if the HGP Common Shares are not quoted 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.
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TAXABLE NATURE OF THE HGP COMMON SHARE DISTRIBUTION
The distribution of HGP Common Shares to holders of New Prime Common Shares,
New Prime Series B Preferred Shares and New Prime Series C Preferred Shares
immediately following the Mergers will be reported as a taxable distribution and
not a tax-free spin-off, and, as such, the HGP Common Share Distribution will be
a fully taxable dividend to such shareholders in an amount equal to the fair
market value of such HGP Common Shares, to the extent that New Prime has current
or accumulated earnings and profits allocable to such distribution in respect of
such class of shares of New Prime. This dividend income will be taxed as
ordinary income.
To the extent that New Prime has current or accumulated earnings and profits
allocable to such distribution in respect of such class of New Prime shares
which is less than the full fair market value of such HGP Common Shares
distributed to such class of New Prime shares (and respecting the treatment of
such distribution as a taxable distribution and not a tax-free spin-off), then
such portion of the HGP Common Share Distribution that is not taxed as a
dividend will be treated first as a return of the recipient holder's adjusted
tax basis in its New Prime Common Shares, New Prime Series B Preferred Shares
and New Prime Series C Preferred Shares, as applicable, and then the balance of
the HGP Common Share Distribution will be recognized as capital gain to such
holder.
The aggregate initial tax basis of the HGP Common Shares received by any New
Prime shareholder should be equal to the fair market value of such HGP Common
Shares at the time of the HGP Common Share Distribution, and the holding period
for HGP Common Shares received by any New Prime shareholder should begin upon
such shareholder's receipt of such HGP Common Shares (respecting the treatment
of the HGP Common Share Distribution as a taxable distribution and not a
tax-free spin-off). See "Horizon Group Properties, Inc.--Federal Income Tax
Consequences."
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
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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 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 SHAREHOLDER APPROVAL
The investment, financing, borrowing and distribution policies of HGP 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 stockholders of HGP. A change in
these policies could adversely affect HGP'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 may be adversely affected. HGP'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 or the entity in
which HGP 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
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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 and
its financial condition may be adversely affected.
UNINSURED LOSS
HGP 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 could lose its
capital invested in a property, as well as the anticipated future revenue from
such property 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.
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'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's financial condition or results of operations.
Nonetheless, it is possible that HGP's assessments do not reveal all
environmental liabilities or that there are material liabilities of which HGP 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. If compliance with the various laws and regulations,
now existing or hereafter adopted, exceeds HGP's budget for such items, HGP's
ability to make distributions to shareholders could be adversely affected.
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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 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, they could be substantial. If
required changes involve greater expense than HGP currently anticipates, HGP's
financial condition and results of operations could be adversely affected.
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 and
could have an adverse effect on HGP's results of operations.
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MEETINGS OF SHAREHOLDERS
PRIME
The Prime Shareholders Meeting has been called to consider and vote on (i)
the approval of the Corporate Merger and the other transactions contemplated by
the Merger Agreement; (ii) the election of three directors of the Prime Board of
Directors; (iii) the approval and adoption of the Prime Retail, Inc. Nonemployee
Director Stock Plan; (iv) the approval and adoption of the Prime Retail, Inc.
1998 Long-Term Stock Incentive Plan; (v) the ratification of the appointment of
Prime's independent accountants; and (vi) the transaction of such other business
as may properly come before the Prime Shareholders Meeting or any adjournment(s)
or postponement(s) thereof, including an adjournment to solicit additional
proxies in the event that a quorum is not present at the meeting or in the event
sufficient proxies voted in favor of the approval of the proposals have not been
received. Proxies voted against the proposals will not be voted in favor of any
such adjournment. The Prime Shareholders Meeting will be held on June 12, 1998
at 11:00 a.m., local time, at 100 East Pratt Street, 19th Floor, Baltimore,
Maryland.
Only holders of record of Prime Common Shares and Prime Series C Preferred
Shares at the close of business on the Prime Record Date will be entitled to
vote at the Prime Shareholders Meeting. Each holder of Prime Common Shares and
Prime Series C Preferred Shares is entitled to one vote per share. Holders of
Prime Common Shares will be entitled to vote with respect to all matters to be
acted upon at the Prime Shareholders Meeting. Holders of Prime Series C
Preferred Shares will be entitled to vote only with respect to the approval and
adoption of the Corporate Merger and the other transactions contemplated by the
Merger Agreement. As of the close of business on April 24, 1998, Prime had
outstanding (i) 27,294,951 Prime Common Shares and (ii) 3,636,363 Prime Series C
Preferred Shares. Approval of the Corporate Merger and the other transactions
contemplated by the Merger Agreement requires the affirmative vote of Prime
shareholders owning two-thirds of the outstanding Prime Series C Preferred
Shares and the outstanding Prime Common Shares, each voting separately as a
class. Approval of the election of directors of the Prime Board of Directors
requires the majority of votes cast by holders of Prime Common Shares entitled
to vote at the Prime Shareholders Meeting. Approval of the Prime Retail, Inc.
Nonemployee Director Stock Plan and the Prime Retail, Inc. 1998 Long-Term Stock
Incentive Plan and the appointment of independent auditors of Prime requires the
affirmative vote of a majority of the votes cast on such matters by holders of
Prime Common Shares.
If the accompanying proxy form is signed and returned, the shares
represented thereby will be voted in accordance with any direction on the proxy
form, or in the absence of a direction, they will be voted FOR the Corporate
Merger and the other transactions contemplated by the Merger Agreement and FOR
the other matters described in this Joint Proxy Statement/Prospectus/Information
Statement to be considered and voted on at the Prime Shareholders Meeting. A
Prime shareholder may revoke the proxy at any time prior to the voting thereof
by giving written notice of such revocation to Prime, by executing and
delivering a proxy bearing a later date, or by attending the Prime Shareholders
Meeting and voting in person.
The expenses of the solicitation of Prime Common Shareholders and Prime
Series C Preferred Shareholders will be paid by Prime. In addition to the use of
the mail, proxies may be solicited by trustees, officers, or regular employees
of Prime in person, by telecopy or by telephone. Arrangements will also be made
with brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation material to the beneficial owners of Prime Common Shares and Prime
Series C Preferred Shares held of record by such persons, and Prime will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
Prime has retained MacKenzie Partners, Inc. to assist in the solicitation of
proxies. The fee of such firm is estimated to be $7,500, plus reimbursement for
out-of-pocket costs and expenses.
The presence at the Prime Shareholders Meeting, in person or by proxy, of
the holders of a majority of the outstanding Prime Common Shares and Prime
Series C Preferred Shares is necessary to constitute a
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quorum under Maryland law and the Amended and Restated Bylaws of Prime (the
"Prime Bylaws"). Votes cast by proxy or in person at the meeting will be
tabulated by election inspectors appointed for the meeting and will determine
whether or not a quorum is present. Under Maryland law, Prime's Amended and
Restated Articles of Incorporation (as amended, the "Prime Charter") and the
Prime Bylaws, the affirmative vote of the holders of two-thirds of the
outstanding Prime Common Shares and two-thirds of the outstanding Prime Series C
Preferred Shares is required to approve the Transactions.
Prime Common Shareholders and Prime Series C Preferred Shareholders may mark
the accompanying Prime proxy to vote their shares FOR or AGAINST, or to ABSTAIN
with respect to, the Corporate Merger and the other transactions contemplated by
the Merger Agreement and the other matters to be considered and voted on at the
Prime Shareholders Meeting. Abstentions and broker non-votes will have the
effect of a vote against approval of the Corporate Merger and the other
transactions contemplated by the Merger Agreement but will not be considered
votes cast for purposes of the other matters to be considered and voted on at
the Prime Shareholders Meeting.
THE PRIME DIRECTORS UNANIMOUSLY APPROVED THE CORPORATE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND RECOMMEND THAT THE PRIME
COMMON SHAREHOLDERS AND PRIME SERIES C PREFERRED SHAREHOLDERS VOTE FOR THE
CORPORATE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT. THE PRIME DIRECTORS ALSO UNANIMOUSLY APPROVED AND RECOMMEND THAT THE
PRIME COMMON SHAREHOLDERS VOTE FOR EACH OF THE OTHER MATTERS DESCRIBED IN THIS
JOINT PROXY STATEMENT/ PROSPECTUS/INFORMATION STATEMENT TO BE CONSIDERED AND
VOTED ON AT THE PRIME SPECIAL MEETING. SEE "OTHER PRIME SHAREHOLDERS MEETING
MATTERS."
Pursuant to the Prime Bylaws, no business may be transacted at the Prime
Shareholders Meeting except that referred to in the accompanying notice of the
Prime Shareholders Meeting.
HORIZON
The Horizon Special Meeting has been called to consider and vote on the
approval of the Merger Agreement and the transactions contemplated thereby,
including the Reincorporation Merger. The Horizon Special Meeting will be held
on June 12, 1998, at 10:00 a.m., local time, at Rudnick & Wolfe, 203 N. LaSalle,
Suite 1800, Chicago, Illinois. Only holders of record of Horizon Common Shares
on the Horizon Record Date will be entitled to notice of and to vote at the
Horizon Special Meeting. Each holder of Horizon Common Shares is entitled to one
vote per share. As of the close of business on April 24, 1998, Horizon had
outstanding 24,177,506 Horizon Common Shares. Approval of the Merger Agreement
and the other transactions contemplated thereby, including the Reincorporation
Merger, require the affirmative vote of the record holders of at least
two-thirds of the Horizon Common Shares entitled to vote.
If the accompanying proxy form is signed and returned, the shares
represented thereby will be voted in accordance with any direction on the proxy
form, or in the absence of a direction, they will be voted FOR the proposal. The
proxy form grants authority to the attorneys-in-fact to vote in their discretion
with respect to any other matter which may properly come before the meeting
including any adjournment thereto. The attorneys-in-fact may vote their proxies
to adjourn the Horizon Special Meeting for any purpose including an adjournment
to solicit additional proxies in the event that a quorum is not present at the
meeting or in the event sufficient proxies voted in favor of the approval of the
proposal have not been received. Proxies voted against the proposal will not be
voted in favor of any such adjournment. The Horizon shareholder may revoke the
proxy at any time prior to the voting thereof by giving written notice of such
revocation to Horizon, by executing and delivering a proxy bearing a later date,
or by attending the Horizon Special Meeting and voting in person.
The expenses of the solicitation of Horizon Common Shareholders will be paid
by Horizon. In addition to the use of the mail, proxies may be solicited by
trustees, officers, or regular employees of Horizon in person, by telecopy or by
telephone. Arrangements will also be made with brokerage firms and other
custodians, nominees and fiduciaries to forward solicitation material to the
beneficial owners of
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Horizon Common Shares held of record by such persons, and Horizon will reimburse
such brokerage firms, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. Horizon has
retained MacKenzie Partners to assist in the solicitation of proxies. The fee of
such firm is estimated to be $7,500, plus reimbursement for out-of-pocket costs
and expenses.
The presence at the Horizon Special Meeting, in person or by proxy, of the
holders of a majority of the outstanding Horizon Common Shares is necessary to
constitute a quorum under Michigan law and the Amended and Restated Bylaws of
Horizon (the "Horizon Bylaws"). Votes cast by proxy or in person at the meeting
will be tabulated by election inspectors appointed for the meeting and will
determine whether or not a quorum is present. The election inspectors will treat
abstentions and "broker non-votes" (i.e., proxies of brokers who have limited
authority to vote on specified proposals) as shares that are present and
entitled to vote for purposes of determining the presence of a quorum at the
meeting.
Horizon Common Shareholders may mark the accompanying Horizon proxy to vote
their shares FOR or AGAINST, or to ABSTAIN with respect to the proposal.
Abstentions and broker non-votes will have the effect of a vote against approval
of the Merger Agreement and the other transactions contemplated thereby,
including the Reincorporation Merger.
THE HORIZON DIRECTORS WHO VOTED ON THE MERGER AGREEMENT AND THE OTHER
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE REINCORPORATION MERGER,
UNANIMOUSLY RECOMMEND THAT HORIZON COMMON SHAREHOLDERS VOTE FOR THE MERGER
AGREEMENT AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
REINCORPORATION MERGER.
Mr. David H. Murdock and certain of his affiliates have agreed, pursuant to
the Murdock Agreement, to vote their Horizon Common Shares in favor of the
Transactions. As of February 1, 1998, Mr. Murdock and such affiliates
represented in the Murdock Agreement that they own 1,099,800, or approximately
4.6%, of the outstanding Horizon Common Shares.
Pursuant to the Horizon Bylaws, no business may be transacted at the Horizon
Special Meeting except that referred to in the accompanying notice of the
Horizon Special Meeting.
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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's executive offices are located at 100 East
Pratt Street, Nineteenth Floor, Baltimore, Maryland 21202 and its 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's executive offices are located at 5000 Hakes Drive,
Norton Shores, Michigan 49441 and its 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's executive offices will be located at 100 East Pratt
Street, Nineteenth Floor, Baltimore, Maryland 21202 and its telephone number
will be (410) 234-0782.
HGP. HGP was recently formed by Horizon in connection with the
Transactions. Upon consummation of the Transactions, HGP will be a
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's executive offices will be located at
5000 Hakes Drive, Norton Shores, Michigan 49441 and its 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 PAYABLE IN CONNECTION
WITH 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 Unit and Prime Partnership
Series C Preferred Unit, 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 PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE CONTRIBUTION AGREEMENT (THE "CONTRIBUTION
AGREEMENT"), THE FULL TEXT OF WHICH IS ATTACHED AS APPENDIX E, AND IS
INCORPORATED HEREIN BY REFERENCE.
BACKGROUND
Horizon, Horizon Partnership, Sky Merger, HGP and HGP LP have entered 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 Third Horizon Group Limited 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 equipment and computer software used
therein; (iv) the capital stock of HGI Management Corp. and the rights to
acquire the capital stock of such entity; and (v) 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, Inc.--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 Algondones, 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:
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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 Partnership Merger
Effective Time, (ii) all leases (whether as lessor, lessee, sublessee, sublessor
or otherwise) and related contracts, and service contracts, relating to any
Contributed Asset and (iii) 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 Partnership
Merger Effective Time, (ii) all liabilities relating to any indebtedness for
borrowed money not assumed by HGP LP, (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 PROXY
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.
PROXY SOLICITATION; VOTE REQUIRED
By separate 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 Unitholders. 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 (i) a majority of the outstanding Prime Partnership
Common Units, (ii) two-thirds of the outstanding Prime Partnership Series C
Preferred Units and (iii) a majority of the outstanding Horizon Partnership
Units. 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
Unitholders.
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 Unitholders 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.
FEDERAL INCOME TAX CONSEQUENCES OF THE PARTNERSHIP MERGER
The Partnership Merger will constitute a merger of Horizon Partnership with
and into Prime Partnership for purposes of Code Section 708 with Prime
Partnership being considered the surviving partnership. 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 Horizon Partnership Unitholders.
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Generally, under Code Section 721(a), no gain or loss will be recognized by
Horizon Partnership, Prime Partnership, Horizon Partnership Unitholders or the
pre-Partnership Merger holders of Prime Partnership units upon such deemed
contribution of the assets (subject to liabilities) of Horizon Partnership to
Prime Partnership in consideration for Prime Partnership units. However, the
federal income tax consequences to any specific holder of Prime Partnership
units or Horizon Partnership Units will be determined by the specific tax
attributes of such holder's interest in Prime Partnership and Horizon
Partnership, respectively. Such holders are strongly urged to consult with their
own tax advisor to determine whether they would recognize any taxable income
despite the general rule of nonrecognition.
THE REINCORPORATION MERGER
THE DESCRIPTION OF THE REINCORPORATION MERGER CONTAINED IN THIS JOINT PROXY
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 15,
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 MBCA. The New Prime Charter and 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
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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 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.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material United States federal
income tax consequences of the Reincorporation Merger to Horizon and Horizon
Common Shareholders and to Prime and Prime Shareholders. The following
discussions were prepared based on consultation with Rudnick & Wolfe, special
counsel to Horizon and Sky Merger, and Winston & Strawn, special counsel to
Prime, in connection with the Reincorporation Merger. 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 Horizon Common Shareholder or Prime Shareholder. 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 of the Reincorporation Merger that may be relevant to particular
Horizon Common Shareholders or Prime Shareholders, 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 Horizon
Common Shares or Prime 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,
Horizon Common Shareholders and Prime Shareholders are urged to consult with
their own legal and tax advisers regarding the United States federal income tax
consequences of the Reincorporation Merger and any other consequences to them of
the Reincorporation Merger under state, local and foreign tax laws.
Rudnick & Wolfe, counsel to Horizon and Sky Merger in connection with the
Transactions, has rendered an opinion to Sky Merger that on the basis of the
factual representations and assumptions set forth in such opinion:
(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 for federal income tax purposes will be recognized
by either Horizon or Sky Merger as a result of the Reincorporation Merger;
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(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; and
(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 shares of Horizon Common Shares were held by
the holder.
Winston & Strawn, counsel to Prime in connection with the Transactions, has
rendered an opinion to Prime in respect of the Corporate Merger on the basis of
the factual representations and assumptions set forth in such opinion, including
those relating to the Reincorporation Merger. See "The Corporate Merger--Federal
Income Tax Consequences."
LIMITED APPRAISAL RIGHTS UNDER MICHIGAN LAW
Shareholders of a Michigan corporation have the right to dissent from and
obtain payment of the fair value of their shares in the event of certain
mergers, acquisitions, share exchanges, sales or exchanges of the corporation's
assets, or if the corporation amends its articles of incorporation in such a
manner that it either materially alters or abolishes a preferential right of the
shares having preferences or creates, alters or abolishes a material provision
or right in respect of the redemption of the shares or a sinking fund for the
redemption or purchase of the shares, subject to certain exceptions. However,
the MBCA does not provide appraisal rights for shares listed on a national
securities exchange or shares held of record by not less than 2,000 persons on
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting of shareholders at which the corporate action is
to be acted upon.
All of the Horizon Common Shares outstanding on the record date for
determining the shareholders entitled to vote on the Merger Agreement and the
transactions contemplated thereby were listed or were entitled to receive shares
that were listed on the NYSE. Therefore, Horizon Common Shareholders are not
entitled to dissenting shareholders' appraisal rights under Michigan law.
THE CORPORATE MERGER
THE DESCRIPTION OF THE CORPORATE MERGER CONTAINED IN THIS JOINT PROXY
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."
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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 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
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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.
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
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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 REITs 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 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
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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 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
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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 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.
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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 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.
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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 Agreements. Following such presentation, the Horizon Board of Directors
unanimously approved the C&C Contribution Agreement and the Murdock Agreements,
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 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
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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
and its shareholders. Accordingly, the Prime Board of Directors unanimously
approved the Corporate Merger and the other transactions contemplated by the
Merger Agreement and unanimously recommends that the Prime Common Shareholders
and Prime Series C Preferred Shareholders approve the Corporate 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 and its shareholders.
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 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 the
New Prime Common Shares and 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 decrease in general and administrative expenses. Management has
identified approximately $3.9 million of general and administrative expenses
which are anticipated to be eliminated or reduced as a result of the
Transactions.
4. ACCRETIVE IMPACT OF TRANSACTIONS ON PRO FORMA NET INCOME (LOSS) PER
COMMON SHARE. The Unaudited Pro Forma Consolidated Statements of Operations
for the nine months ended September 30, 1997 demonstrate the positive impact
of the Transactions on New Prime's net income (loss) per common share. On a
pro forma basis giving effect to the Transactions, New Prime's net income
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per common share for the nine months ended September 30, 1997 was $0.01
compared to a loss per Prime Common Share 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 Corporate 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 and Prime Series B Preferred
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 and its shareholders. 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.
8. TAX-FREE NATURE OF THE CORPORATE MERGER. For federal income tax
purposes the Corporate Merger will be a tax-free transaction for Prime,
which the Prime Board of Directors viewed as favorable because, no gain or
loss will be recognized by Prime in connection with the Corporate Merger.
9. DISTRIBUTIONS OF HGP COMMON SHARES. In connection with the
Transactions, the common and convertible preferred shareholders of Prime
will receive shares of HGP Common Shares. Although the Prime Board of
Directors did not assign a particular value to such shares, it viewed as
favorable the fact that such shares would be distributed as a dividend and
enable such Prime shareholders to benefit from the continuing operations of
HGP.
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 New Prime as of September 30, 1997. In addition, New
Prime'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 on a pro forma basis before the Transactions. The Prime
Board of Directors recognized that such increase could adversely affect the
ability of New Prime to obtain debt financing for additional growth and would
subject Prime's operations (after the Corporate 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 New
Prime to
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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 and its shareholders. The Prime Board of
Directors unanimously approved the Corporate Merger and the other transactions
contemplated by the Merger Agreement and unanimously recommends that the Prime
Series C Preferred Shareholders and Prime Common Shareholders vote FOR the
Corporate 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
and its shareholders. Accordingly, Horizon's Board of Directors has unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Reincorporation Merger and unanimously recommends approval of the
Merger Agreement and the transactions contemplated thereby, including the
Reincorporation Merger by the shareholders of Horizon. 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.
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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 shareholders to maximize Horizon
shareholder 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.
7. LEHMAN FAIRNESS OPINION. The consideration to be paid to Horizon
shareholders is fair to such shareholders. 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 is fair from a financial point of
view to the shareholders.
8. TAX-FREE NATURE OF THE CORPORATE MERGER. The Corporate Merger will
be tax-free for federal income tax purposes with respect to the Horizon
Common Shareholders, which the Horizon Board of Directors viewed as
favorable because no gain or loss would be recognized by a shareholder of
Horizon (except with respect to any cash received by a shareholder of
Horizon in lieu of a fractional interest in a New Prime Common Share or New
Prime Preferred Share).
9. DISTRIBUTIONS OF HGP COMMON SHARES. In connection with the
Transactions, the Horizon Shareholders will receive HGP Common Shares.
Although the Horizon Board of Directors did not assign a particular value to
such shares, it is viewed as favorable the fact that such shares would be
distributed as a dividend and enable such Horizon Common Shareholders to
benefit from the continuing operations of HGP.
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 Common Share was $0.35 and the
distribution declared on the Prime Share Equivalent was $0.07 lower, or
$0.28, 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.
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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.
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 and its
shareholders.
RECOMMENDATION
The Horizon Board of Directors believes that the proposed transaction is
fair and in the best interest of Horizon and its shareholders. Accordingly, the
Horizon Board of Directors has unanimously approved the Merger Agreement and the
transactions contemplated thereby, including the Reincorporation Merger, and
unanimously recommends that the shareholders of Horizon vote FOR the Merger
Agreement and the transactions contemplated thereby, including the
Reincorporation 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 holders of Horizon Common Shares,
(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. 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. 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
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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 F TO THIS JOINT PROXY STATEMENT/PROSPECTUS/ INFORMATION
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. PRIME COMMON SHAREHOLDERS AND
PRIME SERIES C PREFERRED SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS
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 VOTING
SHAREHOLDER AS TO HOW SUCH PRIME VOTING SHAREHOLDER SHOULD VOTE AT THE PRIME
SPECIAL MEETING. 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 PROXY
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.
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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 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%.
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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 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
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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.
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.
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THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS IS ATTACHED AS
APPENDIX G TO THIS JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS AND LIMITED PARTNERS 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.
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,
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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 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
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$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 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-
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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 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).
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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%.
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 15,
1998, and that the Corporate Merger Effective Time will occur on such date
unless a different date is specified in the Corporate Articles
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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 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").
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LIMITED APPRAISAL RIGHTS UNDER MARYLAND LAW
Shareholders of a Maryland corporation have the right to demand and receive
payment of the fair value of their stock in the event of certain mergers,
consolidations, share exchanges or transfers of assets or if the corporation
amends its charter in a way that substantially adversely affects the
stockholder's rights unless such right is reserved in the corporation's charter,
subject to certain exceptions. However, except as otherwise provided by the
MGCL, shareholders 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 shareholder'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 (the "Appraisal Rights Exceptions").
All of the Prime Common Shares, Prime Series A Preferred Shares and Prime
Series B Preferred Shares outstanding on the record date for determining the
shareholders entitled to vote on the Transactions were listed on the NYSE. As a
result, holders of such shares are not entitled to dissenting shareholders'
appraisal rights under Maryland law. Prime Series C Preferred Shareholders have
appraisal rights under Maryland law upon compliance with all necessary
procedures.
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
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.
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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.
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
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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 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
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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 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
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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 and the exchange of the Partnership Merger Consideration
in connection with the Partnership Merger.
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 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.
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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;
(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;
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(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 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;
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(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;
(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);
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(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, 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.
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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, (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 the 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 Corporate Merger 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
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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 Proxy
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."
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material United States federal
income tax consequences of the Corporate Merger, the Prime Special Distribution,
the HGP Common Share Distribution and continuing ownership of New Prime Shares
to Prime, Horizon, New Prime and their respective shareholders. The following
discussions were prepared based on consultation with Winston & Strawn, special
counsel to Prime, and Rudnick & Wolfe, special counsel to Horizon, in connection
with the Corporate Merger. 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 Horizon Common Shares or Prime 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 of the Corporate Merger, the Prime Special Distribution, the HGP
Common Share Distribution or continuing to hold New Prime Shares that may be
relevant to particular holders of Horizon Common Shares and Prime 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 Horizon Common Shares or Prime 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, Horizon Common Shareholders and Prime Shareholders are
urged to consult with their own legal and tax advisors regarding the United
States federal income tax consequences of the Corporate Merger, the Prime
Special Distribution, the HGP Common Share Distribution, continuing to hold New
Prime Shares and any other consequences to them of such transactions under
state, local and foreign tax laws.
TAX CONSEQUENCES OF THE PRIME SPECIAL DISTRIBUTION AND THE HGP COMMON SHARE
DISTRIBUTION.
The Prime Special Distribution in respect of a class of Prime shares should
be respected as a separate transaction from the Corporate Merger, and, as such,
will constitute a fully taxable dividend to such class of Prime Shareholders to
the extent that Prime has current or accumulated earnings and profits allocable
to such class of Prime shares. As a separate transaction, such income will be
taxed as ordinary income.
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As a separate transaction, to the extent that Prime has current or
accumulated earnings and profits allocable to the Prime Special Distribution to
a class of Prime Shares which are less than the full amount of such distribution
to such class of Prime Shares (and respecting such distribution as separate from
the Corporate Merger), then such portion of the Prime Special Distribution that
is not taxed as a dividend will be treated first as a return of the recipient
Prime Shareholder's tax basis in its Prime Series B Preferred Shares, Prime
Series C Preferred Shares and Prime Common Shares, as applicable, and then the
balance of the Prime Special Distribution will be recognized as capital gain to
such Prime Shareholder.
It is currently anticipated that, at the time of the Prime Special
Distribution, Prime will have sufficient current earnings and profits allocable
to such distribution in respect of the Prime Series B Preferred Shares and Prime
Series C Preferred Shares to cause such portion of the Prime Special
Distribution to be treated as a dividend and taxed as ordinary income. It is
further anticipated that following this allocation, no, or a relatively small
amount of, current earnings and profits (and no accumulated earnings and
profits) will remain to be allocated to the Prime Special Distribution made in
respect of the Prime Common Shares. Accordingly, it is expected that all or
substantially all of the Prime Special Distribution in respect of the Prime
Common Shares will first represent a recovery of each Prime Common Shareholder's
adjusted tax basis in such shares, and that the balance of such distribution, if
any, will be recognized by such shareholders as capital gain.
Each of Prime and Horizon believe, and Winston & Strawn opines that, the
Prime Special Distribution should be respected as a distribution by Prime in
respect of its shares. Prime will report the Prime Special Distribution as such
a distribution because, among other reasons, the Prime Special Distribution is
being paid only to Prime Shareholders as of the record date for such
distribution, which will occur before the Closing.
However, it is possible, although not very likely, that the Prime Special
Distribution will be treated as taxable "boot," i.e., other property or money
received by the Prime Common Shareholders, Prime Series B Preferred Shareholders
and Prime Series C Preferred Shareholders in the Corporate Merger under Code
Section 356(a)(1)(B). In such case, then in lieu of the distribution treatment
described above, each Prime Common Shareholder, Prime Series B Preferred
Shareholder and Prime Series C Preferred Shareholder would be required to
recognize any gain realized from the Corporate Merger in an amount up to the
Prime Special Distribution so received. This gain realized would be the excess
of the sum of the fair market value of the New Prime Common Shares, New Prime
Series B Preferred Shares or New Prime Series C Preferred Shares received in the
Corporate Merger and the amount of the Prime Special Distribution received, over
the adjusted tax basis that such Prime Shareholder had in its Prime Common
Shares, Prime Series B Preferred Shares or Prime Series C Preferred Shares,
respectively, immediately before the Corporate Merger. This recognized gain
generally would be capital gain; provided, however, that, if the Prime Special
Distribution and Corporate Merger have the effect of the distribution of a
dividend to a Prime Common Shareholder, Prime Series B Preferred Shareholder or
Prime Series C Preferred Shareholder, then such Prime Shareholder would treat
such gain as ordinary income.
Assuming that the Prime Special Distribution is treated as taxable boot in
the Corporate Merger, the treatment of such distribution as a dividend or
capital gain will depend on the factual circumstances of each Prime Shareholder.
This determination, however, will be made under the assumption that the sole
consideration payable in the Corporate Merger to Prime Shareholders consists of
New Prime Shares, and that a portion of such shares is redeemed by New Prime
with the cash distributed in the Prime Special Distribution. If this deemed
redemption has the effect of reducing any Prime Shareholder's ownership of New
Prime Common Shares and any other of New Prime voting shares by 20%, the Prime
Special Distribution will not, to the extent taxable, be treated as a dividend
to such Prime Shareholder and instead, to the extent taxable, will be taxed as
capital gain.
Even if the deemed redemption does not have this effect with respect to a
Prime Shareholder, it should still not be treated, to the extent taxable as
boot, as a dividend if it is "not essentially equivalent of a dividend". Whether
this deemed redemption is not essentially equivalent of a dividend is a factual
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determination made with respect to each Prime Shareholder. However, if following
the Corporate Merger, a Prime Shareholder holds only New Prime Series B
Preferred Shares or New Prime Series C Preferred Shares or the Prime Shareholder
holds a very small percentage of New Prime Common Shares (including, in each
instance, stock constructively held under the Code), the Prime Special
Distribution should be treated, to the extent taxable as boot, as capital gain
rather than dividend to such Prime Shareholder.
Finally, to the extent that Prime does not have cumulative earnings and
profits to the Closing Date such that, if Prime had distributed the Prime
Special Distribution, such distribution would not be taxable as a dividend with
respect to a class of Prime Shares, the Prime Special Distribution should, to
the extent taxable as boot, be treated as capital gain to Prime Shareholders in
respect of such class of Prime Shares, irrespective of such Prime Shareholder's
ownership of New Prime Shares. Therefore based upon Prime's anticipated earnings
and profits, the Prime Special Distribution in respect of the Prime Common
Shares generally will, to the extent taxable as boot, be taxable as capital
gain.
It is not entirely clear whether the HGP Common Share Distribution of HGP
Common Shares to a class of New Prime Shareholders should be respected as a
taxable distribution, or should be treated as a tax-free spin-off. New Prime
will report the HGP Common Share Distribution as a taxable distribution. As
such, the HGP Common Share Distribution will be a fully taxable dividend to such
class of shareholders in an amount equal to the fair market value of HGP Common
Shares to the extent New Prime has current or accumulated earnings and profits
allocable to such class of New Prime Shares held by such New Prime Shareholders.
This dividend income will be taxed as ordinary income.
To the extent that New Prime has current or accumulated earnings and profits
allocable to a class of New Prime shares less than the full fair market value of
HGP Common Shares distributed in respect of such class (and respecting the
treatment of such distribution as a taxable distribution, and not a tax-free
spin-off), then the portion of the HGP Common Share Distribution that is not
taxed as a dividend will be treated first as a return of the recipient holder's
adjusted tax basis in its New Prime Common Shares, New Prime Series B Preferred
Shares and New Prime Series C Preferred Shares, as applicable, and then the
balance of the HGP Common Share Distribution will be recognized as capital gain
to such holder.
The aggregate initial tax basis of the HGP Common Shares received by any New
Prime Shareholder should be equal to the fair market value of such HGP Common
Shares at the time of the HGP Common Share Distribution (respecting the
treatment of the HGP Common Share Distribution as a taxable distribution and not
a tax-free spin-off). The holding period for HGP Common Shares received by any
New Prime Shareholder should begin upon such shareholder's receipt of such HGP
Common Shares (respecting the treatment of the HGP Common Share Distribution as
a taxable distribution, and not a tax-free spin-off).
Each of Prime and Horizon believes that the most appropriate treatment of
the HGP Common Share Distribution is as a taxable distribution made in respect
of New Prime Shares, and not as a spin-off by Horizon under Code Section 355.
Accordingly, New Prime will report the HGP Common Share Distribution as such a
distribution. However, if the HGP Common Share Distribution instead was treated
as a spin-off by Horizon under Code Section 355, the receipt by New Prime
Shareholders of the HGP Common Shares would be tax-free, and such New Prime
Shareholder's initial tax basis in the HGP Common Shares would be the allocable
portion, based upon relative fair market values of the HGP Common Shares and the
New Prime Shares held by such New Prime Shareholder, of such shareholder's
adjusted tax basis in its New Prime Shares immediately after receipt of the HGP
Common Shares. The holding period in respect of HGP Common Shares then would
include the holding period that such New Prime Shareholder had in the New Prime
Shares in respect of which the distribution of HGP Common Shares was made.
Finally, in such case, the HGP Common Share Distribution would not result in a
dividends paid deduction to New Prime, and a portion of New Prime's earnings and
profits would be allocated to HGP, in each case, possibly causing New Prime and
HGP to have to distribute a greater amount in order to avoid the corporate level
tax under the REIT rules.
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Any net capital gain (i.e., generally, capital gain in excess of capital
loss) recognized by a Prime Shareholder or New Prime Shareholder that is an
individual from either the Prime Special Distribution or the HGP Common Share
Distribution in respect of Prime Shares or New Prime Shares that have a holding
period of more than 18 months will generally be subject to tax at a rate not to
exceed 20%. Net capital gain recognized by such an individual Prime Shareholder
or New Prime Shareholder in respect of Prime Shares or New Prime Shares that
have a holding period of more than 12 months but not more than 18 months, will
be subject to tax at a rate not to exceed 28% and net capital gain recognized in
respect of Prime Shares or New Prime Shares that have a holding period of 12
months or less will be subject to tax at ordinary income tax rates.
TAX CONSEQUENCES OF THE CORPORATE MERGER. Each of Winston & Strawn, counsel
to Prime in connection with the Corporate Merger, and Rudnick & Wolfe, counsel
to Horizon in connection with the Corporate Merger, has rendered its opinion to
Prime and Horizon, respectively, that on the basis of the factual
representations and assumptions set forth in such opinions the Corporate Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code, and Prime and Horizon will each be a party to such reorganization within
the meaning of Section 368(b) of the Code.
In addition, Winston & Strawn, counsel to Prime in connection with the
Corporate Merger, has rendered its opinion to Prime that on the basis of the
factual representations and assumptions set forth in such opinion:
(i) no gain or loss will be recognized by Prime as a result of the
Corporate Merger;
(ii) no gain or loss will be recognized by the Prime Common Shareholders
upon the exchange of their Prime Common Shares solely for New Prime Common
Shares pursuant to the Corporate Merger;
(iii) no gain or loss will be recognized by the Prime Series A Preferred
Shareholders upon the exchange of their Prime Series A Preferred Shares
solely for New Prime Series A Preferred Shares pursuant to the Corporate
Merger;
(iv) no gain or loss will be recognized by the Prime Series B Preferred
Shareholders upon the exchange of their Prime Series B Preferred Shares
solely for New Prime Series B Preferred Shares pursuant to the Corporate
Merger;
(v) no gain or loss will be recognized by the Prime Series C Preferred
Shareholders upon the exchange of their Prime Series C Preferred Shares
solely for New Prime Series C Preferred Shares pursuant to the Corporate
Merger;
(vi) 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 (see "-- Tax
Consequences of the Prime Special Distribution and the HGP Common Share
Distribution");
(vii) subject to the conclusion in paragraph (vi) above, the initial tax
basis of the 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;
(viii) the initial tax basis of the 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;
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(ix) subject to the conclusion in paragraph (vi) above, the initial tax
basis of the 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;
(x) subject to the conclusion in paragraph (vi) above, the initial tax
basis of the New Prime Series C Preferred Shares received by any Prime
Series C Preferred Shareholder in 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; and
(xi) 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.
Finally, Rudnick & Wolfe, counsel to Horizon in connection with the
Corporate Merger, has rendered its opinion to Horizon that on the basis of the
factual representations and assumptions set forth in such opinion:
(i) No gain or loss will be recognized by Sky Merger as a result of the
Corporate Merger;
(ii) no gain or loss will be recognized by the Horizon Common
Shareholders upon the exchange of the Horizon Common Shares solely for New
Prime Common Shares and New Prime Series B Preferred Shares pursuant to the
Corporate Merger;
(iii) holders of fractional Horizon Common Shares will 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;
(iv) the aggregate initial tax basis of the New Prime Common Shares and
New Prime Series B Shares received by any Horizon Common Shareholder solely
in exchange for such Horizon Common Shares pursuant to the Corporate Merger
will be the same as the adjusted tax basis of Horizon 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
(v) the holding period for New Prime Common Shares and New Prime Series
B Shares received solely in exchange for Horizon Common Shares pursuant to
the Corporate Merger will include the period that such Horizon Common Shares
were held by the holder.
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 ending on or before December 31, 1997. Winston & Strawn has opined
that, subsequent to the Corporate Merger, New Prime's proposed method of
operation, as described in this Joint Proxy Statement/Prospectus/Information
Statement and as represented by Prime and Horizon with respect to certain
factual matters, 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
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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 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. See "Description of the Capital Stock of New
Prime--Restrictions on Ownership and Transfer."
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
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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 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 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.
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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 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
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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.
TAX ASPECTS OF NEW PRIME'S INVESTMENTS IN PARTNERSHIPS.
GENERAL. New Prime will hold direct or indirect interests in Prime
Partnership and other subsidiaries which have been treated as partnerships for
federal income tax purposes (each individually a "Partnership" and,
collectively, the "Partnerships"). New Prime believes that each of the
Partnerships qualifies as a partnership (as opposed to an association taxable as
a corporation) for federal income tax purposes. If any of the Partnerships 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 New Prime's assets and items of gross income would change, which
would preclude New Prime from satisfying the asset tests and possibly the income
tests (see "--Federal Income Tax Consequences--Qualification of New Prime as a
REIT--Asset Tests" and "--Gross Income Tests"), and in turn would prevent New
Prime from qualifying as a REIT.
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 profits, 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. 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
(and each Prime Property Partnership) under Code Section 708(b)(1)(B).
Accordingly, under the Section 708 Regulations, all of the assets of Prime
Partnership (and each Prime Property Partnership) will be deemed to be
contributed to a new partnership in return for interests in such new
partnership, and the partners of Prime Partnership, including New Prime (and
each Prime Property Partnership), would be deemed to be distributed interests in
such new partnership in exchange for their present interests in Prime
Partnership (or such Prime Property Partnership). Further, the taxable year of
the Prime Partnership (and each Prime Property Partnership) would end; however,
because the taxable years of both Prime Partnership and New Prime end on the
same date, the closing of Prime Partnership's taxable year should have no
adverse tax consequences to New Prime. The termination of Prime Partnership (and
each Prime Property Partnership) also will cause the Prime Properties to be
depreciated as if they were newly acquired, probably resulting in lower annual
depreciation deductions to New Prime for federal income tax purposes than if
such termination had not occurred.
SALE OF THE PROPERTIES. New Prime's share of any gain realized by Prime
Partnership 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 New Prime 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. The Partnerships have held and
intend to continue to hold the New Prime Properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the New Prime Properties and other properties and to make
such occasional sales of the New Prime Properties as are
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consistent with New Prime's investment objectives. Based upon such investment
objectives, each of Prime and Horizon believes that in general the New Prime
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 New Prime qualifies as a REIT, distributions made to New Prime'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 New Prime Shareholders that are
corporations. For purposes of determining whether distributions on New Prime
shares are out of current or accumulated earnings and profits, the earnings and
profits of New Prime will be allocated first to the New Prime Series A Preferred
Shares, second to the New Prime Series B Preferred Shares, third to the New
Prime Series C Preferred Shares, and fourth to New Prime Common Shares. There
can be no assurance, however, that New Prime will not have sufficient earnings
and profits to cover all distributions on any New Prime 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 New Prime's actual net
capital gain for the taxable year) without regard to the period for which the
shareholder has held its New Prime 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 (including Prime,
Horizon and New Prime) 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 New Prime makes distributions in excess of its current
and accumulated earnings and profits, these distributions are treated first as a
tax-free return of capital to the New Prime Shareholder, reducing the tax basis
of such shareholder's New Prime Shares 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 New Prime Shares are held as a capital asset).
In addition, any dividend declared by New Prime 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 New Prime and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by New Prime during January of the following calendar year. New Prime
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of New Prime.
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 New Prime received by such shareholder are required to be
treated by such New Prime 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 New Prime that begin on or after January 1, 1998, New Prime may elect to
retain and pay income tax on its net long-term capital gain attributable to such
taxable year. If New Prime 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 Prime. A New Prime
Shareholder will be treated as having paid his or her share of the tax paid by
New Prime in respect of such amount so designated by New Prime, for which such
New Prime Shareholder will be entitled to a credit or refund. Additionally, each
New Prime Shareholder's adjusted basis in New Prime shares will be increased by
the excess of the amount so includible in income over the tax deemed paid on
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such amount. New Prime 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 New Prime to
a New Prime 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. Neither Prime nor Horizon has been treated,
and each of Prime and Horizon does not expect New Prime 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 New Prime Shares.
DISTRIBUTIONS FROM NEW PRIME.
1. ORDINARY DIVIDENDS. The portion of dividends received by Non-U.S.
Holders that is payable out of New Prime's earnings and profits which are not
attributable to capital gains of New Prime 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 New Prime which are not
dividends out of the earnings and profits of New Prime 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 New
Prime'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 New Prime.
3. CAPITAL GAIN DIVIDENDS. Under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"), a distribution made by New Prime to a Non-U.S.
Holder, to the extent attributable to gains from dispositions of United States
Real Property Interests ("USRPIs") such as the New Prime 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, New Prime will be required to withhold tax
equal to 35% of the amount of dividends to the extent such dividends constitute
gains from
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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 or reduction.
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 New Prime 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. Each of Prime
and Horizon believes that it has been and anticipates that New Prime 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 New Prime will continue to be a
domestically controlled REIT. If New Prime 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.
OTHER TAX CONSIDERATIONS.
PRIME CORPORATE SUBSIDIARIES. A portion of the cash to be used by Prime
Partnership to fund distributions to its partners, including New Prime, is
expected to come from its preferred stock in 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) and Prime Retail Stores, Inc. These
corporations will pay United States federal and state income tax at the full
applicable corporate rates on their taxable income. To the extent that such
companies are required to pay Federal, state or local taxes, the cash available
for distribution by New Prime to its shareholders will be reduced accordingly.
STATE AND LOCAL TAXES. New Prime 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 New Prime
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 New Prime.
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
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(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.
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 (the "Court")
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.
On May 4, 1998, counsel for the parties appeared before the Honorable James
M. Graves, Judge for the Circuit Court of Muskegon County in Muskegon, Michigan
for the purpose of reporting that a settlement of the case had been reached
subject to the satisfaction of several conditions. At the hearing the Court,
after being advised of the proposed settlement, agreed to enter an order
conditionally approving the proposed class action settlement and certifying a
class of Horizon security holders for purposes of a class settlement. The Court
also scheduled a fairness hearing on the proposed settlement for July 13, 1998.
The general terms of the settlement are contained in a Memorandum of
Understanding (the "Memorandum") among counsel for the parties dated as of May
7, 1998.
Among other things, the Memorandum provides that, in full settlement of any
and all claims which have been or could have been made in the lawsuit, (a) Prime
and Horizon will proceed with the transactions contemplated by the Merger
Agreement, including among other things, the Corporate Merger, and that, as a
result of the Transactions, the holders of HGI Common Shares will (i) continue
to receive shares of New Prime in accordance with the Corporate Merger
Consideration, and (ii) receive HGP Common Shares based on the ownership of
capital stock of New Prime after giving effect to the Mergers; and (b) the
parties to the lawsuit agree that the consideration and distributions to be
received by the holders of the Horizon Common Shares in accordance with the
Merger Agreement constitute fair, adequate and reasonable consideration for the
settlement of all claims which were raised or could have been raised by
plaintiffs or any members of the class in the lawsuit.
The Memorandum further provides that the parties will use their best efforts
to complete the discovery contemplated by the Memorandum and to execute and
present to the court, as soon as practicable, a stipulation of settlement which
will provide (a) for the conditional certification, for settlement purposes
only, as a class action; (b) for the complete release of any and all claims
which have been or could have been asserted in the lawsuit; (c) that the
defendants have denied and continue to deny that any of them have committed any
violations of law or breaches of duty; (d) that the defendants are entering into
the settlement solely because the settlement would eliminate the distraction,
burden and
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expense of further litigation and because defendants have addressed the
plaintiff's claims in the Merger Agreement and the transactions contemplated
thereby; and (e) that, pending final determination of whether to approve the
settlement, the plaintiff and all members of the class are enjoined from
commencing or prosecuting any lawsuit asserting the settled claims by plaintiff
in the lawsuit.
The consummation of the settlement contemplated by the Memorandum is subject
to (i) the completion by the plaintiff of such discovery as is reasonably
requested by him and agreed by the party from whom discovery is requested; (ii)
execution of a formal Stipulation of Settlement; (iii) the consummation of the
Merger Agreement and the Transactions contemplated therein, including the
Mergers; and (iv) final approval by the Court of the settlement and the
dismissal of the lawsuit by the Court with prejudice and the entry by the Court
of a final order and judgment containing such release language as is negotiated
by the parties and contained in the Stipulation of Settlement.
Under the Memorandum, subject to the terms of the Stipulation of Settlement,
the defendants will pay to class counsel $350,000 for their fees and expenses,
subject to approval by the Court.
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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 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. N. 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
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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. 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 EXECUTIVE 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 a key employee, 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
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$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 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.
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NEW PRIME AND HGP
SELECTED UNAUDITED PRO FORMA
FINANCIAL DATA
The following table sets forth the selected unaudited pro forma financial
data for New Prime and HGP 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 Proxy
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 respective historical audited
financial statements and notes thereto of Prime and Horizon incorporated by
reference into this Joint Proxy Statement/Prospectus/Information Statement and
the unaudited pro forma financial statements and notes thereto included
elsewhere in the Joint Proxy 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 and Horizon 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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NEW PRIME AND HGP
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
YEAR ENDED DECEMBER 31,
1997
---------------------------
NEW PRIME HGP
------------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE INFORMATION)
<S> <C> <C>
OPERATING DATA:
REVENUES
Base rents........................................................................ $ 175,545 $ 27,416
Percentage rents.................................................................. 8,140 151
Tenant reimbursements............................................................. 66,732 9,341
Income from investment partnerships............................................... 243 --
Interest and other................................................................ 15,634 2,638
------------- ------------
Total revenues................................................................ 266,294 39,546
EXPENSES
Property operating................................................................ 51,261 7,862
Real estate taxes................................................................. 19,655 3,782
Depreciation and amortization..................................................... 61,649 4,489
General and administrative........................................................ 13,523 3,500
Interest.......................................................................... 81,210 10,034
Impairment and severance.......................................................... -- 6,949
Other charges..................................................................... 7,112 2,696
------------- ------------
Total expenses................................................................ 234,410 39,312
------------- ------------
INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM........................... 31,884 234
Income allocated to minority interests............................................ (3,247) 43
------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM.................................................. 28,637 191
Income allocated to preferred shareholders........................................ 22,976 --
------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM APPLICABLE TO COMMON SHARES...................... $ 5,661 $ 191
------------- ------------
------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE--BASIC AND DILUTED.............. $ 0.17 $ 0.07
------------- ------------
------------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................................ 33,587 2,770
------------- ------------
------------- ------------
<CAPTION>
DECEMBER 31, 1997
BALANCE SHEET DATA: ---------------------------
(at end of period) NEW PRIME HGP
- ---------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Investment in rental property, net................................................ $ 1,736,493 $ 157,099
Total assets...................................................................... 1,844,368 176,749
Total debt........................................................................ 1,095,841 127,387
Minority interests................................................................ 65,300 7,409
Shareholders' equity.............................................................. 628,578 33,156
</TABLE>
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PRIME RETAIL, INC.
SELECTED 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 year ended December 31,
1993 are derived from the consolidated financial statements of Prime and the
combined financial statements of Prime Predecessor. Combined financial
statements for the year ended December 31, 1993 and the period January 1, 1994
to March 21, 1994 are included for Prime Predecessor. The combined financial
statements for Prime 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 the financial statements, notes thereto and
other financial information included elsewhere in this Joint Proxy
Statement/Prospectus/Information Statement.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRIME RETAIL, INC. PRIME PREDECESSOR
---------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
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
--------- --------- --------- ------------- ------------- -------------
Total revenue............................. $ 129,130 $ 89,040 $ 77,398 $ 45,369 $ 6,330 $ 21,800
Total expenses............................ 110,583 82,054 64,592 35,915 8,738 25,673
--------- --------- --------- ------------- ------------- -------------
INCOME (LOSS) BEFORE MINORITY INTERESTS... 18,547 6,986 12,806 9,454 (2,408) (3,873)
(Income) loss allocated to minority
interests............................... (10,581) 2,092 5,364 5,204 -- --
--------- --------- --------- ------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... 7,966 9,078 18,170 14,658 (2,408) (3,873)
Extraordinary item........................ (2,061) (1,017) -- -- -- --
--------- --------- --------- ------------- ------------- -------------
NET INCOME (LOSS)......................... 5,905 8,061 18,170 14,658 $ (2,408) $ (3,873)
------------- -------------
------------- -------------
Income allocated to preferred
shareholders............................ 12,726 14,236 20,944 16,290
--------- --------- --------- -------------
NET LOSS APPLICABLE TO COMMON SHARES...... $ (6,821) $ (6,175) $ (2,774) $ (1,632)
--------- --------- --------- -------------
--------- --------- --------- -------------
PER COMMON SHARE--BASIC AND DILUTED:
Loss before extraordinary item.......... $ (0.25) $ (0.63) $ (0.96) $ (0.57)
Extraordinary item...................... (0.11) (0.12) -- --
--------- --------- --------- -------------
Net loss................................ $ (0.36) $ (0.75) $ (0.96) $ (0.57)
--------- --------- --------- -------------
--------- --------- --------- -------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................. 19,189 8,221 2,875 2,850
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
129
<PAGE>
<TABLE>
<CAPTION>
PRIME RETAIL, INC. PRIME PREDECESSOR
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, DECEMBER 31,
------------------------------- MARCH 21, --------------------
1997 1996 1995 1994 1994 1993
--------- --------- --------- ----------- --------- ---------
Balance Sheet Data
Rental property (before accumulated depreciation).......... $ 904,782 $ 640,759 $ 454,480 $ 376,181 $ 180,170 $ 185,394
Net investment in rental property.......................... 822,749 583,085 414,290 349,513 164,159 169,674
Total assets............................................... 904,183 666,803 462,405 385,930 186,034 190,685
Bonds and notes payable.................................... 515,265 499,523 305,954 214,025 188,378 184,037
Total liabilities.......................................... 549,730 527,594 326,465 233,236 198,244 197,400
Shareholders' equity (deficit)............................. 344,528 139,209 121,484 127,651 (12,210) (6,715)
</TABLE>
<TABLE>
<CAPTION>
PRIME RETAIL, INC. PRIME PREDECESSOR
-------------------------------------------- ------------------------
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>
Supplemental Data:
Funds from operations (1).......................... $ 46,718 $ 33,768 $ 27,996 $ 21,476 $ 139 $ 4,351
Ratio of earnings to combined fixed charges and
preferred stock dividends (4).................... 1.04x -- -- -- -- --
Excess of combined fixed charges and preferred
stock dividends over earnings (2)................ $ -- $ (10,629) $ (11,312) $ (8,185) $ (2,366) $ (4,423)
Net cash (used in) provided by operating
activities....................................... 49,856 45,191 36,399 17,458 (1,873) 14,450
Net cash used in investing activities.............. (229,956) (232,290) (81,978) (149,435) (1,239) (54,210)
Net cash provided by financing activities.......... 182,549 176,096 57,547 134,936 4,087 39,907
Distributions declared per common share............ 1.18 1.18(3) 1.18 0.623 -- --
Factory outlet GLA (sq. ft.)....................... 7,217 5,780 4,331 3,382 1,839 1,839
</TABLE>
- ------------------------
NOTES:
(1) Prime's management believes that in order to facilitate a clear
understanding of the consolidated historical operating results of Prime, FFO
should be considered in conjunction with net income (loss) as presented in
the financial statements included in this Joint Proxy
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.
In March 1995, NAREIT issued a clarification of its definition of FFO.
Although Prime has adopted the NAREIT definition of FFO, Prime cautions that
the calculation of FFO may vary from entity to entity and as such the
presentation of FFO by Prime 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'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 RETAIL, INC. PRIME PREDECESSOR
-------------------------------------------- ------------------------
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
shareholders......................... $ 18,547 $ 13,117(i) $ 12,806 $ 9,454 $ (2,408) $ (3,873)
FFO ADJUSTMENTS
Depreciation and amortization.......... 26,413 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
shareholders......................... $ 46,718 $ 33,768 $ 27,996 $ 21,476 $ 139 $ 4,351
--------- --------- --------- ----------- ----------- -----------
--------- --------- --------- ----------- ----------- -----------
</TABLE>
- ------------------------
NOTES:
(i) Excludes a nonrecurring charge of $6,131 related to the prepayment of
long-term debt during 1996.
130
<PAGE>
(ii) Amounts include net preferential partner distributions from a joint
venture partnership of $81, $162 and $2,538 for the three months ended
March 31, 1995, the year ended December 31, 1995 and 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
stock dividends consist of interest costs whether expensed or capitalized
and amortization of debt issuance costs and preferred stock dividends.
For the years ended December 31, 1996, 1995, 1994 and 1993, Prime's earnings
were inadequate to cover fixed charges and preferred stock distributions. A
reconciliation of income (loss) before minority interests to excess of combined
fixed charges and preferred stock distributions and dividends over earnings is
as follows:
<TABLE>
<CAPTION>
PRIME RETAIL, INC. PRIME PREDECESSOR
---------------------------------------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 31, MARCH 22 TO JANUARY 1 TO YEAR ENDED
------------------------------------------- DECEMBER 31, MARCH 21, DECEMBER 31,
1997 1996 1995 1994 1994 1993
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
minority interests...... $ 18,547 $ 6,986 $ 12,806 $ 9,454 $ (2,408) $ (3,873)
Interest incurred......... 39,078 26,806 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................ 57,755 34,203 36,611 19,553 914 5,216
------------- ------------- ------------- ------------- ------------- -------------
Interest incurred......... 39,078 26,806 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 stock
distributions and
dividends............... 12,726 14,236 20,944 16,290 -- --
------------- ------------- ------------- ------------- ------------- -------------
Combined Fixed Charges
and Preferred Stock
Distributions and
Dividends............. 55,524 44,832 47,923 27,738 3,280 9,639
------------- ------------- ------------- ------------- ------------- -------------
Excess of Combined Fixed
Charges and Preferred
Stock Distributions and
Dividends over
Earnings................ $ -- $ (10,629) $ (11,312) $ (8,185) $ (2,366) $ (4,423)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Distributions and
Dividends............... 1.04x -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
(3) Excludes a special cash distribution of $0.145 per common share paid in
July 1996.
131
<PAGE>
HORIZON GROUP, INC.
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical financial data for
Horizon. The selected historical financial data for each of the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 are derived from the audited
financial statements of Horizon as reported in its Annual Reports on Form 10-K.
The selected historical financial data should be read in conjunction with, and
is qualified in its entirety by, the historical financial statements and notes
thereto of Horizon incorporated by reference into this Joint Proxy
Statement/Prospectus/Information Statement. Certain reclassifications have been
made to Horizon's historical financial data to conform to Prime's presentation.
<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 SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue..................................................... $ 155,726 $ 153,786 $ 93,929 $ 43,267 $ 22,247
Expenses.................................................... 153,220 123,929 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........................ (5,292) (35,498) 27,371 17,194 2,973
Gain on sale of real estate................................. 8 563 776 287 272
----------- ----------- ----------- --------- ---------
Net income (loss) before minority interests and
extraordinary charge...................................... (5,284) (34,935) 28,147 17,481 3,245
Minority interests.......................................... 993 8,080 (6,776) (2,940) (2,702)
Extraordinary charge........................................ (3,293) (419) -- -- --
----------- ----------- ----------- --------- ---------
Net income (loss)........................................... $ (7,584) $ (27,274) $ 21,371 $ 14,541 $ 543
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Net income (loss) per common share 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 common share (2)...................... $ (0.32) $ (1.34) $ 1.52 $ 1.42 $ 0.06
Dividends declared per common share (3)..................... $ 1.050 $ 2.095 $ 2.131 $ 1.755 $ 0.247
BALANCE SHEET DATA:
Real estate, net of accumulated depreciation................ $ 1,009,599 $ 972,334 $ 1,023,745 $ 287,833 $ 176,512
Total assets................................................ 1,072,666 1,059,539 1,059,090 300,043 218,146
Total mortgages and other debt.............................. 626,097 557,672 503,246 96,929 24,888
Total shareholders' equity.................................. 351,234 363,881 341,896 148,849 152,165
OTHER DATA:
Funds from operations before minority interests (4) (5)..... $ 43,406 $ 66,258 $ 47,549 $ 25,656 $ 6,860
Cash flows provided by (used in):
Operating activities...................................... $ 46,010 $ 29,947 $ 35,719 $ 26,713 $ 9,557
Investing activities (5).................................. (75,126) (59,535) (150,916) (114,330) (93,663)
Financing activities...................................... 24,743 39,485 117,592 56,105 118,965
Total gross leasable area (square feet)..................... 9,907 9,369 8,464 3,124 2,215
</TABLE>
- ------------------------------
NOTES:
(1) The selected financial data includes: for the period up to and including
November 7, 1993, the combined financial statements of Horizon 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.
(2) The earnings per share 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. There is
no difference between basic and diluted earnings per share.
(3) Included in 1995 is a special one-time dividend of $0.111 per common share
declared in connection with the merger with McArthur/Glen.
(4) Horizon's management believes that in order to facilitate a clear
understanding of the consolidated historical operating results of Horizon,
FFO should be considered in conjunction with net income (loss) as presented
in the financial statements included in
132
<PAGE>
this Joint Proxy 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. In March 1995, NAREIT issued a clarification of its
definition of FFO. Although Horizon has adopted the NAREIT definition of
FFO, Horizon cautions that the calculation of FFO may vary from entity to
entity and as such the presentation of FFO by Horizon 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'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 to FFO is as follows:
(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
shareholders' equity.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- -----------
Net income (loss) before minority interests and
extraordinary charge.................................... $ (5,284) $ (34,935) $ 28,147 $ 17,481 $ 3,245
FFO ADJUSTMENTS:
Depreciation and amortization............................. 39,634 36,367 20,178 8,462 3,887
Impairment and severance.................................. 7,798 65,355 -- -- --
Merger expenses........................................... 1,001 -- -- -- --
Gain on sale of assets.................................... (8) (563) (776) (287) (272)
Joint venture adjustments................................. 265 34 -- -- --
--------- --------- --------- --------- -----------
Total FFO adjustments................................... 48,690 101,193 19,402 8,175 3,615
--------- --------- --------- --------- -----------
FFO....................................................... $ 43,406 $ 66,258 $ 47,549 $ 25,656 $ 6,860
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
133
<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 the 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 the 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 the 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. No assurance will be given that distributions or dividends will
continue to be paid or as to the amount of such distributions or dividends.
134
<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 the 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 the New Prime Series A Preferred Shares or senior to the New Prime
Series B Preferred Shares or New Prime Series C Preferred Shares) to issue
additional shares of the 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, the 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, the 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, the 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,
the 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
additional 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
135
<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
136
<PAGE>
Credit Facility. The Prime Guarantee will terminate if HGP raises at least $50.0
million in equity and uses no less than $50.0 million of such proceeds to repay
outstanding principal under the HGP Credit Facility pursuant to the Prime
Guarantee. In connection with the Prime Guarantee, HGP has agreed to pay New
Prime a fee of $400,000 per annum until the HGP Credit Facility has been paid in
full. In addition, upon consummation of the Transactions, HGP will assume
Horizon's obligations under a $4.0 million credit facility which was fully drawn
as of December 31, 1997. New Prime has agreed to lend HGP the funds necessary to
repay in full its obligations under this facility upon its maturity on August 1,
1998. Accordingly, if and to the extent HGP is otherwise unable to repay this
facility at maturity, New Prime will be required to lend funds to HGP in an
amount sufficient to enable HGP to make such repayment. See "Horizon Group
Properties, Inc.--HGP Management's Discussion and Financial Analysis--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
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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. 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;
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(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%.
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.
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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
Robert D. Perlmutter Director (term expires 1999) 36
William P. Dickey Director (term expires 2000) 54
</TABLE>
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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., Prime Capital Holding,
L.L.C. and Prime Group Realty Trust and will become a member of the Board of
Directors of 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 responsibilities
with Prime include strategic planning, new business development, investor
relations, capital markets, financing, pre-development activities and building
designs. 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 International Council of Shopping
Centers and NAREIT. Mr. Rosenthal is on the executive committee of the Baltimore
Museum of Art and chairs the organization's Development Committee. Mr. Rosenthal
is also a member of the Maryland/Israel Development Center and is on the board
of Baltimore's Downtown Partnership. Mr. Rosenthal is also a board member of
Sinai Hospital and Bryn Mawr School. 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 outlet 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, the Board of Governors for the National Aquarium of Baltimore and
also sits on the International Counsel of Shopping Centers/Value Retail News
Executive Committee and on the Board for Severn School. 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 also
serves as a director of PGI. 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 operated Bowdoin 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, asset management 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,
advertising, public relations and corporate communications programs in order to
increase Prime's marketing power. 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, President and director 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 the CaFritz Foundation
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and Cousins Properties, 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., Lumbermans Mutual Casualty Company, American Motorist Insurance Company,
American Manufacturers Mutual Insurance Company and Virginia Electric and Power
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
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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.
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.
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 PROXY
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
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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 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 the 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
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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
(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 the 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 areentitled, 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
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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 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
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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.
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 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."
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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 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.
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
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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
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 the 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.
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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 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.
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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.
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
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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 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
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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).
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
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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
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
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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 the New Prime Series C Preferred Shares shall be entitled
to receive 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 the 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
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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 New Prime Series C Preferred Share (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 the 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
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
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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, the 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 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 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).
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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.
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,
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(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").
Within 15 days following the second consecutive quarter that the New Prime
fails to satisfy one or both of the tests set forth above, the 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 the 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 the 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 the
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.
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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 the 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 the 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 the New
Prime Series C Preferred Shares, if the holders of such class or series and the
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 the 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 the 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 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
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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 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
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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 the New Prime Common Shares 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 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 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
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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 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
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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 the 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 the 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), 6.0.3 and 6.0.5 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 from
being owned by less than 100 persons, and (iv) prohibit Horizon from being
"closely held" within the
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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.
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
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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 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.
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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 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
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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 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
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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.
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.
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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 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.
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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.
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 WHICH
IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY
STATEMENT/ PROSPECTUS/INFORMATION STATEMENT IS A PART.
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
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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 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 Partnership 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.
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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.
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 RIGHTS
PRIME PARTNERSHIP SERIES A PREFERRED UNITS. The holders of Prime
Partnership Series A Preferred Units have no exchange rights.
PRIME PARTNERSHIP SERIES B PREFERRED UNITS. The holders of Prime
Partnership Series B Preferred Units have no exchange 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.
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.
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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REDEMPTION
If at any time New Prime Preferred Shares are redeemed pursuant to the New
Prime Charter or 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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HORIZON GROUP PROPERTIES, INC.
GENERAL
Upon consummation of the Transactions, HGP will be a self-administered and
self-managed REIT that will conduct its operations through HGP LP. HGP'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'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 Risk Factors--Ownership
Limit Necessary to Maintain REIT Qualification" and "HGP Risk Factors--Effect of
REIT Distribution Requirements."
BUSINESS STRATEGY
HGP'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 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'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 will consider
alternate retail and entertainment concepts for each of its properties. HGP
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's management believes
that the Laughlin, Nevada Center, which has been an outlet center since its
inception, may have substantially greater potential serving a broader range of
retail and service needs of the nearly 6,000,000 tourists visiting its market
annually.
ACTIVE PROPERTY MANAGEMENT. HGP's management believes that the company's
operating performance can be improved by increasing focus on asset management.
HGP'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 also will closely monitor each center's sales, occupancy
and overall performance.
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TARGETED LOCAL MARKETING. Historically, Horizon has employed a centralized
marketing strategy that has included national and regional promotions. HGP
believes that its existing properties can benefit from marketing and advertising
programs that are specifically targeted to local customers. To implement this
strategy, HGP 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's philosophy is to expand or improve its
existing centers only in response to tenant demand for additional retail space.
For example, HGP may, among other things, construct tenant build-outs and
redesign or reconfigure retail space for tenants. HGP 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's 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 shareholders.
ACQUISITION OF UNDERPERFORMING PROPERTIES. In addition to seeking to
improve the performance of its existing properties, HGP will pursue
opportunities to acquire underperforming properties that offer the potential for
significantly higher cash flow through strategic repositioning. HGP 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's weighted cost of capital after taking into account estimated repositioning
costs, including expenses associated with capital improvements, renovation and
tenant turnover. HGP'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's
properties on a regular basis in accordance with its business objectives. In the
future HGP may dispose of certain of the HGP Properties in order to obtain
higher returns through alternative investments. At present, HGP has not entered
into any agreements or arrangements with respect to the sale or disposition of
any of the HGP Properties.
HGP DISTRIBUTION POLICY
Unless required to maintain its status as a REIT under the Code, HGP does
not currently contemplate paying distributions on HGP Common Shares. Earnings
from the operations of HGP are currently expected to be used by HGP 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'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, the HGP Board of Directors may determine in its discretion to pay
distributions on HGP Common Shares in the future, and any such determination
will be dependent upon HGP's results of operations, financial condition,
contractual restrictions, REIT qualification requirements and other factors
deemed relevant at that time by the HGP Board of Directors. See "HGP Risk
Factors--Absence of Distributions."
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HGP CAPITALIZATION
The following table sets forth the capitalization of HGP 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 financial statements and notes thereto, the HGP pro forma financial
information and notes thereto and "--HGP Management's Discussion and Analysis of
Results of Operations and Financial Condition-Liquidity and Capital Resources"
included elsewhere in this Joint Proxy 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 --
Minority interests....................................................................... -- 7,409
Shareholders' equity:
Common Shares, 50,000,000 shares authorized, $.01 par value, 2,770,000 shares issued
and outstanding...................................................................... -- 28
Preferred Shares, 50,000,000 shares authorized, none issued and outstanding............ -- --
Additional paid-in capital............................................................. -- 33,128
---------- -----------
Total shareholders' equity............................................................... -- 33,156
---------- -----------
Total capitalization..................................................................... $ 230,008 $ 167,952
---------- -----------
---------- -----------
</TABLE>
HORIZON GROUP PROPERTIES, INC. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of HGP. The
information set forth below should be read in conjunction with "Pro Forma
Condensed Financial Statements," "--HGP 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 Proxy 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 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 Proxy
Statement/Prospectus/Information Statement. The HGP 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 Proxy
Statement/Prospectus/Information Statement.
HGP's historical financial information has been derived from the operations
and historical basis of 13 of Horizon's 35 outlet centers (including one power
center) that will be contributed to HGP by Horizon in connection with the
Transactions. As historically HGP was not a separate legal entity with its own
capital structure, per share data for net income and dividends have not been
presented. The historical financial information may not be indicative of HGP's
future performance and does not necessarily reflect what the financial position
and results of operations of HGP would have been had HGP 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 Transferred Properties. See
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"HGP Risk Factors--Limited Relevance of Historical Financial Information."
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
(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..................................... 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 $.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.
(2) HGP's management believes that in order to facilitate a clear understanding
of the combined historical operating results of HGP, FFO should be
considered in conjunction with net income (loss) as presented in the
financial statements included in this Joint Proxy
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. In
March 1995, NAREIT issued a clarification of its definition of FFO. Although
HGP has adopted the NAREIT definition of FFO, HGP cautions that the
calculation of FFO may vary from entity to entity and as such the
presentation of FFO by HGP 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'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 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, INC. SELECTED FINANCIAL DATA" AND HGP COMBINED FINANCIAL
STATEMENTS AND NOTES THERETO, EACH APPEARING ELSEWHERE IN THIS JOINT
PROXY/PROSPECTUS/INFORMATION STATEMENT. HISTORICAL RESULTS AS SET FORTH HEREIN
ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS FROM OPERATIONS.
OVERVIEW
HGP's historical financial information has been derived from the operations
and historical basis of 13 of Horizon's 35 centers that will be contributed to
HGP as a result of the Transactions. The combined financial statements of HGP
are not currently those of a separate legal entity. Accordingly, the combined
financial statements of HGP 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 was not historically operated as a separate
component of Horizon, but in an integrated manner with the remaining net assets
of Horizon, HGP is not insulated from the obligations and commitments of
Horizon. In addition, the historical results of operations and financial
condition of HGP have been presented as the net assets that were managed by
Horizon because HGP did not have separate employees or business practices from
Horizon.
As set forth in the financial information included herein, debt, interest
and general and administrative expenses of HGP are allocations of Horizon's
balances. The balance sheet of HGP includes an allocation of the aggregate debt
balance of Horizon (which has historically been secured by a pool of Horizon
assets) based upon the proportionate use of debt proceeds by the HGP Properties
for development and expansion compared to the Horizon 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 on its debt balances.
General and administrative corporate overhead of Horizon has been allocated
to HGP based upon the ratio of GLA of the HGP Properties compared to the Horizon
Properties. This allocation of Horizon's corporate overhead expense may not
reflect HGP's actual general corporate overhead expense as a separate entity.
Cash and cash equivalents have been included in the combined financial
statements of HGP based upon the respective periods' ratio of GLA of HGP's
portfolio compared to Horizon's total historical portfolio.
Horizon's management believes the assumptions underlying HGP'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 in the future or what results of operations, financial
position and cash flows would have been had HGP been a separate stand-alone
entity during the periods presented.
Horizon 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
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 were acquired as a result of this merger. See Note 3 in the accompanying
combined financial statements of HGP for further information. The above
mentioned factors and the resulting increase in the total GLA contained in HGP's
properties are collectively referred to as the "Portfolio Expansion."
HGP 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
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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, 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 refinanced its outstanding short-term debt during
the second quarter of 1997 and the extraordinary charge represents HGP's
proportionate share of Horizon'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's outlet center in
Laughlin, Nevada after it reached stabilization in July 1997.
In 1997, Horizon'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 for $17.0 million. A charge for asset impairment of $6.0 million
was recorded in the results of operations of HGP 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.
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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. 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 with McArthur/Glen 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's review of the
carrying value of its long-lived assets. The financial statements of HGP 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's
development projects which will not be pursued.
LIQUIDITY AND CAPITAL RESOURCES
The combined financial statements of HGP 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 was historically not operated as a separate company of Horizon, but
in an integrated manner with the net assets of Horizon, HGP is not insulated
from the obligations and commitments of Horizon. HGP's liquidity and capital
resources set forth in the financial information herein represent amounts
allocated from Horizon as the majority of the properties comprising HGP's assets
were dependent on Horizon to fund cash flow requirements that could not be
satisfied by cash flows from operations.
Debt allocated from Horizon as of December 31, 1997 and 1996 reflects an
allocation of debt from Horizon that is based upon the proportionate use of debt
proceeds by HGP's portfolio of properties for development and expansion compared
to Horizon'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 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 for the years ended December 31, 1997 and 1996 were
primarily used for the
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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.
Net contributions (distributions) from (to) Horizon represent the net
amounts advanced from and repaid to Horizon that were necessary to fund
development or were excess cash flows remitted back to Horizon. 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'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's joint venture.
Nomura Asset Capital Corporation ("Nomura") has entered into a commitment
letter pursuant to which Nomura will provide the HGP Credit Facility to the
entities which 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 outstanding debt.
Prime Partnership has agreed to guarantee $10.0 million of indebtedness
under the HGP Credit Facility. In connection with the Prime Guarantee, HGP has
agreed to pay New Prime a fee of $400,000 per annum until the HGP Credit
Facility has been paid in full. 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.
Upon consummation of the Transactions, HGP will assume a $4.0 million
revolving credit facility from Horizon which expires on August 1, 1998. The
outstanding balance on this facility was $4.0 million at December 31, 1997.
Pursuant to the Contribution Agreement, if HGP is otherwise unable to repay in
full its obligations under such facility, New Prime has agreed to lend HGP
sufficient funds, at a rate of 10% per annum, to enable HGP to effect such
repayment on terms substantially similar to the existing facility.
HGP expects to meet its short-term liquidity requirements generally through
its working capital and cash flow provided by operating activities. HGP 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 will have approximately $130 million of outstanding debt. As a
result of HGP's leverage and the covenants related to the debt, HGP's ability to
obtain additional financing sources will be limited. There can be no assurance
that HGP will be able to
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successfully obtain funding from such sources. Furthermore, HGP's business plan
calls for the repositioning of certain of the HGP Properties, which will require
HGP 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 to HGP. 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. HGP 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'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 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's financial condition and results of operations. The majority of
any necessary system changes will be upgraded in the normal course of business.
HGP has initiated formal communications with all of its significant suppliers to
determine the extent to which HGP'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's systems rely, will
be timely converted and would not have an adverse effect on HGP's systems.
FUNDS FROM OPERATIONS
HGP's management believes that to facilitate a clear understanding of the
consolidated historical operating results of HGP, FFO should be considered in
conjunction with net income (loss) as presented in the financial statements
included in this Joint Proxy 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. In March 1995, NAREIT issued a clarification of its
definition of FFO. Although HGP has adopted the NAREIT definition of FFO, HGP
cautions that the calculation of FFO may vary from entity to entity and as such
the presentation of FFO by HGP 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'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 in future
projects or what FFO would have been had HGP 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's leases with the majority of its tenants require the tenants to
reimburse HGP for most operating expenses and increases in common area
maintenance expenses, which reduces HGP's exposure to increases in costs and
operating expenses resulting from inflation.
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<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>
195
<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>
196
<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 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, Inc.
In the opinion of HGP'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'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.
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<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 % OF TOTAL ANNUAL
TO EXPIRING BASE RENT BASE RENT
NUMBER OF LEASES REPRESENTED BY REPRESENTED BY
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'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'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'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 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 in seeking tenants for its centers. Management believes that HGP
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 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's tenants or cause them to renegotiate
their leases at or prior to renewal.
As HGP 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
198
<PAGE>
real estate management and development companies, many of which are large and
have greater financial resources than HGP.
LEGAL PROCEEDINGS
Neither HGP 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'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'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. No
assurance can be given that HGP's investment objectives will be attained or that
the value of HGP will not decrease.
FINANCING. HGP'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's debt instruments may limit its ability to pay dividends
in the future. For a description of HGP's initial sources of financing, see
"--HGP Management's Discussion and Analysis of Results of Operations and
Financial Condition--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 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 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 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.
While HGP intends to emphasize equity real estate investments, it may, in its
discretion, invest in mortgages and other real estate interests. HGP does not
presently intend to invest in mortgages or deeds of trust, but it may invest in
such instruments if management concludes that HGP 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 also may invest in securities of concerns engaged in real estate activities
or in securities of other issuers. HGP does not intend to invest in the
securities of any other issuer for the purpose of exercising control; however,
HGP 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's investment policies. In any event,
HGP does not intend that its investments in securities would require HGP to
register as an investment company under the Investment Company Act of 1940, and
HGP would divest securities before any such registration would be required.
CERTAIN OTHER ACTIVITIES. HGP may make investments other than as previously
described but has no present intention to do so. HGP has authority to offer HGP
Common Shares or other securities in exchange for property, to repurchase or
otherwise reacquire outstanding HGP Common Shares 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.
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<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
HGP. For fifteen years prior to his employment with HGP, 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 and 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.
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
200
<PAGE>
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 filed a petition for protection under Chapter 13 of the
U.S. bankruptcy laws on November 26, 1991 which was converted into a Chapter 7
proceeding on January 18, 1996 and discharged as of July 15, 1996. 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 Brookdale
Living Communities, Inc., Prime Capital Holding, L.L.C. and Prime Group Realty
Trust. 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.
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.
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<PAGE>
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 Long-Term Stock Incentive Plan. See "--The HGP
1998 Long-Term 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, 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 SHAREHOLDERS OF HGP
The following table sets forth information regarding the beneficial
ownership of HGP Common Shares (i) by each beneficial owner of more than 5.0% of
HGP Common Shares, (ii) by each director or proposed director of HGP, (iii) by
certain executive officers of HGP and (iv) by all directors, proposed directors
and executive officers of HGP as a group after giving effect to the
Transactions. Each person
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named in the table has sole voting and investment power with respect to all HGP
Common Shares shown as beneficially owned by such person.
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP OF
PERCENTAGE OUTSTANDING HGP
OWNERSHIP OF COMMON SHARES
NUMBER OF SHARES OUTSTANDING HGP AFTER EXCHANGE OF
NAME(1) BENEFICIALLY OWNED COMMON SHARES(2) UNITS(3)
- ----------------------------------------------------- -------------------- ------------------- -----------------
<S> <C> <C> <C>
The Prime Group, Inc.(4)............................. 379,731 11.2% 10.5%
Gary J. Skoien(5).................................... 90,035 3.3% 2.3%
David R. Tinkham(6).................................. 35,000 1.3% *
Rege S. Eisaman(7)................................... 30,000 1.1% *
John R. Terrell(8)................................... 25,000 * *
Michael W. Reschke(9)................................ 397,937 11.4 % 11.0 %
Norman Perlmutter(10)................................ 62,061 2.2 % 1.6 %
Margaret A. Gilliam(11).............................. 10,000 * *
E. Thomas Thilman(12)................................ 10,000 * *
All directors and executive officers as a group (8
persons)........................................... 660,033 19.3 % 14.9 %
</TABLE>
- ------------------------
NOTES:
* Less than 1.0%
(1) Except as otherwise indicated, all of the directors and the named executive
officers may be contacted c/o Horizon Group Properties, Inc., 5000 Hakes
Drive, Norton Shores, Michigan 49441.
(2) Information presented assumes exchange or conversion only of HGP LP Common
Units owned by such beneficial owner for shares of HGP Common Shares.
Information presented also includes HGP Common Shares issuable upon
exercise of HGP Stock Awards of such beneficial owner.
(3) Information presented assumes exchange or conversion of all outstanding HGP
LP Common Units for HGP Common Shares and also includes HGP Common Shares
issuable upon exercise of HGP Stock Awards. The HGP LP Common Units may be
exchanged on a one-for-one basis for HGP Common Shares (or, at HGP's
election, cash of an equivalent value) at any time.
(4) Information presented includes 367,231 HGP LP Common Units and 12,500 HGP
Common Shares owned by PGI and certain limited partnerships affiliated with
PGI. The address of PGI is 77 West Wacker Drive, Suite 3900, Chicago,
Illinois 60601. Certain of the HGP LP Common Units and HGP Common Shares
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.
(5) Includes 90,000 HGP Common Shares issuable upon the exercise of all
options, all of which will be issued upon consummation of the Transactions,
and none of which will be exercisable as of the Closing.
(6) Includes 35,000 HGP Common Shares issuable upon the exercise of all
options, all of which will be issued upon consummation of the Transactions,
and none of which will be exercisable as of the Closing.
(7) Includes 30,000 HGP Common Shares issuable upon the exercise of all
options, all of which will be issued upon consummation of the Transactions,
and none of which will be exercisable as of the Closing.
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(8) Includes 25,000 HGP Common Shares issuable upon the exercise of all
options, all of which will be issued upon consummation of the Transactions,
and none of which will be exercisable as of the Closing.
(9) 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 (i) includes 10,000 HGP Common Shares issuable upon the exercise
of options, all of which will be issued upon consummation of the
Transactions, and none of which will be exercisable as of the Closing and
(ii) includes 367,231 HGP LP Common Units and 12,500 HGP Common Shares held
by PGI (Mr. M. Reschke is the Chairman and Chief Executive Officer of PGI)
and certain limited partnerships affiliated with PGI and 8,206 HGP Common
Shares owned by Mr. M. Reschke.
(10) Information presented (i) includes 10,000 HGP Common Shares issuable upon
the exercise of options, all of which will be issued upon consummation of
the Transactions, and none of which are exercisable as of the Closing and
(ii) includes 46,117 HGP LP Common Units beneficially owned by Norman
Perlmutter which are immediately exchangeable for HGP Common Shares on a
one-for-one basis.
(11) Includes 10,000 HGP Common Shares issuable upon the exercise of all
options, all of which will be issued upon consummation of the
Transactions, and none of which will be exercisable as of the Closing.
(12) Includes 10,000 HGP Common Shares issuable upon the exercise of all
options, all of which will be issued upon consummation of the
Transactions, and none of which will be exercisable as of the Closing.
DESCRIPTION OF CAPITAL STOCK OF HGP
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 HGP'S CHARTER AND BYLAWS, COPIES OF WHICH ARE ATTACHED AS
EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY
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 Common Shares will be quoted in Nasdaq under the
trading symbol "HGPI."
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
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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 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 Common Shares will be quoted in Nasdaq under the trading symbol "HGPI."
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
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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 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.
THE HGP 1998 LONG-TERM STOCK INCENTIVE PLAN
Prior to the consummation of the Transactions, the HGP Board of Directors
plans to adopt the HGP 1998 Long-Term Stock Incentive Plan (the "HGP Stock
Plan"). The purpose of the HGP Stock Plan is to advance the interests of HGP and
its subsidiaries by encouraging and enabling the acquisition of a financial
interest in HGP by key employees and officers of HGP and its subsidiaries
through equity awards. The HGP Stock Plan will be administered by the HGP
compensation committee or another committee (the "HGP Committee") appointed by
the HGP Board of Directors.
The HGP Stock Plan provides for the grant of incentive and non-qualified
stock options and restricted stock (individually, an "HGP Stock Award," or
collectively, "HGP Stock Awards") The terms of the HGP Stock Awards will be set
forth in award agreements ("HGP Stock Award Agreements"). The HGP Committee, in
its sole discretion, will select the employees to whom HGP Stock Awards will be
granted ("HGP Participants") and will determine the type, size and terms and
conditions applicable to each HGP Stock Award. The HGP Committee also will have
the authority to interpret, construe and implement the provisions of the HGP
Stock Plan, and its decisions will be binding.
The total number of HGP Common Shares that may be issued under the HGP Stock
Plan pursuant to HGP Stock Awards is 338,900. The maximum number of shares that
may be granted during any calendar year to any one person under the HGP Stock
Plan shall be 100,000 shares (on an aggregate basis for all
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such types of HGP Stock Awards), which limit shall apply regardless of whether
such compensation is paid in shares or in cash. The HGP Committee will make
adjustments to the maximum number of HGP Common Shares that may be subject to
HGP Stock Awards under the HGP Stock Plan and to outstanding HGP Stock Awards to
reflect stock dividends, stock splits, reverse stock splits, share combinations,
stock rights offerings, or similar events of or by HGP.
TYPES OF AWARDS
Set forth below is a brief description of the HGP Stock Awards that may be
granted under the HGP Stock Plan:
STOCK OPTIONS. The HGP Committee may grant options to purchase HGP Common
Shares, which may be incentive or non-qualified stock options ("HGP Stock
Options"). Each HGP Stock Option represents the right to purchase one HGP Common
Share at the specified Exercise Price. The HGP Committee will determine the
exercise price (the "Exercise Price") of the HGP Stock Options in its sole
discretion, provided that the Exercise Price may not be less than 100% of the
average of the high and the low trading prices of HGP Common Shares on the
national securities exchange on which the shares are traded on the date of grant
("Fair Market Value"). If an incentive option is issued to an employee who owns
more than 10% of the total combined voting power of all classes of HGP's
outstanding capital stock, the Exercise Price will be at least 110% of the Fair
Market Value of HGP Common Shares on the date of grant.
HGP Stock Options will expire no later than ten years after the date on
which they were granted and will become vested and exercisable at such times and
in such installments as determined by the HGP Committee and specified in the
applicable HGP Stock Award Agreement. The HGP Participant must pay the Exercise
Price, and any related withholding taxes, in full at the time of exercise, in
cash or by check. The HGP Committee may specify in the applicable HGP Stock
Award Agreement that the HGP Participant may pay the Exercise Price in full or
in part, by tendering previously acquired shares having an aggregate Fair Market
Value at the time of exercise equal to the total Exercise Price, by HGP's
withholding a portion of the shares otherwise distributable to the HGP
Participant having an aggregate Fair Market Value at the time of exercise equal
to the total Exercise Price, or by simultaneous sales through a broker of shares
of HGP Common Shares acquired on exercise, or through any combination of such
methods.
RESTRICTED STOCK. The HGP Committee may award HGP Common Shares that are
subject to such restrictions as it deems appropriate, including forfeiture
conditions and restrictions against transfer for a period the HGP Committee
specifies ("HGP Restricted Stock"). Restrictions on HGP Restricted Stock lapse
according to a schedule and/or based on factors selected by the HGP Committee.
Prior to the expiration of the restricted period, an HGP Participant who has
received an HGP Restricted Stock Award generally has the rights of a shareholder
of HGP, including the right to vote and to receive cash dividends on the shares
subject to the HGP Stock Award, as provided by the HGP Committee. Stock
dividends issued with respect to an HGP Restricted Stock Award may be treated as
additional shares under such HGP Stock Award with respect to which such
dividends are issued.
CHANGE IN CONTROL. Upon a Change in Control (as defined in the HGP Stock
Plan document), all outstanding HGP Stock Options will become immediately
exercisable and any restrictions imposed on HGP Restricted Stock will lapse.
AMENDMENT OF THE HGP STOCK PLAN
The HGP Board of Directors may from time to time in its discretion amend or
modify the HGP Stock Plan without the approval of the shareholders. No amendment
shall become effective without shareholder approval if such shareholder approval
is required by law, rule or regulation. No amendment may materially and
adversely affect any right of an HGP Participant with respect to any HGP Stock
Awards theretofore granted under the HGP Stock Plan without such HGP
Participant's written consent, except for modifications required to maintain
compliance with any federal or state statute or regulations.
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The HGP Stock Plan shall terminate ten years from the date of its adoption
by HGP's shareholders, or at such earlier time as the HGP Board of Directors may
determine. Any termination, whether in whole or in part, shall not materially
and adversely affect any award then outstanding under the HGP Stock Plan without
the consent of the affected Participant.
TAX IMPLICATIONS
OPTIONS. A Participant who is awarded an incentive option will not
recognize taxable income at the time of the grant of the HGP Stock Option and
HGP will not be entitled to a deduction at that time. Upon the exercise of such
an HGP Stock Option during employment, or within three months thereafter, the
HGP Participant will not recognize any income and HGP will not be entitled to a
deduction. If any HGP Common Shares acquired upon the exercise of such a HGP
Stock Option are disposed of within two years of the date of grant or within one
year of the transfer of such shares to the HGP Participant, the HGP Participant
will recognize ordinary income in the year of disposition equal to the excess of
the fair market value of the shares at exercise over the Exercise Price. HGP
will be entitled to a deduction in the same amount as the ordinary income
recognized by the HGP Participant.
An HGP Participant will not recognize any taxable income at the time of
grant of a non-qualified HGP Stock Option. Upon exercise of a non-qualified HGP
Stock Option, the HGP Participant will recognize ordinary income for tax
purposes measured by the excess of the Fair Market Value of the shares on such
date over the Exercise Price. HGP will be entitled to a deduction equal to the
ordinary income recognized by an HGP Participant. The ordinary income recognized
by an HGP Participant will be subject to tax withholding. Upon resale of HGP
Common Shares by an HGP Participant, any difference between the sale price and
the Exercise Price, to the extent not recognized as ordinary income upon
exercise as provided above, will be treated as either short-term or long-term
capital gain or loss (depending on the holding period).
RESTRICTED STOCK. Generally, absent an election to be taxed currently under
Section 83(b) of the Code (a "Section 83(b) Election"), there will be no federal
income tax consequences to either the HGP Participant or HGP upon the grant of
HGP Restricted Stock. At the expiration of the restricted period and the
satisfaction of any other restrictions applicable to the HGP Restricted Stock,
the HGP Participant will recognize ordinary compensation income and HGP
generally will be entitled to a corresponding federal income tax deduction equal
to the Fair Market Value of the HGP Common Shares at that time (subject to
satisfying applicable withholding requirements). If the HGP Participant makes a
Section 83(b) Election within 30 days after receiving the HGP Restricted Stock,
the HGP Participant will recognize an amount of ordinary compensation income at
the time of the receipt of the HGP Restricted Stock and HGP will be entitled to
a corresponding federal income tax deduction equal to the Fair Market Value
(determined without regard to applicable restrictions) of the shares at such
time. If a Section 83(b) Election is made, no additional income will be
recognized by the HGP Participant upon the lapse of restrictions on the shares,
but, if the shares are subsequently forfeited, the HGP Participant may not
deduct the income that was recognized pursuant to the Section 83(b) Election at
the time of the receipt of the shares.
EMPLOYMENT AGREEMENTS
HGP plans to enter into employment agreements with Mr. Skoien and Mr.
Tinkham commencing as of the effectiveness of the Mergers. Mr. Skoien's
employment agreement will provide 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 will provide 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 will provide for termination payments if the
executive is terminated by HGP without cause or
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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 RELATIONSHIPS AND RELATED TRANSACTIONS
HGP presently anticipates entering into an agreement with Thilman &
Filippini to provide HGP with insurance brokerage and consulting services. Mr.
Thilman, who has agreed to serve as a Director of HGP, is a founder and partner
of Thilman & Filippini. Any agreement entered into between HGP and Thilman &
Filippini will be on terms no less favorable than those which could be obtained
from an independent party.
Pursuant to the Prime Guarantee, Prime Partnership will guarantee up to
$10.0 million of HGP's obligations under the HGP Credit Facility. In connection
with the Prime Guarantee, HGP has agreed to pay New Prime a fee of $400,000 per
annum until the HGP Credit Facility has been paid in full. In addition, upon
consummation of the Transactions, HGP will assume Horizon's obligations under a
$4.0 million revolving credit facility which was fully drawn as of December 31,
1997. New Prime has agreed to lend HGP the funds necessary to repay in full its
obligations under this facility upon its maturity on August 1, 1998.
Accordingly, if and to the extent HGP is unable to repay this facility at
maturity, New Prime may be required to lend funds to HGP at a rate of 10% per
annum in an amount sufficient to enable HGP to make such repayment. See
"Policies of New Prime with Respect to Certain Activities--New Prime's
Relationship with HGP" and "Horizon Group Properties, Inc.--HGP Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources." Upon consummation of the
Transactions, Mr. M. Reschke and Mr. N. Perlmutter will serve as members of the
HGP Board of Directors and the New Prime Board of Directors. In addition, upon
consummation of the Transactions, Mr. M. Reschke will own approximately 11.0% of
the outstanding HGP Common Shares on a fully diluted basis.
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 PROXY 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
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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.
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.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The HGP Bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors or to bring other
business before an annual meeting of shareholders of HGP (the "Shareholder
Notice Procedure").
The Shareholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the HGP Board of Directors, or by a
shareholder who has given timely written notice containing specified information
to the Secretary of HGP prior to the meeting at which directors are to be
elected, will be eligible for election as directors of HGP, 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 HGP Board of Directors or by a
shareholder who has given timely written notice to the Secretary of HGP 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 HGP 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.
MEETINGS OF SHAREHOLDERS
HGP's Bylaws provide that annual meetings of shareholders shall be held at
the time set by the HGP Board of Directors on the second Tuesday in May, unless
otherwise specified in a resolution adopted by the HGP Board of Directors. The
HGP Bylaws provide that special meetings of the shareholders of HGP may be
called by the HGP Board of Directors, pursuant to a resolution adopted by a
majority of the members of the HGP Board of Directors, the President of HGP, or
the Secretary of HGP upon the receipt by HGP of a written demand duly executed
by shareholders of record of not less than twenty-five percent (25.0%) of all
outstanding HGP Common Shares entitled to vote at such meeting.
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 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
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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 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 an 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 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
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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 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
Proxy 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,
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HGP Partnership, 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 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 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. 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, 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 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 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 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
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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 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.
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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 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
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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 not 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 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 New Prime 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.
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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 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 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 or reduction.
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,
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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 HGP LP PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE AGREEMENT OF LIMITED PARTNERSHIP OF HGP LP (THE
"HGP LP PARTNERSHIP AGREEMENT") IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
HGP LP PARTNERSHIP AGREEMENT.
FORMATION
HGP LP was formed on November 12, 1997 as a limited partnership under
DRUPLA.
CAPITALIZATION
Pursuant to the HGP LP Partnership Agreement, HGP LP has designated HGP LP
Common Units and HGP LP Preferred Units.
MANAGEMENT
The HGP LP Partnership 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 Partnership
Agreement would require the consent of a majority in interest of HGP LP Common
Units. Certain other amendments to the HPG LP Partnership Agreement require the
consent of each partner adversely affected. HGP LP Limited Partners have no
right to remove HGP as general partner of HGP LP.
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TRANSFERABILITY OF INTERESTS
The HGP LP Partnership Agreement provides that HGP may not voluntarily
withdraw from HGP LP, or transfer or assign its interest in HGP LP, without the
consent of a majority in interest of HGP LP Common Units. HGP LP Limited
Partners may not transfer their interests in HGP LP without the consent of the
general partners except in limited circumstances to affiliates, family members,
lenders via a pledge, certain trusts or to an Accredited Investor within the
meaning of Rule 501 promulgated under the Securities Act, and 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 Partnership 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 net proceeds to HGP LP on comparable terms and conditions as are
applicable to HGP's borrowing of such funds. The HGP LP Partnership 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
On the Closing Date, HGP will enter into a registration rights agreement for
the benefit of certain holders of HGP LP Common Units. Pursuant to such
registration rights agreement, holders of HGP LP Common Units will have certain
"demand" and "piggyback" registration rights (collectively, the "Registration
Rights") with respect to the HGP Common Shares acquired by them upon exchange of
HGP LP Common Units. Subject to certain conditions, the demand registration
rights permit such holders to request up to one demand registration per year.
Subject to certain conditions, the piggyback registration rights permit the
limited partners to include their HGP Common Shares in the registration by HGP
of its HGP Common Shares or other similar equity securities issued by HGP. The
holders of HGP LP Common Units may exercise their demand registration rights on
or after the 90th day following the Closing Date.
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 Partnership 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.
DISTRIBUTIONS
The HGP LP Partnership 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. 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.
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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. However, no HGP LP Limited Partner may
exchange any HGP LP Common Units for HGP Common Shares if such entity's actual
or constructive ownership of such HGP Common Shares would violate the HPG
Ownership Limit with respect to the HGP Common Shares. See "--Description of
Capital Stock of HGP."
INDEMNIFICATION
To the extent permitted by law, the HGP LP Partnership Agreement provides
for indemnification of HPG, as general partner, its officers and trustees and
such otehr persons as HGP may designate to the same extent indemnification is
provided to officers and trustees of HGP in the Declaration of Trust, and limits
the liability of HGP and its officers and trustees to HGP LP to the same extent
liability of officers and trustees of HGP is limited under the Declaration of
Trust.
DUTIES AND CONFLICTS
The HGP LP Partnership Agreement provides that substantially 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. Any HGP LP
Limited Partner may engage in other business activities outside HPG LP,
including business activities that directly compete with HPG LP.
TERM
HGP LP will continue in full force and effect until December 31, 2050,
unless sooner dissolved and terminated in accordance with the HGP LP Partnership
Agreement or by operation of law.
BOOKS AND REPORTS
HGP is required to keep certain 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 105 days after the close of each year, an annual
report containing copies of audited financial statements for HGP LP which may be
prepared on a consolidated basis in accordance with GAAP.
The general partner will use reasonable efforts to furnish to each limited
partner within 90 days after the end 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.
OTHER PRIME SHAREHOLDERS MEETING MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding the beneficial
ownership of Prime Common Shares and of Prime Partnership Common Units as of
April 1, 1998 for (a) each person known by Prime to be the beneficial owner of
more than five percent of the voting securities of Prime (b) each named
executive officer of Prime listed in the Summary Compensation Table presented
below (the "Prime Named Executives"), (c) each director of Prime and (d) the
directors and officers of Prime as a group. Unless otherwise indicated in the
footnotes, all of such interests are owned directly, and the indicated person or
entity has sole voting and investment power. The number of shares represents the
number of Prime Common Shares the person holds, the number of Prime Common
Shares the person has the right to
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acquire upon exercise of certain options to purchase Prime Common Shares ("Prime
Stock Options"), the number of Prime Common Shares into which Prime Partnership
Common Units held by the person are exchangeable (if, as discussed below, Prime
elects to issue Prime Common Shares rather than pay cash upon such exchange) and
the number of Prime Common Shares into which Prime Series B Preferred Shares,
held by the person are convertible. The extent to which a person directly holds
Prime Common Shares, Prime Stock Options, Prime Partnership Common Units or
Prime Series B Preferred Shares is set forth in the notes.
<TABLE>
<CAPTION>
PERCENT OF ALL
NUMBER OF PRIME COMMON PRIME COMMON
SHARES/PRIME PARTNERSHIP PERCENT OF SHARES/PRIME
COMMON UNITS ALL PRIME PARTNERSHIP
NAME AND ADDRESS OF BENEFICIALLY OWNED COMMON SHARES COMMON UNITS
BENEFICIAL OWNER(1) (2) (3) (4)
- ----------------------------------------------------- ------------------------ ----------------- -----------------
<S> <C> <C> <C>
The Prime Group, Inc.(5)............................. 7,594,629 21.9% 18.8%
Michael W. Reschke(6)................................ 8,008,771 22.8 19.7
Abraham Rosenthal(7)................................. 625,091 2.2 1.5
William H. Carpenter, Jr.(8)......................... 625,375 2.2 1.5
Glenn D. Reschke(9).................................. 325,217 1.2 (10)
David G. Phillips(11)................................ 72,787 (10) (10)
Robert P. Mulreaney(12).............................. 23,441 (10) (10)
Terence C. Golden.................................... 12,500 (10) (10)
Kenneth A. Randall................................... 10,000 (10) (10)
James R. Thompson.................................... 10,500 (10) (10)
Marvin S. Traub(13).................................. 56,293 (10) (10)
Sharon J. Sharp...................................... -- -- --
Longleaf Partners Realty Fund(14).................... 2,442,100 8.9 6.0
Merrill Lynch Asset Management(15)................... 1,936,777 7.1 4.8
Becker Capital Management, Inc.(16).................. 1,730,200 6.3 4.3
Directors and officers of Prime as a group (21
persons)........................................... 9,860,551 26.9 24.4
</TABLE>
- ------------------------
Notes:
(1) All of the directors of Prime and the Prime Named Executives may be
contacted c/o Prime Retail, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202.
(2) The beneficial ownership of Prime Common Shares and Prime Series B
Preferred Shares reported herein is based upon filings with the Commission
and is subject to confirmation by Prime that such ownership did not violate
the ownership restrictions in the Prime Charter. The ownership of Prime
Partnership Common Units reported herein is derived from the transfer
records maintained by Prime Partnership based on information provided by
the Prime Partnership Limited Partners. Information presented includes
Prime Shares issuable upon exercise of Prime Stock Options which have
vested or will vest within 60 days of April 1, 1998 as follows: Mr. M.
Reschke 250,001; Mr. Rosenthal 250,001; Mr. Carpenter 250,001; Mr. Golden
10,000; Mr. Randall 10,000; Governor Thompson 10,000; Mr. Traub, including
Marvin Traub Associates, Inc. ("MTA"), 55,000; Mr. G. Reschke 73,917 (2,250
of which are held by Ms. Tina Reschke, wife of Mr. G. Reschke); Mr.
Mulreaney 20,000; and Mr. Phillips 71,667.
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(3) Information presented assumes exchange or conversion only of Prime
Partnership Common Units and Prime Series B Preferred Shares owned by such
beneficial owner for shares of Prime Common Shares. Information presented
also includes Prime Common Shares issuable upon exercise of Prime Stock
Options of such beneficial owner which have vested or will vest within 60
days of April 1, 1998.
(4) Information presented assumes exchange or conversion of all outstanding
Prime Partnership Common Units and Prime Series B Preferred Shares for
Prime Common Shares and also includes Prime Common Shares issuable upon
exercise of Prime Stock Options which have vested or will vest within 60
days of April 1, 1998. The Prime Partnership Common Units may be exchanged
on a one-for-one basis for Prime Common Shares (or, at Prime's election,
cash of an equivalent value) at any time.
(5) Information presented includes 7,344,629 Prime Partnership Common Units and
250,000 Prime Common Shares owned by PGI and certain limited partnerships
affiliated with PGI. The address of PGI is 77 West Wacker Drive, Suite
3900, Chicago, Illinois 60601. Certain of the Prime Partnership Common
Units and Prime Common Shares 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 Prime Partnership 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 Prime Partnership Common Units so pledged. The Pledgees disclaim
beneficial ownership of these pledged Prime Partnership Common Units.
(6) Information presented includes 7,344,629 Prime Partnership Common Units and
250,000 shares of Prime Common Shares held by PGI (Mr. M. Reschke is the
Chairman and Chief Executive Officer of PGI) and certain limited
partnerships affiliated with PGI, 152,717 Prime Common Shares owned by Mr.
M. Reschke, 11,424 Prime Common Shares issuable to Mr. M. Reschke upon
conversion of the 9,552 shares of Prime Series B Preferred Shares owned by
him, and 250,001 Prime Common Shares which Mr. M. Reschke has the right to
acquire upon exercise of Prime Stock Options. Mr. M. Reschke's address is
77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601.
(7) Information presented includes 371,090 Prime Partnership Common Units,
125,000 of which are held by a limited liability company controlled by Mr.
Rosenthal and 18,198 of which are held in trust for Mr. Rosenthal's
children, 4,000 Prime Common Shares owned by Mr. Rosenthal, 200,001 Prime
Common Shares which Mr. Rosenthal has the right to acquire upon exercise of
Prime Stock Options and 50,000 Prime Partnership Common Units which Mr.
Rosenthal has the right to acquire upon exercise of certain options granted
by PGI.
(8) Information presented includes 371,090 Prime Partnership Common Units,
125,000 of which are held by a limited liability company controlled by Mr.
Carpenter, 4,284 Prime Common Shares owned by Mr. Carpenter's children,
200,001 Prime Common Shares which Mr. Carpenter has the right to acquire
upon exercise of Prime Stock Options and 50,000 Prime Partnership Common
Units which Mr. Capenter has the right to acquire upon exercise of certain
options granted by PGI.
(9) Information presented includes 251,300 Prime Partnership Common Units which
are held by Reschke I LLC, 71,667 Prime Common Shares which Mr. G. Reschke
has the right to acquire upon the exercise of Prime Stock Options and 2,250
Prime Common Shares which Ms. Tina M. Reschke, Mr. G. Reschke's wife, has
the right to acquire upon the exercise of Prime Stock Options. Mr. G.
Reschke disclaims beneficial ownership of such shares pursuant to Section
13d-4 of the Exchange Act.
(10) Amount represents less than 1%.
(11) Information presented includes 71,667 Prime Common Shares which Mr.
Phillips has the right to acquire upon exercise of Prime Stock Options,
1,000 Prime Common Shares owned by Mr. Phillips and 120 Prime Common
Shares issuable to Mr. Phillips upon conversion of the 100 shares of Prime
Series B Preferred Shares owned by him.
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(12) Information presented includes 2,425 Prime Common Shares owned by Mr.
Mulreaney, 1,016 Prime Common Shares issuable to Mr. Mulreaney upon
conversion of the 850 shares of Prime Series B Preferred Shares owned by
him, and 20,000 Prime Common Shares which Mr. Mulreaney has the right to
acquire upon exercise of Prime Stock Options.
(13) Information presented includes 45,000 Prime Common Shares which MTA, an
affiliate of Mr. Traub, has the right to acquire upon exercise of Prime
Stock Options.
(14) Information presented is based on a Schedule 13G filed with the Commission
on February 13, 1998 on behalf of (i) Longleaf Partners Realty Fund, a
series of Longleaf Partners Funds Trust, an open-end management investment
company registered under the Investment Company Act of 1940 ("Longleaf"),
(ii) Southeastern Asset Management, Inc., a registered investment adviser
("Southeastern") and (iii) Mr. O. Mason Hawkins, the Chairman of the Board
and C.E.O. of Southeastern. The Schedule 13G indicates that all the
securities covered by this statement are owned by Longleaf and none are
owned directly or indirectly by Southeastern. Southeastern and Mr. Hawkins
disclaim beneficial ownership of the Prime Common Shares pursuant to
Section 13d-4 of the Exchange Act. The address of each of Longleaf,
Southeastern and Mr. Hawkins is Southeastern Asset Management, Inc., 6410
Poplar Ave., Suite 900, Memphis, Tennessee 38119.
(15) Information presented is based on a Schedule 13G filed with the Commission
on February 5, 1998 on behalf of Princeton Services, Inc. ("PSI"), Merrill
Lynch Asset Management ("MLAM") and Merrill Lynch Global Allocation Fund
("MLGA"). The Schedule 13G indicates that (i) PSI may be deemed to be the
beneficial owner of 1,936,777 Prime Common Shares by virtue of its being
the general partner of MLAM, (ii) MLAM may be deemed to be the beneficial
owner of 1,936,777 Prime Common Shares as a result of acting as investment
advisor to one or more investment companies registered under Section 8 of
the Investment Company Act of 1940 and/or to one or more private accounts
and (iii) MLGA, a registered investment company advised by MLAM, is the
beneficial owner of 1,839,825 Prime Common Shares. The Schedule 13G
further indicates that PSI disclaims beneficial ownership of the Prime
Common Shares pursuant to Section 13d-4 of the Exchange Act. The address
of each of PSI, MLAM and MLGA is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
(16) Information presented is based on a Schedule 13G filed on February 13,
1998 on behalf of Becker Capital Management, Inc. ("Becker"). All
securities reported on this statement are owned by advisory clients of
Becker. Becker disclaims beneficial ownership of all such securities.
ELECTION OF DIRECTORS
The Prime Board of Directors proposes the election of three Class I
directors at the Prime Shareholders Meeting, each to hold office for a three
year term or until their successors are duly elected and qualified. It is
intended that the accompanying form of Proxy will be voted for the nominees set
forth below, each of whom is currently a director of Prime. If some unexpected
occurrence should make necessary, in the Prime Board of Directors' judgment, the
substitution of some other person or persons for any of the nominees, shares
will be voted for such other person or persons as the Prime Board of Directors
may select. The Prime Board of Directors is not aware that any nominee may be
unable or unwilling to serve as a director.
Set forth below are the names of and certain other information regarding the
nominees for the three director positions to be elected by the holders of Prime
Common Shares at the Prime Shareholders Meeting.
A majority of votes is required to elect directors. Abstentions and brokers
non-votes will be treated as shares not valid and will have no effect on such
voting.
THE PRIME BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF
EACH OF THE NOMINEES NAMED BELOW.
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NOMINEES FOR ELECTION
<TABLE>
<CAPTION>
YEAR TERM OF
PRINCIPAL OCCUPATION OFFICE WILL SERVED AS A
NAME AGE AND POSITION HELD EXPIRE DIRECTOR SINCE
- ---------------------------------------------- --- ------------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
William H. Carpenter, Jr...................... 47 President, Chief Operating 2001 1994
Officer, Director
Kenneth A. Randall............................ 70 Director 2001 1994
Sharon J. Sharp............................... 58 Director 2001 1997
</TABLE>
For the biographies of Messrs. Carpenter and Randall and Ms. Sharp, see
"Management and Operation of New Prime after the Transactions."
INFORMATION REGARDING MEETINGS AND COMMITTEES OF THE PRIME BOARD OF DIRECTORS
The Prime Board of Directors has established an Audit Committee, an
Executive Committee, a Compensation Committee, an Executive Compensation and
Stock Incentive Plan Committee and an Independent Directors Committee.
AUDIT COMMITTEE. The functions of the Audit Committee, which consists of
Messrs. Golden and Randall, 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 Prime's internal
accounting controls.
EXECUTIVE COMMITTEE. The Executive Committee, which consists of Messrs. M.
Reschke, Rosenthal and Carpenter, has certain authority to acquire and dispose
of real property and the power to authorize, on behalf of the Prime Board of
Directors, the execution of certain contracts and agreements, including those
related to certain financings by Prime. The Executive Committee meets monthly
(or more frequently if necessary) and all actions by the committee are reported
at the next meeting of the Prime Board of Directors.
COMPENSATION COMMITTEE. The Compensation Committee, which consists of
Messrs. Golden, Randall and Traub and Governor Thompson and Ms. Sharp, has
responsibility for determining the compensation for Prime's employees.
EXECUTIVE COMPENSATION AND STOCK INCENTIVE PLAN COMMITTEE. The Executive
Compensation and Stock Incentive Plan Committee (the "Executive Compensation
Committee"), which consists of Messrs. Golden and Randall and Ms. Sharp, has
responsibility for determining the compensation of Prime's executive officers
and implementing and administering Prime's Stock Incentive Plans.
INDEPENDENT DIRECTORS COMMITTEE. The Independent Directors Committee, which
consists of Messrs. Golden, Randall, Traub and Governor Thompson and Ms. Sharp
has the responsibility to (i) consider and approve any proposed action or
transaction involving 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 Prime's independent directors under either the Prime Partnership
Agreement or corporate governance documents relating to 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 Prime.
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<PAGE>
During the fiscal year ended December 31, 1997, the Audit Committee held one
meeting, the Compensation Committee held two meetings and the Prime Board of
Directors held seven meetings.
APPROVAL OF PRIME RETAIL, INC. NONEMPLOYEE DIRECTOR STOCK PLAN
On March 18, 1998, the Prime Board of Directors approved for submission to
holders of Prime Common Shares for approval at the Prime Meeting the Prime
Retail, Inc. Nonemployee Director Stock Plan (the "Prime Director Plan"). If
approved by a majority of the votes cast by holders of Prime Common Shares
entitled to vote at such meeting, the Prime Director Plan will have an effective
date of March 19, 1998 (the "Effective Date"). The Prime Board of Directors
believes that the Prime Director Plan will enhance Prime's long-term prospects
and serve the interests of Prime's stockholders by giving nonemployee directors
of Prime a direct and personal financial stake in Prime and aligning the
financial interests of such directors with the interests of Prime's
stockholders. If the Prime Director Plan is approved and the Merger is
consummated, the Prime Director Plan will be assumed by New Prime.
The following is a summary description of the Prime Director Plan, which is
qualified in its entirety by reference to the Prime Director Plan, a copy of
which is attached to this Joint Proxy Statement/Prospectus/ Information
Statement as Appendix I.
ELIGIBILITY. Each director of Prime who is not a current employee of Prime
(a "Nonemployee Director") will participate in the Prime Director Plan. Of the
three nominees for election as directors of Prime at the Prime Shareholders
Meeting, Mr. Randall and Ms. Sharp are Nonemployee Directors.
ADMINISTRATION. The Prime Board of Directors shall administer the Prime
Director Plan. The Prime Board of Directors has the authority to interpret the
Prime Director Plan and establish or amend any rules for its administration.
However, the Prime Board of Directors does not have any discretion with respect
to either the eligibility or selection of Nonemployee Directors to receive stock
options pursuant to the Prime Director Plan ("Prime Director Plan Stock
Options") or the number, timing or vesting of the Prime Director Plan Stock
Option grants.
SHARES AVAILABLE UNDER THE PRIME DIRECTOR PLAN. A maximum of 285,000 shares
of Prime Common Shares will be reserved for issuance under the Prime Director
Plan. The Prime Board of Directors is authorized to satisfy grants under the
Prime Director Plan from authorized but unissued shares of Prime Common Shares
reserved for issuance under the Prime Director Plan or shares previously issued
that have been reacquired by Prime. Prime intends to purchase shares in the open
market to satisfy grants under the Prime Director Plan, to the extent the Prime
Board of Directors deems such purchases to be in Prime's best interests. If a
Prime Director Plan Stock Option award expires, terminates or is forfeited for
any reason the Prime Common Shares associated with the expired, terminated or
forfeited portion of such Prime Director Plan Stock Option shall again become
available for awards under the Prime Director Plan. The Prime Board of Directors
will make adjustment to the maximum number of Prime Common Shares that may be
delivered under the Prime Director Plan and to outstanding Prime Director Plan
Stock Option awards to reflect stock dividends, stock splits, reverse stock
splits, share combinations, stock rights offerings, or similar events of or by
Prime.
PRIME DIRECTOR PLAN STOCK OPTION GRANTS. Subject to shareholder approval of
the Prime Director Plan, the Prime Director Plan will provide for automatic
grants of Prime Director Plan Stock Options to purchase 10,000 shares of Prime
Common Shares to each Nonemployee Director who has at least three months of
service on the Prime Board of Directors on the Prime Director Plan's Effective
Date. The Prime Director Plan also will provide for automatic grants of Prime
Director Plan Stock Options to purchase 5,000 shares to each Nonemployee
Director who is added to the Prime Board of Directors on or after the Prime
Director Plan's Effective Date, and an automatic grant of Prime Director Plan
Stock Options to purchase 5,000 shares to each Nonemployee Director who
completes a year of service on the Prime Board of Directors as of each annual
meeting date (beginning with the 1999 annual meeting). Prime Director
226
<PAGE>
Plan Stock Options granted automatically pursuant to the Prime Director Plan
will be immediately exercisable.
The exercise price per Prime Common Share under each Prime Director Plan
Stock Option shall be 100% of the Fair Market Value of a Prime Common Share on
the date of grant. Such exercise price may be paid by check or in cash, in whole
shares of Prime Common Shares valued at Fair Market Value on the date of
exercise, by simultaneous sales through a broker of shares of Prime Common
Shares acquired on exercise, by Prime's withholding a portion of the Prime
Common Shares otherwise distributable on exercise having an aggregate Fair
Market Value at the time of exercise equal to such exercise price, or through
any combination of such methods.
Prime Director Plan Stock Options shall not be transferable by a Nonemployee
Director other than by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order. All Prime Director Plan Stock Options
will be non-qualified options not entitled to special tax treatment under
Section 422 of the Code, as such Section 422 may be amended from time to time.
AMENDMENTS AND TERMINATION OF THE PLAN. The Prime Board of Directors may
from time to time in its discretion amend or modify the Prime Director Plan
without the approval of the shareholders, provided that the Prime Board of
Directors may not change the Prime Director Plan to increase the cost to Prime.
No amendment shall become effective without shareholder approval if such
shareholder approval is required by law, rule or regulation. No amendment may
materially and adversely affect any right of a Nonemployee Director with respect
to any Prime Director Plan Stock Options or Prime Common Shares theretofore
granted under the Prime Director Plan without such Nonemployee Director's
written consent, except for modifications required to maintain compliance with
any federal or state statute or regulations.
The Prime Director Plan shall terminate ten years from the date of its
adoption by the Prime Board of Directors, or at such earlier time as the Prime
Board of Directors may determine. Any termination, whether in whole or in part,
shall not materially and adversely affect any award then outstanding under the
Prime Director Plan without the consent of the affected Nonemployee Director.
FEDERAL INCOME TAX CONSEQUENCES. A Nonemployee Director will not recognize
any taxable income at the time of grant of a Prime Director Plan Stock Option.
Upon exercise of a Prime Director Plan Stock Option, the Nonemployee Director
will recognize ordinary income for tax purposes measured by the excess of the
Fair Market Value of the Prime Common Shares on such date over the exercise
price. Prime will be entitled to a deduction equal to the ordinary income
recognized by the Nonemployee Director. Upon resale of Prime Common Shares by
the Nonemployee Director, any difference between the sale price and the exercise
price, to the extent not recognized as ordinary income upon exercise as provided
above, will be treated as either short-term or long-term capital gain or loss
(depending on the holding period).
Generally, if a Nonemployee Director delivers previously acquired Prime
Common Shares in payment of all or part of the exercise price of a Prime
Director Plan Stock Option, the Nonemployee Director will not, as a result of
such delivery, be required to recognize as taxable income or loss any
appreciation or depreciation in the value of the previously acquired Prime
Common Shares after their acquisition date. The Nonemployee Director's tax basis
in, and holding period for, the previously acquired Prime Common Shares
surrendered upon exercise of the Prime Director Plan Stock Option carries over
to an equal number of Prime Common Shares received, on a share-for-share basis.
The Fair Market Value of the Prime Common Shares received in excess of the Prime
Common Shares surrendered constitutes compensation taxable to the Nonemployee
Director as ordinary income. The tax basis for such Prime Common Shares is equal
to their Fair Market Value on the exercise date, and the holding period of such
Prime Common Shares begins on that date. Prime may be entitled to a tax
deduction equal to the compensation income recognized by the Nonemployee
Director, at the time such income is recognized.
The following table sets forth the number of Prime Director Plan Stock
Options that will be issued under the Prime Director Plan during 1998 to each of
the nominees for election as directors of Prime at
227
<PAGE>
the Prime Special Meeting, assuming their election to the Prime Board of
Directors and assuming Prime Shareholders approve the Prime Director Plan, and
to all current directors as a group. Additional shares would be issued under the
Prime Director Plan in subsequent years.
<TABLE>
<CAPTION>
NUMBER OF
DOLLAR PRIME DIRECTOR PLAN
NONEMPLOYEE DIRECTOR VALUE(1) STOCK OPTIONS
- ----------------------------------------------------------------------------- -------------- -------------------
<S> <C> <C>
Terence C. Golden............................................................ $ 22,511 10,000
Kenneth A. Randall........................................................... $ 22,511 10,000
James R. Thompson............................................................ $ 22,511 10,000
Marvin S. Traub.............................................................. $ 22,511 10,000
Sharon J. Sharp.............................................................. $ 22,511 10,000
-------------- ------
All current nonemployee Directors as a group................................. $ 112,555 50,000
</TABLE>
- ------------------------
(1) The dollar values shown is based on the Black-Scholes option pricing model.
The material assumptions incorporated in the Black-Scholes model in
estimating the value of Prime Director Plan Stock Options that will be
issued under the Prime Director Plan during 1998 include the following:
exercise price of $14.00, option term of 10 years; interest rate of 5.5%,
volatility of 35.78%; and dividends at the rate of 8.0% per annum. The
actual value, if any, an optionee will realize upon exercise of an option
will depend upon the excess of the market value of the Prime Common Shares
over the exercise price on the date the option is exercised. There is no
assurance that the value realized by an optionee will be at or near the
value estimated by the Black-Scholes model.
THE PRIME BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF
THE PRIME DIRECTOR PLAN.
APPROVAL OF THE PRIME RETAIL, INC. 1998 LONG-TERM STOCK INCENTIVE PLAN
The Executive Compensation Committee has adopted and the Prime Board of
Directors has ratified the Prime Retail, Inc. 1998 Long-Term Stock Incentive
Plan (the "Prime Stock Incentive Plan") and directed that the Prime Stock
Incentive Plan be submitted to the holders of Prime Common Shares for their
approval at the Prime Shareholders Meeting. The Prime Stock Incentive Plan will
become effective upon the approval by the holders of a majority of Prime Common
Shares represented and entitled to vote at the Prime Shareholders Meeting. The
purpose of the Prime Stock Incentive Plan is to advance the interests of Prime
and its subsidiaries by encouraging and enabling the acquisition of a financial
interest in Prime by key employees and officers of Prime and its subsidiaries
through equity awards. The Prime Stock Incentive Plan will be administered by
the Executive Compensation Committee or another committee appointed by the Prime
Board of Directors. If the Prime Stock Incentive Plan is approved and the Merger
is consummated, the Prime Stock Incentive Plan will be assumed by New Prime. The
following summary description of the Prime Stock Incentive Plan is qualified in
its entirety by reference to the full text of the Prime Stock Incentive Plan
attached hereto as Appendix J.
228
<PAGE>
The Prime Stock Incentive Plan provides for the grant of incentive and
non-qualified stock options, restricted stock, performance shares and
performance units (individually, a "Prime Stock Incentive Award," or
collectively, "Prime Stock Incentive Awards"). Prime Stock Incentive Awards may
be granted to key employees and officers who, as determined by the Executive
Compensation Committee, provide substantial and important services to Prime
("Participants"). The terms of the Prime Stock Incentive Awards will be set
forth in award agreements ("Prime Stock Incentive Award Agreements"). The
Executive Compensation Committee, in its sole discretion, will select the
employees to whom Prime Stock Incentive Awards will be granted and will
determine the type, size and terms and conditions applicable to each Prime Stock
Incentive Award. The Executive Compensation Committee also will have the
authority to interpret, construe and implement the provisions of the Prime Stock
Incentive Plan, and its decisions will be binding.
The total number of Prime Common Shares that may be issued under the Prime
Stock Incentive Plan pursuant to Prime Stock Incentive Awards is 1,900,000,
which represents approximately 5% of the Prime Common Shares outstanding as of
December 31, 1997, assuming the conversion of all outstanding Prime Series B
Preferred Shares and Prime Series C Preferred Shares and the exchange of all
other outstanding Prime Partnership Series C Preferred Units and Prime
Partnership Common Units; provided, however, that if the Transactions are
consummated, the total number of New Prime Common Shares available under the
Prime Stock Incentive Plan will be increased to 3,100,000, which represents
approximately 5% of the number of New Prime Common Shares expected to be
outstanding on the Closing Date assuming the conversion of all the additional
New Prime Series B Preferred Shares and New Prime Series C Preferred Shares and
the exchange of all the then outstanding Prime Partnership Series C Preferred
Units and Prime Partnership Common Units. The maximum number of shares and share
equivalent units that may be granted during any calendar year to any one person
under the Prime Stock Incentive Plan shall be 400,000 shares (on an aggregate
basis for all such types of Prime Stock Incentive Awards), which limit shall
apply regardless of whether the Prime Stock Incentive Awards would be paid in
shares or in cash. The maximum numbers of shares that may be issued or
transferred to the any person under restricted stock, performance shares and
performance units in any year shall be 100,000. The Executive Compensation
Committee will make adjustment to the maximum number of Prime Common Shares that
may be subject to Prime Stock Incentive Awards under the Prime Stock Incentive
Plan and to outstanding Prime Stock Incentive Awards to reflect stock dividends,
stock splits, reverse stock splits, share combinations, stock rights offerings,
or similar events of or by Prime.
TYPES OF AWARDS
Set forth below is a brief description of the Prime Stock Incentive Awards
that may be granted under the Prime Stock Incentive Plan:
STOCK OPTIONS. The Executive Compensation Committee may grant options to
purchase Prime Common Shares, which may be incentive or non-qualified stock
options ("Prime Incentive Stock Options"). Each Prime Incentive Stock Option
represents the right to purchase one Prime Common Share at the specified
Exercise Price. The Executive Compensation Committee will determine the exercise
price (the "Exercise Price") of the Prime Incentive Stock Options in its sole
discretion, provided that the Exercise Price may not be less than 100% of the
average of the high and the low trading prices of Prime Common Shares on the
national securities exchange on which the shares are traded ("Fair Market
Value") on the date of grant. If an incentive option is issued to an employee
who owns more than 10% of the total combined voting power of all classes of
Prime's outstanding capital stock, the Exercise Price will be at least 110% of
the Fair Market Value of Prime Common Shares on the date of grant.
Prime Incentive Stock Options will expire no later than ten years after the
date on which they were granted and will become vested and exercisable at such
times and in such installments as determined by the Executive Compensation
Committee and specified in the applicable Prime Stock Incentive Award Agreement.
The Participant must pay the Exercise Price, and any related withholding taxes,
in full at the time of
229
<PAGE>
exercise, in cash or by check. The Executive Compensation Committee may specify
in the applicable Prime Stock Incentive Award Agreement that the Participant may
pay the Exercise Price by check or in cash, by tendering previously acquired
shares of Prime Common Shares having an aggregate Fair Market Value at the time
of exercise equal to the total Exercise Price, by Prime's withholding a portion
of the Prime Common Shares otherwise distributable on exercise having an
aggregate Fair Market Value at the time of exercise equal to the total Exercise
Price, or by simultaneous sales through a broker of shares of Prime Common
Shares acquired on exercise, or through any combination of such methods.
RESTRICTED STOCK. The Executive Compensation Committee may award Prime
Common Shares that are subject to such restrictions as it deems appropriate,
including forfeiture conditions and restrictions against transfer for a period
the Executive Compensation Committee specifies ("Restricted Stock"). The
Executive Compensation Committee may award Restricted Stock under the Prime
Stock Incentive Plan for services and/or payment of cash. Restrictions on
Restricted Stock may lapse in installments based on factors selected by the
Executive Compensation Committee. Prior to the expiration of the restricted
period, a Participant who has received an award of Restricted Stock generally
has the rights of a shareholder of Prime, including the right to vote and to
receive cash dividends on the shares of Restricted Stock, except as, and only
if, provided by the Executive Compensation Committee. Stock dividends issued
with respect to Restricted Stock may be treated as additional shares awarded
under such Restricted Stock with respect to which such dividends are issued.
PERFORMANCE SHARES AND PERFORMANCE UNITS. The Executive Compensation
Committee may grant a performance share Prime Stock Incentive Award
("Performance Share") and/or a performance unit Prime Stock Incentive Award (a
"Performance Unit") under the Prime Stock Incentive Plan. Each Performance Unit
will have an initial value that is established by the Executive Compensation
Committee at the time of grant. Each Performance Share will have an initial
value equal to the Fair Market Value of one Prime Common Share on the date of
grant. Such Prime Stock Incentive Awards may be earned based upon satisfaction
of certain performance criteria within a performance period specified in the
applicable Prime Stock Incentive Award Agreement, and subject to such other
terms and conditions as the Executive Compensation Committee deems appropriate.
Prior to the end of a performance period, the Executive Compensation Committee,
in its discretion, may adjust the performance conditions or a significant
acquisition or disposition of assets or other property by Prime. The extent to
which a grantee is entitled to payment in settlement of such a Prime Stock
Incentive Award at the end of a performance period will be determined by the
Executive Compensation Committee in its sole discretion, based on whether the
performance criteria have been met. Prime will make payment in cash or in Prime
Common Shares, or some combination thereof, subject to availability of Prime
Common Shares to Prime, in accordance with the terms of the applicable Prime
Stock Incentive Award Agreement.
CHANGE IN CONTROL. Upon a Change in Control (as defined in the Prime Stock
Incentive Plan document), all outstanding Prime Incentive Stock Options will
become immediately exercisable, any restrictions imposed on Restricted Stock
will lapse, and the vesting of all Performance Units and Performance Shares
shall be accelerated.
AMENDMENT OF THE PRIME STOCK INCENTIVE PLAN
The Prime Board of Directors may from time to time in its discretion amend
or modify the Prime Stock Incentive Plan without the approval of the
shareholders. No amendment shall become effective without shareholder approval
if such shareholder approval is required by law, rule or regulation. No
amendment may materially and adversely affect any right of a Participant with
respect to any Prime Stock Incentive Awards theretofore granted under the Prime
Stock Incentive Plan without such Participant's written consent, except for
modifications required to maintain compliance with any federal or state statute
or regulations.
230
<PAGE>
The Prime Stock Incentive Plan shall terminate ten years from the date of
its adoption by the Prime Board of Directors, or at such earlier time as the
Prime Board of Directors may determine. Any termination, whether in whole or in
part, shall not materially and adversely affect any award then outstanding under
the Prime Stock Incentive Plan without the consent of the affected Participant.
TAX IMPLICATIONS
OPTIONS. A Participant who is awarded an incentive option will not
recognize taxable income at the time of the grant of the Prime Incentive Stock
Option and Prime will not be entitled to a deduction at that time. Upon the
exercise of such a Prime Incentive Stock Option during employment, or within
three months thereafter, the Participant will not recognize any income and Prime
will not be entitled to a deduction. If any Prime Common Shares acquired upon
the exercise of such a Prime Incentive Stock Option are disposed of within two
years of the date of grant or within one year of the transfer of such shares to
the Participant, the Participant will recognize ordinary income in the year of
disposition equal to the excess of the fair market value of the shares at
exercise over the Exercise Price. Prime will be entitled to a deduction in the
same amount as the ordinary income recognized by the Participant.
A Participant will not recognize any taxable income at the time of grant of
a non-qualified Prime Incentive Stock Option. Upon exercise of a non-qualified
Prime Incentive Stock Option, the Participant will recognize ordinary income for
tax purposes measured by the excess of the Fair Market Value of the shares on
such date over the Exercise Price. Prime will be entitled to a deduction equal
to the ordinary income recognized by the Participant. The ordinary income
recognized by a Participant will be subject to tax withholding. Upon resale of
Prime Common Shares by the Participant, any difference between the sale price
and the Exercise Price, to the extent not recognized as ordinary income upon
exercise as provided above, will be treated as either short-term or long-term
capital gain or loss (depending on the holding period).
RESTRICTED STOCK. Generally, absent an election to be taxed currently under
Section 83(b) of the Code (a "Section 83(b) Election"), there will be no federal
income tax consequences to either the Participant or Prime upon the grant of
Restricted Stock. At the expiration of the restricted period and the
satisfaction of any other restrictions applicable to the Restricted Stock, the
Participant will recognize ordinary compensation income and Prime generally will
be entitled to a corresponding federal income tax deduction equal to the Fair
Market Value of the Prime Common Shares at that time (subject to satisfying
applicable withholding requirements). If the Participant makes a Section 83(b)
Election within 30 days after receiving the Restricted Stock, the Participant
will recognize an amount of ordinary compensation income at the time of the
receipt of the Restricted Stock and Prime will be entitled to a corresponding
federal income tax deduction equal to the Fair Market Value (determined without
regard to applicable restrictions) of the shares at such time. If a Section
83(b) Election is made, no additional income will be recognized by the
Participant upon the lapse of restrictions on the shares of Restricted Stock,
but, if the shares are subsequently forfeited, the Participant may not deduct
the income that was recognized pursuant to the Section 83(b) Election at the
time of the receipt of the shares.
PERFORMANCE SHARE OR PERFORMANCE UNIT. There will be no federal income tax
consequences to either the Participant or Prime upon the grant of a Performance
Share or Performance Unit. Generally, the Participant will recognize ordinary
income upon the receipt of payment pursuant to a Performance Share or
Performance Unit in an amount equal to the Fair Market Value of the Prime Common
Shares and the aggregate amount of cash received. Prime generally will be
entitled to a corresponding tax deduction equal to the amount includible in the
Participant's income, but with respect to a Performance Share or Performance
Unit paid in Prime Common Shares, Prime must satisfy applicable withholding
requirements in order to be eligible for a corresponding tax deduction.
The following table sets forth the number of Prime Stock Incentive Awards
that Prime has commited to grant pursuant to the Prime Stock Incentive Plan. The
grant of such options is subject to appeal of the
231
<PAGE>
Prime Stock Incentive Plan by the Prime Shareholders. Additional awards may be
issued during 1998 pursuant to the Prime Stock Incentive Plan.
<TABLE>
<CAPTION>
NUMBER OF PRIME
STOCK INCENTIVE
PARTICIPANT DOLLAR VALUE(1) AWARDS
- -------------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Michael W. Reschke.............................................................. -- 300,000
Abraham Rosenthal............................................................... -- 300,000
William H. Carpenter, Jr........................................................ -- 300,000
</TABLE>
(1) The dollar value of these options is not ascertainable as the exercise price
for such options will be based on the fair market value of a Prime Common
Share at the time, if any, that the Prime Stock Incentive Plan is approved
by the Prime Shareholders.
THE PRIME BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF
THE PRIME STOCK INCENTIVE PLAN
RATIFICATION OF INDEPENDENT AUDITORS
The Prime Board of Directors has selected Ernst & Young LLP as independent
auditors of Prime, and in the event the Transactions are consummated, as
independent auditors of New Prime, for the year ending December 31, 1998. Ernst
& Young LLP served as independent auditors of Prime for the year ended December
31, 1997. A representative of Ernst & Young LLP will attend the Prime
Shareholders Meeting and will have an opportunity to make a statement if they
desire to do so and, while not intending to make a statement, will respond to
appropriate questions directed to Ernst & Young LLP.
The appointment of auditors is approved annually by the Prime Board of
Directors and subsequently submitted to the stockholders for ratification. The
decision of the Prime Board of Directors is based on the recommendation of the
Audit Committee. The Audit Committee also reviews and approves proposed nonaudit
services to ensure that they will not impair the independence of the
accountants.
Before making its recommendation to the Prime Board of Directors for
appointment of Ernst & Young LLP, the Audit Committee carefully considered that
firm's qualifications as auditors for Prime. This included a review of its
performance last year, as well as its reputation for integrity and competence in
the fields of accounting and auditing. The Audit Committee has expressed its
satisfaction with Ernst & Young LLP in all of these respects.
THE PRIME BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS OF PRIME FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1998.
232
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation for
services in all capacities to Prime for the years ended December 31, 1995, 1996
and 1997 with respect to 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 (the "Prime Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
AWARDS PAYOUTS
ANNUAL ------------- --------------
COMPENSATION SECURITIES LTIP
------------- UNDERLYING PAYOUTS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS # $
- ----------------------------------------------- --------- ------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Michael W. Reschke, ........................... 1997 $ 150,000 $ 500,000 75,000(3) --
Chairman of the Board 1996 150,000 --(2) 50,000(3) --
1995 150,000 --(2) --
Abraham Rosenthal, ............................ 1997 257,420 250,000 75,000(4) 1,261,150(5)
Chief Executive Officer 1996 257,420 200,833 50,000(3) --
1995 257,385 125,000 --
William H. Carpenter, Jr., .................... 1997 257,420 250,000 75,000(4) 1,261,150(5)
President, Chief Operating Officer 1996 257,420 200,833 50,000(3)
1995 257,385 125,000 --
Glenn D. Reschke .............................. 1997 175,000 175,000 10,000(3) --
Executive Vice President-- Development and 1996 168,269 140,583 20,000(3) --
Acquisitions 1995 150,000 125,000 --
David G. Phillips, ............................ 1997 175,000 175,000 10,000(3) --
Executive Vice President--Operations and 1996 168,269 140,583 20,000(3) --
Marketing 1995 150,000 100,000 -- --
Robert P. Mulreaney, .......................... 1997 175,000 175,000 10,000(3) --
Executive Vice President--Chief Financial 1996 168,269 140,583 10,000(3) --
Officer and Treasurer 1995 136,539 25,000 -- --
</TABLE>
- ------------------------
Notes:
(1) Reflects bonus paid for performance in year indicated.
(2) At his request, Mr. M. Reschke was not considered for a discretionary bonus
for the years ended December 31, 1995 and 1996. See "Report of Compensation
Committee."
(3) Options granted pursuant to the 1995 Stock Incentive Plan.
(4) Reflects (i) 25,000 options to purchase Prime Common Shares granted pursuant
to the 1995 Stock Incentive Plan and (ii) 50,000 options to purchase Prime
Partnership Common Units granted by PGI pursuant to certain indemnification
and option agreements (the "Executive Indemnification and Option
Agreements"). See "Certain Relationships and Related
Transactions--Indemnification and Option Agreements with Messrs. Rosenthal
and Carpenter and the Executive LLCs."
(5) Reflects a special distribution from Prime Partnership to certain limited
liability companies controlled by Messrs. Rosenthal and Carpenter (the
"Executive LLCs"). See "Report of Executive Compensation
Committee--Long-Term Compensation" and "Certain Relationships and Related
Transactions-- Indemnification and Option Agreements with Messrs. Rosenthal
and Carpenter and the Executive LLCs."
233
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to options
granted in 1997 to the Prime Named Executives by Prime and PGI.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
----------------------------------------------------------- RATES OF STOCK PRICE
NUMBER OF APPRECIATION FOR OPTION
SECURITIES PERCENT OF TOTAL EXERCISE OR TERM BASED ON GRANT DATE
UNDERLYING OPTIONS GRANTED BASE PRICE STOCK PRICE
OPTIONS(1) TO EMPLOYEES IN ($/SH) EXPIRATION ------------------------
NAME GRANTED(#) FISCAL YEAR(2) (3) DATE 5%($) 10%($)
- ------------------------------- --------------- ---------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Reschke............. 75,000 30.0% $ 12.53 5/29/07 $ 590,768 $ 1,497,122
Abraham Rosenthal.............. 75,000(4) 10.0 (5) (6) 605,705 1,534,974
William H. Carpenter, Jr....... 75,000(4) 10.0 (5) (6) 605,705 1,534,974
Glenn D. Reschke............... 10,000 4.0 12.53 5/29/07 84,677 214,587
David G. Phillips.............. 10,000 4.0 12.53 5/29/07 78,769 199,616
Robert P. Mulreaney............ 10,000 4.0 12.53 5/29/07 78,769 199,616
</TABLE>
- ------------------------
Notes:
(1) Options are fully vested. Except as otherwise noted, the exercise price for
the options is generally payable in cash or, in certain circumstances, by
the surrender, at the fair market value on the date on which the option is
exercised, of Prime Common Shares.
(2) Reflects the percent of total options to purchase Prime Common Shares
granted to employees in the last fiscal year pursuant to the 1995 Stock
Incentive Plan. A total of 246,250 options were granted to employees on May
29, 1997 pursuant to the 1995 Stock Incentive Plan. Excludes options granted
by PGI to Messrs. Rosenthal and Carpenter pursuant to the Executive
Indemnification and Option Agreements. See "Certain Relationships and
Related Transactions--Indemnification and Option Agreements with Messrs.
Rosenthal and Carpenter and the Executive LLCs."
(3) Based on average closing price for the five business days preceding the
grant date.
(4) Reflects (i) 25,000 options to purchase Prime Common Shares granted pursuant
to the 1995 Stock Incentive Plan and (ii) 50,000 options to purchase Prime
Partnership Common Units granted by PGI pursuant to the Executive
Indemnification and Option Agreements. See "Certain Relationships and
Related Transactions--Indemnification and Option Agreements with Messrs.
Rosenthal and Carpenter and the Executive LLCs."
(5) Options to purchase Prime Common Shares granted pursuant to the 1995 Stock
Incentive Plan have an exercise price of $12.53 per Prime Common Share.
Options to purchase Prime Partnership Common Units granted by PGI pursuant
to the Executive Indemnification and Option Agreements have an exercise
price of $13.00 per Prime Partnership Common Unit. See "Certain
Relationships and Related Transactions--Indemnification and Option
Agreements with Messrs. Rosenthal and Carpenter and the Executive LLCs."
(6) Options granted pursuant to the 1995 Stock Incentive Plan have an expiration
date of May 29, 2007. Options granted by PGI pursuant to the Executive
Indemnification and Option Agreements have an expiration date of December
31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the number of
Prime Common Shares underlying Prime Stock Options held by each of the Prime
Named Executives and the value of such
234
<PAGE>
officers' exercisable and unexercisable options on December 31, 1997. None of
the Prime Named Executives exercised any Prime Stock Options during 1997.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF OPTIONS AT
UNEXERCISED OPTIONS 1997
AT 1997 YEAR-END YEAR-END
SHARES (#) ($)(1)
ACQUIRED ON ------------------- -------------
EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------------- ------------- ----------------- ------------------- -------------
<S> <C> <C> <C> <C>
Michael W. Reschke................................. -- -- 237,501/37,499 $240,313/0
Abraham Rosenthal.................................. -- -- 237,501/37,499(2) 216,563/0
William H. Carpenter, Jr........................... -- -- 237,501/37,499(2) 216,563/0
Glenn D. Reschke................................... -- -- 68,250/12,500 64,122/ 0
David G. Phillips.................................. -- -- 67,500/12,500 62,875/ 0
Robert P. Mulreaney................................ -- -- 20,000/0 39,750/ 0
</TABLE>
- ------------------------
Note:
(1) Based on the market price of $14.19 per share, which was the closing selling
price per Prime Common Share on the NYSE on December 31, 1997, less the
option exercise price of unexercised, in-the-money options held by the Prime
Named Executives at December 31, 1997.
(2) Includes 50,000 options to purchase Prime Partnership Common Units granted
by PGI pursuant to the Executive Indemnification and Option Agreements. See
"Certain Relationships and Related Transactions--Indemnification and Option
Agreements with Messrs. Rosenthal and Carpenter and the Executive LLCs."
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL AGREEMENTS
Prime has entered into agreements (the "Employment Agreements") with each of
the Prime Named Executives other than Messrs. Mulreaney and G. Reschke. The
agreements with Messrs. M. Reschke, Rosenthal, Carpenter and Phillips generally
provide that such executive officers shall devote substantially all of their
business time to the operation of Prime, except that Mr. M. Reschke is required
to devote only such time as he deems necessary to fulfill his duties and
obligations to Prime as Chairman of the Prime Board of Directors. The Employment
Agreements for each of Mr. M. Reschke and Mr. Phillips provide for terms
expiring on March 22, 1999, which terms are automatically extended for
successive one year periods unless either Prime or the executive officer
provides the other with prior written notice that such term shall not be
extended. The Employment Agreements for Messrs. Rosenthal and Carpenter provide
for a term expiring on the third anniversary of January 1, 1998, which terms are
automatically extended for successive one year periods unless either Prime or
the executive officer provides the other with prior written notice that such
term shall not be extended.
The Employment Agreements with Messrs. M. Reschke and Phillips provide that
the employees covered thereby are eligible to receive discretionary bonuses
based on the achievement of performance goals established by Prime. The
Employment Agreements with Messrs. Rosenthal and Carpenter provide for annual
performance based bonuses of not more than the executive's base salary
determined by a formula based on the following financial factors: annual growth
in FFO on a fully diluted per share basis, first year return on total
development cost for all new centers and expansions which open during the year,
average sales per square foot, percentage of space leased, and a discretionary
component of not more than 10% of the total bonus paid based on the executive's
participation in the development of new concepts. The Executive Compensation
Committee may, in its sole discretion, pay an annual performance bonus that is
greater than that indicated by application of the formula.
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If the Employment Agreements are terminated by Prime "without cause" or are
terminated by the executive after a "change in control" or for "good reason" (as
such terms are defined in the Employment Agreements), the executive will be
entitled to a lump sum payment. With regard to Messrs. M. Reschke and Phillips,
such payment will be an amount equal to the greater of such executive's annual
base salary or 50% of the remaining aggregate base salary due the executive over
the remaining term of his Employment Agreement. With regard to Messrs. Rosenthal
and Carpenter, such amount for termination by Prime "without cause" or for
termination by the executive for "good reason" will be equal to the executive's
annual base salary plus the average annual performance bonus paid to the
executive for the two years preceding the termination.
The Employment Agreements with Messrs. Rosenthal and Carpenter provide that
if, within twenty-four months following a "change of control" of Prime, Prime
terminates the executive's employment "without cause" or the executive
terminates his employment with "good reason," such executive will be entitled to
receive any bonuses accrued but undistributed, other vested benefits through the
effective date of the termination and health and life insurance benefits for a
period of two years, plus a termination distribution in the amount of $1.6
million. Additionally, if the Employment Agreements are so terminated, certain
restrictions on the transfer of stock held by Messrs. Rosenthal and Carpenter
(or obtained by such persons upon exercise of Prime Partnership Common Units)
may terminate, and any stock awards under Prime's 1998 Stock Incentive Plan will
be vested. Finally, if the Employment Agreements are terminated, Messrs.
Rosenthal and Carpenter will be fully vested in any amount accrued on their
behalf under any qualified or nonqualified retirement plans of Prime. With
regard to Messrs. Rosenthal and Carpenter, the Employment Agreements contain
certain non-compete provisions restricting the executives from developing,
acquiring or operating retail properties similar to those properties developed
or operated by Prime for a period of up to two years following termination of
employment, which period may be limited to four quarters by either party at any
time prior to 30 days before the end of the fourth quarter. The Employment
Agreements provide that if Prime terminates the executive's employment without
cause or the executive terminates his employment with good reason then, so long
as the executive is in compliance with these non-compete provisions, Prime will
pay the executive an amount equal to $66,666.66 per calendar month for a period
of 2 years, beginning with the first calendar month after termination of the
executive's employment; provided that, either Prime or the executive may elect
to limit the non-compete period, and the $66,666.66 monthly payments, to one
year.
The Employment Agreements provide for a base salary of $250,000 for Mr. M.
Reschke, $400,000 for Messrs. Rosenthal and Carpenter and $225,000 for Mr.
Phillips. The current terms of compensation for Messrs. G. Reschke and Mulreaney
include a base salary of $225,000.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee of the Prime Board of Directors, which
is required to have a majority of outside Directors who are neither employees
nor officers of Prime, is charged with determining compensation for Prime's
executive officers. Messrs. Terence C. Golden and Kenneth A. Randall and Ms.
Sharon Sharp currently serve on the Executive Compensation Committee.
No executive officer of Prime served as a director or member of (i) the
compensation committee of another entity, an executive officer of which entity
is a director of Prime or member of Prime's Executive Compensation Committee,
(ii) the Prime Board of Directors of another entity in which one of the
executive officers of such entity served on Prime's Executive Compensation
Committee, or (iii) the compensation committee of any other entity in which one
of the executive officers of such entity served as a member of the Prime Board
of Directors, during the year ended December 31, 1997.
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REPORT OF EXECUTIVE COMPENSATION COMMITTEE
RESPONSIBILITIES OF THE COMMITTEE
The Executive Compensation Committee of the Prime Board of Directors
consists of three independent, non-employee directors. The Executive
Compensation Committee consists of Messrs. Kenneth A. Randall and Terence C.
Golden and Ms. Sharon J. Sharp. It is the Executive Compensation Committee's
responsibility to:
- Recommend and report to the Prime Board of Directors concerning matters of
compensation relating to Prime's senior executive officers, including the
Prime Named Executives;
- Administer Prime's executive incentive plans; and
- Monitor the performance and compensation of Prime's senior executive
officers.
The Executive Compensation Committee has retained the services of a
nationally recognized compensation and benefits consulting firm (the
"Consultant") to assist it in performing these duties, and to obtain access to
an extensive database of competitive market practices.
COMPANY PERFORMANCE
In the Executive Compensation Committee's view, Prime's senior management
has contributed significantly to Prime's growth in recent years, measured both
in terms of portfolio size and FFO. Prime's senior management also has
contributed significantly to Prime's successful efforts to strengthen its
financial condition. Since the completion of the Prime IPO in March 1994,
Prime's outlet center portfolio has grown from 9 centers with approximately 2.2
million square feet of GLA to 28 centers with approximately 7.2 million square
feet of GLA as of December 31, 1997. During 1997, Prime's portfolio of outlet
center properties increased in size by 24%, or approximately 1.4 million square
feet of GLA. The growth in 1997 reflects the acquisition of seven outlet centers
and the expansion of four existing centers. For the year ended December 31,
1997, Prime's FFO before allocations to preferred stockholders and minority
interests was $46.7 million, or 38% higher than in 1996 (before giving effect to
a non-recurring charge in 1996 relating to a financing transaction). Another
significant development highlighting Prime's growth is the proposed merger with
Horizon through which Prime will acquire 22 of Horizon's best performing centers
and establish itself as the largest owner and operator of outlet centers in the
United States.
In addition, since June 1996, the members of management have played key
roles in structuring and implementing transactions designed to strengthen
Prime's financial condition. These transactions included: (i) consummating an
exchange offer in which Prime issued Prime Common Shares in exchange for Prime
Series B Preferred Shares; (ii) completing a $60 million private placement of
convertible preferred equity securities to an affiliate of Security Capital
Group; (iii) consummating three public equity offerings that generated aggregate
net proceeds of approximately $222.7 million; and (iv) closing on $738.0 million
in new loan facilities. As a result of these transactions, Prime has
substantially increased its level of common equity, reduced its leverage and
exposure to refinancing risk and enhanced its financial flexibility to further
pursue property acquisition and development activities. In this regard, the
Executive Compensation Committee notes that the number of publicly traded Prime
Common Shares increased from 2,875,000 on December 31, 1995 to 27,294,951 on
December 31, 1997, representing an increase in the public market value of
outstanding Prime Common Shares (based on closing prices as of such dates) from
$34.1 million to $387.3 million.
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THE STRUCTURE AND BASIS OF PRIME'S COMPENSATION PROGRAM
Prime's compensation programs are based on the following guiding principles:
- Competitiveness--Offering competitive levels of total compensation,
commensurate with performance, to attract critical executive talent.
- Pay for Performance--Fostering a culture that motivates and rewards
high-performing executives and emphasizes incentive based salary
compensation.
- Retention--Retaining exceptional executive talent and promotion management
stability for the long-term benefits of Prime and its shareholders.
- Shareholder Interests--Maintaining a compensation program that rewards the
achievement of strategic objectives that enhance shareholder value.
During 1997, the Consultant found that, in terms of annual incentive and
total annual cash compensation, most REITs with the same asset class focus as
Prime (i.e., retail) and REITs with a similar market capitalization are
providing greater levels than those received by Prime's senior executive
officers, including the Chairman of the Board, the Chief Executive Officer, and
the President and Chief Operating Officer of Prime.
Prime's executive compensation programs consists of the following
components:
BASE SALARY
Prime has entered in to Employment Agreements with Mr. M. Reschke, the
Chairman of the Board of Prime, Mr. Rosenthal, the Chief Executive Officer of
Prime, Mr. Carpenter, the President and Chief Operating Officer of Prime, and
certain other senior executives. Pursuant to such agreements, the base salaries
of Messrs. M. Reschke, Rosenthal and Carpenter for the period from January 1,
1997 to December 31, 1997 was $150,000, $250,000 and $250,000, respectively. See
"--Employment Agreements and Change of Control Agreements." Pursuant to the
Employment Agreements, the Executive Compensation Committee may increase the
senior executive officers' annual base salary based on achievement of individual
performance goals as well as other factors.
Prime has not adjusted the senior executive officers' base salaries since
Prime's IPO in 1994. Upon review of the market data for comparable management
positions, the Executive Compensation Committee has established new base
salaries to be effective in 1998, which are competitive with the practices of
other REITs comparable in size and asset class.
ANNUAL PERFORMANCE BONUS
Executive officers are eligible to receive annual performance bonuses.
Pursuant to the Employment Agreements with Messrs. Rosenthal and Carpenter, 90%
of their annual performance bonus is determined by a formula tied to certain
financial and operating objectives and the remaining 10% is determined at the
discretion of the Executive Compensation Committee based on such executive's
participation in the development of new concepts. See "--Employment Agreements
and Change of Control Agreements." The annual performance bonus for other senior
officers, including Mr. M. Reschke, is determined by the Executive Compensation
Committee based on a variety of criteria related to individual and company
performance.
The Executive Compensation Committee awarded Messrs. Rosenthal and Carpenter
a performance bonus of $250,000 each for the period from January 1, 1997 to
December 31, 1997. In addition to the criteria specified in the Employment
Agreements, the Executive Compensation Committee's decision to pay these bonus
amounts was based on two other important factors. First, the Consultant advised
the Executive Compensation Committee that both the annual compensation paid, and
the equity ownership
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opportunities provided, to Messrs. Rosenthal and Carpenter were below that of
similarly situated senior executive officers at REITs with the same asset class
focus as Prime (i.e. retail) and REITs with a similar market capitalization.
Second, Prime met or exceeded substantially all of the objectives established in
its 1997 strategic plan, including: (i) achieving total shareholder return
objectives; (ii) reducing the ratio of debt to total market capitalization;
(iii) strengthening the portfolio by leasing vacant space, increasing sales by
its tenants, and enticing "key tenants" to lease more space; (iv) acquiring and
developing new projects; and (v) developing new businesses.
The Executive Compensation Committee also decided to award Mr. M. Reschke a
bonus of $500,000 for 1997. The Executive Compensation Committee based this
decision on several factors. First, Prime pays Mr. Reschke a relatively low base
salary. Second, Mr. Reschke, at his request, has not been considered for an
annual incentive award since 1994. Finally, Mr. Reschke has played, and will
continue to play, a substantial role in various strategic transactions,
including the proposed Horizon merger, equity sales, financings, and asset
acquisitions.
STOCK INCENTIVE PLANS
As of December 31, 1997, only 66,250 authorized shares remained for issuance
under the 1995 Stock Incentive Plan. In light of the limited number of available
shares, the Executive Compensation Committee approved and the Prime Board of
Directors adopted, subject to approval by Prime's shareholders, the Prime Stock
Incentive Plan, which authorizes issuance of awards up to 1,900,000 Prime Common
Shares, which represents approximately 5% of the Prime Common Shares outstanding
as of December 31, 1997, assuming conversions of the then outstanding
convertible preferred stock and the exchange of the then outstanding units in
the Prime Partnership. In the event the proposed merger with Horizon is
consummated, such number of authorized shares will increase to 3,100,000 which
represents approximately 5% of the Prime Common Shares anticipated to be
outstanding immediately following such transaction under the same assumptions.
Pursuant to the 1995 Stock Incentive Plan, on May 29, 1997, Prime granted
non-qualified stock options to senior executive officers and certain other key
employees. Messrs. Rosenthal, Carpenter and M. Reschke were granted options to
purchase 25,000, 25,000 and 50,000 Prime Common Shares, respectively, at the
fair market value of the Prime Common Shares on the date of grant. The options
were fully vested upon the grant. The Executive Compensation Committee made such
grants based on its assessment of the long-term contributions such individuals
can continue to make to Prime's performance. The Executive Compensation
Committee believes the options granted under the 1995 Stock Incentive Plan will
continue to align management's interests with those of Prime's stockholders by
emphasizing long-term stock ownership and increases in stockholder value.
LONG-TERM COMPENSATION
The compensation of Messrs. Rosenthal and Carpenter is, in part, linked to
Prime's achievement of certain long-term operating objectives. Pursuant to
Special Distribution and Allocation Agreements ("Special Distribution
Agreements"), certain limited liability companies controlled by Messrs.
Rosenthal and Carpenter may be entitled to receive cash distributions ("Special
Distributions") from Prime Partnership of up to 50% of the amount of the full
recourse obligations that such LLCs incurred to purchase Prime Partnership
Common Units in connection with the Prime IPO. The Special Distributions would
be paid by March 31, 1999, if and to the extent that (i) the average annual
growth rate of Prime's FFO during the three year period ending December 31, 1998
exceeds 10% and (ii) such individuals remain employed by Prime throughout such
period. See "--Certain Relationships and Transactions--Loans to Messrs.
Rosenthal and Carpenter."
Based on what the Executive Compensation Committee believes to be superior
performance by the senior executive officers since the Prime IPO and,
especially, during 1997, the Executive Compensation
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Committee decided to amend the Special Distribution Agreements to waive the
performance criteria contained in such agreements and accelerate the payment
date by one year, thereby providing a Special Distribution of approximately
$1,261,150 to each of The Rosenthal Family LLC and Carpenter Associates LLC in
1998. Upon receipt, The Rosenthal Family LLC and Carpenter Associates LLC each
immediately applied the full amount of the Special Distribution to repay their
obligations under the full recourse notes.
POLICY WITH RESPECT TO THE $1 MILLION DEDUCTION LIMIT
Section 162(m) of the Code, limits the ability of a publicly-held
corporation such as Prime to deduct compensation in excess of $1,000,000 per
individual, other than performance-based compensation. It is Prime's policy to
consider this rule in setting the compensation of its affected executives.
Currently, the Executive Compensation Committee does not believe that there
is a risk of losing deductions under Section 162(m). The 1995 Stock Incentive
Plan was structured with the intention that compensation attributable to options
granted thereunder would not be subject to the Section 162(m) limitation.
However, base salary and bonuses payable to Prime's senior executives under
their Employment Agreements would be considered as compensation subject to the
Section 162(m) limitation. Accordingly, it is possible that in some future year
some portion of the compensation Prime pays to its senior executives will not be
tax deductible under Section 162(m).
The Executive Compensation Committee intends to consider carefully any
benefit plan or compensation arrangement that might result in the disallowance
of compensation deductions. The Executive Compensation Committee will use its
best judgement, considering all the factors, including the materiality of any
deductions that may be lost versus the broader interests of Prime to be served
by paying adequate compensation for services rendered, before adopting any plan
or compensation arrangement.
Executive Compensation and Stock Incentive Plan Committee
Kenneth A. Randall
Terence C. Golden
Sharon J. Sharp
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PERFORMANCE GRAPH
The following performance graph compares Prime's performance to the Prime
Peer Group. Share price performance for the period January 1, 1997 through
December 31, 1997 is not necessarily indicative of future results. Historical
share price information is not necessarily indicative of future results. All
stock price performance assumes an initial investment of $100 at the beginning
of the period and assumes the reinvestment of any dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PRIME RETAIL,
INC. S & P 500 SELECTED PEER GROUP
<S> <C> <C> <C>
Mar-94 100.00 100.00 100.00
Dec-94 72.08 105.33 88.07
Dec-95 70.71 144.75 85.60
Dec-96 82.20 178.03 89.14
Dec-97 101.70 237.43 89.25
</TABLE>
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING AGREEMENTS WITH AFFILIATES OF MR. TRAUB. Prime has entered into
a consulting agreement with MTA, an entity owned and controlled by Mr. Traub.
The consulting agreement provides that for so long as Mr. Traub remains a
director of Prime, MTA will provide consulting and advisory services in
connection with Prime's merchant relations and MTA will receive a monthly fee of
$8,333 for such services.
Prime has entered into a consulting agreement with Financo, Inc.
("Financo"), an affiliate of Mr. Traub, pursuant to which Financo will advise
and assist Prime in developing certain discount retailing concepts (the
"Concepts"). In connection with this agreement, Prime paid Financo a retainer of
$50,000. In addition, in the event that Prime either develops or makes an
investment in a business relating to the Concepts, Prime will pay Financo a fee
of $250,000 and grant Financo options to acquire certain equity interests in
such business. This agreement is terminable by either party upon ten days' prior
written notice.
LOANS TO MESSRS. ROSENTHAL AND CARPENTER. In connection with the IPO, Prime
Partnership made recourse loans of $2.375 million for the benefit of each of
Messrs. Rosenthal and Carpenter. Messrs. Rosenthal and Carpenter used such loan
proceeds to acquire 125,000 Prime Partnership Common Units at a price of $19.00
per unit, reflecting the Prime IPO price per Prime Common Share. Each of Messrs.
Rosenthal and Carpenter incurred such loans and made such purchases through the
Executive LLC that he controls and which is the borrower under each such loan.
Each of the loans is secured by a pledge of 125,000 Prime Partnership Common
Units acquired with the proceeds thereof (the "Pledged Common Units") and is
guaranteed by Messrs. Rosenthal and Carpenter, respectively. On January 1, 1996,
Prime and Messrs. Rosenthal and Carpenter, respectively, modified the loans to
add accrued and unpaid interest of $187,500 to the principal amount thereof and
to amend the interest rate applicable to the loan from 6.55% per annum to the
lesser of (i) the amount of the distributions paid by Prime Partnership with
respect to such Pledged Common Units or (ii) 6.55% per annum. Interest of
$129,443.75 accrued and was paid on the principal balance of each such loan for
the year ended December 31, 1996. Each loan matures on the earlier to occur of
(i) March 22, 2004 or (ii) the first anniversary of the termination of the
individual's employment with Prime for any reason. The Executive LLCs holding
the Pledged Common Units are subject to the same limitations on transfer and
exchange applicable to Messrs. Rosenthal and Carpenter personally.
Pursuant to Special Distribution Agreements entered into between Prime,
Prime Partnership and each of the Executive LLCs on January 1, 1996, the
Executive LLCs were entitled to receive on or before March 31, 1999, cash
distributions ("Special Distributions") from Prime Partnership equal to the
product of (a)(i) the average annual growth in Prime's FFO per share (expressed
as a percentage) during the three year period ending December 31, 1998 minus 10%
(ii) divided by 5%, and (b) one-half of the outstanding amount of the recourse
loans that such Executive LLCs incurred to purchase Prime Partnership Common
Units in connection with the Prime IPO, provided that such individuals remained
employed by Prime throughout such a period. In 1998, the Special Distribution
Agreements were amended with the approval of the Executive Compensation
Committee to eliminate the performance criteria contained in such agreements,
fix the amount of the Special Distributions at $1,261,150 and accelerate the
payment of such distributions to the Executive LLCs to March 19, 1998. Upon
receipt, the Executive LLCs each immediately applied the full amount of the
Special Distribution to repay, in part, their obligations under the recourse
loans.
INDEMNIFICATION AND OPTION AGREEMENTS WITH MESSRS. ROSENTHAL AND CARPENTER
AND THE EXECUTIVE LLCS. On January 1, 1996, PGI entered into the Executive
Indemnification and Option Agreements with Messrs. Rosenthal and Carpenter and
the Executive LLCs. Pursuant to these agreements, subject to Messrs. Rosenthal
and Carpenter's continued employment by Prime and certain other conditions, PGI
has agreed to indemnify Messrs. Rosenthal and Carpenter and the Executive LLCs
against 50% of any Loss (as hereinafter defined). "Loss" means an amount equal
to the Note Balance less the sum of (i) the value of the Pledged Common Units
(which shall be deemed to equal the market value of an identical number of
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Prime Common Shares on the date at which the Executive LLC must repay the Note
Balance, and (ii) any distributions paid in respect of the Pledged Common Units
(other than distributions used to pay interest on the Note Balance), including
any special distributions received by the Executive LLCs pursuant to the Special
Distribution Agreements.
PGI also agreed, subject to Messrs. Rosenthal and Carpenter's continued
employment by Prime, to grant to each of Messrs. Rosenthal and Carpenter options
to purchase (i) up to 50,000 Prime Partnership Common Units at $13.00 per Prime
Partnership Common Unit upon the first date on which the regular cash
distribution for each of four successive calendar quarters of Prime Partnership
distributable with respect to Prime Partnership Common Units is equal to or
greater than the regularly quarterly (calendar) dividend on a per share basis
for the outstanding Prime Common Shares for the same calendar quarters, and (ii)
up to 50,000 Prime Partnership Common Units at $13.00 per Prime Partnership
Common Unit upon the first date on which the regular quarterly (calendar)
dividend per share of Prime Series B Preferred Share exceeds $.53125 based on
the ability of such class of stock to participate in dividends declared and paid
in respect of the Prime Common Shares. Any options so granted will expire on
December 31, 2000. On August 15, 1997, PGI granted each of Messrs. Rosenthal and
Carpenter 50,000 options to purchase Prime Partnership Common Units as a result
of the satisfaction of the conditions set forth in (i) of this paragraph.
OBLIGATIONS WITH RESPECT TO HGP CREDIT FACILITIES. Pursuant to the Prime
Guarantee, New Prime will 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 New Prime to make
payments under the guarantee. In addition, upon consummation of the
Transactions, HGP will assume a $4.0 million credit facility from Horizon. New
Prime has agreed to provide HGP with the funds necessary to pay off this
facility upon its maturity on August 1, 1998. Accordingly, if HGP is unable to
refinance or pay off this facility at maturity, New Prime may be required to pay
off the entire amount outstanding under this facility.
OTHER TRANSACTIONS. Governor James R. Thompson, a Director of Prime, is
Chairman of the law firm of Winston & Strawn, which has provided, and continues
to provide, legal services to Prime.
OTHER INFORMATION
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires Prime's officers and directors,
and persons who own more than 10% of a registered class of Prime's equity
securities, to file reports of the ownership and changes in the ownership with
the Commission and the NYSE. Officers, directors and beneficial owners of more
than 10% of Prime Common Shares are required by Commission regulation to furnish
Prime with copies of all such forms which they file.
Based solely on Prime's review of the copies of such forms received by it,
and/or written representations from certain reporting persons, Prime believes
that, during the year ended December 31, 1997, its directors, executive officers
and beneficial owners of more than ten percent of Prime Common Shares have
complied with all filing requirements applicable to them.
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LEGAL MATTERS
Certain legal matters in connection with the Transactions will be passed
upon for Prime 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 and HGP 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, Horizon and the combined
financial statements of HGP and the statements of revenue and certain expenses
of Prime Transferred Properties appearing or incorporated by reference in this
Joint Proxy/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 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.
Representatives of Ernst & Young LLP will attend the Prime Shareholders
Meeting and the Horizon Special Meeting and will have an opportunity to make a
statement if they desire to do so and, while not intending to make a statement,
will respond to appropriate questions directed to Ernst & Young LLP.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder of Prime intends to present at the 1998
annual meeting of shareholders of Prime, if the Transactions have not been
consummated prior to the date such meeting is to be held, must have been
received by the Secretary of Prime no later than January 14, 1999 to have been
eligible for inclusion in Prime's proxy statement and proxy form relating to
such meeting.
Any proposal which a shareholder of Horizon intends to present at the 1998
annual meeting of shareholders of Horizon, if the Transactions have not been
consummated prior to the date such meeting is to be held, must have been
received by Horizon at its principal executive offices at a reasonable time
before Horizon's proxy statement for Horizon's 1998 annual meeting is mailed to
shareholders, eligible for inclusion in Horizon's proxy statement and proxy form
relating to such meeting.
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GLOSSARY
FOR PURPOSES OF THIS JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT, THE
FOLLOWING CAPITALIZED TERMS SHALL HAVE THE MEANING SET FORTH BELOW:
<TABLE>
<S> <C>
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.
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.
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.
Assumed Liabilities............... Certain liabilities which HGP LP will assume in
connection with the Horizon Partnership Contribution.
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
</TABLE>
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<TABLE>
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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.
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...................... Outstanding Sky Merger Common Shares.
Chelsea........................... Chelsea GCA Realty Inc.
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.
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.
Consultant........................ A nationally recognized compensation and benefits and
consulting firm retained by the Executive Compensation
Committee.
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
E.
Control Share Acquisition......... The acquisition of control shares, subject to certain
exceptions.
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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 acquitor 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,
a copy of which is attached hereto as Appendix D.
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.
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).
Court............................. The Circuit Court for Muskegan County, Michigan.
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.
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.
Employment Agreements............. Employment agreements entered into by Prime with each of
the Prime Named Executives other than Messrs. Mulreaney
and G. Reschke.
Exchange Act...................... The Securities Exchange Act of 1934, as amended.
Exchange Agent.................... American Stock Transfer & Trust Company.
Executive Compensation Committee.. The Executive Compensation and Stock Incentive Plan
Committee of the Prime Board of Directors.
Executive Indemnification and
Option Agreements............... Certain indemnification and option agreements entered
into by PGI with Messrs. Rosenthal and Carpenter and the
Executive LLCs.
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Executive LLCs.................... Certain limited liability companies controlled by
Messrs. Rosenthal and Carpenter.
Executive Officers................ The executive officers of HGP.
Exercise Price.................... The exercise price of the Prime Stock Options or HGP
Stock Options determined by the Executive Compensation
Committee or the HGP Compensation Committee,
respectively, in its sole discretion, provided that it
may not be less than the 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.
Fair Market Value................. The average of the high and the low trading prices of
Prime Common Shares or HGP Common Shares on the national
securities exchange on which the shares are traded.
FBR............................... Friedman, Billings, Ramsey & Co., Inc.
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........................... Financo, Inc., an affiliate of Marvin Traub.
FIRPTA............................ The Foreign Investment in Real Property Tax Act of 1980.
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.
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.
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HGP 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.
HGP Common Shares................. The shares of common stock, $0.01 par value per share,
of HGP.
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 LP............................ Horizon Group Properties, L.P., a Delaware limited
partnership.
HGP LP Common Unit Distribution... The distribution by Prime Partnership of interests in
HGP LP Common Units as declared in the Prime Partnership
Declaration of HGP LP Common Units.
HGP LP Common Units............... The common units of HGP LP.
HGP LP Partnership Agreement...... The Agreement of Limited Partnership 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 Participants.................. Key employees and officers who, as determined by the HGP
Committee, provide substantial and important services to
HGP and may be granted HGP Stock Awards under the HGP
Stock Plan.
HGP Properties.................... All of the properties owned directly or indirectly by
HGP.
HGP Restricted Stock.............. HGP Common Shares that are subject to such restrictions
as the HGP Compensation Committee deems appropriate,
including forfeiture conditions and restrictions against
transfer for a period specified by the HGP Compensation
Committee.
HGP Stock Award................... The grant of incentive and non-qualified stock options
and HGP Restricted Stock provided by the HGP Stock Plan.
HGP Stock Award Agreements........ Award agreements setting forth the terms of the HGP
Stock Awards.
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HGP Stock Plan.................... The 1998 Long-Term Stock Incentive Plan of HGP.
HGP Stock Options................. Incentive or non-qualified stock options to purchase HGP
Common Shares, which may be granted by the HGP
Compensation Committee.
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.
Horizon Common Shares............. The shares of common stock, $0.01 par value per share,
of Horizon.
Horizon Contributed Properties.... The 13 of the 35 outlet centers currently operated by
Horizon Partnership which will ultimately be owned and
operated by HGP LP.
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 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
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
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and the assumption by HGP LP of certain obligations of
Horizon Partnership.
Horizon Partnership Unitholders... The holders of Horizon Partnership Common Units.
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 directly or indirectly by
Horizon.
Horizon Record Date............... April 24, 1998.
Horizon Special Meeting........... The meeting of Horizon Common Shareholders to be held on
June 12, 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.
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 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.
Kittery Center.................... Collectively, Prime's Tidewater Outlet Mall,
Manufacturer's Outlet Mall and Kittery Outlet Village.
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.
Latham Center..................... 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
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Brothers Realty Corporation, a Delaware corporation,
dated as of June 30, 1997.
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).
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 $50.0
million.
MBCA.............................. The Michigan Business Corporation Act.
McArthur/Glen..................... McArthur/Glen Realty Corp.
Meetings of Shareholders.......... The Horizon Special Meeting and the Prime Special
Meeting.
Memorandum........................ The Memorandum of Understanding containing the general
terms of the settlement of the shareholder litigation
brought by a shareholder of Horizon.
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.
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 Stock Market, Inc.
Nebraska/Indiana Property
Transfers....................... Prime's collective sale 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.
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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.
New Prime Preferred Shares........ The shares of preferred stock, $0.01 par value per
share, of the New Prime.
New Prime Properties.............. All of the properties owned directly or indirectly by
New Prime.
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
Distribution Payment Date....... Distributions payable quarterly in arrears on the
fifteenth day of
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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
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
the 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.
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
the 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 the new prime's outstanding capital
stock.
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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 the New Prime.
New Prime Series C Conversion
Date............................ Date determined by New Prime to convert New Prime Series
C Preferred Shares to the 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.
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 the 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
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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 Center.................... Prime's Niagara International Factory Outlets.
NOI............................... Net Operating Income.
Nomura............................ Nomura Asset Capital Corporation.
Nomura Loan Facilities............ Various debt facilities providing New Prime $305.0
million of debt financing from Nomura.
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
Executive Compensation 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.
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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.
Pledged Common Units.............. 125,000 Prime Partnership Common Units pledged to secure
the loans made to the Executive LLCs for the benefit of
each of Messrs. Rosenthal and Carpenter.
Pledgees.......................... Certain unaffiliated third parties to which PGI has
pledged Prime Common Shares and Prime Partnership Common
Units in order to secure certain indebtedness of PGI and
its affiliates.
Port Huron Center................. The Port Huron, Michigan factory outlet center formerly
owned by Horizon.
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 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 Finance Corporations........ Prime Services Corp, Prime Retail Finance, Inc., Prime
Retail Finance II, Inc., Prime Retail Finance III, Inc.,
Prime Retail Finance IV, Inc., Prime Retail Finance V,
Inc., Prime Retail Finance VI, Inc., Prime Retail
Finance VII, 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.
</TABLE>
257
<PAGE>
<TABLE>
<S> <C>
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.
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 Limited
Partners........................ The limited partners of Prime Partnership.
Prime Partnership Preferred
Units........................... The Prime Partnership preferred units designated in the
Second Amended and Restated 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 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 Peer Group.................. Horizon, Tanger Factory Outlet Centers, Inc., Chelsea
GCA Realty, Inc. and FAC Realty Trust, Inc.
Prime Predecessor................. Prime Retail Properties.
Prime Properties.................. All of the properties owned directly or indirectly by
Prime.
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 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.
</TABLE>
258
<PAGE>
<TABLE>
<S> <C>
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, the Prime Series A
Preferred Shareholders, the Prime Series B Preferred
Shareholders and Prime Series C Preferred Shareholders.
Prime Shareholders Meeting........ The meeting of Prime Shareholders to be held on June 12,
1998, at 11:00 a.m.
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 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 Prime
Stock Incentive Awards.
Prime Stock Incentive Plan........ The Prime Retail, Inc. 1998 Long-Term Incentive Stock
Plan.
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 Option Committee.
Prime Stock Options............... Certain options to purchase Prime Common Shares.
Prime Transferred Properties...... The Indiana Factory Shops and the Nebraska Factory
Shops.
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 Prime on Form S-4
under the Securities Act.
</TABLE>
259
<PAGE>
<TABLE>
<S> <C>
Reincorporation Articles of
Merger.......................... Articles of merger to be filed by Horizon and Sky Merger
with the Maryland Department to effectuate the
Reincorporation Merger a copy of which is attached
hereto as Appendix B.
Reincorporation Certificate of
Merger.......................... A certificate of merger between Horizon and Sky Merger
filed with the Michigan Department to effectuate the
Reincorporation Merger a copy of which is attached
hereto as Appendix C.
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.
Repurchase Payment................ A repurchase price payable in cash in an amount equal to
100% of 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.
</TABLE>
260
<PAGE>
<TABLE>
<S> <C>
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.
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 Center..................... Prime's Shasta Factory Stores.
Silverthorne Center............... Horizon's Silverthorne Factory Stores in Silverthorne,
Colorado.
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.
Special Distribution Agreements... Certain Special Distribution and Allocation Agreements
pursuant to which Executive LLCs may be entitled to
receive Special Distributions.
Special Distributions............. Cash distributions to certain Executive LLCs from Prime
Partnership of up to 50% of the amount of the full
recourse obligations that such Executive LLCs incurred
to purchase Prime Partnership Common Units in connection
with the Prime IPO.
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.
</TABLE>
261
<PAGE>
<TABLE>
<S> <C>
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.
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.
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 Corporate Line.......... The $40.0 million full recourse unsecured corporate line
of credit.
USRPIs............................ United States Real Property Interests.
</TABLE>
262
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
NEW PRIME (Prime Retail, Inc.)
Pro Forma Post-Transactions (Unaudited)
Basis of Presentation to Pro Forma Consolidated Balance Sheet as of December 31, 1997.................. F-3
Pro Forma Consolidated Balance Sheet as of December 31, 1997........................................... F-4
Notes to Pro Forma Consolidated Balance Sheet.......................................................... F-5
Basis of Presentation to Pro Forma Consolidated Statement of Operations for the year ended December 31,
1997.................................................................................................. F-11
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.................... F-12
Notes to Pro Forma Consolidated Statement of Operations................................................ F-13
PRIME RETAIL, INC.
Pro Forma Pre-Transactions (Unaudited)
Basis of Presentation to Pro Forma Consolidated Statement of Operations for the year ended December 31,
1997.................................................................................................. F-16
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.................... F-17
Notes to Pro Forma Consolidated Statement of Operations................................................ F-18
HORIZON GROUP, INC.
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-19
Pro Forma Consolidated Balance Sheet as of December 31, 1997........................................... F-20
Notes to Pro Forma Consolidated Balance Sheet.......................................................... F-21
Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997.................... F-22
Notes to Pro Forma Consolidated Statement of Operations................................................ F-23
PRIME TRANSFERRED PROPERTIES
Report of Independent Auditors........................................................................... F-24
Statements of Revenue and Certain Expenses for the years ended December 31, 1997, 1996 and 1995.......... F-25
Notes to Statements of Revenue and Certain Expenses...................................................... F-26
HORIZON GROUP PROPERTIES, INC.
Report of Independent Auditors........................................................................... F-27
Combined Statements of Net Assets as of December 31, 1997 and 1996....................................... F-28
Combined Statements of Operations for the years ended December 31, 1997, 1996 and 1995................... F-29
Combined Statements of Changes in Net Assets............................................................. F-30
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Combined Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................... F-31
Notes to Combined Financial Statements................................................................... F-32
Schedule III--Real Estate and Accumulated Depreciation................................................... F-40
Notes to Schedule III.................................................................................... F-41
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-42
Pro Forma Combined Balance Sheet as of December 31, 1997............................................... F-43
Notes to Pro Forma Combined Balance Sheet.............................................................. F-44
Pro Forma Combined Statement of Operations for the year ended December 31, 1997........................ F-49
Notes to Pro Forma Combined Statements of Operations................................................... F-50
</TABLE>
F-2
<PAGE>
NEW PRIME (PRIME RETAIL, INC.)
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 and Horizon 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 and Horizon. 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 and Horizon incorporated by reference into this Joint Proxy
Statement/Prospectus; and (b) the Unaudited Pre-Transactions Pro Forma
Consolidated Balance Sheet as of December 31, 1997 of Horizon and notes thereto,
included elsewhere herein.
F-3
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
NEW PRIME (PRIME RETAIL, INC.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TRANSACTIONS ADJUSTMENTS
PRE-TRANSACTIONS ------------------------------------------------------------------
HORIZON PRIME TRANSFERRED PURCHASE OF FINANCINGS
ASSETS PRIME [A] PRO FORMA [B] HGP [C] PROPERTIES [D] FINGER LAKES CENTER [E] AND OTHER
----------- --------------- --------- ----------------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment in rental
property, net......... $ 822,749 $ 945,304 $(213,190) $ (42,058) $ 47,741 $ 216,512[F]
(40,565)[H]
Cash and cash
equivalents........... 6,373 11,279 (3,581) 25,958 811 (25,300)[I]
Restricted cash......... 41,736 751 (281) 919
Accounts receivable,
net................... 9,745 6,603 (395) (336) 315
Deferred charges, net... 16,206 18,233 (4,933) 2,002[J]
(13,300)[K],[F]
Due from affiliates,
net................... 1,052 11,639 (11,639) (44)
Investment in
partnerships.......... 3,278 2,629 (309) (2,320)
Assets held for sale.... 1,933 (1,933)
Other assets............ 3,044 8,815 (1,075)
----------- --------------- --------- -------- -------- -----------
Total assets........ $ 904,183 $ 1,007,186 $(237,336) $ (16,480) $ 47,466 $ 139,349
----------- --------------- --------- -------- -------- -----------
----------- --------------- --------- -------- -------- -----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Mortgages and other
debt.................. $ 515,265 $ 596,784 $(146,846) $ 46,100 $ 45,474[L]
21,865[M]
21,747[N],[F]
18,750[O],[F]
2,002[J]
(25,300)[I]
Accrued interest........ 3,767 3,294 (818)
Real estate taxes
payable............... 4,639 6,679 (1,322) $ (375)
Construction costs
payable............... 5,849 2,807 (417)
Accounts payable and
other liabilities..... 20,210 14,835 (4,771) (1,094) 1,366
----------- --------------- --------- -------- -------- -----------
Total liabilities... 549,730 624,399 (154,174) (1,469) 47,466 84,538
Minority interests...... 9,925 61,445 55,375[P],[F]
(61,445)[Q],[F]
Commitments and
contingencies [V]
Shareholders' equity
[W]:
Series A preferred
stock............... 23
Series B preferred
stock............... 30 48[F],[R]
Series C preferred
stock............... 36
Common stock.......... 273 241 144[F],[S]
(241)[T],[F]
Additional paid-in
capital............. 398,188 468,593 205,022[S],[F]
(468,593)[T],[F]
115,712[R],[F]
Predecessor owners'
capital............. (83,162) 128,636[F],[U]
(45,474)[L]
Distributions in
excess of net
income.............. (54,022) (147,492) (15,011)[G] (21,865)[M]
(40,565)[H]
188,057[T],[F]
----------- --------------- --------- -------- -------- -----------
Total shareholders'
equity............ 344,528 321,342 (83,162) (15,011) 60,881
----------- --------------- --------- -------- -------- -----------
Total liabilities
and shareholders'
equity............ $ 904,183 $ 1,007,186 $(237,336) $ (16,480) $ 47,466 $ 139,349
----------- --------------- --------- -------- -------- -----------
----------- --------------- --------- -------- -------- -----------
<CAPTION>
NEW PRIME
ASSETS PRO FORMA
-----------
<S> <C>
Investment in rental
property, net......... $1,736,493
Cash and cash
equivalents........... 15,540
Restricted cash......... 43,125
Accounts receivable,
net................... 15,932
Deferred charges, net... 18,208
Due from affiliates,
net................... 1,008
Investment in
partnerships.......... 3,278
Assets held for sale....
Other assets............ 10,784
-----------
Total assets........ $1,844,368
-----------
-----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
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..... 30,546
-----------
Total liabilities... 1,150,490
Minority interests...... 65,300
Commitments and
contingencies [V]
Shareholders' equity
[W]:
Series A preferred
stock............... 23
Series B preferred
stock............... 78
Series C preferred
stock............... 36
Common stock.......... 417
Additional paid-in
capital............. 718,922
Predecessor owners'
capital.............
Distributions in
excess of net
income.............. (90,898)
-----------
Total shareholders'
equity............ 628,578
-----------
Total liabilities
and shareholders'
equity............ $1,844,368
-----------
-----------
</TABLE>
See accompanying Notes to Post-Transactions Pro Forma Consolidated Balance
Sheet.
F-4
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET
NEW PRIME (PRIME RETAIL, INC.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[A] Represents Prime's historical balances at December 31, 1997.
[B] See Pre-Transactions Horizon 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 which were previously owned and operated by Horizon. See
HGP 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 for $26,015 upon
consummation of the Transactions as follows (see Note [G]):
<TABLE>
<CAPTION>
ELIMINATION OF
HISTORICAL SALES
COST 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)
Predecessor owners' capital.................................................. (41,026) $ 41,026 --
Distributions in excess of net income........................................ (15,011) (15,011)
-------------- ------------- ----------
Total liabilities and shareholders' equity............................... $ (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'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.
F-5
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
NEW PRIME (PRIME RETAIL, INC.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[F] Represents adjustments to record the Transactions in accordance with the
purchase method of accounting, asssuming a purchase price of $973,062,
based on the March 24, 1998 closing prices of $14.25 and $24.00 per Prime
Common Share and Prime Series B Preferred Share, respectively, as follows:
<TABLE>
<S> <C> <C>
Issuance of 14,397,631 New Prime Common Shares (i)........................ $ 205,166
Issuance of 3,885,940 Prime Partnership Common Units based on a 0.9193
exchange ratio for 4,227,064 Horizon Partnership Common Units........... 55,375
Issuance of 4,823,327 New Prime Series B Preferred Shares (i)............. 115,760
Assumption of Horizon's liabilities, net of liabilities to be distributed
to HGP (ii)............................................................. 556,264
Adjustment to increase the assumed Horizon debt to its fair value......... 21,747
Transactions costs (iii).................................................. 18,750
---------
Total purchase price.................................................... 973,062
Less historical basis of net assets acquired (iv):
Rental property, net.................................................... $(732,114)
Cash and cash equivalents............................................... (7,698)
Restricted cash......................................................... (470)
Accounts receivable, net................................................ (6,208)
Investment in partnerships.............................................. (2,320)
Other assets............................................................ (7,740)
---------
Subtotal.............................................................. (756,550)
---------
Step-up to record fair value of rental property........................... $ 216,512
---------
---------
Components of the step-up adjustment include the following:
Issuance of 14,397,631 shares of New Prime Common Stock (see Note
[S]).................................................................. $ 205,166
Elimination of HGP's Predecessor Owners' Capital (see Note [U])......... 128,636
Issuance of 4,823,327 New Prime Series B Preferred Stock (see Note
[R]).................................................................. 115,760
Issuance of 3,885,940 Prime Partnership Common Units (see Note [P])..... 55,375
Premium required to adjust assumed debt of Horizon to its estimated fair
value (see Note [N]).................................................. 21,747
Transaction costs (see Note [O])........................................ 18,750
Elimination of Horizon's deferred charges, net of the portion
attributable to HGP of $4,933 (See Note [K]).......................... 13,300
Elimination of Horizon's Shareholders' Equity, net of the distribution
of HGP's net assets of $40,565 (see Note [T])......................... (280,777)
Elimination of Horizon's Minority Interests (see Notes [E] and [Q])..... (61,445)
---------
Total................................................................. $ 216,512
---------
---------
</TABLE>
- ------------------------
Notes:
(i) Based on the exchange ratio of 0.5970 of a New Prime Common Share and 0.20
of a New Prime Series B Preferred Share for 24,116,635 Horizon Common
Shares.
(ii) Represents primarily long-term debt of $535,977 and other liabilities and
accrued expenses of $20,287.
F-6
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
NEW PRIME (PRIME RETAIL, INC.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
(iii) The following is a calculation of the estimated fees and other expenses
related to the Transactions:
<TABLE>
<S> <C>
Employee termination costs............................................................ $ 4,600
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 Pro Forma balances less HGP's
historical balances per the New Prime's Pro Forma Consolidated Balance Sheet
included herein:
<TABLE>
<CAPTION>
PRE-TRANSACTIONS
HORIZON
PRO FORMA LESS HGP TOTAL
--------------- ------------- ----------
<S> <C> <C> <C>
Rental property, net....................................................... $ 945,304 $ (213,190) $ 732,114
Cash and cash equivalents.................................................. 11,279 (3,581) 7,698
Restricted cash............................................................ 751 (281) 470
Accounts receivable, net................................................... 6,603 (395) 6,208
Investment in partnerships................................................. 2,629 (309) 2,320
Other assets............................................................... 8,815 (1,075) 7,740
--------------- ------------- ----------
$ 975,381 $ (218,831) $ 756,550
--------------- ------------- ----------
--------------- ------------- ----------
</TABLE>
[G] In connection with the closing of the Transactions, Prime intends to sell
the Prime Transferred Properties to HGP for an aggregate consideration of
$26,015 resulting in a loss of $15,011 to New Prime. The loss is included
in Distributions in Excess of Net Income since the ultimate disposition of
the Prime Transferred Properties is contingent upon the successful
completion of the Transactions and, prior to the merger closing date, Prime
can elect, at its sole discretion, not to effectuate the sale of the Prime
Transferred Properties even if the merger is consummated. While Prime
intends to sell the Prime Transferred Properties to HGP, it is not
contractually committed to do so. No assurance can be made that the sale of
the Prime Transferred Properties will be effectuated.
If the sale of the Prime Transferred Properties is consummated, New Prime
will record a loss of $15,011 in its consolidated statements of operations
upon the effective date of the Transactions. Accordingly, the loss on the
sale of the Prime Transferred Properties is not reflected in the
Post-Transactions Pro Forma Consolidated Statement of Operations because it
is nonrecurring.
F-7
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
NEW PRIME (PRIME RETAIL, INC.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[H] Represents the distribution of net assets to HGP calculated as follows:
<TABLE>
<S> <C>
Estimated fair value of HGP's assets................................................... $ 176,749
Total liabilities of HGP............................................................... 136,184
---------
Purchase price allocated to HGP (see Note (i) below)............................... $ 40,565
---------
---------
</TABLE>
The estimated fair value of HGP'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 factory outlet centers.
- ------------------------
Note:
(i) Reflects the difference between HGP's net assets on a historical cost and
fair value basis as follows:
<TABLE>
<S> <C>
Historical basis of HGP net assets...................................................... $ 83,162
Adjustment of HGP's net assets to its fair value.................................... (42,597)
---------
Estimated fair value of HGP'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's deferred charges in connection with the
Transactions, net of the portion attributable to HGP of $4,933.
[L] To reflect the debt allocated to HGP included in the historical financial
statements of HGP of $45,474 based upon the proportionate use of debt
methodology (See Note 2 of the historical combined financial statements of
HGP, 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 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.
F-8
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
NEW PRIME (PRIME RETAIL, INC.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[P] Reflects the issuance of 3,885,940 Prime Partnership Common Units based on
the March 24, 1998 closing price of $14.25 per Prime Common Share as
follows (see Note [F] above):
<TABLE>
<S> <C>
Prime Partnership Common Units issued (in thousands).................................... 3,886
Multiply by market price................................................................ $ 14.25
---------
Total............................................................................... $ 55,375
---------
---------
</TABLE>
[Q] Elimination of Horizon's Minority Interests.
[R] Reflects the issuance of 4,823,327 New Prime Series B Preferred Shares as
follows (see Note [F] above):
<TABLE>
<S> <C>
Par value of 4,823,327 New Prime Series B Preferred Stock at $0.01 par value........... $ 48
Additional paid-in capital based on the March 24, 1998 closing price of $24.00 per
Prime Series B Preferred Share....................................................... 115,712
---------
Total.............................................................................. $ 115,760
---------
---------
</TABLE>
[S] Reflects the issuance of 14,397,631 shares of New Prime Common Stock as
follows (see Note [F] above):
<TABLE>
<S> <C>
Par value of 14,397,631 shares of New Prime Common Stock at $0.01 par value............ $ 144
Additional paid-in capital based on the March 24, 1998 closing price of $14.25 per
Prime Common Share................................................................... 205,022
---------
Total.............................................................................. $ 205,166
---------
---------
</TABLE>
[T] Reflects the elimination of Horizon's Shareholders' Equity, net of the
distribution of HGP's net assets, as follows:
<TABLE>
<S> <C>
Common stock........................................................................... $ 241
Additional paid-in capital............................................................. 468,593
Distributions in excess of net income, net of distribution of HGP's net assets of
$40,565.............................................................................. (188,057)
---------
Total.............................................................................. $ 280,777
---------
---------
</TABLE>
[U] Reflects the elimination of HGP's Predecessor Owners' Capital, including
the debt allocated to HGP of $45,474 (see Note [L]).
[V] In connection with obtaining a first mortgage loan commitment for HGP from
a third party lender, New Prime has agreed to guarantee up to $10,000 in
principal of HGP's mortgage indebtedness. If HGP completes a public or
private equity offering of at least $50,000 and such proceeds are used to
repay the mortgage loan, then New Prime will be released from such
guaranty.
F-9
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
NEW PRIME (PRIME RETAIL, INC.)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
[W] The number of shares authorized, issued and outstanding on a historical and
pro forma basis for each class of equity is as follows:
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------
<S> <C> <C> <C>
SHARES SHARES SHARES
AUTHORIZED ISSUED OUTSTANDING
------------ ------------ ------------
Preferred Shares:............................................................. 24,315,000
------------
------------
Prime Series A Preferred Shares............................................. 2,300,000 2,300,000
Prime Series B Preferred Shares............................................. 2,981,800 2,981,800
Prime Series C Preferred Shares............................................. 3,636,363 3,636,363
------------ ------------
Total..................................................................... 8,918,163 8,918,163
------------ ------------
------------ ------------
Prime Common Shares........................................................... 75,000,000 27,294,951 27,294,951
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------
<S> <C> <C> <C>
SHARES SHARES SHARES
AUTHORIZED ISSUED OUTSTANDING
------------- ------------ ------------
Preferred Shares:........................................................... 24,315,000
-------------
-------------
New Prime Series A Preferred Shares....................................... 2,300,000 2,300,000
New Prime Series B Preferred Shares....................................... 7,805,127 7,805,127
New Prime Series C Preferred Shares....................................... 3,636,363 3,636,363
------------ ------------
Total................................................................... 13,741,490 13,741,490
------------ ------------
------------ ------------
New Prime Common Shares..................................................... 150,000,000 41,692,582 41,692,582
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
F-10
<PAGE>
NEW PRIME (PRIME RETAIL, INC.)
BASIS OF PRESENTATION TO UNAUDITED POST-TRANSACTIONS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
The accompanying Unaudited Post-Transactions Pro Forma Consolidated
Statement of Operations for the year ended December 31, 1997 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 Statement 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
Statement of Operations is presented for comparative purposes only and is not
necessarily indicative of what the actual consolidated results of Prime and
Horizon would have been for the year ended December 31, 1997 if the Transactions
had been completed at January 1, 1997, nor does it purport to represent the
future consolidated results of operations of Prime and Horizon. This Unaudited
Post-Transactions Pro Forma Consolidated Statement of Operations should be read
in conjunction with, and is qualified in its entirety by, (a) the historical
financial statements and the notes thereto of Prime and Horizon incorporated by
reference into this Joint Proxy Statement/Prospectus; and (b) the Unaudited
Pre-Transactions Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1997 of Horizon and notes thereto, included elsewhere herein.
F-11
<PAGE>
POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NEW PRIME (PRIME RETAIL, INC.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
TRANSACTIONS ADJUSTMENTS
-----------------------------------------------------
PRIME
PRE-TRANSACTIONS PRE-TRANSACTIONS TRANSFERRED PURCHASE OF
PRIME HORIZON PROPERTIES FINGER LAKES FINANCINGS NEW PRIME
PRO FORMA [A] PRO FORMA [B] HGP [C] [D] CENTER [E] AND OTHERS PRO FORMA
--------------- --------------- ----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Base rents.............. $ 91,032 $ 106,753 $ (23,129) $ (4,287) $ 5,176 $ 175,545
Percentage rents........ 4,020 4,220 (151) 51 8,140
Tenant reimbursements... 43,370 31,301 (7,116) (2,225) 1,402 66,732
Income (loss) from
investment
partnerships.......... 243 (108) 108 243
Interest and other...... 10,123 8,149 (2,147) (491) 15,634
--------------- --------------- ----------- ------------- ------------ -----------
Total revenues........ 148,788 150,315 (32,543) (7,003) 6,737 266,294
EXPENSES
Property operating...... 35,952 22,020 (6,153) (1,709) 1,151 51,261
Real estate taxes....... 10,641 12,429 (3,036) (746) 367 19,655
Depreciation and
amortization.......... 30,317 39,710 (10,228) (1,586) 1,624 $ 1,812[F] 61,649
General and
administrative [G].... 5,603 10,521 (2,813) 212 13,523
Interest................ 43,194 47,004 (7,936) 3,347 (4,399)[H] 81,210
Impairment and
severance............. 6,949 (6,949)
Other charges........... 3,338 6,064 (2,163) (133) 6 7,112
--------------- --------------- ----------- ------------- ------------ ----------- -----------
Total expenses........ 129,045 144,697 (39,278) (4,174) 6,707 (2,587) 234,410
--------------- --------------- ----------- ------------- ------------ ----------- -----------
INCOME BEFORE MINORITY
INTERESTS AND
EXTRAORDINARY ITEM.... 19,743 5,618 6,735 (2,829) 30 2,587 31,884
(Income) loss allocated
to minority
interests............. (10,581) 993 6,341[I] (3,247)
--------------- --------------- ----------- ------------- ------------ ----------- -----------
INCOME BEFORE
EXTRAORDINARY ITEM.... 9,162 6,611 6,735 (2,829) 30 8,928 28,637
Income allocated to
preferred
shareholders.......... 12,726 10,250[J] 22,976
--------------- --------------- ----------- ------------- ------------ ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM
APPLICABLE TO COMMON
SHARES................ $ (3,564) $ 6,611 $ 6,735 $ (2,829) $ 30 $ (1,322) $ 5,661
--------------- --------------- ----------- ------------- ------------ ----------- -----------
--------------- --------------- ----------- ------------- ------------ ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM PER
COMMON SHARE--BASIC
AND DILUTED........... $ (0.19) $ 0.28 $ 0.17
--------------- --------------- -----------
--------------- --------------- -----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.... 19,189 23,848 (9,450)[K] 33,587
--------------- --------------- ----------- -----------
--------------- --------------- ----------- -----------
</TABLE>
See accompanying Notes to Post-Transactions Pro Forma Consolidated Statement of
Operations.
F-12
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NEW PRIME (PRIME RETAIL, INC.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] See Pre-Transactions Prime Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1997 included elsewhere herein.
[B] See Pre-Transactions Horizon Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1997 included elsewhere herein.
[C] To eliminate HGP's historical operations for the year ended December 31,
1997. See HGP Combined Financial Statements included elsewhere herein.
The pro forma adjustment to interest expense reflects the following:
<TABLE>
<S> <C>
HGP's historical interest expense................................. $ (11,497)
Adjustment to interest expense allocated to HGP (i)............... 3,561
---------
$ (7,936)
---------
---------
</TABLE>
----------------------------
Note:
(i) This adjustment to interest expense results from the elimination of a
portion of the debt which was included in the debt allocated to HGP in
the historical Combined Financial Statements of HGP based upon the
proportionate use of debt methodology (see Note 5--"Debt Allocated From
Horizon" of the Notes to Combined Financial Statements of HGP included
elsewhere herein). The adjustment to interest expense allocated to HGP is
calculated as follows:
<TABLE>
<S> <C>
Elimination of portion of debt allocated to HGP.................... $ 45,474
Weighted average interest rate..................................... 7.83%
---------
$ 3,561
---------
---------
</TABLE>
The effect of a 1/8% variance in the weighted average interest rate on
the debt eliminated would be approximately $57.
[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.
In connection with the closing of the Transactions, Prime intends to sell
the Prime Transferred Properties to HGP for an aggregate consideration of
$26,015 resulting in a loss of $15,011 to New Prime. The loss is included in
Distributions in Excess of Net Income since the ultimate disposition of the
Prime Transferred Properties is contingent upon the successful completion of
the Transactions and, prior to the merger closing date, Prime can elect, at
its sole discretion, not to effectuate the sale of the Prime Transferred
Properties even if the merger is consummated. While Prime intends to sell
the Prime Transferred Properties to HGP, it is not contractually committed
to do so. No assurance can be made that the sale of the Prime Transferred
Properties will be effectuated.
If the sale of the Prime Transferred Properties is consummated, New Prime
will record a loss of $15,011 in its consolidated statements of operations
upon the effective date of the Transactions. Accordingly, the loss on the
sale of the Prime Transferred Properties is not reflected in the Post-
Transactions Pro Forma Consolidated Statement of Operations because it is
nonrecurring.
F-13
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(CONTINUED)
NEW PRIME (PRIME RETAIL, INC.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[E] To reflect the pending acquisition of Horizon's joint venture partner's 50%
partnership interest in the Finger Lakes Center for $46,100. The pro forma
adjustments reflect the (i) historical depreciation expense and depreciation
expense on the step-up adjustment allocated to rental property and (ii)
interest expense on debt issued to finance the acquisition.
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 joint venture partner's capital 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.
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>
<S> <C>
Depreciation on the pro forma adjustments allocated to depreciable
rental property.................................................. $ 3,959
Elimination of Horizon's historical amortization of deferred
leasing commissions, net of HGP.................................. (1,980)
Elimination of Horizon's historical amortization of deferred
charges, net of HGP.............................................. (167)
---------
$ 1,812
---------
---------
</TABLE>
The pro forma adjustments to rental property result from recording the
Horizon real estate at its net purchase price. The pro forma adjustments
were allocated 10.0% to land and 90.0% to depreciable assets. The
depreciation expense on the pro forma adjustments is computed using the
straight-line method over an estimated useful life of 40 years.
[G] Management has forecasted approximately $3,919 of certain general and
administrative expenses which are anticipated to be eliminated or reduced as
a result of the Transactions. The general and administrative cost savings
have not been included in the Post-Transactions Pro Forma Consolidated
Statement of Operations. There can be no assurance that New Prime will be
successful in realizing such anticipated cost savings. The components of the
anticipated cost savings are as follows:
<TABLE>
<S> <C>
Salaries and related benefits.................................... $ 2,327(i)
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
employees being retained by New Prime.
F-14
<PAGE>
NOTES TO POST-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(CONTINUED)
NEW PRIME (PRIME RETAIL, INC.)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
(ii) The following summarizes the components of such reduction:
<TABLE>
<S> <C>
Professional fees, primarily accounting fees................ $ 470
D & O insurance............................................. 205
Other....................................................... 61
-----
$ 736
-----
-----
</TABLE>
(iii) The following summarizes the components of such reduction:
<TABLE>
<S> <C>
Travel, lodging, meals and entertainment............ $ 390
Conventions and meetings............................ 211
Operating lease expense............................. 110
-----
$ 711
-----
-----
</TABLE>
[H] Decrease reflects the following:
<TABLE>
<S> <C>
Amortization of premium required to record Horizon's debt, net of
HGP, at its estimated fair value (i)............................. $ (3,708)
Elimination of Horizon's historical amortization of deferred
financing costs, net of HGP...................................... (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 Special Distribution......................... 2,888
Amortization of deferred financing costs attributable to debt
refinancing...................................................... 377
---------
$ (4,399)
---------
---------
</TABLE>
The effect of a 1/8% variance in the interest rate on the debt issued
would be approximately $234.
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 the issuance of additional Prime Partnership Common Units
in connection with the consummation of the Transactions. The pro forma
allocation to minority interests is based upon the percentage to be owned by
the holders of the Prime Partnership Common Units.
[J] Increase reflects additional income allocated to New Prime Series B
Preferred Shares issued in connection with the consummation of the
Transactions at the beginning of the period presented.
[K] Decrease reflects the following:
<TABLE>
<S> <C>
Elimination of Horizon's historical common shares outstanding..... (23,848)
Issuance of Prime Common Shares in connection with consummation of
the Transactions................................................ 14,398
---------
(9,450)
---------
---------
</TABLE>
F-15
<PAGE>
PRIME RETAIL, INC.
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 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 acquisition, 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 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 Consolidated Statement of Operations.
F-16
<PAGE>
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
PRIME RETAIL, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1997
ACQUIRED PRE-TRANSACTIONS
PROPERTIES PRIME
PRIME [A] FINANCINGS [B] PRO FORMA
--------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Base rents............................................... $ 78,046 $ 12,986 $ 91,032
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....................................... 10,185 (62) 10,123
--------- ------------- ---------------
Total revenues......................................... 129,130 19,658 148,788
EXPENSES
Property operating....................................... 29,492 6,460 35,952
Real estate taxes........................................ 9,417 1,224 10,641
Depreciation and amortization............................ 26,715 3,602 30,317
General and administrative............................... 5,603 5,603
Interest................................................. 36,122 2,323 $ 4,749 43,194
Other charges............................................ 3,234 104 3,338
--------- ------------- ------- ---------------
Total expenses......................................... 110,583 13,713 4,749 129,045
--------- ------------- ------- ---------------
INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY
ITEM................................................... 18,547 5,945 (4,749) 19,743
Income allocated to minority interests................... (10,581) (10,581)
--------- ------------- ------- ---------------
INCOME BEFORE EXTRAORDINARY ITEM......................... 7,966 5,945 (4,749) 9,162
Income allocated to preferred shareholders............... 12,726 12,726
--------- ------------- ------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM APPLICABLE TO
COMMON SHARES.......................................... $ (4,760) $ 5,945 $ (4,749) $ (3,564)
--------- ------------- ------- ---------------
--------- ------------- ------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER COMMON
SHARE--BASIC AND DILUTED............................... $ (0.25) $ (0.19)
--------- ---------------
--------- ---------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............... 19,189 19,189
--------- ---------------
--------- ---------------
</TABLE>
See accompanying Notes to Pre-Transactions Pro Forma Consolidated Statement of
Operations.
F-17
<PAGE>
NOTES TO PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
PRIME RETAIL, INC.
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 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-18
<PAGE>
HORIZON GROUP, INC.
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 the 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 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-19
<PAGE>
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET
HORIZON GROUP, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-TRANSACTIONS
C&C CONTRIBUTION HORIZON
HORIZON [A] AGREEMENT [B] PRO FORMA
------------ ----------------- ---------------
<S> <C> <C> <C>
ASSETS
Investment in rental property, net............................. $ 1,009,599 $ (64,295) $ 945,304
Cash and cash equivalents...................................... 12,091 (812) 11,279
Restricted cash................................................ 751 751
Accounts receivable, net....................................... 6,489 114 6,603
Deferred charges, net.......................................... 18,708 (475) 18,233
Due from affiliates, net....................................... 11,639 11,639
Investment in partnerships..................................... 2,629 2,629
Assets held for sale........................................... 1,933 1,933
Other assets................................................... 8,827 (12) 8,815
------------ -------- ---------------
Total assets........................................... $ 1,072,666 $ (65,480) $ 1,007,186
------------ -------- ---------------
------------ -------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
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......................... 20,917 (6,082) 14,835
------------ -------- ---------------
Total liabilities...................................... 659,987 (35,588) 624,399
Minority interests............................................. 61,445 61,445
Shareholders' equity:
Common stock................................................. 241 241
Additional paid-in capital................................... 468,593 468,593
Distributions in excess of net income........................ (117,600) (29,892) (147,492)
------------ -------- ---------------
Total shareholders' equity............................. 351,234 (29,892) 321,342
------------ -------- ---------------
Total liabilities and shareholders' equity............. $ 1,072,666 $ (65,480) $ 1,007,186
------------ -------- ---------------
------------ -------- ---------------
</TABLE>
See accompanying Notes to Pre-Transactions Pro Forma Consolidated Balance Sheet.
F-20
<PAGE>
NOTES TO PRE-TRANSACTIONS PRO FORMA CONSOLIDATED BALANCE SHEET
HORIZON GROUP, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] Certain reclassifications have been made to Horizon's balance sheet to
conform to Prime'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'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 incurred a loss
of approximately $29,892 which represents the net assets of such centers.
F-21
<PAGE>
PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
HORIZON GROUP, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
C&C CONTRIBUTION AGREEMENT
PURCHASE OF SALE OF ----------------------------
GILROY PORT HURON DOLE CANNERY LAKE ELSINORE
HORIZON [A] CENTER [B] CENTER [C] CENTER [D] CENTER [E]
----------- ------------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Base rents.................................. $ 110,753 $ 3,662 $ (969) $ (588) $ (6,105)
Percentage rents............................ 3,924 343 (3) (44)
Tenant reimbursements....................... 32,686 1,196 (249) (371) (1,961)
Loss from investment partnerships (108)
Interest and other.......................... 8,479 (3) (155) (158) (14)
----------- ------ ------- ------------- -------------
Total revenues............................ 155,734 5,198 (1,376) (1,117) (8,124)
EXPENSES
Property operating.......................... 24,511 850 (301) (1,658) (1,382)
Real estate taxes........................... 12,930 499 (68) (235) (697)
Depreciation and amortization............... 40,525 1,159 (4) (1,970)
General and administrative.................. 11,446 89 (158) (316) (540)
Interest.................................... 48,889 (251) (1,704) (2,798)
Impairment and severance.................... 7,091 (142)
Other charges............................... 15,626 21 (42) (9,460) (81)
----------- ------ ------- ------------- -------------
Total expenses............................ 161,018 2,618 (966) (13,373) (7,468)
----------- ------ ------- ------------- -------------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM........................ (5,284) 2,580 (410) 12,256 (656)
Loss allocated to minority interests........ 993
----------- ------ ------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON SHARES............... $ (4,291) $ 2,580 $ (410) $ 12,256 $ (656)
----------- ------ ------- ------------- -------------
----------- ------ ------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER
COMMON SHARE--BASIC AND DILUTED........... $ (0.18)
-----------
-----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 23,848
-----------
-----------
<CAPTION>
PRE-TRANSACTIONS
HORIZON
FINANCINGS PRO FORMA
----------- ---------------
<S> <C> <C>
REVENUES
Base rents.................................. $ 106,753
Percentage rents............................ 4,220
Tenant reimbursements....................... 31,301
Loss from investment partnerships (108)
Interest and other.......................... 8,149
---------------
Total revenues............................ 150,315
EXPENSES
Property operating.......................... 22,020
Real estate taxes........................... 12,429
Depreciation and amortization............... 39,710
General and administrative.................. 10,521
Interest.................................... $ 2,868[F] 47,004
Impairment and severance.................... 6,949
Other charges............................... 6,064
----------- ---------------
Total expenses............................ 2,868 144,697
----------- ---------------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM........................ (2,868) 5,618
Loss allocated to minority interests........ 993
----------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON SHARES............... $ (2,868) $ 6,611
----------- ---------------
----------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER
COMMON SHARE--BASIC AND DILUTED........... $ 0.28
---------------
---------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 23,848
---------------
---------------
</TABLE>
See accompanying Notes to Pre-Transactions Pro Forma Consolidated Statement of
Operations.
F-22
<PAGE>
NOTES TO PRE-TRANSACTIONS PRO FORMA CONSOLIDATED STATEMENTS
HORIZON GROUP, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] Certain reclassifications have been made to Horizon's statement of
operations to conform to the presentation of Prime's statement of
operations.
[B] To reflect the operations and the depreciation expense for the Gilroy Center
acquired by Horizon 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 years. Depreciation expense is computed using
the 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's contribution of such center and (ii) the release of Horizon 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'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-23
<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-24
<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-25
<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-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Horizon Group, Inc.
We have audited the accompanying combined statements of net assets of Horizon
Group Properties, Inc., 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, Inc. 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.
/s/ ERNST & YOUNG LLP
------------------------------------------------------------------
Ernst & Young LLP
Chicago, Illinois
April 3, 1998
F-27
<PAGE>
HORIZON GROUP PROPERTIES, INC.
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............................................................. 146,846 132,513
Accounts payable and accrued expenses................................................... 5,005 6,109
Prepaid rents and other tenant liabilities.............................................. 1006 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-28
<PAGE>
HORIZON GROUP PROPERTIES, INC.
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 revenues............................................................. 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
---------- ---------- ---------
NET 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-29
<PAGE>
HORIZON GROUP PROPERTIES, INC.
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................................................. 25,504
Net income..................................................................... 3,799
---------
Net assets at December 31, 1995.................................................. 105,248
Net contributions from Horizon................................................. 20,882
Net loss....................................................................... (18,770)
---------
Net assets at December 31, 1996.................................................. 107,360
Net distributions to Horizon................................................... (13,094)
Net loss....................................................................... (11,104)
---------
Net assets at December 31, 1997.................................................. $ 83,162
---------
---------
</TABLE>
See Notes to Combined Financial Statements.
F-30
<PAGE>
HORIZON GROUP PROPERTIES, INC.
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:
Net income (loss) before extraordinary charge.................................. $ (10,296) $ (18,615) $ 3,799
Adjustments to reconcile net 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.......................... (13,094) 20,882 25,504
Proceeds from net increase in debt allocated from Horizon.................... 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-31
<PAGE>
HORIZON GROUP PROPERTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
These footnotes should be read in conjunction with the Joint Proxy
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, entered into an amended and restated agreement and plan of merger
("Merger Agreement"). Transactions contemplated under the Merger Agreement are
designed to enable Prime to acquire 22 of Horizon'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 and two outlet centers
that will be acquired from Prime. The 13 Horizon 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 as if HGP had been a
separate entity for all periods presented. The historical results of operations
and financial condition of the net assets comprising HGP are based on the manner
in which Horizon historically managed such net assets. Accordingly, the combined
financial statements of HGP have been prepared using Horizon'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 has never been a separate legal
entity, the net assets of HGP are not insulated from the obligations and
commitments of Horizon. 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,
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-32
<PAGE>
HORIZON GROUP PROPERTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION (CONTINUED)
The 13 outlet centers of HGP 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 and McArthur/Glen Realty Corp.
("McArthur/Glen") 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'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, the Company 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 FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the financial
statements of HGP reflect impairment losses on long-
F-33
<PAGE>
HORIZON GROUP PROPERTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Excess cash flows have been
reflected as being distributed back to Horizon. Net contributions represent
Horizon's funding of HGP's development cost needs in excess of cash flows
generated from HGP'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 corporate 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
corporate 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 do not include any allocation of tax expense.
ALLOCATIONS FROM HORIZON - The combined financial statements of HGP include
an allocation of the aggregate debt balances of Horizon (which have historically
been secured by a pool of Horizon's assets)
F-34
<PAGE>
HORIZON GROUP PROPERTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
based upon the proportionate use of debt proceeds by HGP's portfolio of outlet
centers compared to Horizon'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 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's statements of operations
reflecting the stand-alone interest cost of doing business.
General and administrative expenses of Horizon have been allocated to HGP
based upon the ratio of gross leasable area of HGP's portfolio of outlet centers
compared to Horizon's outlet centers.
Cash and cash equivalents have been included in the combined financial
statements of HGP based upon the respective periods' ratio of gross leasable
area of HGP's outlet centers compared to Horizon's total historical portfolio of
outlet centers. Horizon 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
existed as a separate entity. Management of Horizon believes, however, that such
allocations are reasonable.
NOTE 3 - BUSINESS COMBINATIONS
On July 14, 1995, McArthur/Glen merged with and into Horizon, as the
surviving corporation (the "McG Merger"). McArthur/Glen developed, owned and
managed outlet centers.
The McG Merger was accounted for using the purchase method by Horizon in
accordance with Accounting Principles Board Opinion No. 16. The accompanying
combined financial statements include the results of operations of six
McArthur/Glen 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 reflect $93.0 million
of the total McArthur/Glen 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 by Horizon 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 would have been, assuming the six McArthur/Glen
Properties had been contributed to HGP as of the beginning of the period
presented.
In 1995, Horizon acquired an outlet center in Holland, MI, adjacent to an
existing outlet center owned by Horizon, for a purchase price of $8.7 million,
consisting primarily of the assumption of existing
F-35
<PAGE>
HORIZON GROUP PROPERTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - BUSINESS COMBINATIONS (CONTINUED)
mortgage indebtedness and unpaid real estate tax obligations. This outlet center
has been included in the net assets and operating results of HGP 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. Results of operations in 1997 include a charge for asset
impairment of $6.0 million which was recorded by HGP 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. 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'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
Debt allocated from Horizon, as of December 31, 1997 and 1996, reflects an
allocation of debt from Horizon that is based upon the proportionate use of debt
proceeds used by HGP's portfolio of outlet center properties for development and
expansion compared to Horizon's total portfolio which resulted in an allocation
of 23.5% and 23.8% of Horizon's debt to HGP 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-36
<PAGE>
HORIZON GROUP PROPERTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEBT ALLOCATED FROM HORIZON (CONTINUED)
The aggregate amount of all required principal payments for debt allocated
from Horizon based upon the proportionate allocation of Horizon'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 approximate their
fair value. The fair value of HGP's long-term debt allocated from Horizon 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 to HGP 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-37
<PAGE>
HORIZON GROUP PROPERTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - DUE FROM JOINT VENTURE
At December 31, 1997 and 1996, HGP's financial statements include $11.6
million and $13.8 million, respectively, due from an unconsolidated joint
venture in which Horizon has a 45% interest. The amount due represents cash
advances for construction of an expansion to an existing center ("Joint
Venture"). Horizon 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 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 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 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 recorded $4.0
million of income in 1997 as a result of the revised Lease Term.
F-38
<PAGE>
HORIZON GROUP PROPERTIES, INC.
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>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<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'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 properties (the "HGP Credit Facility") upon consummation of the
Merger Agreement.
F-39
<PAGE>
HORIZON GROUP PROPERTIES, INC.
DECEMBER 31, 1997
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO INITIAL
INITIAL COST TO HGP DEVELOPMENT OR
------------------------- ACQUISITION(A)
BUILDINGS -------------------------
AND BUILDINGS AND
PROPERTY ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------------------- ------------ ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Bellport $ 7,164,800 $ 460,700 $16,036,400 $ 355,800 $ 318,500
Dry Ridge 2,724,400 995,900 8,627,500 (1,700) (5,567,500)
Holland 7,772,000 791,600 12,265,800 3,100 (6,841,800)
Laughlin 35,494,600 43,571,500 1,600
Medford 5,047,200 269,600 18,586,100 144,400 356,300
Monroe 815,000 17,982,900 225,800 1,936,800
Norton Shores-
Lakeshore
Marketplace 21,095,400 3,538,300 22,346,900 225,900 1,094,700
Sealy 9,424,300 827,400 13,454,700 18,100 4,169,500
Somerset 10,849,700 1,750,000 16,460,300 237,100
Traverse City 1,909,000 675,600 7,976,000 (5,000,500)
Tulare 20,128,400 3,330,900 16,188,000 416,200 1,752,600
Warrenton 12,138,700 1,982,500 14,760,800 8,300 5,750,400
Miscellaneous(b) 13,097,900 42,500 5,445,600 5,700 4,421,100
------------ ----------- ------------ ---------- -------------
Total $146,846,400 $15,480,000 $213,702,500 $1,401,600 $ 2,628,800
------------ ----------- ------------ ---------- -------------
------------ ----------- ------------ ---------- -------------
<CAPTION>
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD
----------------------------------------------------
BUILDINGS
AND ACCUMULATED DATE OF DATE OF
PROPERTY LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUISITION
- -------------------- ----------- ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Bellport $ 816,500 $16,354,900 $ 17,171,400 $2,072,400 1992 1995
Dry Ridge 994,200 3,060,000 4,054,200 1991 1995
Holland 794,700 5,424,000 6,218,700 297,300 1988 1995
Laughlin 43,573,100 43,573,100 71,600 1996 --
Medford 414,000 18,942,400 19,356,400 2,345,600 1991 1995
Monroe 1,040,800 19,919,700 20,960,500 5,829,800 1987 --
Norton Shores-
Lakeshore
Marketplace 3,764,200 23,441,600 27,205,800 1,272,100 1995 --
Sealy 845,500 17,624,200 18,469,700 1,316,100 1995 1995
Somerset 1,750,000 16,697,400 18,447,400 2,375,900 1990 1993
Traverse City 675,600 2,975,500 3,651,100 29,800 1990 --
Tulare 3,747,100 17,940,600 21,687,700 658,300 1995 --
Warrenton 1,990,800 20,511,200 22,502,000 1,688,900 1993 1995
Miscellaneous(b) 48,200 9,866,700 9,914,900 2,065,200 1995 --
----------- ------------ ------------ -----------
Total $16,881,600 $216,331,300 $233,212,900 $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 on assets held for sale at
December 31, 1997.
F-40
<PAGE>
HORIZON GROUP PROPERTIES, INC.
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
Addition 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-41
<PAGE>
HORIZON GROUP PROPERTIES, INC.
BASIS OF PRESENTATION
PRO FORMA COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997
(UNAUDITED)
The accompanying Unaudited 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 Combined Statement of Operations for the year
ended December 31, 1997 reflects the following transactions, 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 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 Combined Financial Statements.
F-42
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRIME
TRANSFERRED
PROPERTIES PRO FORMA
HGP [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 SHAREHOLDERS' EQUITY
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 1,469 (19,459) 136,184
Minority interests..................................... 7,409[I] 7,409
Shareholders' equity[J]:
Common stock......................................... 28[E] 28
Additional paid-in capital........................... 40,537[E] 33,128
(7,409)[I]
Predecessor owners' capital.......................... 83,162 (83,162)[F] --
---------- ----------- -----------
Total shareholders' equity......................... 83,162 (50,006) 33,156
---------- ------------- ----------- -----------
Total liabilities and shareholders' equity......... $ 237,336 $ 1,469 $ (62,056) $ 176,749
---------- ------------- ----------- -----------
---------- ------------- ----------- -----------
</TABLE>
See accompanying Notes to Pro Forma Combined Balance Sheet.
F-43
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] Certain reclassifications have been made to HGP's balance sheet to conform
to Prime's balance sheet presentation.
[B] To reflect the purchase of Prime Transferred Properties using the purchase
method of accounting. Amounts represent purchase price allocation calculated
as follows:
<TABLE>
<CAPTION>
NEW PRIME 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'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 and included in its historical financial statements based
upon the proportionate use of debt methodology (see Note 2 of the historical
combined financial statements of HGP, included elsewhere herein) which will
not be transferred to HGP in connection with the Transactions. The pro forma
adjustment was calculated as follows:
<TABLE>
<S> <C>
HGP 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-44
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
The following summarizes the terms of HGP's pro forma Mortgages and Other Debt:
<TABLE>
<CAPTION>
PRO FORMA DEBT
MORTGAGES AND INTEREST MATURITY SERVICE
DESCRIPTION COLLATERAL OTHER DEBT RATE DATE 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 prin-
cipal 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 obligation... 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 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. In connection with the mortgage loan
commitment, New Prime will guarantee up to $10,000 in principal. If HGP
completes a public or private equity offering of at least $50.0 million and
such proceeds are used to repay the mortgage loan, then New Prime 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.
F-45
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[E] The pro forma adjustments reflect the issuance of 2,770 shares of HGP Common
Stock as follows:
<TABLE>
<S> <C>
Par value of 2,770 shares of HGP Common Stock at $0.01 par value........... $ 28
Additional paid-in capital................................................. 40,537
---------
HGP pro forma net assets(i).............................................. $ 40,565
---------
---------
- ------------------------
Note:
(i) Represents the estimated fair value of HGP'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.
</TABLE>
[F] Elimination of HGP's historical Predecessor Owners' Capital in connection
with the Transactions.
[G] To reflect the financing of the Prime Transferred Properties. See Note D for
terms of the financing.
[H] HGP 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
------------
------------
- ------------------------
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 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 relating to cash advances to fund construction of
Phase II and III.
</TABLE>
F-46
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[I] The pro forma HGP allocation to minority interests is as follows:
<TABLE>
<S> <C>
HGP pro forma net assets (see Note E)............................ $ 40,565
Multiply by minority interests ownership percentage.............. 18.26%(i)
---------
Minority interests allocation.................................. $ 7,409
---------
---------
</TABLE>
- ------------------------
Note:
(i) See Note J (HGP ownership summary) for the minority ownership percentage.
[J] Issuance of 2,770 HGP Common Shares at $0.01 par value. Reflects the
elimination of predecessor owners' capital and adjusting certain assets to
their estimated fair value. The number of authorized shares on a pro forma
basis is 50,000 for HGP Common Shares and 50,000 for HGP Preferred Shares.
The number of shares and units to be issued to the shareholders and unit
holders of Prime and Horizon is calculated as follows:
<TABLE>
<CAPTION>
HORIZON SHAREHOLDERS/HORIZON PARTNERSHIP PRIME SHAREHOLDERS/
UNIT HOLDERS PRIME PARTNERSHIP
---------------------------------------------- UNIT HOLDERS
TOTAL SERIES B ------------------------
SHARES/ COMMON COMMON PREFERRED COMMON COMMON
UNITS UNITS SHARES SHARES UNITS SHARES
--------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total shares/units as of December 31, 1997......... 28,294 8,505 35,226(i)
Common Stock award to Horizon executive officer.... 50
Units to be exchanged for Prime Partnership Common
Units............................................ (4,227) 4,227
Exchange ratio..................................... 0.9193
--------- -----------
Subtotal....................................... 3,886
Horizon Common Shares to be exchanged for New Prime
Common Shares and New Prime Series B Preferred
Shares in the Corporate 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 Common Shares/HGP LP Common Units.......... 194 720 289 425 1,761
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------
</TABLE>
- ------------------------
Notes:
(i) As adjusted for the conversion of New Prime Series B Preferred Shares and
New Prime Series C Preferred Shares to HGP Common Shares at the conversion
ratio of approximately 1.196 to 1.0 and 1.0 to 1.0, respectively.
F-47
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
HORIZON GROUP PROPERTIES, INC.
AS OF DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
(ii) Pursuant to the HGP Common Share Distribution, the New Prime will declare a
distribution of the HGP Common Shares 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 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.
Share and Unit Ownership Summary:
<TABLE>
<CAPTION>
HGP OWNERSHIP
------------------------------------------------
<S> <C> <C> <C> <C>
HGP LP
COMMON HGP COMMON
UNITS SHARES TOTAL PERCENTAGE
----------- ----------- --------- -----------
Prime shareholders/unit holders........................................ 425 1,761 2,186 64.50%
Horizon shareholders/unit holders...................................... 194 1,009 1,203 35.50%
----------- ----------- --------- -----------
HGP shares/units....................................................... 619 2,770 3,389 100.00%
----------- ----------- --------- -----------
----------- ----------- --------- -----------
Ownership percentage................................................... 18.26% 81.74% 100.00%
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
F-48
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
HORIZON GROUP PROPERTIES, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRIME
TRANSFERRED
PROPERTIES PRO FORMA
HGP [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) BEFORE MINORITY INTERESTS AND EXTRAORDINARY
ITEM...................................................... (10,296) 1,072 9,458 234
Income allocated to minority interests...................... 43[G] 43
---------- ------ ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... $ (10,296) $ 1,072 $ 9,415 $ 191
---------- ------ ----------- -----------
---------- ------ ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM PER COMMON
SHARE -- BASIC AND DILUTED................................ $ 0.07
-----------
-----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 2,770
-----------
-----------
</TABLE>
See accompanying Notes to Pro Forma Combined Statement of Operations.
F-49
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
HORIZON GROUP PROPERTIES, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
[A] Historical statement of operations of HGP for the year ended December 31,
1997.
[B] To reflect the purchase of Prime Transferred Properties.
[C] Represents the depreciation expense of HGP 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 at fair value.............................. $ 157,099
Less: Fair value allocated to land................................ (15,710)
---------
Pro forma basis of HGP depreciable rental property at fair
value........................................................... 141,389
Divide by 31.5 years.............................................. 31.5
---------
Annual pro forma depreciation expense............................. 4,489
Historical depreciation for the year ended December 31, 1997...... (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>
<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% ii) 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.
F-50
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
HORIZON GROUP PROPERTIES, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
- ------------------------
Notes:
(i) Pursuant to a mortgage loan commitment expected to be closed simultaneously
upon the formation of HGP. 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.
(ii) Based on 30-day LIBOR plus 1.90% 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.
[G] Reflects allocation of income to minority interests as follows:
<TABLE>
<S> <C> <C>
Total units................................................. 619 18.26%
Total shares................................................ 2,770 81.74%
--------- ---------
Total shares/units.......................................... 3,389 100.00%
--------- ---------
--------- ---------
Income before minority interests............................ $ 234
Minority interest percentage................................ 18.26%
---------
Income allocated to minority interests...................... $ 43
---------
---------
</TABLE>
F-51
<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
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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 Surving 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);
(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
Appendix A-58
<PAGE>
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 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
Appendix A-59
<PAGE>
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 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
Appendix A-60
<PAGE>
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
REINCORPORATION
ARTICLES OF MERGER
<PAGE>
APPENDIX B
ARTICLES OF MERGER
MERGING
HORIZON GROUP, INC.
(A MICHIGAN CORPORATION)
INTO
SKY MERGER CORP.
(A MARYLAND CORPORATION)
FIRST: Sky Merger Corp., a Maryland corporation ("Sky Merger" or the
"Surviving Company"), and Horizon Group, Inc., a Michigan corporation
("Horizon"), each agree that Horizon will merge with and into Sky Merger (the
"Merger") pursuant to the Amended and Restated Agreement and Plan of Merger
among Prime Retail, Inc., Prime Retail, L.P., a Delaware limited partnership
("Prime Partnership"), Horizon, 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"), dated as of February 1, 1998 (the
"Merger Agreement").
SECOND: Sky Merger will survive the Merger and will continue under the name
"Sky Merger Corp." as a corporation of the State of Maryland.
THIRD: The date of incorporation of Horizon was October 25, 1984. Horizon is
incorporated under the Michigan Business Corporation Act (the "MBCA"). Horizon
was qualified to do business in Maryland on July 10, 1995.
FOURTH: The principal office of Horizon in Michigan is located in Norton
Shores, Michigan. Horizon owns property in Cecil County and Queen Anne's County,
State of Maryland, the title to which could be affected by the recording of an
instrument among the land records. The principal office of the Surviving Company
in Maryland is located in Baltimore City. Sky Merger does not own any interest
in land in the State of Maryland.
FIFTH: The terms and conditions of the Merger as set forth in these Articles
of Merger were advised, authorized and approved by Horizon, in the manner and by
the vote required by its charter and the laws of Michigan, as follows:
(a) At a meeting of the Board of Directors held on January 30, 1998, the
Board of Directors adopted a resolution approving the Merger and
recommending that the proposed Merger be submitted for approval by the
stockholders.
(b) At a special meeting of the stockholders held on , 1998, the
stockholders duly approved the Merger by the affirmative vote of the
holders of of the shares of common stock, par value $.01 per share,
entitled to vote thereon.
SIXTH: The terms and conditions of the Merger as set forth in these Articles
of Merger were advised, authorized and approved by Sky Merger, in the manner and
by the vote required by its articles of incorporation and the laws of Maryland,
as follows:
(a) At a meeting of the Board of Directors held on January 29, 1998, the
Board of Directors adopted a resolution approving the Merger and
recommending that the proposed Merger be submitted for approval by the
shareholders.
Appendix B-1
<PAGE>
(b) By a written consent executed on , 1998 by Horizon, as the
sole stockholder in accordance with the General Maryland Corporation Law
("MGCL"), the sole stockholder duly approved the Merger.
SEVENTH: The articles of incorporation of the Surviving Company will be
amended and restated as set forth in the Amended and Restated Articles of
Incorporation filed concurrently herewith and attached hereto as Exhibit A. The
total number of shares of all classes which each party to these Articles of
Merger has authority to issue and the number of each class are as follows:
(a) SKY MERGER.
The total number of shares of stock of all classes which Sky Merger has
authority to issue is 50,000,000 shares of common stock, par value $.01
per share. The aggregate par value of all the shares of all classes of
stock of Sky Merger is $500,000.
(b) HORIZON.
The total number of shares of stock of all classes which Horizon has
authority to issue is 60,000,000, consisting of: 47,000,000 shares of
common stock, par value $.01 per share; 3,000,000 shares of preferred
stock, par value $.01 per share; and 10,000,000 shares of excess common
stock, par value $.01 per share. The aggregate par value of all the
shares of all classes of stock of Horizon is $600,000.
EIGHTH: The manner and basis of converting or exchanging issued and
outstanding stock of Horizon into shares of the Surviving Company and the
treatment of any issued and outstanding stock of the merging entities not to be
so converted or exchanged is as follows:
(a) EFFECTIVE TIME. The Merger shall become effective upon the later of:
(i) the acceptance of the filing of these Articles of Merger with the
State Department of Assessments and Taxation of Maryland in accordance
with the MGCL, (ii) the endorsement of a certificate of merger by the
Department of Commerce of the State of Michigan in accordance with the
MBCA, and (iii) .m., , 1998, which effective time is
immediately after the effective time of the merger of Horizon Partnership
into Prime Partnership pursuant to the Merger Agreement, but which in no
event is greater than 30 days later than (i) above (the time the Merger
becomes effective being the "Effective Time").
(b) EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the MGCL and the MBCA.
(c) CONVERSION OF COMMON STOCK. Upon the Effective Time, each issued and
outstanding share of common stock of Horizon ("Horizon Common Share")
shall be converted into the right to receive from Sky Merger one (1)
fully paid and nonassessable common share of Sky Merger, $.01 par value
per share ("Sky Merger Common Shares") (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). As of the Effective Time, all Horizon Common Shares shall no
longer be outstanding and shall automatically be canceled and retired and
all rights with respect thereto shall cease to exist, and each
certificate representing any Horizon Common Share shall be deemed to
represent the same number of Sky Merger Common Shares until consummation
of the Prime/Sky Merger in accordance with the terms of the Merger
Agreement, 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 Effective Time which may have been declared or
made by Horizon on such Horizon Common Shares which remain unpaid at the
Effective Time.
(d) SKY MERGER COMMON SHARES. Upon the Effective Time, each common share of
Sky Merger outstanding immediately prior to the Effective Time shall no
longer be outstanding and shall be
Appendix B-2
<PAGE>
canceled and the holder of a certificate representing such Sky Merger
Common Shares shall cease to have any rights with respect thereto.
SKY MERGER CORP. and HORIZON GROUP, INC. have caused these presents to be
signed in their respective names and on their respective behalves by their
respective presidents and witnessed by their respective secretaries on
, 1997.
IN WITNESS WHEREOF:
WITNESS: SKY MERGER CORP.
By:
Secretary Name:
Title: President
WITNESS: HORIZON GROUP, INC.
By:
Secretary Name:
Title: President
THE UNDERSIGNED, President of SKY MERGER CORP., a Maryland corporation, who
executed on behalf of the Corporation the foregoing Articles of Merger of which
this certificate is made a part, hereby acknowledges in the name and on behalf
of said Corporation the foregoing Articles of Merger to be the corporate act of
said Corporation and hereby certifies that to the best of his knowledge,
information and belief the matters and facts set forth therein with respect to
the authorization and approval thereof are true in all material respects under
the penalties of perjury.
______________________________________
President
THE UNDERSIGNED, President of HORIZON GROUP, INC., a Maryland corporation,
who executed on behalf of the Corporation the foregoing Articles of Merger of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles of Merger to be the corporate
act of said Corporation and hereby certifies that to the best of his knowledge,
information and belief the matters and facts set forth therein with respect to
the authorization and approval thereof are true in all material respects under
the penalties of perjury.
______________________________________
President
Appendix B-3
<PAGE>
APPENDIX C
REINCORPORATION CERTIFICATE OF MERGER
<PAGE>
APPENDIX C
CERTIFICATE OF MERGER
MERGING
HORIZON GROUP, INC.
(A MICHIGAN CORPORATION)
INTO
SKY MERGER CORP.
(A MARYLAND CORPORATION)
FIRST: The name of the constituent corporations are HORIZON GROUP, INC., a
Michigan corporation ("HGI"), and SKY MERGER CORP., a Maryland corporation ("Sky
Merger").
SECOND: Sky Merger will survive the merger and will continue under the name
"Sky Merger Corp."
THIRD: HGI and Sky Merger each agree that HGI will merge with and into Sky
Merger pursuant to the Amended and Restated Agreement and Plan of Merger dated
as of February 1, 1998 (the "Merger Agreement") among HGI, Sky Merger, Prime
Retail, Inc., a Maryland corporation, Prime Retail, L.P., a Delaware limited
partnership, 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.
FOURTH: The outstanding shares of each class and series of HGI consists of
[24,066,635] shares of common stock, par value $0.01 per share, all of which are
entitled to vote. No shares of preferred stock of HGI or excess common stock of
HGI is outstanding. The outstanding shares of Sky Merger consist of [ ]
shares of common stock, par value $0.01 per share, all of which are entitled to
vote.
FIFTH: The terms and conditions of the merger, including the manner and
basis of converting the shares of each constituent corporation into shares of
the surviving corporation, are as follows:
(a) Upon the Effective Time (as defined below), each issued and outstanding
share of common stock of HGI ("HGI Common Share") shall be converted into
the right to receive from Sky Merger one (1) fully paid and nonassessable
common share of Sky Merger, $0.01 par value per share ("Sky Merger Common
Share"); provided, that HGI Common Shares owned by HGI or any HGI
subsidiary shall automatically be cancelled and retired and no Sky Merger
Common Shares shall be issued with respect thereto. As of the Effective
Time, (i) all HGI Common Shares shall no longer be outstanding and shall
automatically be cancelled and retired and all rights with respect
thereto shall cease to exist, (ii) each certificate representing any HGI
Common Shares shall be deemed to represent the same number of Sky Merger
Common Shares as the number of HGI Common Shares evidenced by such
certificate immediately prior to the Effective Time, and (iii) each
holder of a certificate shall otherwise cease to have any rights with
respect to such HGI Common Shares, except the right to receive any
dividends or other distributions with a record date prior to the
Effective Time which may have been declared or made by HGI on such HGI
Common Shares which remain unpaid at the Effective Time.
(b) Upon the Effective Time, each Sky Merger Common Share outstanding
immediately prior to the Effective Time shall be cancelled and the holder
of a certificate representing such Sky Merger Common Shares shall cease
to have any rights with respect thereto.
Appendix C-1
<PAGE>
(c) As of the Effective Time, each option to purchase any HGI Common Shares
outstanding under the HGI 1993 Stock Option Plan, the HGI Long Term
Incentive Plan (to the extent permitted under the terms of such plan and
the terms of the options outstanding under such plan), the HGI Director
Stock Option Plan and the HGI 1997 Stock Option Plan shall be converted
into the option to purchase the same number of Sky Merger Common Shares
on the same terms and conditions as were applicable under such option to
purchase HGI Common Shares.
SIXTH: The merger of HGI into Sky Merger (the "Merger") shall become
effective upon the later of (i) the issuance of a certificate of merger by the
State Department of Assessments and Taxation of Maryland in accordance with the
Maryland General Corporation Law ("MGCL"), (ii) the endorsement of this
Certificate of Merger by the Department of Commerce of the State of Michigan in
accordance with the Michigan Business Corporation Act ("MBCA"), and (iii) at
.M. , 1998 (the time the Merger becomes effective being referred to
herein as the "Effective Time").
SEVENTH: The Merger shall have the effects set forth in the MGCL and the
MBCA.
EIGHTH: Effective as of the Effective Time, the articles of incorporation of
Sky Merger as the surviving corporation shall be amended and restated as set
forth in Exhibit "A" to this Certificate of Merger, until duly amended in
accordance with its terms and applicable law.
NINTH: The Merger Agreement, including the plan of merger contained therein,
has been adopted by the Board of Directors of HGI in accordance with Section 701
of the MBCA and the Board of Directors of Sky Merger in accordance with the
MGCL.
TENTH: A copy of the Merger Agreement will be furnished by the surviving
corporation, on request and without cost, to any shareholder of either of the
constituent corporations.
ELEVENTH: The Merger Agreement was approved by the shareholders of HGI in
accordance with Section 701 of the MBCA and by the sole shareholder of Sky
Merger in accordance with the MGCL.
IN WITNESS WHEREOF, HGI and Sky Merger have caused this Certificate of
Merger to be executed by their respective officers thereunto duly authorized on
, 1998.
<TABLE>
<S> <C>
SKY MERGER CORP. HORIZON GROUP, INC.
By: ---------------------------------------- By: ----------------------------------------
President President
Attest: ------------------------------------- Attest: -------------------------------------
Secretary Secretary
</TABLE>
Appendix C-2
<PAGE>
APPENDIX D
CORPORATE
ARTICLES OF MERGER
<PAGE>
APPENDIX D
ARTICLES OF MERGER
MERGING
PRIME RETAIL, INC.
(A MARYLAND CORPORATION)
INTO
SKY MERGER CORP.
(A MARYLAND CORPORATION)
FIRST: Sky Merger Corp., a Maryland corporation ("Sky Merger" or the
"Surviving Company"), and Prime Retail, Inc., a Maryland corporation ("Prime"),
each agree that Prime will merge with and into Sky Merger (the "Merger")
pursuant to the Amended and Restated Agreement and Plan of Merger among Prime,
Prime Retail, L.P., a Delaware limited partnership ("Prime Partnership"),
Horizon Group, Inc., a Michigan corporation, Sky Merger Corp., a Maryland
corporation, 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"), dated as of February 1, 1998 (the "Merger Agreement").
SECOND: Sky Merger will survive the Merger and will continue under the name
"Prime Retail, Inc." as a corporation under the State of Maryland.
THIRD: The principal office of Prime in Maryland is located in Baltimore
City. Prime owns property in Baltimore City, State of Maryland, the title to
which could be affected by the recording of an instrument among the land
records. The principal office of the Surviving Company in Maryland is located in
Baltimore City. After giving effect to the merger of Horizon Group, Inc. with
and into Sky Merger Corp., which effective time is immediately prior to the
effective time of the Merger, Sky Merger owns property in Cecil County and Queen
Anne's County, State of Maryland, the title to which could be affected by the
recording of an instrument among the land records.
FOURTH: The terms and conditions of the Merger as set forth in these
Articles of Merger were advised, authorized and approved by Prime, in the manner
and by the vote required by its charter and the laws of Maryland, as follows:
(a) At a meeting of the Board of Directors held on January 30, 1998, the
Board of Directors adopted a resolution approving the Merger and
recommending that the proposed Merger be submitted for approval by the
shareholders.
(b) At a special meeting of the shareholders held on , 1998, the
shareholders duly approved the Merger by the affirmative vote of the
holders of two-thirds (2/3) of each class of stock entitled to vote
separately thereon.
FIFTH: The terms and conditions of the Merger as set forth in these Articles
of Merger were advised, authorized and approved by Sky Merger, in the manner and
by the vote required by its charter and the laws of Maryland, as follows:
(a) At a meeting of the Board of Directors held on January 29, 1998, the
Board of Directors adopted a resolution approving the Merger and
recommending that the proposed Merger be submitted for approval by the
shareholders.
Appendix D-1
<PAGE>
(b) The sole stockholder duly approved the Merger, in accordance with the
Maryland General Corporation Law ("MGCL").
SIXTH: No amendment to the Charter of Surviving Corporation is to be
effected as a part of the Merger.
SEVENTH: The total number of shares of all classes which each party to these
Articles of Merger has authority to issue and the number of each class are as
follows:
(a) SKY MERGER.
The total number of shares of stock of all classes which Sky Merger has
authority to issue is consisting of: shares of common
stock, par value $.01 per share; shares of preferred stock, par
value $.01 per share; and shares of excess common stock, par
value $.01 per share. The aggregate par value of all the shares of all
classes of stock of Sky Merger is $ .
(b) PRIME.
The total number of shares of stock of all classes which Prime has
authority to issue is 150,315,000, consisting of: 75,000,000 shares of
common stock, par value $.01 per share; 24,315,000 shares of preferred
stock, par value $.01 per share; and 51,000,000 shares of excess common
stock, par value $.01 per share. The aggregate par value of all the
shares of all classes of stock of Prime is $1,503,150.
The Merger does not increase the authorized stock of Surviving Corporation.
EIGHTH: The manner and basis of converting or exchanging issued and
outstanding stock of Prime into different shares of the Surviving Company and
the treatment of any issued and outstanding stock of the merging entities not to
be so converted or exchanged is as follows:
(a) EFFECTIVE TIME. The Merger shall become effective for state law
purposes upon the later of: (i) the issuance of a certificate of merger
by the State Department of Assessments and Taxation of Maryland in
accordance with the MGCL and (ii) .m., , 1998, which
effective time is immediately after the effective time of the merger of
Horizon Group, Inc. into Sky Merger pursuant to the Merger Agreement, but
which in no event is greater than 30 days later than (i) above (the time
the Merger becomes effective being the "Effective Time").
(b) EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the MGCL.
(c) CONVERSION OF PRIME COMMON STOCK. Upon the Effective Time, each issued
and outstanding share of common stock of Prime ("Prime Common Share")
shall be converted into one (1) fully paid and nonassessable common share
of Surviving Company, $.01 par value per share ("Surviving Company Common
Shares").
(d) CONVERSION OF PRIME SERIES A PREFERRED STOCK. Upon the Effective Time,
each issued and outstanding share of 10.5% Series A Cumulative Preferred
Stock, $0.01 per value, of Prime ("Prime Series A Preferred Shares")
shall be converted into one (1) 10.5% Series A Senior Cumulative
Preferred Share of Surviving Company ("Surviving Company Series A
Preferred Share").
(e) CONVERSION OF PRIME SERIES B PREFERRED STOCK. Upon the Effective Time,
each issued and outstanding share of 8.5% Series B Cumulative
Participating Convertible Preferred Stock, $0.01 per value, of Prime
("Prime Series B Preferred Shares") shall be converted into one (1) 8.5%
Series B Cumulative Participating Convertible Preferred Share of
Surviving Company ("Surviving Company Series B Preferred Share").
Appendix D-2
<PAGE>
(f) CONVERSION OF PRIME SERIES C PREFERRED STOCK. Upon the Effective Time,
each issued and outstanding share of Series C Cumulative Convertible
Redeemable Preferred Stock, $0.01 per value, of Prime ("Prime Series C
Preferred Shares") shall be converted into one (1) Series C Cumulative
Convertible Redeemable Preferred Share of Surviving Company ("Surviving
Company Series C Preferred Share").
(g) At the 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 a
Surviving Company Common Share, Surviving Company Series A Preferred
Share, Surviving Company Series B Preferred Share or a Surviving Company
Series C Preferred Share, as the case may be.
(h) CONVERSION OF SKY MERGER COMMON SHARES. Upon the Effective Time, each
common share of Sky Merger outstanding immediately prior to the Effective
Time ("Sky Merger Common Share") (other than Sky Merger Common Shares
held by Horizon Group, Inc. or any Horizon Group, Inc. 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 Surviving Company Series B Preferred Share and
0.597 of a Surviving Company Common Share. As of the Effective Time, all
Sky Merger Common Shares shall no longer be outstanding and shall
automatically be canceled and retired and all rights with respect thereto
shall cease to exist, and each holder of a certificate representing any
Sky Merger 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 Surviving Company Common Shares and
Surviving Company Series B Preferred Shares required to be delivered
under this paragraph (h) and any dividends or other distributions with a
record date prior to the Effective Time which may have been declared or
made by Sky Merger on such Sky Merger Common Shares which remain unpaid
at the 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.
(i) NO FRACTIONAL SHARES. No certificates or scrip representing fractional
Surviving Company Common 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. In lieu of such fractional
share, the holder thereby will be entitled to cash as provided in the
Merger Agreement.
Appendix D-3
<PAGE>
SKY MERGER CORP. and PRIME RETAIL, INC. have caused these presents to be
signed in their respective names and on their respective behalves by their
respective presidents and witnessed by their respective secretaries on
, 1998.
<TABLE>
<S> <C>
IN WITNESS WHEREOF:
WITNESS: SKY MERGER CORP.
- -------------------------------------------- By: ----------------------------------------
Secretary Name:
Title: President
WITNESS: PRIME RETAIL, INC.
- -------------------------------------------- By: ----------------------------------------
Secretary Name:
Title: President
</TABLE>
THE UNDERSIGNED, President of SKY MERGER CORP., a Maryland corporation, who
executed on behalf of the Corporation the foregoing Articles of Merger of which
this certificate is made a part, hereby acknowledges in the name and on behalf
of said Corporation the foregoing Articles of Merger to be the corporate act of
said Corporation and hereby certifies that to the best of his knowledge,
information and belief the matters and facts set forth therein with respect to
the authorization and approval thereof are true in all material respects under
the penalties of perjury.
--------------------------------------
President
THE UNDERSIGNED, President of PRIME RETAIL, INC., a Maryland corporation,
who executed on behalf of the Corporation the foregoing Articles of Merger of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles of Merger to be the corporate
act of said Corporation and hereby certifies that to the best of his knowledge,
information and belief the matters and facts set forth therein with respect to
the authorization and approval thereof are true in all material respects under
the penalties of perjury.
--------------------------------------
President
Appendix D-4
<PAGE>
APPENDIX E
CONTRIBUTION AGREEMENT
<PAGE>
APPENDIX E
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT, dated as of , 1998 (this "Agreement"),
by and among 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 ("HGP"), and Horizon
Group Properties, L.P., a Delaware limited partnership ("HGP LP").
RECITALS
A. THE MERGER TRANSACTIONS. Prime Retail, Inc., a Maryland corporation
("Prime"), Prime Retail, L.P., a Delaware limited partnership ("Prime
Partnership") and the parties hereto have entered into an Amended and Restated
Agreement and Plan of Merger, dated as of February 1, 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
and Horizon Partnership expect to contribute the Contributed Assets and the
Contributed Business (each as hereinafter defined) to HGP and HGP LP as a
capital contribution, and to cause HGP 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 HGP LP and/or HGP 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 the Liabilities of Initial Horizon
Partnership Group which are not Retained Liabilities, and which arise 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 Initial Horizon Partnership Group under certificates or articles of
incorporation, by-laws, partnership agreements, employment agreements,
indemnification agreements or otherwise, for any matter occurring
Appendix E-1
<PAGE>
after the Prime/Horizon Merger Effective Time, (ii) all Liabilities relating to
the loans described on the Schedule of Debt, and (iii) all leases (whether as
lessor, lessee, sublessee, sublessor or otherwise) and related contracts,
including capitalized leases and land contracts and service contracts, relating
to the Contributed Assets.
"Contributed Assets" shall mean, collectively, (I) 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 outlet centers listed on Schedule
1.1(a) hereto, including but not limited to, all capital stock, partnership
interests and membership interests of Horizon and Horizon Partnership in MG Long
Island Limited Partnership, a Virginia limited partnership; MG Patchogue Limited
Partnership, a District of Columbia limited partnership; MG Patchogue II Limited
Partnership, a Virginia limited partnership; Third HGI, Inc., a Delaware
corporation; Third HGI, L.L.C., a Delaware limited liability company; Algondones
Outlet L.L.C., a Delaware limited liability company and Third Horizon Group
Limited Partnership, a Delaware limited partnership; (ii) the Contributed
Proprietary Name Rights (as hereinafter defined); (iii) the capital stock of HGI
Management Corp., a Michigan corporation, and the rights to acquire any capital
stock of such entity and (iv) Horizon's administrative offices located at 5000
Hakes Drive, Norton Shores, Michigan, including the equipment and computer
software used therein.
"Contributed Business" shall mean all business and operations of Initial
Horizon Partnership Group relating to the Contributed Assets.
"Employee Benefits Agreement" shall have the meaning assigned thereto in
Section 4.6 hereof.
"HGP Group" shall mean, collectively, HGP and its direct and indirect
Subsidiaries, including HGP LP, after giving effect to the Contribution.
"Horizon Partnership Group" shall mean, collectively, Horizon, Horizon
Partnership and their Subsidiaries (other than HGP Group) after giving effect to
the Contribution.
"Indemnified Loss" shall mean, with respect to any claim by an Indemnified
Party for indemnification pursuant to Article IV 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,
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 and notwithstanding
anything to the contrary in this agreement:
(a) all membership and other interests in Finger Lakes Outlet Center,
L.L.C.; and
(b) 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.
Appendix E-2
<PAGE>
"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 not described on the Schedule of Debt, and any other mortgage loans
secured by a Retained Asset incurred after the date hereof, and (iii) all leases
(whether as lessor, lessee, sublessee, sublessor or otherwise) and related
contracts, and service contracts, relating to the Retained Assets.
"Schedule of Debt" shall mean the Horizon Schedule of Debt attached as
Schedule 1.1< hereto.
"Tax Disaffiliation Agreement" shall have the meaning assigned thereto in
Article II hereof.
"Time of Contribution" shall mean the time of consummation of the
Contribution.
"Working Capital Facility" shall mean the credit facility evidenced by that
certain Business Loan Agreement dated August 1, 1996, as amended and extended,
by and between Huntington National Bank, as successor to FMB-Lumberman's Bank,
and Horizon Partnership.
ARTICLE II
TAX MATTERS
Prior to the Time of Contribution, Horizon and HGP 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").
ARTICLE III
CONTRIBUTION AND ASSUMPTION
3.1 CONTRIBUTION OF ASSETS.
(a) Subject to Section 3.1(c) and to the satisfaction or waiver of the
conditions set forth in Article V of this Agreement, each of Horizon and
Horizon Partnership shall transfer, assign and convey to HGP or HGP LP as a
capital contribution all of their respective right, title and interest in
and to the Contributed Assets and the Contributed Business in accordance
with the documents executed pursuant to Section 3.3 hereof.
(b) Notwithstanding Section 3.1(a), Initial Horizon Partnership Group
shall retain and not contribute to HGP or HGP LP any of its respective
right, title, or interest in and to the Retained Assets.
(c) At the Time of Contribution, (i) HGP LP shall issue, directly or
indirectly, to Horizon Partnership, in partial consideration for the
Contribution, that number of common units of HGP LP (the "HGP LP Common
Units") which, when combined with the number of HGP LP Common Units then
outstanding or to be issued, is appropriate to consummate the transactions
as contemplated by the Merger Agreement and (ii) HGP shall issue, directly
or indirectly, to Horizon, in partial consideration for the Contribution,
that number of shares of common stock of HGP which, when combined with the
number of shares of common stock of HGP then outstanding or to be issued, is
appropriate to consummate the transactions as contemplated by the Merger
Agreement.
Appendix E-3
<PAGE>
3.2 ASSUMPTION OF LIABILITIES.
(a) Subject to Section 3.2(b) and effective as of the Time of
Contribution, HGP LP, in partial consideration for the Contribution, will,
directly or indirectly, unconditionally assume the Assumed Liabilities.
(b) Notwithstanding Section 3.2(a), Horizon Partnership Group shall
retain, and HGP and HGP 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 III, at the Time of Contribution or as promptly as practicable
thereafter (i) Horizon and Horizon Partnership shall each execute and deliver,
and cause their respective 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) HGP LP shall, or shall
cause it subsidiaries to, 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 HGP Group thereunder. Initial Horizon Partnership
Group 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 HGP LP, and HGP 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 HGP and HGP 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 HGP LP would not receive all such rights, then Initial Horizon
Partnership Group 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 HGP or HGP 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 and HGP LP shall
determine which of the names, trademarks, trade names and other proprietary
rights related to the Contributed Assets which HGP LP shall have the sole
and exclusive ownership of and right to use, as between HGP 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 HGP 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 Initial 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) HGP shall cause HGP Group to take all
action necessary to cease using, and change as promptly as practicable
(including by amending any charter documents),
Appendix E-4
<PAGE>
any corporate or other names which are the same as or confusingly similar to
any of the Retained Proprietary Name Rights, and (ii) Horizon shall cause
Horizon Partnership Group 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, HGP shall cause HGP Group to cease holding
itself out as having an affiliation with Horizon Partnership Group.
ARTICLE IV
CERTAIN COVENANTS
4.1 INDEMNITY AS BETWEEN HGP LP AND HORIZON PARTNERSHIP WITH RESPECT TO
ASSUMED LIABILITIES AND RETAINED LIABILITIES.
(a) Effective upon the Contribution, HGP LP agrees to indemnify and hold
Horizon Partnership, 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 HGP LP, 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 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 Indemnified Party to give notice as provided in this Section 4.2 shall
not relieve the related Indemnifying Party of its obligations under this
Article IV, except to the extent that such Indemnifying Party is actually
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 IV 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 4.2 within the time period specified, or fails to
pursue the defense of a Third Party Claim diligently and in good faith, such
Appendix E-5
<PAGE>
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
Action.
4.3 ADJUSTMENT FOR INSURANCE AND TAXES. The amount which either HGP LP or
Horizon Partnership is required to pay to, for or on behalf of the other
pursuant to Sections 4.1 and 4.2, shall be adjusted (including, without
limitation, retroactively) (i) by any insurance proceeds actually recovered by
or on behalf of HGP 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 HGP 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 HGP 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 Loss
or Third Party Claim, then HGP Group, Horizon Partnership Group or the
Indemnified Party, as the case may be, shall pay to HGP Group, Horizon
Partnership Group or the Indemnified Party, as the case may be, the amount of
such insurance proceeds or net tax benefit, or if less, 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 agreement or document,
representing or warranting to such party in any way as to the assets, business
or Liabilities transferred, retained 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", "WHERE 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,
INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE,
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 HGP LP nor any member of HGP Group shall assume such liability.
Effective as of the Partnership Merger
Appendix E-6
<PAGE>
Effective Time, Horizon Partnership and HGP LP shall cooperate to transfer to
the employ of HGP Group, each person employed by Horizon Partnership Group,
other than the Retained Employees (such employees and other persons who become
employees of the HGP Group after the Partnership Merger Effective Time in
accordance with this Section 4.5 shall be hereinafter referred to as the
"Transferred Employees"). With respect to the Transferred Employees, HGP 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 HGP 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 the Partnership Merger
Effective Time, HGP 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 to HGP LP pursuant to Section 3.1(a),
and HGP 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 HGP Group, regardless of whether the insurance
policy under which such claim is made is retained by Horizon Partnership Group
pursuant to Section 3.1(b).
4.8 TRANSFER AND GAINS TAXES. HGP LP shall pay or cause to be paid the
Transfer and Gains Taxes imposed in connection with or as a result of the
Contribution.
4.9 WORKING CAPITAL FINANCING. The parties hereto understand that the
Working Capital Facility will mature on August 1, 1998. HGP covenants to use its
best efforts to refinance the Working Capital Facility upon terms and conditions
acceptable to it as promptly as practical following the Closing Date. If HGP is
unable to refinance such indebtedness, Prime agrees that it will refinance such
indebtedness upon terms and conditions, including interest rates, substantially
similar to those set forth in the Working Capital Facility.
ARTICLE V
CONDITIONS
The obligations of the parties to consummate the Contribution shall be
subject to (i) 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 (except for the conditions contained in Section 6.2(h) of the
Merger Agreement relating to the execution of, and consummation of the
transactions contemplated by, this Agreement) and (ii) the Tax Disaffiliation
Agreement and the Employee Benefits Agreement shall have been executed and
delivered by each of the parties thereto.
ARTICLE VI
ACCESS TO INFORMATION AND SERVICES
6.1 PROVISION OF CORPORATE RECORDS. At the Time of Contribution, Horizon
and Horizon Partnership shall cause Initial Horizon Partnership Group to
deliver, or cause to be delivered, to HGP Group all
Appendix E-7
<PAGE>
corporate books and records which relate primarily to HGP Group, the Contributed
Assets, Contributed Business 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 HGP Group.
6.2 ACCESS TO INFORMATION. From and after the Time of Contribution (i)
Horizon and Horizon Partnership shall cause Horizon Partnership Group to afford
to HGP 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 HGP Group, the Contributed Assets, the Contributed
Businesses or the Assumed Liabilities, insofar as such access is reasonably
required by HGP Group, and (ii) HGP shall cause HGP 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
HGP Group's possession relating to Initial Horizon Partnership Group and the
assets of Initial Horizon Partnership Group (including without limitation, the
Contributed Assets, the Contributed Businesses or the Assumed Liabilities),
insofar as such access is reasonably required by Horizon Partnership Group.
Information may be requested under this Section 6.2 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 shall cause Horizon Partnership Group, and HGP shall cause
HGP Group each to retain, for a period of at least five years following the Time
of Contribution, all significant or mutual Information relating to the
Contributed Assets, Retained Assets, Assumed Liabilities, Retained Liabilities,
Contributed Business or the Retained Business. Notwithstanding the foregoing,
either Horizon Partnership Group or HGP Group may destroy or otherwise dispose
of any of such Information at any time, provided that, prior to such destruction
or disposal (a) Horizon or HGP, 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 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,
directors, 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 nonconfidential basis prior to its disclosure by
the other party, (b) in the public domain through no fault of such party or
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,
Appendix E-8
<PAGE>
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 6.5.
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 7.1.
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 Time, 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 HGP or HGP LP:
Horizon Group Properties, Inc.
5000 Hakes Drive
Norton Shores, MI 49441
Attention: Gary T. Skoien
Fax: No.: (616) 798 - 5100
with a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
Attention: Wayne D. Boberg, Esq.
Fax No.: (312) 558-5700
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
Appendix E-9
<PAGE>
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 4.1 and 4.2 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 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. The parties agree that if, after the Time
of Contribution, a party holds assets or Liabilities which by the terms hereof
or of the Merger Agreement were intended to be assigned and transferred to, or
retained by, another party, such party shall promptly assign and transfer or
cause to be assigned and transferred such assets or Liabilities to the
applicable party.
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 HGP 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 and Horizon
Partnership each shall assign to HGP Group, and cause each member of Horizon
Partnership Group to assign to HGP Group, its rights (if any) to any
attorney-client privilege with respect to legal advice concerning the business
or operations of HGP 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 HGP Group and its legal counsel with respect to legal advice concerning
the business or operations of HGP Group, including the Assumed Liabilities or
the transactions contemplated hereby.
7.9 NO THIRD-PARTY BENEFICIARIES. Except as provided in Section 4.1, 4.2
and 7.1 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 E-10
<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.
<TABLE>
<S> <C> <C>
HORIZON GROUP, INC.
By:
-----------------------------------------
Name:
Title:
SKY MERGER CORP.
By:
-----------------------------------------
Name:
Title:
HORIZON/GLEN OUTLET CENTERS
LIMITED PARTNERSHIP
By: Horizon Group, Inc.,
its general partner
By:
-----------------------------------------
Name:
Title:
HORIZON GROUP PROPERTIES, INC.
By:
-----------------------------------------
Name:
Title:
HORIZON GROUP PROPERTIES, L.P.
By: Horizon Group Properties, Inc.,
its general partner
By:
-----------------------------------------
Name:
Title:
</TABLE>
Appendix E-11
<PAGE>
SCHEDULE 1.1(a)
TO
CONTRIBUTION AGREEMENT
The Contributed Assets include, without limitation, the following retail
outlet centers designated on Initial Horizon Partnership Group's books and
records by location and owner as:
<TABLE>
<CAPTION>
LOCATION OWNER
- ------------------------------------------------------- -----------------------------------------------
<S> <C>
Algondones Algondones Outlet, L.L.C.
Dry Ridge Third Horizon Group Limited Partnership
Holland Third Horizon Group Limited Partnership
Laughlin Third Horizon Group Limited Partnership
Medford Third Horizon Group Limited Partnership
Monroe Third Horizon Group Limited Partnership
Sealy Third Horizon Group Limited Partnership
Somerset Third Horizon Group Limited Partnership
Traverse City Third Horizon Group Limited Partnership
Tulare Third Horizon Group Limited Partnership
Warrenton Third Horizon Group Limited Partnership
Norton Shores Third Horizon Group Limited Partnership
Patchogue--Bellport (Phase I) MG Patchogue Limited Partnership
Patchogue--Bellport (Phase II & III) MG Patchogue II Limited Partnership
</TABLE>
Appendix E-12
<PAGE>
SCHEDULE 1.1(b)
TO
CONTRIBUTION AGREEMENT
The Retained Assets include, without limitation, the following retail outlet
centers designated on Initial Horizon Partnership Group's books and records by
location and owner as:
<TABLE>
<CAPTION>
LOCATION OWNER
- ---------------------------------------- --------------------------------------------------------------
<S> <C>
Birch Run Horizon/Glen Outlet Centers Limited Partnership
Conroe Horizon/Glen Outlet Centers Limited Partnership
Edinburgh Horizon/Glen Outlet Centers Limited Partnership
Jeffersonville Horizon/Glen Outlet Centers Limited Partnership
Vero Beach Horizon/Glen Outlet Centers Limited Partnership
Williamsburg Horizon/Glen Outlet Centers Limited Partnership
Woodbury Horizon/Glen Outlet Centers Limited Partnership
Burlington First Horizon Group Limited Partnership
Fremont First Horizon Group Limited Partnership
Kenosha First Horizon Group Limited Partnership
Oshkosh First Horizon Group Limited Partnership
Hillsboro Second Horizon Group Limited Partnership
Pismo Beach Second Horizon Group Limited Partnership
Queenstown Second Horizon Group Limited Partnership
Tracy Second Horizon Group Limited Partnership
Perryville H/G Perryville Limited Partnership
Calhoun The Prime Outlets at Calhoun Limited Partnership
Gilroy Phases III & IV The Prime Outlets at Gilroy Limited Partnership
Lee The Prime Outlets at Lee Limited Partnership
Michigan City The Prime Outlets at Michigan City Limited Partnership
Silverthorne Indianapolis Factory Shops Limited Partnership
Gilroy Phase V HGL Outlet Associates (General Partnership)
</TABLE>
Appendix E-13
<PAGE>
SCHEDULE 1.1(c)
TO
CONTRIBUTION AGREEMENT
Indebtedness under the Working Capital Facility
Indebtedness owed to The Union Labor Life Insurance Company, as assignee, and
evidenced by the certain Promissory Note of MG Patchogue Limited Partnership
dated July 29, 1991 and that certain Building Loan Note of MG Patchogue Limited
Partnership dated August 23, 1991
Indebtedness owed to First of America Bank-Michigan, N.A. evidenced by the
Promissory Notes dated December 22, 1995
Appendix E-14
<PAGE>
EXHIBIT A
TO
CONTRIBUTION AGREEMENT
TAX DISAFFILIATION AGREEMENT
TAX DISAFFILIATION AGREEMENT, dated as of , 1998, among
HORIZON GROUP, INC., a Michigan corporation ("Horizon"), SKY MERGER CORP., a
Maryland corporation ("Sky Merger"), and Horizon Group Properties, Inc., a
Maryland corporation ("HGP").
WHEREAS, upon the terms and subject to the conditions set forth herein,
after the formation of Horizon Group Properties, L.P., a Delaware limited
partnership ("HGP LP"), it is contemplated that immediately prior to the
declaration of the Prime Partnership Special Distribution on the Closing Date
(as hereinafter defined), Horizon and Horizon/Glen Outlet Centers Limited
Partnership, a Delaware limited partnership ("Horizon Partnership") shall each
contribute to HGP LP certain of their respective assets subject to the
obligations and liabilities relating to such assets, all as provided in the
Contribution Agreement;
WHEREAS, 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 units of
HGP LP ("HGP LP Common Units") to the record holders of certain partnership
interests in Prime Partnership immediately after the consummation of the
Partnership Merger;
WHEREAS, upon the terms and subject to the conditions set forth herein,
after the consummation of the Prime Partnership Common Distribution, Prime shall
contribute to HGP all of the HGP LP Common Units that it receives pursuant to
the Prime Partnership Common Distribution and all of the HGP Common Shares held
by Prime as a result of the Prime/Horizon Merger, and HGP shall issue to Prime
shares of HGP common stock (each an "HGP Common Share");
WHEREAS, upon the terms and subject to the conditions set forth herein,
after the consummation of the Prime Corporate Contribution, Prime shall declare
and make a distribution of the HGP 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; and
WHEREAS, Horizon, Sky Merger and HGP desire on behalf of themselves, their
Subsidiaries, and their successors to set forth their rights and obligations
with respect to matters affecting their reporting of, and liability for, Taxes
(as defined below).
Section 1. DEFINITIONS. Unless otherwise defined herein, for purposes of
this Tax Disaffiliation Agreement (the "Agreement") the following terms will
have the following definitions:
"Subsidiary" shall mean a current or former corporation, partnership, joint
venture, or other business entity in which 50 percent or more of the outstanding
equity or voting power is owned directly or indirectly by HGP or Horizon;
provided, however, that HGP and any Subsidiary of HGP shall not be considered a
Subsidiary of Horizon (including, but not limited to, HGP LP) for purposes of
the Tax Sharing Obligations in Section 3 hereof.
"Tax" shall mean all taxes, charges, fee, levies, imposts, duties and other
assessments imposed by any governmental authority, including, without
limitation, income, gross receipts, excise, property, sales, use, ad valorem,
value added, withholding, employment, payroll, occupation, license, franchise,
transfer, and windfall profits taxes, fees and charges, and any interest, fines,
penalties, additions to tax, or other additional amounts imposed by any
governmental authority with respect to any tax, charge, fee, levy, impost, duty,
or other assessment.
"Tax Return" shall mean all returns or reports to be filed or that may be
filed with respect to any Tax.
Appendix E-15
<PAGE>
"Underpayment Rate" shall mean the rate specified in Section 6621(a)(2) of
the Code.
Other capitalized terms not defined herein have the meaning set forth in
that certain Amended and Restated Agreement and Plan of Merger, dated as of
February 1, 1998 by and among Prime Retail, Inc., a Maryland corporation, Prime
Retail, L.P., a Delaware limited partnership, Horizon, Sky Merger, HGP, HGP LP
and Horizon Partnership.
Section 2. TAX RETURNS AND TAX PAYMENTS.
(a) Obligations to File Tax Returns.
(i) HGP shall timely file, or caused to be filed, all Tax Returns that
relate to HGP, or any of its Subsidiaries, for any taxable period that ends
after the Closing Date.
(ii) Horizon shall timely file, or caused to be filed, all Tax Returns
that relate to Horizon, or any of its Subsidiaries, for any taxable period,
and for HGP and any of its Subsidiaries, for any taxable period of HGP that
ends on or before the Closing Date.
(b) Obligations to Pay Taxes. Horizon and HGP shall remit, or caused to be
remitted, any Taxes due in respect of any Tax for which it is required to file a
Tax Return.
Section 3. TAX SHARING OBLIGATIONS.
(a) Obligations of HGP. HGP shall be liable and hold Horizon, and all of
Horizon's Subsidiaries, harmless against any liability for Taxes arising from
the operations of HGP or any of its Subsidiaries or because of HGP's ownership
of any Subsidiary or any other corporation, partnership, joint venture, or other
business entity.
(b) Obligations of Horizon. Horizon shall be liable and hold HGP, and all of
HGP's Subsidiaries harmless against any liability for Taxes arising from the
operations of Horizon or any of its Subsidiaries or because of Horizon's
ownership of any Subsidiary or any other corporation, partnership, joint
venture, or other business entity.
(c) Payments. To the extent that either party (the "Payor") owes money to
another party (the "Payee") pursuant to this Section 3 of the Agreement, the
Payor shall pay the Payee no later than 15 days after the date the Payor makes a
demand for payment, which is accompanied with appropriate calculations, of the
amount the Payor is required to indemnify the Payee under this Section 3 of the
Agreement.
(d) Interest. Any payments required by this Agreement that are not made on
or before the date provided shall bear interest after such date at the
Underpayment Rate.
Section 4. TAX AUDITS.
(a) Responsibility. HGP and Horizon shall have sole responsibility for all
audits or other proceedings with respect to Tax Returns that it is required to
file under Section 2 of this Agreement.
(b) Cooperation. HGP and Horizon shall cooperate with each other in the
conduct of any audit (and in the filing of any Tax Return) and each shall
execute and deliver such powers of attorney and make available such other
documents and employees as are necessary to carry out the intent of this
Agreement.
Section 5. RETENTION OF RECORDS.
(a) Maintenance. HGP and Horizon shall maintain until the expiration of the
relevant statute of limitations all records, documents, accounting data, and
other information necessary for the preparation and filing of all Tax Returns of
HGP and Horizon or for the audit of such Tax Returns.
(b) Access. HGP and Horizon shall provide each other reasonable access to
any records, documents, accounting date, and other information and to its
personnel and premises for purposes of a review or audit of such information to
the extent it is relevant to a obligation or liability of a party under this
Agreement.
Appendix E-16
<PAGE>
Section 5. HORIZON/SUBSIDIARY MERGER.
Upon the Horizon/Subsidiary Merger, Sky Merger shall assume all obligations
of Horizon under this Agreement.
Section 6. MISCELLANEOUS PROVISIONS.
(a) Notices and Governing Law. All notices required to permitted to be given
pursuant to this Agreement shall be given, and the applicable law governing the
interpretation of this Agreement, shall be determined by reference to the
Contribution Agreement.
(b) Binding Effect. This Agreement shall be binding on, and shall inure to
the benefit of, the parties and their respective successors and assigns.
(c) Entire Agreement. This Agreement constitutes the entire agreement of the
parties concerning the subject matter hereof and supersedes all prior
agreements, whether or not written, concerning the subject matter. This
Agreement may not be amended except by an agreement in writing, signed by all
parties.
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which shall
constitute together the same document.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first written above.
<TABLE>
<S> <C> <C>
HORIZON GROUP, INC.
By:
-----------------------------------------
Name:
Title:
SKY MERGER CORP.
By:
-----------------------------------------
Name:
Title:
HORIZON GROUP PROPERTIES, INC.
By:
-----------------------------------------
Name:
Title:
</TABLE>
Appendix E-17
<PAGE>
APPENDIX F
OPINION OF FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
<PAGE>
APPENDIX F
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 F-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 F-2
<PAGE>
Board of Directors
Prime Retail, Inc.
Page 3
Mergers to the shareholders of 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 F-3
<PAGE>
APPENDIX G
OPINION OF LEHMAN BROTHERS
<PAGE>
APPENDIX G
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 G-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 G-2
<PAGE>
APPENDIX H
MARYLAND STATUTES
REGARDING STOCKHOLDER APPRAISAL RIGHTS
<PAGE>
APPENDIX H
MARYLAND STATUTES
REGARDING STOCKHOLDER APPRAISAL RIGHTS
SECTION 3-201. "SUCCESSOR" DEFINED.
(a) Corporation amending charter. In this subtitle, except as provided in
subsection (b) of this section, "successor" includes a corporation which amends
its charter in a way which alters the contract rights, as expressly set forth in
the charter, of any outstanding stock, unless the right to do so is reserved by
the charter of the corporation.
(b) Corporation whose stock is acquired. When used with reference to a share
exchange, "successor" means the corporation the stock of which was acquired in
the share exchange. History
SECTION 3-202. RIGHT TO FAIR VALUE OF STOCK.
(a) General rule. Except as provided in subsection (c) of this section, a
stockholder of a Maryland corporation has the right to demand and receive
payment of the fair value of the stockholder's stock from the successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action
under Section 3-105 (d) of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's rights, unless
the right to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by Section 3-602 of this title or
exempted by Section 3-603 (b)of this title.
(b) Basis of fair value.
(1) Fair value is determined as of the close of business:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary into its parent, on the day notice is
given or waived under Section 3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value
may not include any appreciation or depreciation which directly or
indirectly results from the transaction objected to or from its proposal.
(3) In any transaction governed by Section 3-602 of this title or
exempted by Section 3-603 (b) of this title, fair value shall be value
determined in accordance with the requirements of Section 3-603 (b) of this
title.
(c) When right to fair value does not apply. Unless the transaction is
governed by Section 3-602 of this title or is exempted by Section 3-603 (b) of
this title, a stockholder may not demand the fair value of his stock and is
bound by the terms of the transaction if:
(1) The 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.:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary into its parent, on the date notice
is given or waived under Section 3-106; or
Appendix H-1
<PAGE>
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction objected to;
(2) The stock is that of the successor in a merger, unless:
(i) 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 do so; or
(ii) 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; or
(3) The stock is that of an open-end investment company registered with
the Securities and Exchange Commission under the Investment Company Act of
1940 and the value placed on the stock in the transaction is its net asset
value.
SECTION 3-203. PROCEDURE BY STOCKHOLDER.
(a) Specific duties. A stockholder of a corporation who desires to receive
payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary into its parent, within 30 days after
notice is given or waived under Section 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for record,
shall make a written demand on the successor for payment for his stock,
stating the number and class of shares for which he demands payment.
(b) Failure to comply with section. A stockholder who fails to comply with
this section is bound by the terms of the consolidation, merger, share exchange,
transfer of assets, or charter amendment.
SECTION 3-204. EFFECT OF DEMAND ON DIVIDEND AND OTHER RIGHTS.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of business
on the day as at which fair value is to be determined under Section 3-202 of
this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that
stock, except the right to receive payment of its fair value.
SECTION 3-205. WITHDRAWAL OF DEMAND.
A demand for payment may be withdrawn only with the consent of the
successor.
SECTION 3-206. RESTORATION OF DIVIDEND AND OTHER RIGHTS.
(a) When rights restored. The rights of a stockholder who demands payment
are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required by
this subtitle;
Appendix H-2
<PAGE>
(3) A court determines that the stockholder is not entitled to relief;
or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration.
SECTION 3-207. NOTICE AND OFFER TO STOCKHOLDERS.
(a) Duty of successor.
(1) The successor promptly shall notify each objecting stockholder in
writing of the date the articles are accepted for record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the
corporation which issued the stock:
(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the date
of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) Manner of sending notice. The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by certified
mail, return receipt requested, bearing a postmark from the United States Postal
Service, at the address he gives the successor in writing, or, if none, at his
address as it appears on the records of the corporation which issued the stock.
SECTION 3-208. PETITION FOR APPRAISAL; CONSOLIDATION OF PROCEEDINGS; JOINDER OF
OBJECTORS.
(a) Petition for appraisal. Within 50 days after the Department accepts the
articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not have a
principal office in this State, where the resident agent of the successor is
located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors.
(1) If more than one appraisal proceeding is instituted, the court shall
direct the consolidation of all the proceedings on terms and conditions it
considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
SECTION 3-209. NOTATION ON STOCK CERTIFICATE.
(a) Submission of certificate. At any time after a petition for appraisal
is filed, the court may require the objecting stockholders parties to the
proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation. If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
Appendix H-3
<PAGE>
SECTION 3-210. APPRAISAL OF FAIR VALUE.
(a) Court to appoint appraisers. If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers - Filing. Within 60 days after their appointment,
unless the court sets a longer time, the appraisers shall determine the fair
value of the stock as of the appropriate date and file a report stating the
conclusion of the majority as to the fair value of the stock.
(c) Same - Contents. The report shall state the reasons for the conclusion
and shall include a transcript of all testimony and exhibits offered.
(d) Same - Service; objection.
(1) On the same day that the report is filed, the appraisers shall mail
a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to it
and request a hearing.
SECTION 3-211. ACTION BY COURT ON APPRAISERS' REPORT.
(a) Order of court. The court shall consider the report and, on motion of
any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order.
(1) If the appraisers' report is confirmed or modified by the order,
judgment shall be entered against the successor and in favor of each
objecting stockholder party to the proceeding for the appraised fair value
of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or
(ii) Remit the proceedings to the same or other appraisers on terms
and conditions it considers proper.
(c) Judgment includes interest.
(1) Except as provided in paragraph (2) of this subsection, a judgment
for the stockholder shall award the value of the stock and interest from the
date as at which fair value is to be determined under Section 3-202 of this
subtitle.
(2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under Section 3-207 of
this subtitle was arbitrary and vexatious or not in good faith. In making
this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(d) Costs of proceedings.
Appendix H-4
<PAGE>
(1) The costs of the proceedings, including reasonable compensation and
expenses of the appraisers, shall be set by the court and assessed against
the successor. However, the court may direct the costs to be apportioned and
assessed against any objecting stockholder if the court finds that the
failure of the stockholder to accept an offer for the stock made under
Section 3-207 of this subtitle was arbitrary and vexatious or not in good
faith. In making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable
fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under Section
3-207 of this subtitle; or
(ii) The value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
(e) Effect of judgment. The judgment is final and conclusive on all parties
and has the same force and effect as other decrees in equity. The judgment
constitutes a lien on the assets of the successor with priority over any
mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
SECTION 3-212. SURRENDER OF STOCK.
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
indorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the certificates
and sufficient indemnity bond are furnished.
SECTION 3-213. RIGHTS OF SUCCESSOR WITH RESPECT TO STOCK.
(a) General rule. A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders of
record of that stock on a record date after the close of business on the day as
at which fair value is to be determined under Section 3-202 of this subtitle.
(b) Successor in transfer of assets. After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
Appendix H-5
<PAGE>
APPENDIX I
PRIME RETAIL, INC.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ---------------------------------------------------------------------------------------------------------- ---------
<S> <C>
1. Purpose of Plan....................................................................................... 1
2. Definitions........................................................................................... 1
2.1 "Administrator".............................................................................. 1
2.2 "Board"...................................................................................... 1
2.3 "Code"....................................................................................... 1
2.4 "Common Stock"............................................................................... 1
2.5 "Company".................................................................................... 1
2.6 "Date of Grant".............................................................................. 1
2.7 "Director"................................................................................... 1
2.8 "Eligible Director".......................................................................... 1
2.9 "Exchange Act"............................................................................... 1
2.10 "Fair Market Value".......................................................................... 1
2.11 "Option"..................................................................................... 1
2.12 "Optionee"................................................................................... 1
2.13 "Plan"....................................................................................... 1
2.15 "Securities Act"............................................................................. 1
2.16 "Severance Date"............................................................................. 1
2.17 "Stock Option Agreement"..................................................................... 1
3. Stock Subject to Plan................................................................................. 1
3.1 Stock Subject to Plan........................................................................ 1
3.2 Unexercised Options.......................................................................... 2
4. Granting of Options................................................................................... 2
4.1 Eligibility.................................................................................. 2
4.2 Granting of Options.......................................................................... 2
4.3 Administration Of the Plan................................................................... 2
5. Terms of Options...................................................................................... 2
5.1 Option Agreement............................................................................. 2
5.2 Vesting of Options........................................................................... 2
5.3 Option Exercise Price........................................................................ 2
5.4 Exercise Periods............................................................................. 3
5.5 Adjustments in Outstanding Options........................................................... 3
5.6 No Right to Continued Service................................................................ 3
6. Exercise of Options................................................................................... 3
6.1 Person Eligible to Exercise.................................................................. 3
6.2 Partial Exercise............................................................................. 3
6.3 Manner of Exercise........................................................................... 3
6.4 Conditions to Issuance of Stock Certificates................................................. 4
6.5 Rights as Stockholders....................................................................... 4
6.6 Transfer Restrictions........................................................................ 5
7. Additional Provisions................................................................................. 5
7.1 Approval of Plan by Stockholders............................................................. 5
7.2 Nontransferability........................................................................... 5
7.3 Death of Optionee............................................................................ 5
7.4 Securities Act............................................................................... 5
7.5 Termination and Amendment of Plan............................................................ 5
7.6 Duties of the Company........................................................................ 6
</TABLE>
Appendix I-i
<PAGE>
<TABLE>
<S> <C>
8. General Provisions.................................................................................... 6
8.1 Expenses..................................................................................... 6
8.2 Applicable Laws.............................................................................. 6
8.3 No Obligation................................................................................ 6
</TABLE>
Appendix I-ii
<PAGE>
PRIME RETAIL, INC. NONEMPLOYEE DIRECTOR STOCK PLAN
SECTION 1. PURPOSE OF PLAN
The purpose of the Prime Retail, Inc. Nonemployee Director Stock Plan (the
"Plan") is to provide a means by which Prime Retail, Inc. (the "Company") may
attract and retain directors with outstanding qualifications, by affording those
individuals with incentives to exert maximum efforts for the success of the
Company through opportunities to participate in the growth, development and
financial success of the Company.
SECTION 2. DEFINITIONS
Wherever the following capitalized terms are used in the Plan, they shall
have the following respective meanings:
2.1 "ADMINISTRATOR" means the Board or any committee the Board designates.
2.2 "BOARD" means the Board of Directors of the Company.
2.3 "CODE" means the Internal Revenue Code of 1986, as amended.
2.4 "COMMON STOCK" means the Common Stock of the Company, par value $0.01
per share.
2.5 "COMPANY" means Prime Retail, Inc., a Maryland corporation, or any
successor thereto.
2.6 "DATE OF GRANT" means the date as of which an Option has been granted
pursuant to the Plan.
2.7 "DIRECTOR" means a member of the Board.
2.8 "ELIGIBLE DIRECTOR" means a Director who is not an employee of the
Company or any of its subsidiaries or affiliated corporations or partnerships.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
2.10 "FAIR MARKET VALUE" means the per share value of the Common Stock as
of a given date, determined as the average of the highest and lowest quoted
selling prices for Common Stock on the relevant date, or, if no sales occurred
on such date, the weighted average of the means between the highest and lowest
quoted selling prices on the nearest day before and the nearest day after the
relevant date; provided, however, that notwithstanding the foregoing, the
Administrator may determine "Fair Market Value" in its discretion.
2.11 "OPTION" means any option granted under this Plan.
2.12 "OPTIONEE" means an Eligible Director to whom an Option is granted
under this Plan.
2.13 "PLAN" means the Prime Retail, Inc. Nonemployee Director Stock Plan,
as it may be amended from time to time.
2.15 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.16 "SEVERANCE DATE" means the date the individual ceases to be a
Director.
2.17 "STOCK OPTION AGREEMENT" means the agreement reflecting the terms and
conditions of an Option pursuant to Section 5.1.
SECTION 3. STOCK SUBJECT TO PLAN
3.1 STOCK SUBJECT TO PLAN. The aggregate number of shares of the Company's
Common Stock that may be issued upon exercise of Options granted under Section 4
of the Plan shall not exceed 285,000, unless and until a larger number shall
have been approved by the Company's stockholders pursuant to Section 7.5.
Appendix I-1
<PAGE>
3.2 UNEXERCISED OPTIONS. If any Option expires or is cancelled without
having been fully exercised, a new Option or Options for the number of shares of
Common Stock that would have been issued upon exercise of the unexercised
portion of such Option may be granted under this Plan, subject to the
limitations of Section 3.1.
SECTION 4. GRANTING OF OPTIONS
4.1 ELIGIBILITY. Options may only be granted to Eligible Directors. Options
granted under the Plan shall be non-qualified stock options for purposes of the
Code.
4.2 GRANTING OF OPTIONS.
(a) Each individual who has been serving as an Eligible Director for at
least three months on the date the Plan is approved by the Company's
stockholders shall be granted as of such date an Option to purchase 10,000
shares of Common Stock.
(b) Each individual who first becomes an Eligible Director on or after
the date the Plan is approved by the Company's stockholders shall be granted
as of such date an Option to purchase 5,000 shares of Common Stock.
(c) Subject to the limitations of Section 3.1, each Eligible Director
who has completed a year of service on the Board on the date of each annual
meeting of the Company's stockholders, commencing with the 1999 meeting, and
who continues to serve as a member of the Board immediately following the
applicable meeting shall automatically be granted as of the date of such
meeting an Option to purchase 5,000 shares of Common Stock.
4.3 ADMINISTRATION OF THE PLAN. The Administrator shall administer the
Plan. Except as otherwise provided in the Plan and except as otherwise expressly
stated to the contrary in the Company's Articles of Incorporation, Bylaws, or
elsewhere, the Administrator shall have the authority (i) to interpret the Plan,
(ii) to prescribe, amend and rescind rules and regulations relating to the Plan,
and (iii) to take any other actions in connection with the Plan as it may deem
necessary or advisable for the administration of the Plan. All expenses and
liabilities incurred by the Administrator in connection with the administration
of the Plan shall be borne by the Company. The Administrator may employ
attorneys, consultants, accountants, appraisers, brokers or other persons. The
Administrator, the Company and the Board shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All elections taken and all
interpretations and determinations made by the Administrator in good faith shall
be final and binding upon all Optionees, the Company and all other interested
persons. No member of the Administrator shall be personally liable for any
action, determination or interpretation made in good faith with respect to the
Plan. Members of the Administrator shall be entitled to indemnification by the
Company for any action or any failure to act in connection with services
performed by or on behalf of the Administrator for the benefit of the Company to
the fullest extent provided or permitted by the Company's Articles of
Incorporation, Bylaws, any insurance policy or other agreement intended for the
benefit of the Administrator, or by any applicable law.
SECTION 5. TERMS OF OPTIONS
5.1 OPTION AGREEMENT. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall indicate the Date of the Grant and
contain such terms and conditions as the Administrator shall determine with
respect to such Option, consistent with the Plan.
5.2 VESTING OF OPTIONS. Options granted under the Plan shall be fully
vested upon the Date of Grant.
5.3 OPTION EXERCISE PRICE. The exercise price per share for an Option
granted under the Plan shall be equal to 100% of the Fair Market Value of such
share on the Date of Grant.
Appendix I-2
<PAGE>
5.4 EXERCISE PERIODS. Except as otherwise provided in the Plan or
applicable Stock Option Agreement, each Option shall be exercisable, in whole or
in part, at any time on or after the Date of Grant and prior to its expiration.
No Option may be exercised to any extent by anyone after the first to occur of
the following events:
(a) the expiration of ten years from the Date of Grant; or
(b) the expiration of one year from the Optionee's Severance Date unless
the Optionee dies within said one-year period; or
(c) the expiration of one year from the date of the Optionee's death.
5.5 ADJUSTMENTS IN OUTSTANDING OPTIONS. In the event that the outstanding
shares of Common Stock subject to Options are changed into or exchanged for a
different number or kind of shares of the Company or other securities of the
Company by reason of merger, consolidation, recapitalization, reclassification,
or the number of shares is increased or decreased by reason of a stock split-up,
stock dividend, combination of shares or any other increase or decrease in the
number of such shares of Common Stock effected without receipt of consideration
by the Company (provided, however, that conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration"), the Administrator shall make appropriate adjustments in the
number and kind of shares as to which all outstanding Options, or portions
thereof then unexercised, shall be exercisable, to the end that after such event
the Optionee's proportionate interest shall be maintained as before the
occurrence of such event. Such adjustment in an outstanding Option shall be made
without change in the total price applicable to the Option or the unexercised
portion of the Option (except for any change in the aggregate price resulting
from rounding-off of share quantities or prices) and with any necessary
corresponding adjustment in Option price per share. Any such adjustment made by
the Administrator shall be final and binding upon all Optionees, the Company and
all other interested persons.
5.6 NO RIGHT TO CONTINUED SERVICE. Nothing in this Plan or in any Stock
Option Agreement shall confer upon any Optionee any right to retention as a
member of the Board.
SECTION 6. EXERCISE OF OPTIONS
6.1 PERSON ELIGIBLE TO EXERCISE. Except as provided in Section 7.2, during
the lifetime of the Optionee, only such Optionee may exercise an Option (or any
portion thereof) granted to such Optionee. After the death of the Optionee, any
exercisable portion of such an Option may be exercised by the personal
representative of such Optionee or by any person empowered to do so under the
deceased Optionee's will or under the then applicable laws of descent and
distribution.
6.2 PARTIAL EXERCISE. At any time and from time to time prior to the time
when any Option becomes unexercisable under the Plan or applicable Stock Option
Agreement, such Option or portion thereof may be exercised in whole or in part;
provided, however, that the Company shall not be required to issue fractional
shares and the Administrator may, by the terms of the Stock Option Agreement,
require any partial exercise to be with respect to a specified minimum number of
shares.
6.3 MANNER OF EXERCISE. An Option, or any portion thereof, may be exercised
solely by delivery to the Company of all of the following prior to the time when
such Option or such portion becomes unexercisable under the Plan or the
applicable Stock Option Agreement:
(a) notice in writing signed by the Optionee or other person then
entitled to exercise such Option or portion, stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Administrator; and
(b) (i) full payment (in cash or by check) for the shares with respect
to which such Option or portion is thereby exercised; or
Appendix I-3
<PAGE>
(ii) if permitted under the terms of an Optionee's Stock Option
Agreement or with the consent of the Administrator, shares of the
Company's Common Stock owned by the Optionee duly endorsed for transfer
to the Company, with a Fair Market Value on the date of Option exercise
equal to the aggregate Option price of the shares with respect to which
such Option or portion is thereby exercised; or
(iii) with the consent of the Administrator, a full recourse
promissory note bearing interest (at least such rate as shall then
preclude the imputation of interest under the Code or any successor
provision) and payable upon such terms as may be prescribed by the
Administrator. The Administrator may also prescribe the form of such note
and the security to be given for such note. No Option may, however, be
exercised by delivery of a promissory note or by a loan from the Company
when or where such loan or other extension of credit is prohibited by
law; or
(iv) if permitted in the Optionee's Option Agreement, through a
special sale and remittance procedure pursuant to which the Optionee
concurrently provides irrevocable written instructions to a
Company-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
federal, state and local income and employment taxes required to be
withheld by the Company by reason of such exercise, and the Company to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.
(v) with the consent of the Administrator, any combination of the
consideration provided in the foregoing subsections (i) through (iv); and
(c) such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or
state securities laws or regulations, including the representation that the
shares of the Common Stock are being acquired for investment and not resale.
The Administrator may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance including,
without limitation, placing legends on share certificates and issuing
stop-transfer orders to transfer agents and registrars; and
(d) in the event that the Option or portion thereof shall be exercised
pursuant to Section 6.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Option or portion thereof.
6.4 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The shares of Common
Stock issuable and deliverable upon the exercise of an Option, or any portion
thereof, may be either previously authorized but unissued shares or issued
shares that have then been reacquired by the Company. The Company shall not be
required to issue or deliver any certificate or certificates for shares of
Common Stock purchased upon the exercise of any Option or portion thereof prior
to fulfillment of all of the following conditions:
(a) the satisfaction of all requirements set forth in Section 6.3,
including payment of the exercise price; and
(b) the obtaining of any approval or other clearance from any state or
federal governmental agency that the Administrator shall, in its absolute
discretion, determine to be necessary or advisable; and
(c) the lapse of such reasonable period of time following the exercise
of the Option as the Administrator may establish from time to time for
reasons of administrative convenience.
6.5 RIGHTS AS STOCKHOLDERS. The holders of Options shall not be, nor have
any of the rights or privileges of, stockholders of the Company in respect to
any shares purchasable upon the exercise of any
Appendix I-4
<PAGE>
part of an Option unless and until the Option is exercised, the Option price has
been paid to the Company and certificates representing such shares have been
issued by the Company to such holders.
6.6 TRANSFER RESTRICTIONS. The Administrator, in its absolute discretion,
may impose such restrictions on the transferability of the shares purchasable
upon the exercise of an Option as it deems appropriate. Any such restriction
shall be set forth in the respective Stock Option Agreement and may be referred
to on the certificates evidencing such shares.
SECTION 7. ADDITIONAL PROVISIONS
7.1 APPROVAL OF PLAN BY STOCKHOLDERS. This Plan shall be submitted for the
approval of the Company's stockholders.
7.2 NONTRANSFERABILITY. No Option or interest or right therein or part
thereof shall be liable for the debts, contracts or engagements of the Optionee
or any successors in interest to the Optionee or, except as provided below,
shall be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that nothing in this Section 7.2 shall prevent transfers by will or by
the applicable laws of descent and distribution. Notwithstanding the foregoing,
an Option may be assigned in whole or in part during the Optionee's lifetime in
accordance with the terms of a domestic relations order that substantially
qualifies with the requirements of Code Section 414(p), as determined by the
Administrator in its sole discretion (a "qualified domestic relations order").
The assigned portion may be exercised only by the person or persons who acquire
a proprietary interest in the Option pursuant to such qualified domestic
relations order. The terms applicable to the assigned portion shall be the same
as those in effect for the Option immediately prior to such assignment.
7.3 DEATH OF OPTIONEE. In the event of an Optionee's death, the executor,
administrator or other personal representative of the Optionee's estate, or any
heir, successor, assign or other transferee of the Optionee receiving such
Options by will or by the laws of descent and distribution, shall have the
right, subject to the restrictions hereof, to exercise all of the Optionee's
outstanding Options to the extent then exercisable at any time within one year
after the date of the Optionee's death.
7.4 SECURITIES ACT. No shares of Common Stock of the Company shall be
required to be distributed until the Company shall have taken such action, if
any, as is then required to comply with the provisions of the Securities Act or
any other then applicable securities law. The Company reserves the right to
place a legend on any stock certificate issued pursuant to the Plan to assure
compliance with this Section.
7.5 TERMINATION AND AMENDMENT OF PLAN. The Board may at any time suspend or
terminate the Plan, or make such modifications of the Plan as it shall deem
advisable, provided that the Plan shall not be so changed to increase the cost
of the Plan to the Company. However, without approval of the Company's
stockholders given within twelve months before or after the action by the Board,
no such action may, except as provided in Section 5.5, increase any limit
imposed in Section 3.1 on the maximum number of shares that may be issued upon
exercise of Options, materially modify the eligibility requirements of Section
4.1, reduce the minimum Option price requirements of Section 5.3, or extend the
limit imposed in this Section 7.5 on the period during which Options may be
granted. No Option may be granted during any period of suspension nor after
termination of the Plan, and in no event may any Option be granted under this
Plan after the first to occur of the following events:
(a) the expiration of ten years from the date the Plan is adopted by the
Board; or
(b) the expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 7.1.
Appendix I-5
<PAGE>
7.6 DUTIES OF THE COMPANY. The Company shall, at all times during the term
of each Option, reserve and keep available for issuance or delivery such number
of shares of Common Stock as will be sufficient to satisfy the requirements of
all Options at the time outstanding, shall pay all original issue taxes with
respect to the issuance or delivery of shares pursuant to the exercise of such
Option and all other fees and expenses necessarily incurred by the Company in
connection therewith.
SECTION 8. GENERAL PROVISIONS
8.1 EXPENSES. The Company shall pay all costs and expenses of administering
the Plan.
8.2 APPLICABLE LAWS. The granting of Options and the issuance of shares of
Common Stock under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required. The provisions of this Plan shall be
interpreted so as to comply with the conditions or requirements of the
Securities Act, the Exchange Act, and rules and regulations issued thereunder
unless a contrary interpretation of any such provision is otherwise required by
applicable law. This Plan and all Option agreements entered into pursuant
thereto shall be construed and enforced in accordance with, and governed by, the
laws of the State of Maryland, determined without regard to its conflict of
interest rules.
8.3 NO OBLIGATION. The granting of an Option shall impose no obligation
upon the Optionee to exercise such option.
Appendix I-6
<PAGE>
APPENDIX J
PRIME RETAIL, INC.
1998 LONG-TERM STOCK INCENTIVE PLAN
<PAGE>
PRIME RETAIL, INC. 1998 LONG-TERM STOCK INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Article 1. Establishment, Objectives and Duration....................................................... 1
Article 2. Definitions.................................................................................. 1
Article 3. Administration............................................................................... 4
Article 4. Shares Subject to the Plan and Maximum Awards................................................ 4
Article 5. Eligibility and Participation................................................................ 5
Article 6. Stock Options................................................................................ 5
Article 7. Restricted Stock............................................................................. 7
Article 8. Performance Units and Performance Shares..................................................... 8
Article 9. Performance Measures......................................................................... 9
Article 10. Beneficiary Designation...................................................................... 9
Article 11. Deferrals.................................................................................... 10
Article 12. Rights of Employees.......................................................................... 10
Article 13. Change in Control............................................................................ 10
Article 14. Amendment, Modification and Termination...................................................... 11
Article 15. Withholding.................................................................................. 11
Article 16. Indemnification.............................................................................. 12
Article 17. Successors................................................................................... 12
Article 18. Legal Construction........................................................................... 12
</TABLE>
Appendix J-i
<PAGE>
PRIME RETAIL, INC. 1998 LONG-TERM STOCK INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, OBJECTIVES AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Prime Retail, Inc., a Delaware corporation
(the "Company"), has established the Prime Retail, Inc. 1998 Long-Term Stock
Incentive Plan (the "Plan"), as set forth in this document. The Plan permits the
grant of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock,
Performance Shares and Performance Units. In addition, the Plan permits
participants to defer the payment of salary, bonuses and other forms of
incentive compensation.
Subject to the approval of the Company's stockholders, the Plan will become
effective as of March 19, 1998 (the "Effective Date") and will remain in effect
as provided in Section 1.3 hereof.
1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize the
profitability and growth of the Company through long-term incentives that are
consistent with the Company's objectives and which link the interests of
Participants to those of the Company's stockholders; to give Participants an
incentive for excellence in individual performance; and to promote teamwork
among Participants; and to give the Company a significant advantage in
attracting and retaining officers, key employees and directors.
The Company further intend the Plan to provide flexibility to the Company in
its ability to motivate, attract and retain the services of Participants who
make significant contributions to the Company's success and to allow
Participants to share in the success of the Company.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, as
described in Section 1.1 hereof. The Plan will remain in effect, subject to the
right of the Board of Directors to amend or terminate the Plan at any time
pursuant to Article 14 hereof, until all Shares subject to it pursuant to
Article 4 shall have been purchased or acquired according to the Plan's
provisions. However, in no event may an Award be granted under the Plan on or
after the tenth anniversary of the date the Plan is adopted by the Board, or the
date the Plan is approved by the Company's stockholders, whichever is earlier.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
2.1 "AFFILIATES" means the Company's subsidiaries within the meaning of
Code Section 424(f) and, if any, the Company's parent within the meaning of Code
Section 424(e).
2.2 "AWARD" means, individually or collectively, a grant under this Plan of
Nonqualified Stock Options, Incentive Stock Options, Restricted Stock,
Performance Shares or Performance Units.
2.3 "AWARD AGREEMENT" means an agreement entered into by the Company and a
Participant setting forth the terms and provisions applicable to an Award or
Awards granted under this Plan to such Participant.
2.4 "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the meaning
ascribed to such term in Rule 13d-3 of the General Rules and Regulations under
the Exchange Act.
2.5 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.
2.6 "CAUSE" shall have the meaning set forth in any unexpired employment or
severance agreement between the Participant and the Company and/or an Affiliate.
In the absence of any such agreement, "Cause" shall mean a finding by the Board
(i) that the Participant has materially harmed the Company through an act of
dishonesty or material conflict of interest that relates to the performance of
Participant's duties hereunder, (ii) of Participant's conviction of a felony
involving moral turpitude, fraud or embezzlement, (iii) that Participant's
failure to perform in any material respect his duties under this Agreement
(other than a failure due to disability) after written notice specifying the
failure and a reasonable opportunity to cure (it being understood that if
Participant's failure to perform is not of a type requiring a
Appendix J-1
<PAGE>
single action to fully cure, then Participant may commence the cure promptly
after such written notice and thereafter diligently prosecute such cure to
completion, or (iv) of a material breach by Participant of any of his
obligations hereunder and the failure of Participant to cure such breach within
thirty (30) days after receipt by the Participant of a written notice of the
Company specifying in reasonable detail the nature of the breach .
2.7 "CHANGE IN CONTROL" of the Company shall be deemed to have occurred if
(i) any "person" (as such term is used in SectionSection 13(d) and 14(d) of the
Exchange Act), other than a trustee or other fiduciary holding securities under
an employee benefit plan of the Company, a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, employees of the
Company, or any of their respective affiliates, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding securities that vote generally in
the election of directors (referred to herein as "Voting Securities"); (ii)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board and any new directors whose election by the
Board or nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any to constitute
a majority of the Board; (iii) the stockholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than a merger
or consolidation that (A) would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 50% or more of the total voting power represented by
the Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (B) 50% or more of the board
of directors of the surviving entity is composed of members from the Board of
the Company; (iv) the Company's stockholders approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of (in one transaction or a series of transactions) all or substantially
all of the Company's assets.
2.8 "CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
2.9 "COMMITTEE" means, as specified in Article 3 herein, the Compensation
Committee of the Board or such other committee as the Board may appoint to
administer the Plan.
2.10 "COMPANY" means Prime Retail, Inc., a Delaware corporation, and any
successor thereto as provided in Article 17 herein.
2.11 "DIRECTOR" means any individual who is a member of the Board of
Directors of the Company.
2.12 "DISABILITY" shall mean (a) long-term disability as defined under the
Company's long-term disability plan covering that individual, or (b) if such
long-term disability plan does not cover the individual, disability as defined
for purposes eligibility for a disability award under the Social Security Act.
2.13 "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Section 1.1 hereof.
2.14 "ELIGIBLE EMPLOYEE" means any officer or key employee of the Company
or any of its Affiliates. Directors who are not employed by the Company or its
Affiliates shall not be considered Eligible Employees under this Plan.
2.15 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
2.16 "EXERCISE PRICE" means the price at which a Participant may purchase a
Share pursuant to an Option.
2.17 "FAIR MARKET VALUE" means:
Appendix J-2
<PAGE>
(a) the average of the high and low prices of publicly traded Shares on
the national securities exchange on which the Shares as listed (if the
Shares are so listed) or on the NASDAQ National Market System (if the Shares
are regularly quoted on the NASDAQ National Market System);
(b) if not so listed or regularly quoted, the mean between the closing
bid and asked prices of publicly traded Shares in the over-the-counter
market; and
(c) if such bid and asked prices are not available, as reported by any
nationally recognized quotation service selected by the Committee or as
determined by the Committee.
2.18 "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase Shares
granted under Article 6 herein which is designated as an Incentive Stock Option
and that is intended to meet the requirements of Code Section 422.
2.19 "NONEMPLOYEE DIRECTOR" means an individual who is a member of the
Board of Directors of the Company but who is not an employee of the Company or
any of its Affiliates.
2.20 "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase
Shares granted under Article 6 herein that is not intended to meet the
requirements of Code Section 422.
2.21 "OPTION" means an Incentive Stock Option or a Nonqualified Stock
Option, as described in Article 6 herein.
2.22 "PARTICIPANT" means an Eligible Employee whom the Committee has
selected to participate in the Plan pursuant to Section 5.2 and who has
outstanding an Award granted under the Plan. The term "Participant" shall not
include Nonemployee Directors.
2.23 "PERFORMANCE-BASED EXCEPTION" means the performance-based exception
from the tax deductibility limitations of Code Section 162(m) and any
regulations promulgated thereunder.
2.24 "PERFORMANCE SHARE" means an Award granted to a Participant, as
described in Article 8 herein.
2.25 "PERFORMANCE UNIT" means an Award granted to a Participant, as
described in Article 9 herein.
2.26 "PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in SectionSection 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) thereof.
2.27 "RESTRICTION PERIOD" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of performance objectives, or upon the occurrence of other
events as determined by the Committee, at its discretion), and/or the Restricted
Stock is not vested.
2.28 "RESTRICTED STOCK" means a contingent grant of stock awarded to a
Participant pursuant to Article 7 herein.
2.29 "RETIREMENT" shall mean termination of employment on or after (a)
attaining the age established by the Company as the normal retirement age in any
unexpired employment agreement between the Participant and the Company and/or an
Affiliate. In the absence of such an agreement, the normal retirement age under
the tax-qualified defined benefit retirement plan or, if none, the tax-qualified
defined contribution retirement plan, sponsored by the Company or an Affiliate
in which the Participant participates, or (b) attaining age sixty-two with ten
years of service with the Company and/or an Affiliate provided the Chief
Executive Officer of the Company approves the retirement, unless the Participant
is an officer subject to Section 16 of the Exchange Act in which case the
Committee must approve the retirement.
2.30 "SHARES" means the shares of common stock, $.01 par value, of the
Company.
Appendix J-3
<PAGE>
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board, or by any other Committee the Board appoints, which
Committee (unless otherwise determined by the Board) shall satisfy the
"nonemployee director" requirements of Rule 16b-3 under the Exchange Act and the
regulations of Rule 16b-3 under the Exchange Act and the "outside director"
provisions of Code Section 162(m), or any successor regulations or provisions.
The members of the Committee shall be appointed from time to time by, and shall
serve at the discretion of, the Board of Directors. The Committee shall act by a
majority of its members at the time in office and eligible to vote on any
particular matter, and such action may be taken either by a vote at a meeting or
in writing without a meeting.
3.2 AUTHORITY OF THE COMMITTEE. Except as limited by law and subject to the
provisions herein, the Committee shall have full power to: select Eligible
Employees who shall participate in the Plan; determine the sizes and types of
Awards; determine the terms and conditions of Awards in a manner consistent with
the Plan; construe and interpret the Plan and any agreement or instrument
entered into under the Plan; establish, amend or waive rules and regulations for
the Plan's administration; and (subject to the provisions of Article 14 herein)
amend the terms and conditions of any outstanding Award to the extent such terms
and conditions are within the discretion of the Committee as provided in the
Plan. Further, the Committee shall make all other determinations that may be
necessary or advisable for the administration of the Plan. As permitted by law
and consistent with Section 3.1, the Committee may delegate its authority as
identified herein.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan shall be final, conclusive and
binding on all persons, including the Company, its Board of Directors, its
stockholders, all Affiliates, employees, Participants and their estates and
beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as
provided in Section 4.3 herein, the number of Shares that may be issued or
transferred to Participants under the Plan shall be 1,900,000 Shares. In the
event the proposed merger with Horizon Group, Inc. is consummated, the number of
authorized shares shall automatically increase to 3,100,000 shares. The maximum
numbers of Shares that may be issued or transferred to the Participants under
Performance Units shall be 100,000.
The maximum number of Shares and Share equivalent units that may be granted
during any calendar year to any one Participant, under Options, Restricted
Stock, or Performance Shares, shall be 400,000 Shares (on an aggregate basis for
all such types of Awards), which limit shall apply regardless of whether such
compensation is paid in Shares or in cash.
4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled,
terminates, expires or lapses for any reason, any Shares subject to such Award
again shall be available for the grant of an Award under the Plan (other than
for purposes of Subsection 4.1 above).
4.3 ADJUSTMENTS IN AUTHORIZED SHARES.
(a) In the event the Shares, as presently constituted, shall be changed
into or exchanged for a different number or kind of shares of stock or other
securities of the Company or of another corporation (whether by reason of
merger, consolidation, recapitalization, reclassification, split, reverse
split, combination of shares, or otherwise) or if the number of such Shares
shall be increased through the payment of a stock dividend, then there shall
be substituted for or added to each Share theretofore appropriated or
thereafter subject or which may become subject to an Award under this Plan,
the number and kind of shares of stock or other securities into which each
outstanding Share shall be so changed, or for which each such Share shall be
exchanged, or to which each such Share shall be entitled, as the case may
be. Outstanding Awards shall also be appropriately amended as to
Appendix J-4
<PAGE>
price and other terms as may be necessary to reflect the foregoing events.
In the event there shall be any other change in the number or kind of the
outstanding Shares, or of any stock or other securities into which such
Shares shall have been changed, or for which it shall have been exchanged,
then, if the Committee shall, in its sole discretion, determine that such
change equitably requires an adjustment in any Award therefore granted or
which may be granted under the Plan, such adjustments shall be made in
accordance with such determination.
(b) Fractional Shares resulting from any adjustment in Awards pursuant
to this section may be settled in cash or otherwise as the Committee shall
determine. Notice of any adjustment shall be given by the Company to each
Participant who holds an Award which has been so adjusted and such
adjustment (whether or not such notice is given) shall be effective and
binding for all purposes of the Plan.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan consist of
all Eligible Employees, including Eligible Employees who are members of the
Board.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all Eligible Employees, those to
whom it shall grant Awards and shall determine the nature and amount of each
Award.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Eligible Employees in such number, and upon such
terms, and at any time and from time to time as the Committee shall determine.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Exercise Price, the duration of the Option, the
number of Shares to which the Option pertains, the manner, time and rate of
exercise or vesting of the Option, and such other provisions as the Committee
shall determine. The Award Agreement also shall specify whether the Option is
intended to be an ISO within the meaning of Code Section 422 or an NQSO that is
not intended to qualify under the provisions of Code Section 422.
6.3 EXERCISE PRICE. The Exercise Price for each share subject to an Option
granted under this Plan shall be at least equal to one hundred percent of the
Fair Market Value of a Share on the date the Option is granted.
6.4 DURATION OF OPTIONS. Each Option granted to an Eligible Employee shall
expire at such time as the Committee shall determine at the time of grant;
provided, however, that no Option shall be exercisable later than the tenth
anniversary of the date of its grant.
6.5 DIVIDEND EQUIVALENTS. The Committee may grant dividend equivalents in
connection with Options granted under this Plan. Such dividend equivalents may
be payable in cash or in Shares, upon such terms as the Committee, in its sole
discretion, deems appropriate.
6.6 EXERCISE OF OPTIONS. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each Award or for each Participant.
6.7 PAYMENT. Options granted under this Article 6 shall be exercised by the
delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the Option is to be exercised accompanied
by full payment for the Shares and any withholding tax-relating to the exercise
of the Option.
Appendix J-5
<PAGE>
The Exercise Price, and any related withholding taxes, upon exercise of any
Option shall be payable to the Company in full either: (a) in cash, or its
equivalent, in United States dollars, (b) if permitted in the governing Award
Agreement, by tendering previously acquired Shares having an aggregate Fair
Market Value at the time of exercise equal to the total Exercise Price, (c) if
permitted in the governing Award Agreement, by the Company's withholding a
portion of the Shares otherwise distributable to the Participant having an
aggregate Fair Market Value at the time of exercise equal to the total Exercise
Price, (d) if permitted in the governing Award Agreement, through a special sale
and remittance procedure pursuant to which the Participant concurrently provides
irrevocable written instructions to a Company-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the Company, out
of the sale proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares plus all
applicable federal, state and local income and employment taxes required to be
withheld by the Company by reason of such exercise, and the Company to deliver
the certificates for the purchased shares directly to such brokerage firm in
order to complete the sale, or (e) if permitted in the governing Award
Agreement, by any combination of (a) through (d). The Committee also may allow
cashless exercise as permitted under Federal Reserve Board's Regulation T,
subject to applicable securities law restrictions, or by any other means which
the Committee determines to be consistent with the Plan's purpose and applicable
law.
6.8 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as the Committee deems necessary or advisable,
including, without limitation, restrictions under applicable federal securities
laws, under the requirements of any stock exchange or market upon which such
Shares are then listed and/ or traded, and under any blue sky or state
securities laws applicable to such Shares.
6.9 TERMINATION OF EMPLOYMENT. Each Option Award Agreement shall set forth
the extent to which the Participant shall have the right to exercise the Option
following termination of the Participant's employment with the Company and all
Affiliates. The Committee shall determine such provisions in its sole
discretion. Such provisions shall be included in the Award Agreement entered
into with each Participant, need not be uniform among all Options issued
pursuant to this Article 6, and may reflect distinctions based on the reasons
for termination of employment.
6.10 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Except as
provided below, Options granted under the Plan shall not be transferable by the
Participant other than by will or the laws of descent and distribution and shall
be exercisable, during the Participant's lifetime, only by the Participant. The
Committee may, in its discretion, require a Participant's guardian or legal
representative to supply it with such evidence as the Committee deems necessary
to establish the authority of the guardian or legal representative to act on
behalf of the Participant.
(a) In the event of the Participant's death of a during employment or
prior to the termination, expiration, cancellation or forfeiture of any
Option held by the Participant hereunder, each Option theretofore granted to
the Participant shall be exercisable or payable to the extent provided in
Section 6 but only: (i) by or to the executor or administrator of the estate
of the deceased Participant or the person or persons to whom the deceased
Participant's rights under the Option shall pass by will or the laws of
descent and distribution; and (ii) to the extent set forth in the Award
Agreement.
(b) Notwithstanding the foregoing, an Award Agreement for a grant of
Options that are not Incentive Stock Options, may permit the Participant who
received the Option at any time prior to the Participant's death, to assign
all or any portion of the Option granted to him or her to: (i) the
Participant's spouse or lineal descendants; (ii) the trustee of a trust for
the primary benefit of the Participant's spouse or lineal descendants; or
(iii) a partnership of which the Participant's spouse and lineal descendants
are the only partners. In such event, the spouse, lineal descendant, trustee
or partnership will be entitled to all of the rights of the Participant with
respect to the assigned portion of such Option, and such portion of the
Option will continue to be subject to all of the terms, conditions
Appendix J-6
<PAGE>
and restrictions applicable to the Option, as set forth herein and in the
related Award Agreement immediately prior to the effective date of the
assignment. Any such assignment will be permitted only if: the Participant
does not receive any consideration therefore. Any such assignment shall be
evidenced by an appropriate written document executed by the Participant,
and a copy thereof shall be delivered to the Committee on or prior to the
effective date of the assignment.
(c) A Nonqualified Stock Option may be assigned in whole or in part
during the Participant's lifetime in accordance with the terms of a domestic
relations order that substantially qualifies with the requirements of Code
Section 414(p), as determined by the Committee in its sole discretion (a
"qualified domestic relations order"). The assigned portion may be exercised
only by the person or persons who acquire a proprietary interest in the
Option pursuant to such qualified domestic relations order. The terms
applicable to the assigned portion shall be the same as those in effect for
the Option immediately prior to such assignment.
ARTICLE 7. RESTRICTED STOCK
7.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the
Plan, the Committee may, at any time and from time to time, grant Restricted
Stock to Participants in such amounts as the Committee shall determine. Each
grant of Restricted Stock shall be represented by the number of Shares to which
the Award relates.
7.2 AWARD AGREEMENT. Each Restricted Stock grant shall be evidenced by an
Award Agreement that shall specify the Restriction Periods, the number of Shares
granted, and such other provisions as the Committee shall determine.
7.3 NONTRANSFERABILITY. Except as provided in this Article 7, the
Restricted Stock granted herein may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated until the end of the applicable
Restriction Period established by the Committee and as specified in the Award
Agreement, or upon earlier satisfaction of any other conditions, as specified by
the Committee in its sole discretion and as set forth in the Award Agreement.
All rights with respect to Restricted Stock granted to a Participant under the
Plan shall be available during the Participant's lifetime only to such
Participant or the Participant's guardian or legal representative. The Committee
may, in its discretion, require a Participant's guardian or legal representative
to supply it with such evidence as the Committee deems necessary to establish
the authority of the guardian or legal representative to act on behalf of the
Participant.
7.4 OTHER RESTRICTIONS. Subject to Article 10 herein, the Committee may
impose such other conditions and/or restrictions on any Restricted Stock granted
pursuant to the Plan as it deems advisable including, without limitation,
restrictions based upon the achievement of specific performance objectives
(Company-wide, business unit, and/or individual), time-based restrictions on
vesting following the attainment of the performance objectives, and/or
restrictions under applicable federal or state securities laws.
The Company shall retain the certificates representing Shares of Restricted
Stock in the Company's possession until such time as all conditions and/or
restrictions applicable to such Shares have been satisfied.
7.5 PAYMENT OF AWARDS. Except as otherwise provided in this Article 7,
Shares covered by each Restricted Stock grant made under the Plan shall become
freely transferable by the Participant after the last day of the applicable
Restriction Period.
7.6 VOTING RIGHTS. During the Restriction Period, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
7.7 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Restriction Period,
Participants holding Shares of Restricted Stock hereunder shall be credited with
regular cash dividends or dividend equivalents paid with respect to the
underlying Shares while they are so held. Such dividends may be paid currently,
accrued as
Appendix J-7
<PAGE>
contingent cash obligations, or converted into additional Shares of Restricted
Stock, upon such terms as the Committee establishes.
The Committee may apply any restrictions to the crediting and payment of
dividends and other distributions that the Committee deems advisable. Without
limiting the generality of the preceding sentence, if the grant or vesting of
Restricted Stock is designed to qualify for the Performance-Based Exception, the
Committee may apply any restrictions it deems appropriate to the payment of
dividends declared with respect to such Restricted Stock, such that the
dividends and/or the Restricted Stock maintain eligibility for the
Performance-Based Exception.
7.8 TERMINATION OF EMPLOYMENT. Each Award Agreement shall set forth the
extent to which the Participant shall have the right to retain unvested
Restricted Stock following termination of the Participant's employment with the
Company or an Affiliate. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Award Agreement entered
into with each Participant, need not be uniform among all Awards of Restricted
Stock issued pursuant to the Plan, and may reflect distinctions based on the
reasons for termination of employment.
ARTICLE 8. PERFORMANCE UNITS AND PERFORMANCE SHARES
8.1 GRANT OF PERFORMANCE UNITS/SHARES. Subject to the terms of the Plan,
Performance Units and/or Performance Shares may be granted to Participants in
such amounts and upon such terms, and at any time and from time to time, as
shall be determined by the Committee.
8.2 VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value of
a Share on the date of grant. The Committee shall set performance objectives in
its discretion which, depending on the extent to which they are met, will
determine the number and/or value of Performance Units/Shares that will be paid
out to the Participant. For purposes of this Article 8, the time period during
which the performance objectives must be met shall be called a "Performance
Period" and shall be set by the Committee in its discretion.
8.3 EARNING OF PERFORMANCE UNITS/SHARES. Subject to the terms of this Plan,
after the applicable Performance Period has ended, the holder of Performance
Units/Shares shall be entitled to receive payout on the number and value of
Performance Units/Shares earned by the Participant over the Performance Period,
to be determined as a function of the extent to which the corresponding
performance objectives have been achieved.
8.4 AWARD AGREEMENT. Each grant of Performance Units and/or Performance
Shares shall be evidenced by an Award Agreement which shall specify the material
terms and conditions of the Award, and such other provisions as the Committee
shall determine.
8.5 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES. Except as
provided in Article 11, payment of earned Performance Units/Shares shall be made
within seventy-five calendar days following the close of the applicable
Performance Period in a manner determined by the Committee, in its sole
discretion. Subject to the terms of this Plan, the Committee, in its sole
discretion, may pay earned Performance Units/Shares in the form of cash or in
Shares (or in a combination thereof). Such Shares may be paid subject to any
restrictions deemed appropriate by the Committee.
8.6 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR
RETIREMENT. Unless determined otherwise by the Committee and set forth in the
Participant's Award Agreement, in the event the employment of a Participant is
terminated by reason of death, Disability or Retirement during a Performance
Period, the Participant shall receive a payout of the Performance Units/Shares
which is prorated, as specified by the Committee in its discretion in the Award
Agreement. Payment of earned Performance Units/Shares shall be made at a time
specified by the Committee in its sole discretion and set forth in the
Participant's Award Agreement.
Appendix J-8
<PAGE>
8.7 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a
Participant's employment terminates during a Performance Period for any reason
other than those reasons set forth in Section 9.6 herein, all Performance
Units/Shares shall be forfeited by the Participant to the Company, unless
determined otherwise by the Committee in the Participant's Award Agreement.
8.8 NONTRANSFERABILITY. Except as otherwise provided in a Participant's
Award Agreement, Performance Units/Shares may not be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, except as otherwise provided in a
Participant's Award Agreement, a Participant's rights under the Plan shall be
exercisable during the Participant's lifetime only by such Participant or
Participant's guardian or legal representative. The Committee may, in its
discretion, require a Participant's guardian or legal representative to supply
it with such evidence as the Committee deems necessary to establish the
authority of the guardian or legal representative to act on behalf of the
Participant.
ARTICLE 9. PERFORMANCE MEASURES
Unless and until the Committee proposes for shareholder approval and the
Company's shareholders approve a change in the general performance measures set
forth in this Article 9, the attainment of which may determine the degree of
payout and/or vesting with respect to Awards which are designed to qualify for
the Performance-Based Exception, the performance measure(s) to be used for
purposes of such awards shall be chosen from among the following alternatives:
(a) return to shareholders (absolute or peer-group comparative);
(b) stock price increase (absolute or peer-group comparative);
(c) cumulative net income (absolute or competitive growth rates
comparative);
(d) return on equity;
(e) return on capital;
(f) cash flow, including operating cash flow, free cash flow, discounted
cash flow return on investment, and cash flow in excess of cost of capital;
(g) economic value added (income in excess of capital costs); or
(h) market share.
The Committee shall have the discretion to adjust the determinations of the
degree of attainment of the preestablished performance objectives; provided,
however, that Awards which are designed to qualify for the Performance-Based
Exception may not be adjusted upward (the Committee shall retain the discretion
to adjust such Awards downward), except to the extent permitted under Code
Section 162(m) to reflect accounting changes or other events.
In the event that Code Section 162(m) or applicable tax and/or securities
laws change to permit Committee discretion to alter the governing performance
measures without obtaining shareholder approval of such changes, the Committee
shall have sole discretion to make such changes without obtaining shareholder
approval. In addition, in the event that the Committee determines that it is
advisable to grant Awards which shall not qualify for the Performance-Based
Exception, the Committee may make such grants without satisfying the
requirements of Code Section 162(m).
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any beneficiary
or beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of the death of the Participant
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the same Participant, shall be in a form
prescribed by the Committee
Appendix J-9
<PAGE>
during the Participant's lifetime. If the Participant's designated beneficiary
predeceases the Participant or no beneficiary has been designated, benefits
remaining unpaid at the Participant's death shall be paid to the Participant's
spouse or if none, the Participant's estate.
ARTICLE 11. DEFERRALS
The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option, the lapse or waiver of restrictions with respect to Restricted Stock, or
the satisfaction of any requirements or objectives with respect to Performance
Units/Shares. If any such deferral election is permitted or required, the
Committee shall, in its sole discretion, establish rules and procedures for such
deferrals. Notwithstanding the foregoing, the Committee in its sole discretion
may defer payment of cash or the delivery of Shares that would otherwise be due
to a Participant under the Plan if such payment or delivery would result in
compensation not deductible by the Company or an Affiliate by virtue of Code
Section 162(m). Such a deferral may continue until the payment or delivery would
result in compensation deductible by the Company under Code Section 162(m).
ARTICLE 12. RIGHTS OF EMPLOYEES
12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company or any Affiliate to terminate any Participant's
employment at any time, or confer upon any Participant any right to continue in
the employ of the Company or any Affiliate.
12.2 PARTICIPATION. No Eligible Employee shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to be
selected to receive a future Award.
ARTICLE 13. CHANGE IN CONTROL
13.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges:
(a) Any and all outstanding Options granted hereunder shall become
immediately exercisable, and shall remain exercisable throughout their
entire term.
(b) Any Periods of Restriction and restrictions imposed on Restricted
Stock shall lapse; provided, however, that the degree of vesting associated
with Restricted Stock that has been conditioned upon the achievement of
performance conditions pursuant to Section 7.4 herein shall be determined in
the manner set forth in Section 13.1(c) herein.
(c) Except as otherwise provided in the Award Agreement, the vesting of
all Performance Units and Performance Shares shall be accelerated as of the
effective date of the Change in Control, and there shall be paid out in cash
to Participants within thirty days following the effective date of the
Change in Control a pro rata amount based upon an assumed achievement of all
relevant performance objectives at target levels, and upon the length of
time within the Performance Period which has elapsed prior to the effective
date of the Change in Control; provided, however, that in the event the
Committee determines that actual performance to the effective date of the
Change in Control exceeds target levels, the prorated payouts shall be made
at levels commensurate with such actual performance (determined by
extrapolating such actual performance to the end of the Performance Period),
based upon the length of time within the Performance Period which has
elapsed prior to the effective date of the Change in Control.
13.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE IN-CONTROL
PROVISIONS. Notwithstanding any other provision of this Plan or any Award
Agreement provision, the provisions of this Article 13 may not be terminated,
amended, or modified on or after the effective date of a Change
Appendix J-10
<PAGE>
in Control to affect adversely any Award theretofore granted under the Plan
without the prior written consent of the Participant with respect to said
Participant's outstanding Awards.
ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION
14.1 AMENDMENT, MODIFICATION AND TERMINATION. Subject to Section 13.2
herein, the Board may at any time and from time to time, alter, amend, modify or
terminate the Plan in whole or in part.
Subject to the terms and conditions of the Plan, the Committee may modify,
extend or renew outstanding Awards under the Plan, or accept the surrender of
outstanding Awards (to the extent not theretofore exercised) and grant new
Awards in substitution therefor (to the extent not theretofore exercised). The
Committee shall not, however, modify any outstanding Incentive Stock Option so
as to specify a lower Exercise Price. Notwithstanding the foregoing, no
modification of an Award shall, without the consent of the Participant, alter or
impair any rights or obligations under any Award theretofore granted under the
Plan.
14.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in
Section 4.3 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting principles,
whenever the Committee determines that such adjustments are appropriate in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, subject to the requirements of
Code Section 162(m) for the Performance-Based Exception in the case of Awards
designed to qualify for the Performance-Based Exception.
14.3 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award.
14.4 COMPLIANCE WITH CODE SECTION 162(M). Awards shall comply with the
requirements of Code Section 162(m); provided, however, that in the event the
Committee determines that such compliance is not desired with respect to any
Award or Awards available for grant under the Plan, then compliance with Code
Section 162(m) will not be required. In addition, in the event that changes are
made to Code Section 162(m) to permit greater flexibility with respect to any
Award or Awards available under the Plan, the Committee may, subject to this
Article 15, make any adjustments it deems appropriate.
ARTICLE 15. WITHHOLDING
15.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
(either in cash or Shares) sufficient to satisfy federal, state, and local
taxes, domestic or foreign, required by law or regulation to be withheld with
respect to any taxable event arising as a result of this Plan.
15.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options, upon the lapse of restrictions on Restricted Stock, or upon
any other taxable event arising as a result of Awards granted hereunder, the
Company may satisfy the minimum withholding requirement for supplemental wages,
in whole or in part, by withholding Shares having a Fair Market Value
(determined on the date the Participant recognizes taxable income on the Award)
equal to the withholding tax required to be collected on the transaction. The
Participant may elect, subject to the approval of the Committee, to deliver the
necessary funds to satisfy the withholding obligation to the Company, in which
case there will be no reduction in the Shares otherwise distributable to the
Participant.
Appendix J-11
<PAGE>
ARTICLE 16. INDEMNIFICATION
The Company shall indemnify and hold harmless each person who is or has been
a member of the Committee, or of the Board, against and from any loss, cost,
liability, or expense that may be imposed upon or reasonably incurred by such
person in connection with or resulting from any claim, action, suit, or
proceeding to which such person may be a party or in which such person may be
involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by such person in a settlement
approved by the Company, or paid by such person in satisfaction of any judgment
in any such action, suit, or proceeding against such person, provided such
person shall give the Company an opportunity, at its own expense, to handle and
defend the same before such person undertakes to handle and defend it. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
ARTICLE 17. SUCCESSORS
All obligations of the Company under the Plan or any Award Agreement with
respect to Awards granted hereunder shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or
indirect purchase of all or substantially all of the business and/or assets of
the Company, or a merger, consolidation, or otherwise.
ARTICLE 18. LEGAL CONSTRUCTION
18.1 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
18.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Share
and/or cash payouts under the Plan shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
18.4 SECURITIES LAW COMPLIANCE. With respect to any individual who is, on
the relevant date, an officer, director or ten percent beneficial owner of any
class of the Company's equity securities that is registered pursuant to Section
12 of the Exchange Act, all as defined under Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 under the Exchange Act, or any successor rule. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.
18.5 AWARDS TO FOREIGN NATIONALS AND EMPLOYEES OUTSIDE THE UNITED
STATES. To the extent the Committee deems it necessary, appropriate or desirable
to comply with foreign law of practice and to further the purposes of this Plan,
the Committee may, without amending the Plan, (i) establish rules applicable to
Awards granted to Participants who are foreign nationals, are employed outside
the United States, or both, including rules that differ from those set forth in
this Plan, and (ii) grant Awards to such Participants in accordance with those
rules.
18.6 UNFUNDED STATUS OF THE PLAN. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments or deliveries of Shares not yet made to a Participant by the Company,
nothing contained herein shall give any rights that are greater than those of a
general creditor of the Company. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Shares or payments hereunder consistent with the foregoing.
18.7 GOVERNING LAW. To the extent not preempted by federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Delaware.
Appendix J-12
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
New Prime's directors and officers are and will be indemnified against
certain liabilities under Maryland and Delaware law, the New Prime Charter, the
New Prime Bylaws and the Prime Partnership Agreement. The New Prime Charter
requires New Prime to indemnify its directors and officers to the fullest extent
permitted from time to time by the laws of Maryland.
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. The 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 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 By-laws 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.
The New Prime Partnership Agreement also provides for indemnification of New
Prime and its directors and officers to the same extent indemnification is
provided to directors and officers of New Prime in its Charter, and limits the
liability of New Prime and its directors and officers to Prime Partnership and
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<PAGE>
its partners to the same extent liability of directors and officers of New Prime
to New Prime and its stockholders is limited under New Prime's Charter.
New Prime has entered into indemnification agreements with each of its
directors and executive officers. The indemnification agreements require, among
other things, that 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.
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 D to the Prospectus contained in this
Registration Statement)
2.3 Reincorporation Certificate of Merger (MI) (Included as Appendix C to the
Prospectus contained in this Registration Statement)
2.4 Reincorporation Articles of Merger (MD) (Included as Appendix B to the Prospectus
contained in this Registration Statement)
3.1 Form of Sky Merger Corp. Articles of Incorporation*
3.2 Form of Sky Merger Corp. Bylaws*
4.1 Form of Series A Preferred Stock Certificate--Incorporated by reference to
Exhibit 4.1 in Prime's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-23616)
4.2 Form of Series B Preferred Stock Certificate--Incorporated by reference to
Exhibit 4.2 in Prime's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-23616)
4.3 Form of Common Stock Certificate--Incorporated by reference to Exhibit 4.3 in
Prime's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-23616)
5.1 Piper & Marbury L.L.P. opinion regarding legality of shares
8.1a Winston & Strawn opinion regarding tax aspects of the mergers and REIT status of
New Prime
8.1b Winston & Strawn opinion regarding historical REIT status of Prime
8.1c Winston & Strawn opinion regarding REIT status of HGP
8.2 Rudnick & Wolfe opinion regarding tax aspects of the mergers
8.3 Rudnick & Wolfe opinion regarding REIT status of Horizon
10.1 Contribution Agreement (Included as Appendix E to the Prospectus contained in
this Registration Statement)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.2 Form of Second Amended and Restated Agreement of Limited Partnership of Prime
Retail, L.P.
10.3 C&C Contribution Agreement--Incorporated by reference to Exhibit 10(c) of the
Form 8-K of Horizon dated February 1, 1998 (File No. 001-12424)
10.4 Voting Agreement--Incorporated by reference to Exhibit 10(b) of the Form 8-K of
Prime dated February 1, 1998 (File No. 001-13301)
10.5 Form of Indemnity Agreement for board of directors of New Prime*
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 8.1a, 8.1b and 8.1c)
23.4 Consent of Rudnick & Wolfe (included as part of Exhibits 8.2 and 8.3)
23.5 Consent of Piper & Marbury, L.L.P. (included as part of Exhibit 5.1)
23.6 Consent of Friedman, Billings, Ramsey & Co., Inc.*
23.7 Consent of Lehman Brothers*
23.8 Consents of persons named as directors of New Prime*
24.1 Power of Attorney (included in the signature page at page II-5)*
24.2 Power of Attorney (Norman Perlmutter)
99.1 Form of Proxy Card for Prime Shareholders*
99.2 Form of Proxy Card for Horizon Shareholders*
99.3 Opinion of Friedman, Billings, Ramsey & Co., Inc. (Included as Appendix F to the
Prospectus contained in this Registration Statement)
99.4 Opinion of Lehman Brothers (Included as Appendix G to the Prospectus contained in
this Registration Statement)
99.5 Additional Prime Shareholders' letter
</TABLE>
- ------------------------
* Previously filed
(B) FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements.
(C) REPORTS, OPINIONS AND APPRAISALS
The fairness opinions of Friedman, Billings, Ramsey & Co., Inc. and Lehman
Brothers with respect to the transactions are set forth in Appendices F and G,
respectively, to the Prospectus contained in this Registration Statement.
ITEM 22. UNDERTAKINGS
The Registrant hereby undertakes:
(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
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<PAGE>
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 registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
each registrants' 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 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.
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<PAGE>
(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.
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<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 11th 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 the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
NORMAN PERLMUTTER* Chairman of the Board and May 11, 1998
- ------------------------------ Director
Norman Perlmutter
ROBERT D. PERLMUTTER* Director May 11, 1998
- ------------------------------
Robert D. Perlmutter
/s/ JAMES S. WASSEL President (Principal May 11, 1998
- ------------------------------ Executive Officer and
James S. Wassel Principal Financial
Officer) and Director
RICHARD D. STEWART* Assistant Controller May 11, 1998
- ------------------------------ (Principal Accounting
Richard D. Stewart Officer)
*By: /s/ JAMES S. WASSEL
----------------------------------
James S. Wassel
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT 5.1
[PIPER & MARBURY LETTERHEAD]
May 11, 1998
Prime Retail, Inc.
100 East Pratt Street
Baltimore, Maryland 21201
Dear Sirs:
We are acting as Maryland counsel for Prime Retail, Inc., a Maryland
corporation (the "Corporation"), in connection with the Corporation's Joint
Proxy Statement/ Prospectus/Information Statement (the "Registration
Statement"), relating to 42,103,515 shares of Common Stock, $0.01 par value
per share (the "Common Shares") and 4,960,993 shares of 8.5% Series B
Cumulative Participating Convertible Preferred Stock, par value $.01 per
share (the "Series B Shares" and together with the Common Shares, the
"Shares") of Sky Merger Corp., a Maryland Corporation (the "Surviving
Corporation") to be issued in connection with the combination (the
"Combination") of the Corporation, the Surviving Corporation and Horizon
Group, Inc. ("Horizon").
We have examined the Articles of Incorporation and By-laws of the
Corporation, and all amendments thereto, and the proposed Articles of
Incorporation and By-laws to be filed with the Maryland State Department of
Assessments and Taxation (the "SDAT") by the Surviving Corporation and have
examined and relied upon the originals, or copies certified to our
satisfaction, of such records of meetings of the directors of the Corporation
and documents and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinions expressed below.
In examining the foregoing documents, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to
us as certified or photostatic copies, and the authenticity of the originals
of such latter documents. We further have assumed that the Articles of
Incorporation and By-laws of the Surviving Corporation as finally adopted and
filed with the SDAT will conform in all matrial respects to the drafts
reviewed by us.
Based on the foregoing, we are of the opinion that when the Shares have
been duly and properly authorized for issuance by appropriate action by the
Board of Directors of the Surviving Corporation on a basis consistent with
the authorization of the Combination and transactions related thereto
provided by (i) the Corporation and (ii) the shareholders of the Corporation,
and when the Shares are issued upon consummation of the Combination in
accordance with the terms and provisions of the Amended and Restated
Agreement and Plan of Merger, dated as of February 1, 1998, by and among the
Corporation, Prime Retail, L.P., a Delaware limited partnership, Horizon, the
Surviving Corporation, 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, the Shares will be duly and validly authorized, issued, fully
paid and nonassessable.
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Prime Retail, Inc.
May 11, 1998
Page 2
We hereby consent to the use of our name in the Registration Statement and
under the caption "Legal Matters" in the related Prospectus/Proxy Statement and
consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
EXHIBIT 8.1A
May 12, 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 tax 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. ("Prime
Partnership"), Horizon Group, Inc. ("Horizon"), Sky Merger Corp., Horizon
Group Properties, Inc. ("HGP"), Horizon Group Properties, L.P. ("HGP LP") and
Horizon/Glen Outlet Centers Limited Partnership ("Horizon 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 May 14, 1998 (the "Joint
Proxy") and the Joint Consent Solicitation Statement/Prospectus/Information
Statement filed by Prime Partnership, Horizon Partnership, and HGP LP dated
May 14, 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 May 12, 1998 from Prime to
Winston & Strawn, a copy of which is attached hereto;
(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
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Prime Retail, Inc.
May 12, 1998
Page 2
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;
(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;
(m) the Amended and Restated Registration Rights Agreement;
(n) 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;
(o) the Form of Second Amended and Restated Agreement of Limited
Partnership of Prime Retail, L.P., to be dated as of Closing,
attached to the Joint Consent as Appendix F;
(p) the Joint Proxy;
(q) the Joint Consent;
(r) each of the Prime Property Partnership agreements, as amended;
and
(s) the Amended and Restated Articles of Incorporation of New
Prime, to the date hereof (the "Charter"),
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
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Prime Retail, Inc.
May 12, 1998
Page 3
signatures, and the capacity of each party executing a document to so execute
such document. We have also relied upon certificates of public officials.
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. We have reviewed and, with your permission, are relying upon the
Officer's Certificate dated as of May 12, 1998 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 with respect to Prime, New Prime
Partnership, each Prime Property Partnership, the Services Partnership, each
Prime Finance Corporation, Prime Retail Finance VII, Inc. and the Finance
Partnership. Our reliance upon this Officer's Certificate relates only to
matters of fact and not to matters of law or legal conclusions. We have
further relied on and assumed the truth and correctness of (i) Prime's
factual representations in the Agreement of Limited Partnershp of New Prime
Partnership and (ii) the certificates of public officials with respect to the
formation of certain limited partnerships. Moreover, for the purposes of
rendering our opinions, we have assumed that no partner in New Prime
Partnership, the Services Partnership, the Finance Partnership, or any of the
Prime Property Partnerships has or will elect to be excluded from all or part
of subchapter K of the Code. 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 or
verification to determine the existence or absence of any facts, 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 these 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. We will also rely
upon the factual representations, warranties and assumptions within our
opinion letter to you dated as of the date hereof regarding the qualification
of New Prime Partnership as a partnership for federal income tax purposes, as
well as our opinions set forth therein, in rendering our REIT opinion below.
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, the Joint Proxy, and the Joint Consent
will be consummated in accordance with the Relevant 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, New Prime Partnership, each Prime
Property Partnership, the Services Partnership, each Prime Finance
Corporation, Prime Retail Finance VII, Inc. and the Finance Partnership will
each be operated in the manner described in the relevant partnership
agreement or other organizational documents and in the Joint Proxy and Joint
Consent and in accordance with applicable laws; and (ii) each partner of New
Prime Partnership, each Prime Property Partnership, 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. The Corporate Merger will qualify as a reorganization within
the meaning of Code section 368(a) to which Prime and Sky Merger Corp.
will be parties to such reorganization within the meaning of Code
section 368(b), and the Reincorporation Merger will qualify as a
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Prime Retail, Inc.
May 12, 1998
Page 4
reorganization within the meaning of Section 368(a) of the Code to which
Horizon and Sky Merger Corp. will be parties 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 Prime Common
Shareholders upon the exchange of their Prime Common Shares solely for
New Prime Common Shares pursuant to the Corporate Merger;
4. No gain or loss will be recognized by the Prime Series A
Preferred Shareholders 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 Prime Series B
Preferred Shareholders 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 Prime Series C
Preferred Shareholders 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
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Prime Retail, Inc.
May 12, 1998
Page 5
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 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, New Prime's proposed
method of operation as described in the Joint Proxy and as represented
by Prime and Horizon with respect to certain factual matters, 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 New Prime's 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 - 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 - Ownership Limit Necessary
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 6
to Maintain REIT Qualification", "HGP Risk Factors - Taxable Nature of
the HGP Common Share Distribution", "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" to the extent they constitute matters of law or legal
conclusions, are accurate in all material respects; and
15. The discussions in the Joint Consent 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", "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 subheadings 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. - 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" and all
subheadings thereunder, "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" to the extent they constitute matters of law or
legal conclusions, are accurate in all material respects.
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 7
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 under the Code; currently published
administrative rulings and 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, 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
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, rulings, or
procedures issued in the future.
New Prime's qualification and taxation as a REIT (possibly
including Prime Partnership's qualification and taxation as a partnership,
and not a publicly traded partnership taxable as a corporation) 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 and Joint Consent 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
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 8
Shareholders and Prime Unitholders in connection with the Mergers, without our
prior written consent. Notwithstanding the foregoing, we hereby consent to the
use of this opinion as Exhibit 8.1A to the Registration Statement and to the use
of our name in the Joint Proxy and Joint Consent. 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,
/s/ Winston & Strawn
<PAGE>
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") 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
Executive Vice President-General Counsel and Secretary of 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 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
Executive 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
- -------------
(1) Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Joint Proxy, or the
Joint Consent, as the context requires.
<PAGE>
Preferred Shares and Prime Series C Preferred Shares surrendered in such
exchange. 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, plus (iii) the aggregate cash paid to dissenter
Prime Series A Preferred Shareholders.
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.
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<PAGE>
8. Prime, each of the Prime Affiliates, and to the best of the
knowledge of Prime management, New Prime and Sky Merger will not pay
expenses of Prime Shareholders or Sky Merger Shareholders, if any,
incurred in connection with the Corporate Merger. Prime and each Prime
Affiliate have not had their expenses, incurred in connection with the
Corporate Merger, paid by Prime Shareholders or Sky Merger shareholders,
and, to the best of the knowledge of Prime management, Sky Merger and
New Prime have not had their expenses, incurred in connection with the
Corporate Merger, paid by Prime Shareholders or Sky Merger shareholders.
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. Each of the aggregate fair market value and the aggregate adjusted tax
basis of the assets of Prime transferred to 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. 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. Winston & Strawn may rely upon the legal conclusions contained in
the Rudnick & Wolfe 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 real estate investment trust
("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, including the officer's certificates attached
thereto, without independent verification thereof.
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
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<PAGE>
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 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 Stores,
Inc. ("Prime Stores"), 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, Prime Stores'
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 Prime Stores, 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 Prime Stores. 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 Prime
Stores. The sale, transfer or other disposition of the common stock of
Prime Stores 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 intends to 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; (v) renting "push
carts" to various venders for use in common areas at such properties;
and (vi) providing only activities and services with respect to
properties owned by New Prime, Prime Partnership or any Prime Property
Partnership which a 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 (vi) of this
paragraph.
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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
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. Prime
Retail Finance V, Inc. ("Finance V"), 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 VI, Inc. ("Finance VI"), 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 VII, Inc.
("Finance VII"), a Maryland corporation, has operated, and intends to
continue to operate, in accordance with 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, Finance IV, Finance
V, Finance VI, and Finance VII, 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 any 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 any 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, Prime
Partnership intends that at least 90% of its gross income shall consist
only of amounts derived from the following sources: (A) interest,
(B) dividends, (C)
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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.
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 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 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 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
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Partnership, Finance, Finance II, Finance III, Finance IV, Finance V,
Finance VI and Finance VII 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 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, Finance IV, Finance V, Finance VI and Finance VII 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, Finance IV,
Finance V, Finance VI and Finance VII 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;
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(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;
(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, Finance V,
Finance VI, Finance VII 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
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acquired by Prime, Prime Partnership, any Prime Property
Partnership, Finance, Finance II, Finance III, Finance IV, Finance
V, Finance VI or Finance VII 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
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
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(I) "qualified temporary investment income" as defined in Code
section 856(c)(5)(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
Partnership, the Finance Partnership, the Services Partnership, Finance,
Finance II, Finance III, Finance IV, Finance V, Finance VI or Finance
VII 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, Finance IV,
Finance V, Finance VI nor Finance VII 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,
Finance IV, Finance V, Finance VI or Finance VII 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).
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32. Neither Prime, New Prime, Prime Partnership, any Property
Partnership, the Services Partnership, the Finance Partnership, nor any
of the Prime Finance Corporations 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. However, for taxable years beginning after December 31,
1997, Prime or New Prime, as the case may be, may provide a de minimis
amount of impermissible services to tenants or in connection with the
management of the property and still treat amounts received with respect
to that property as rent as long as the value of the impermissible
services does not exceed 1% of the gross income from the property. For
this purpose, the amount treated as received with respect to any
impermissible service shall not be less than 150% of the direct cost to
Prime or New Prime of providing such service. 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 Partnership, the Finance
Partnership, or any of the Prime Finance Corporations 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 or any of the Prime Finance Corporations 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 or any of the Prime
Finance Corporations 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,
Finance IV, Finance V, Finance VI or Finance VII 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, Finance IV,
Finance V, Finance VI or Finance VII have derived, and intend to derive,
amounts with respect to interest on obligations secured by mortgages on
real property described above in
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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 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 each of the taxable years 1994, 1995, 1996, 1997 and the Short
Period Year, 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.
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, Finance IV, Finance V, Finance VI or
Finance VII 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 be entitled under applicable federal income tax law or may
obtain by extension from the Service, Prime, New Prime, Prime
Partnership, any Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III, Finance IV, Finance V, Finance VI or
Finance VII 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,
Finance IV, Finance V, Finance VI nor Finance VII 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
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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 outlots in any single taxable year of Prime.
39. Prime's federal income tax returns (which includes Finance, Finance
II, Finance III, Finance IV, Finance V, Finance VI and Finance VII) 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
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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, Finance IV, Finance V,
Finance VI and Finance VII, 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 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, Finance IV, Finance V, Finance VI and Finance
VII 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
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<PAGE>
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.
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, Finance V, Finance VI, Finance VII
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)(4) 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, Finance IV, Finance V,
Finance VI and Finance VII 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.
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<PAGE>
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, Finance IV, Finance V, Finance VI and
Finance VII 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 856(c)(4) 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.
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<PAGE>
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 currently owns 76.24% of the Prime Partnership Common Units,
100% of the Prime Partnership Series A Preferred Units, 100% of the
Prime Partnership Series B Preferred Units, and 83.34% of the Prime
Partnership Series C Preferred Units. Upon consummation of the
transactons contemplated in the Joint Proxy and the Merger Agreement,
New Prime will own (prior to conversion) 77.08% of the Prime Partnership
Common Units, 100% of the Prime Partnership Series A Preferred Units,
100% of the Prime Partnership Series B Preferred Units, and 83.34% of
the Prime Partnership Series C Preferred Units. Prime currently has
approximately $673,316,704 in net assets and New Prime does not intend
to significantly reduce its net assets in the foreseeable future.
59. The Prime Special Distribution will be paid from internal funds or
from proceeds from the Nomura loan secured by Prime unleveraged
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.
60. The Corporate Merger, Partnership Merger and other transactions
described in the Joint Proxy and Joint Consent are being effected for
bona fide business reasons as articulated in such Joint Proxy and Joint
Consent.
61. 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
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.
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<PAGE>
62. Prime Partnership holds direct and indirect interests in subsidiary
partnerships, joint ventures, and limited liability companies ("Subsidiary
Partnerships"). Regarding any Subsidiary Partnerships in existence prior
to January 1, 1997, each such Subsidiary Partnership claimed to be a
partnership for federal income tax purposes and did not elect to be
treated as a corporation or association taxable as a corporation.
Regarding any Subsidiary Partnership formed on or after January 1, 1997,
New Prime Partnership, and any subsidiary partnership, joint venture, or
limited liability company formed or to be formed under New Prime
Partnership that has or will have more than one partner or member, each
such entity is or will be formed under United States law, and no such
entity has or will elect to be treated as other than a partnership for
federal income tax purposes.
63. Prime at all times has been, and intends to always be, managed by one
or more directors or trustees, and Prime intends that the beneficial
ownership of Prime has been, and Prime intends that the beneficial
ownership of Prime will always be, evidenced by transferable shares.
With the exception of restrictions imposed by Prime's Articles of
Incorporation, there are no restrictions on the transfer of Prime's
shares.
64. 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.
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<PAGE>
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 12th day of May, 1998.
PRIME RETAIL, Inc.
By: /s/ C. Alan Schroeder
-------------------------------
Its: Executive Vice President,
General Counsel and Secretary
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<PAGE>
EXHIBIT 8.1B
May 12, 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 tax counsel for Prime Retail, Inc. ("Prime") in
connection with the transactions contemplated by that certain Amended and
Restated Agreement and Plan of Merger among Prime, Prime Retail, L.P. ("Prime
Partnership"), Horizon Group, Inc. ("Horizon"), Sky Merger Corp., Horizon
Group Properties, Inc. ("HGP"), Horizon Group Properties, L.P. ("HGP LP" and
Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership") dated
as of February 1, 1998 (the "Merger Agreement"). This opinion letter
addresses the federal income tax issues on which Prime 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 May 14, 1998 (the "Joint
Proxy") and the Joint Consent Solicitation Statement/Prospectus/Information
Statement filed by Prime Partnership, Horizon Partnership, and HGP LP dated
May 14, 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.
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 as a partnership for federal
income tax purposes, as well as our opinions set forth therein, in rendering
this REIT opinion.
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 2
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:
(a) the Joint Proxy;
(b) the Joint Consent;
(c) the Amended and Restated Articles of Incorporation of Prime as
amended to the date hereof (the "Charter") and all prior versions
of the Charter;
(d) the Agreement of Limited Partnership of Prime Partnership as
amended to the date hereof;
(e) each of the Prime Property Partnerships' agreements as amended;
and
(f) the Officer's Certificate dated as of the date hereof and
attached hereto setting forth certain factual 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 the
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
with respect to Prime, Prime Partnership, each of the Prime Property
Partnerships, each Prime Finance Corporation, Prime Retail Services Limited
Partnership (the "Services Partnership"), and Prime Retail Finance Limited
Partnership (the "Finance Partnership"). Our reliance upon this Officer's
Certificate relates only to matters of fact and not to matters of law or
legal conclusions. 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
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 3
Partnership or any of the Prime Property Partnerships has elected or will
elect 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, the Joint Consent
and the Officer's Certificate. We have consequently relied upon your factual
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 and the Joint Consent will be consummated in
accordance with the Relevant 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, each
Prime Finance Corporation, the Services Partnership 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 each of the Prime Finance
Corporations 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.
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 4
Other than as expressly stated above, we express no opinion on any
issue relating to Prime, Prime Partnership, the Services Partnership, any of
the Prime Finance Corporations, the Finance Partnership or any of the Prime
Property Partnerships or to any investment therein.
This opinion is being delivered only to Prime; Prime may deliver
this opinion to Horizon pursuant to Section 6.3(d) of the Merger Agreement,
but this opinion 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 8.1B to the Registration Statement and the use of our name in
the Joint Proxy and the Joint Consent. 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,
/s/ Winston & Strawn
<PAGE>
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") 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
Executive Vice President-General Counsel and Secretary of 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 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
Executive 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
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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, or the
Joint Consent, as the context requires.
<PAGE>
Preferred Shares and Prime Series C Preferred Shares surrendered in such
exchange. 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, plus (iii) the aggregate cash paid to dissenter
Prime Series A Preferred Shareholders.
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.
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<PAGE>
8. Prime, each of the Prime Affiliates, and to the best of the
knowledge of Prime management, New Prime and Sky Merger will not pay
expenses of Prime Shareholders or Sky Merger Shareholders, if any,
incurred in connection with the Corporate Merger. Prime and each Prime
Affiliate have not had their expenses, incurred in connection with the
Corporate Merger, paid by Prime Shareholders or Sky Merger shareholders,
and, to the best of the knowledge of Prime management, Sky Merger and
New Prime have not had their expenses, incurred in connection with the
Corporate Merger, paid by Prime Shareholders or Sky Merger shareholders.
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. Each of the aggregate fair market value and the aggregate adjusted tax
basis of the assets of Prime transferred to 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. 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. Winston & Strawn may rely upon the legal conclusions contained in
the Rudnick & Wolfe 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 real estate investment trust
("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, including the officer's certificates attached
thereto, without independent verification thereof.
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
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<PAGE>
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 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 Stores,
Inc. ("Prime Stores"), 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, Prime Stores'
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 Prime Stores, 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 Prime Stores. 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 Prime
Stores. The sale, transfer or other disposition of the common stock of
Prime Stores 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 intends to 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; (v) renting "push
carts" to various venders for use in common areas at such properties;
and (vi) providing only activities and services with respect to
properties owned by New Prime, Prime Partnership or any Prime Property
Partnership which a 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 (vi) of this
paragraph.
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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
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. Prime
Retail Finance V, Inc. ("Finance V"), 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 VI, Inc. ("Finance VI"), 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 VII, Inc.
("Finance VII"), a Maryland corporation, has operated, and intends to
continue to operate, in accordance with 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, Finance IV, Finance
V, Finance VI, and Finance VII, 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 any 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 any 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, Prime
Partnership intends that at least 90% of its gross income shall consist
only of amounts derived from the following sources: (A) interest,
(B) dividends, (C)
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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.
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 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 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 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
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Partnership, Finance, Finance II, Finance III, Finance IV, Finance V,
Finance VI and Finance VII 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 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, Finance IV, Finance V, Finance VI and Finance VII 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, Finance IV,
Finance V, Finance VI and Finance VII 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;
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(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;
(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, Finance V,
Finance VI, Finance VII 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
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acquired by Prime, Prime Partnership, any Prime Property
Partnership, Finance, Finance II, Finance III, Finance IV, Finance
V, Finance VI or Finance VII 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
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
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(I) "qualified temporary investment income" as defined in Code
section 856(c)(5)(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
Partnership, the Finance Partnership, the Services Partnership, Finance,
Finance II, Finance III, Finance IV, Finance V, Finance VI or Finance
VII 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, Finance IV,
Finance V, Finance VI nor Finance VII 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,
Finance IV, Finance V, Finance VI or Finance VII 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).
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32. Neither Prime, New Prime, Prime Partnership, any Property
Partnership, the Services Partnership, the Finance Partnership, nor any
of the Prime Finance Corporations 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. However, for taxable years beginning after December 31,
1997, Prime or New Prime, as the case may be, may provide a de minimis
amount of impermissible services to tenants or in connection with the
management of the property and still treat amounts received with respect
to that property as rent as long as the value of the impermissible
services does not exceed 1% of the gross income from the property. For
this purpose, the amount treated as received with respect to any
impermissible service shall not be less than 150% of the direct cost to
Prime or New Prime of providing such service. 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 Partnership, the Finance
Partnership, or any of the Prime Finance Corporations 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 or any of the Prime Finance Corporations 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 or any of the Prime
Finance Corporations 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,
Finance IV, Finance V, Finance VI or Finance VII 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, Finance IV,
Finance V, Finance VI or Finance VII have derived, and intend to derive,
amounts with respect to interest on obligations secured by mortgages on
real property described above in
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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 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 each of the taxable years 1994, 1995, 1996, 1997 and the Short
Period Year, 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.
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, Finance IV, Finance V, Finance VI or
Finance VII 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 be entitled under applicable federal income tax law or may
obtain by extension from the Service, Prime, New Prime, Prime
Partnership, any Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III, Finance IV, Finance V, Finance VI or
Finance VII 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,
Finance IV, Finance V, Finance VI nor Finance VII 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
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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 outlots in any single taxable year of Prime.
39. Prime's federal income tax returns (which includes Finance, Finance
II, Finance III, Finance IV, Finance V, Finance VI and Finance VII) 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
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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, Finance IV, Finance V,
Finance VI and Finance VII, 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 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, Finance IV, Finance V, Finance VI and Finance
VII 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
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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.
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, Finance V, Finance VI, Finance VII
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)(4) 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, Finance IV, Finance V,
Finance VI and Finance VII 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.
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<PAGE>
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, Finance IV, Finance V, Finance VI and
Finance VII 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 856(c)(4) 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.
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<PAGE>
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 currently owns 76.24% of the Prime Partnership Common Units,
100% of the Prime Partnership Series A Preferred Units, 100% of the
Prime Partnership Series B Preferred Units, and 83.34% of the Prime
Partnership Series C Preferred Units. Upon consummation of the
transactons contemplated in the Joint Proxy and the Merger Agreement,
New Prime will own (prior to conversion) 77.08% of the Prime Partnership
Common Units, 100% of the Prime Partnership Series A Preferred Units,
100% of the Prime Partnership Series B Preferred Units, and 83.34% of
the Prime Partnership Series C Preferred Units. Prime currently has
approximately $673,316,704 in net assets and New Prime does not intend
to significantly reduce its net assets in the foreseeable future.
59. The Prime Special Distribution will be paid from internal funds or
from proceeds from the Nomura loan secured by Prime unleveraged
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.
60. The Corporate Merger, Partnership Merger and other transactions
described in the Joint Proxy and Joint Consent are being effected for
bona fide business reasons as articulated in such Joint Proxy and Joint
Consent.
61. 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
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.
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<PAGE>
62. Prime Partnership holds direct and indirect interests in subsidiary
partnerships, joint ventures, and limited liability companies ("Subsidiary
Partnerships"). Regarding any Subsidiary Partnerships in existence prior
to January 1, 1997, each such Subsidiary Partnership claimed to be a
partnership for federal income tax purposes and did not elect to be
treated as a corporation or association taxable as a corporation.
Regarding any Subsidiary Partnership formed on or after January 1, 1997,
New Prime Partnership, and any subsidiary partnership, joint venture, or
limited liability company formed or to be formed under New Prime
Partnership that has or will have more than one partner or member, each
such entity is or will be formed under United States law, and no such
entity has or will elect to be treated as other than a partnership for
federal income tax purposes.
63. Prime at all times has been, and intends to always be, managed by one
or more directors or trustees, and Prime intends that the beneficial
ownership of Prime has been, and Prime intends that the beneficial
ownership of Prime will always be, evidenced by transferable shares.
With the exception of restrictions imposed by Prime's Articles of
Incorporation, there are no restrictions on the transfer of Prime's
shares.
64. 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.
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<PAGE>
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 12th day of May, 1998.
PRIME RETAIL, Inc.
By: /s/ C. Alan Schroeder
-------------------------------
Its: Executive Vice President,
General Counsel and Secretary
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<PAGE>
EXHIBIT 8.1C
May 12, 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 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. ("Prime
Partnership"), Horizon Group, Inc. ("Horizon"), Sky Merger Corp., Horizon
Group Properties, Inc. ("HGP"), Horizon Group Properties, L.P. ("HGP LP")
and Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership")
dated as of February 1, 1998 (the "Merger Agreement"). This opinion letter
addresses the federal income tax issues described below on which you have
requested our opinion in connection with the Joint Proxy
Statement/Prospectus/Information Statement dated May 14, 1998 (the "Joint
Proxy") and the Joint Consent Solicitation Statement/Prospectus/Information
Statement filed by Prime Partnership, Horizon Partnership, and HGP LP dated
May 14, 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 the contemplated transactions, certain
classes of New Prime Shareholders will receive common shares of HGP, a
Maryland corporation, 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.
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 2
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:
(a) the Joint Proxy;
(b) the Joint Consent;
(c) the Articles of Incorporation of HGP as amended to the date
hereof (the "Charter");
(d) the Form of Agreement of Limited Partnership of HGP LP;
(e) each of the HGP Subsidiary Partnerships' operative agreements as
amended; and
(f) 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
with respect to HGP, HGP LP, HGI Management Corp. and each of the HGP
Subsidiary Partnerships. Our reliance upon this Officer's Certificate
relates only to matters of fact and not to matters of law or legal
conclusions. 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 has or will elect to be excluded from all or
part of subchapter K of the Code.
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 3
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, the Joint Consent
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 and the Joint Consent will be consummated in
accordance with the Relevant 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 the Joint Consent and in
accordance with 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 (possibly including HGP
LP's qualification and taxation as a partnership, and not a publicly traded
partnership taxable as a corporation) 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 and the
Joint Consent 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.
May 12, 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 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, without our prior written consent.
Notwithstanding the foregoing, we hereby consent to the use of this opinion
as an Exhibit 8.1C to the Registration Statement and the use of our name in
the Joint Proxy and the Joint Consent. 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,
/s/ Winston & Strawn
<PAGE>
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. The factual representations and assumptions set forth in 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 the
legal conclusions contained in the Rudnick & Wolfe opinions without
independent verification thereof.
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 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.
____________________
(1) Capitalized terms used herein and not otherwise defined shall
have the meanings assigned to such terms in the Joint Proxy.
<PAGE>
5. HGI Management Corp. (the "Services Company"), 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, the Services Company's
Articles of Incorporation, as amended, and Bylaws, as amended, and in the
manner described in the Joint Proxy and this Certificate. Neither the
Company nor HGP LP has at any time owned or will own any voting stock in
the Services Company, and a majority of HGP's directors cannot vote for
or elect the directors of the Services Company. Furthermore, a majority
of HGP's directors are not, and are not expected to be in the future,
directors, officers, shareholders, or employees of the Services Company.
The sale, transfer, or other disposition of the common stock of the
Services Company by the holders thereof is not subject to any
restrictions. The Services Company currently performs only third party
property management services. The Services Company will perform only
activities and services with respect to properties owned by HGP or HGP
LP, if any, which are customarily rendered in connection with the rental
of space for occupancy only and are not rendered primarily for the
convenience of the tenant. Neither HGP nor HGP LP has or will have any
contract or agreement with the holders of the common stock in the
Services Company or to vote on those business affairs of the Services
Company that are usually decided by a corporation's board of directors
under Maryland law.
6. 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.
7. For all taxable years ending after the Closing Date, HGP LP intends
that at least 90% of the gross income derived by it 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 Code 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 Code section 1231(b)) held for the production
of income described in (A)-(E) of this paragraph.
8. 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).
9. 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 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.
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<PAGE>
10. 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, there are no restrictions on the transfer of
HGP's shares.
11. 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).
12. 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.
13. 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 16 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 17 below), (ii) any amount described in Code section
856(d)(2)(A) (discussed in paragraph 15 below) and (iii) any
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<PAGE>
rent received from a tenant to whom or with respect to whom services
are provided other than services described in paragraph 18 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 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.
14. 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:
(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
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<PAGE>
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 16
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 17 below), (ii) any amount described in Code
section 856(d)(2)(A) (which is discussed in paragraph 15 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 18 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
(I) "qualified temporary investment income" as defined in Code
section 856(c)(5)(D).
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<PAGE>
15. 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.
16. 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.
17. 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).
18. None of HGP, HGP LP, and HGP Subsidiary Partnerships or the
Services Company 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. However, HGP may provide a de minimis
amount of impermissible services to tenants or in connection with the
management of the property and still treat amounts received with respect
to that property as rent as long as the value of the impermissible
services does not exceed 1% of the gross income from the property. For
this purpose, the amount treated as received with respect to any
impermissible service shall not be less than 150% of the direct cost to
HGP of providing such service. 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, each HGP Subsidiary
Partnership and the Services Company will be considered usually or
customariy 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, any of the HGP Subsidiary Partnerships or
the Services Company 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 HGP, HGP LP, the HGP
Subsidiary Partnerships and the Services Company 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).
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<PAGE>
19. 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.
20. 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 13B 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.
21. 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 17 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.
22. Within three 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 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
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<PAGE>
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.
23. 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.
24. 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.
25. 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.
26. 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.
27. The financial projections and analysis dated May 12, 1998 prepared by
Prime 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)(4) 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.
28. 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:
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<PAGE>
(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.
29. 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
28 above;
30. 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)(4)
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.
31. 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
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<PAGE>
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.
32. HGP has furnished Winston & Strawn with access to all leases for
properties in which HGP directly or indirectly holds an ownership interest.
33. 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.
34. 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)(4) of
the Code to the extent attributable in whole or in part to acquisitions
during such quarter.
Requirements with respect to Shareholders
- -----------------------------------------
35. 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.
36. 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.
37. 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.
38. 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
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<PAGE>
ownership and information required to be requested from shareholders of
HGP who own greater than the applicable ownership percentage in such
regulations).
39. 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.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on
behalf of HGP, HGP LP and the HGP Affiliates this 12th day of May, 1998.
HORIZON GROUP PROPERTIES, INC.
By: /s/ Gary J. Skoien
____________________________
Gary J. Skoien
Its: President and Chief Executive Officer
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<PAGE>
May 12, 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. 333-51285), 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. 333-50139), 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.
May 12, 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.
May 12, 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 May 12, 1998, attached as Exhibit A hereto, the letter
to us from Prime, dated May 12, 1998, attached as Exhibit B hereto, in the
opinion letters of Winston & Strawn, dated May 12, 1998, attached as
Exhibits 8.1a, 8.1b and 8.1c to the Joint Proxy
Statement/Prospectus/Information Statement, 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;
<PAGE>
Horizon Group, Inc.
May 12, 1998
Page 4
(ii) no gain or loss will be recognized by either Horizon or Sky
Merger as a 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;
<PAGE>
Horizon Group, Inc.
May 12, 1998
Page 5
(xi) the holding period for New Prime Common Shares and New Prime
Series 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; and
(xii) the statement of federal income tax matters and consequences
described in the Joint Proxy Statement/Prospectus/Information Statement
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--Penalty Tax on Prohibited Transactions,"
"New Prime Risk Factors--Adverse Impact of New Prime's Failure to Continue
to Qualify as a REIT," "New Prime Risk Factors--Effect of REIT Distribution
Requirements," "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--Effect of REIT
Distribution Requirements," "HGP Risk Factors-- Adverse Impact of the
Failure to Continue to Qualify as a REIT," "HGP Risk Factors--Penalty Tax
on Prohibited Transactions," "HGP Risk Factors--Taxable Nature of the
HGP Common Share Distribution," "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"
respectively, to the extent that it constitutes matters of law or legal
conclusions, is accurate in all material respects.
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.
<PAGE>
Horizon Group, Inc.
May 12, 1998
Page 6
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.
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 Common
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 Merger Registration Statement and the use of
our name in the Joint Proxy Statement/Prospectus/Information Statement under
the sections entitled "Summary--Federal Income Tax Consequences," "The
Corporate Merger--Federal Income Tax Consequences," "The Reincorporation
Merger--Federal Income Tax Consequences," and "Horizon Group Properties,
Inc.--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,
/s/ Rudnick & Wolfe
--------------------------
RUDNICK & WOLFE
<PAGE>
EXHIBIT A
HORIZON GROUP, INC.
5000 HAKES DRIVE
NORTON SHORES, MICHIGAN 49441
May 12, 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.
333-51285) (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. 333-50139) (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>
May 12,1998
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, (ii) transfers
described in both Section 368(a)(2)(C) of the Code and Treasury Regulations
Section 1.368-2(j)(4), and (iii) the HGP Common Share Distribution.
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 the historic business of Horizon.
7. Immediately following the consummation of the Reincorporation
Merger, Sky Merger will possess the same assets as Horizon immediately prior
to the consummation of the Reincorporation Merger.
8. Immediately following the consummation of the Reincorporation
Merger, the shareholders of Horizon will own all of the outstanding stock of
Sky Merger, and will own such stock solely by reason of their ownership of
Horizon Stock immediately prior to the Reincorporation Merger.
9. 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>
May 12,1998
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.
10 . 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.
11. 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.
12. 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).
13. 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).
14. 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.
15. 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 Shares or New Prime Series B Preferred Shares,
<PAGE>
May 12,1998
Page 4
respectively.
16. 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.
17. 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.
18. Horizon has the corporate power and authority to make all of the
representations contained herein.
19. Sky Merger has the corporate power and authority to make all of the
representations contained herein.
HORIZON GROUP, INC., a Michigan corporation
By: /s/ James S. Wassel
--------------------------------------------
Name: James S. Wassel
--------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
SKY MERGER CORP., a Maryland corporation
By: /s/ James S. Wassel
--------------------------------------------
Name: James S. Wassel
--------------------------------------
Its: President
--------------------------------------
<PAGE>
EXHIBIT B
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") 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
Executive Vice President-General Counsel and Secretary of 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 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
Executive 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
- -------------
(1) Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Joint Proxy, or the
Joint Consent, as the context requires.
<PAGE>
Preferred Shares and Prime Series C Preferred Shares surrendered in such
exchange. 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, plus (iii) the aggregate cash paid to dissenter
Prime Series A Preferred Shareholders.
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.
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<PAGE>
8. Prime, each of the Prime Affiliates, and to the best of the
knowledge of Prime management, New Prime and Sky Merger will not pay
expenses of Prime Shareholders or Sky Merger Shareholders, if any,
incurred in connection with the Corporate Merger. Prime and each Prime
Affiliate have not had their expenses, incurred in connection with the
Corporate Merger, paid by Prime Shareholders or Sky Merger shareholders,
and, to the best of the knowledge of Prime management, Sky Merger and
New Prime have not had their expenses, incurred in connection with the
Corporate Merger, paid by Prime Shareholders or Sky Merger shareholders.
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. Each of the aggregate fair market value and the aggregate adjusted tax
basis of the assets of Prime transferred to 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. 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. Winston & Strawn may rely upon the legal conclusions contained in
the Rudnick & Wolfe 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 real estate investment trust
("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, including the officer's certificates attached
thereto, without independent verification thereof.
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
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<PAGE>
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 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 Stores,
Inc. ("Prime Stores"), 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, Prime Stores'
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 Prime Stores, 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 Prime Stores. 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 Prime
Stores. The sale, transfer or other disposition of the common stock of
Prime Stores 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 intends to 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; (v) renting "push
carts" to various venders for use in common areas at such properties;
and (vi) providing only activities and services with respect to
properties owned by New Prime, Prime Partnership or any Prime Property
Partnership which a 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 (vi) of this
paragraph.
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<PAGE>
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
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. Prime
Retail Finance V, Inc. ("Finance V"), 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 VI, Inc. ("Finance VI"), 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 VII, Inc.
("Finance VII"), a Maryland corporation, has operated, and intends to
continue to operate, in accordance with 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, Finance IV, Finance
V, Finance VI, and Finance VII, 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 any 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 any 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, Prime
Partnership intends that at least 90% of its gross income shall consist
only of amounts derived from the following sources: (A) interest,
(B) dividends, (C)
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<PAGE>
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.
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 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 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 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
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<PAGE>
Partnership, Finance, Finance II, Finance III, Finance IV, Finance V,
Finance VI and Finance VII 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 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, Finance IV, Finance V, Finance VI and Finance VII 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, Finance IV,
Finance V, Finance VI and Finance VII 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;
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(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;
(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, Finance V,
Finance VI, Finance VII 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
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acquired by Prime, Prime Partnership, any Prime Property
Partnership, Finance, Finance II, Finance III, Finance IV, Finance
V, Finance VI or Finance VII 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
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
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(I) "qualified temporary investment income" as defined in Code
section 856(c)(5)(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
Partnership, the Finance Partnership, the Services Partnership, Finance,
Finance II, Finance III, Finance IV, Finance V, Finance VI or Finance
VII 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, Finance IV,
Finance V, Finance VI nor Finance VII 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,
Finance IV, Finance V, Finance VI or Finance VII 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).
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32. Neither Prime, New Prime, Prime Partnership, any Property
Partnership, the Services Partnership, the Finance Partnership, nor any
of the Prime Finance Corporations 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. However, for taxable years beginning after December 31,
1997, Prime or New Prime, as the case may be, may provide a de minimis
amount of impermissible services to tenants or in connection with the
management of the property and still treat amounts received with respect
to that property as rent as long as the value of the impermissible
services does not exceed 1% of the gross income from the property. For
this purpose, the amount treated as received with respect to any
impermissible service shall not be less than 150% of the direct cost to
Prime or New Prime of providing such service. 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 Partnership, the Finance
Partnership, or any of the Prime Finance Corporations 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 or any of the Prime Finance Corporations 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 or any of the Prime
Finance Corporations 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,
Finance IV, Finance V, Finance VI or Finance VII 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, Finance IV,
Finance V, Finance VI or Finance VII have derived, and intend to derive,
amounts with respect to interest on obligations secured by mortgages on
real property described above in
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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 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 each of the taxable years 1994, 1995, 1996, 1997 and the Short
Period Year, 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.
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, Finance IV, Finance V, Finance VI or
Finance VII 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 be entitled under applicable federal income tax law or may
obtain by extension from the Service, Prime, New Prime, Prime
Partnership, any Prime Property Partnership, the Finance Partnership,
Finance, Finance II, Finance III, Finance IV, Finance V, Finance VI or
Finance VII 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,
Finance IV, Finance V, Finance VI nor Finance VII 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
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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 outlots in any single taxable year of Prime.
39. Prime's federal income tax returns (which includes Finance, Finance
II, Finance III, Finance IV, Finance V, Finance VI and Finance VII) 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
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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, Finance IV, Finance V,
Finance VI and Finance VII, 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 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, Finance IV, Finance V, Finance VI and Finance
VII 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
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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.
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, Finance V, Finance VI, Finance VII
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)(4) 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, Finance IV, Finance V,
Finance VI and Finance VII 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.
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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, Finance IV, Finance V, Finance VI and
Finance VII 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 856(c)(4) 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.
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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 currently owns 76.24% of the Prime Partnership Common Units,
100% of the Prime Partnership Series A Preferred Units, 100% of the
Prime Partnership Series B Preferred Units, and 83.34% of the Prime
Partnership Series C Preferred Units. Upon consummation of the
transactons contemplated in the Joint Proxy and the Merger Agreement,
New Prime will own (prior to conversion) 77.08% of the Prime Partnership
Common Units, 100% of the Prime Partnership Series A Preferred Units,
100% of the Prime Partnership Series B Preferred Units, and 83.34% of
the Prime Partnership Series C Preferred Units. Prime currently has
approximately $673,316,704 in net assets and New Prime does not intend
to significantly reduce its net assets in the foreseeable future.
59. The Prime Special Distribution will be paid from internal funds or
from proceeds from the Nomura loan secured by Prime unleveraged
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.
60. The Corporate Merger, Partnership Merger and other transactions
described in the Joint Proxy and Joint Consent are being effected for
bona fide business reasons as articulated in such Joint Proxy and Joint
Consent.
61. 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
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.
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62. Prime Partnership holds direct and indirect interests in subsidiary
partnerships, joint ventures, and limited liability companies ("Subsidiary
Partnerships"). Regarding any Subsidiary Partnerships in existence prior
to January 1, 1997, each such Subsidiary Partnership claimed to be a
partnership for federal income tax purposes and did not elect to be
treated as a corporation or association taxable as a corporation.
Regarding any Subsidiary Partnership formed on or after January 1, 1997,
New Prime Partnership, and any subsidiary partnership, joint venture, or
limited liability company formed or to be formed under New Prime
Partnership that has or will have more than one partner or member, each
such entity is or will be formed under United States law, and no such
entity has or will elect to be treated as other than a partnership for
federal income tax purposes.
63. Prime at all times has been, and intends to always be, managed by one
or more directors or trustees, and Prime intends that the beneficial
ownership of Prime has been, and Prime intends that the beneficial
ownership of Prime will always be, evidenced by transferable shares.
With the exception of restrictions imposed by Prime's Articles of
Incorporation, there are no restrictions on the transfer of Prime's
shares.
64. 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.
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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 12th day of May, 1998.
PRIME RETAIL, Inc.
By: /s/ C. Alan Schroeder
-------------------------------
Its: Executive Vice President,
General Counsel and Secretary
-19-
<PAGE>
May 12, 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. 333-51285) (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. 333-50139) (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.
May 12, 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.
May 12, 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 Horizon/Glen Outlet Centers Limited Partnership Amended and
Restated Agreement of Limited Partnership , dated as of
July 14, 1995, 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 May 12,
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. 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 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 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 completeness of the factual
representations contained in the Horizon Officer's Certificate or of the
Reviewed Documents in a material way.
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 4
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 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
<PAGE>
Prime Retail, Inc.
May 12, 1998
Page 5
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, but on or before December 31, 1997, 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 complied with the
requirements for qualification and taxation as a REIT under the
Code and its method of operation will enable it to continue to meet
the requirements for qualification and taxation as a REIT under the
Code up to the Reincorporation Merger Effective Time;
(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; and
(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.
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.
<PAGE>
Prime Retail, Inc.
May 12, 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 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 Proxy Statement/Prospectus/Information Statement under the
sections entitled "Summary--Federal Income Tax Consequences," "The Corporate
Merger--Federal Income Tax Consequences," "The Reincorporation
Merger--Federal Income Tax Consequences," and "Horizon Group Properties,
Inc.--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,
/s/ Rudnick & Wolfe
--------------------------
RUDNICK & WOLFE
<PAGE>
EXHIBIT A
HORIZON GROUP, INC.
5000 HAKES DRIVE
NORTON SHORES, MICHIGAN 49441
May 12, 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.
333-51285) (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. 333-50139) (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 A 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>
May 12, 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>
May 12, 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>
May 12, 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>
May 12, 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>
May 12, 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>
May 12, 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>
May 12, 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. Horizon Partnership holds direct and indirect interests in the
Horizon Subsidiary Partnerships. Regarding any Horizon Subsidiary
Partnerships in existence prior to January 1, 1997, each Horizon
Subsidiary Partnership claimed to be a partnership for federal
income tax purposes and did not elect to be treated as a
corporation or association taxed as a corporation. Regarding any
Horizon Subsidiary Partnership formed on or after January 1, 1997,
no such Horizon Subsidiary Partnership has, as of the date hereof,
elected to be treated as other than a partnership for federal
income tax purposes.
36. 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.
37. 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: /s/ James S. Wassel
--------------------------------------------
Name: James S. Wassel
--------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
SKY MERGER CORP., a Maryland
corporation
By: /s/ James S. Wassel
--------------------------------------------
Name: James S. Wassel
--------------------------------------
Its: President
--------------------------------------
<PAGE>
EXHIBIT A
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.
A-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
A-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.
A-3
<PAGE>
FORM OF
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
PRIME RETAIL, L.P.
Dated as of ____________, 1998
<PAGE>
TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS; ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Adjusted Capital Account Deficit . . . . . . . . . . . . . . . . 2
Administrative Expenses. . . . . . . . . . . . . . . . . . . . . 3
Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Antidilution Provisions. . . . . . . . . . . . . . . . . . . . . 4
Audited Financial Statements . . . . . . . . . . . . . . . . . . 4
Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Capital Account. . . . . . . . . . . . . . . . . . . . . . . . . 6
Capital Contribution . . . . . . . . . . . . . . . . . . . . . . 7
Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Closing Price. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Common Distribution. . . . . . . . . . . . . . . . . . . . . . . 9
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Common Units . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Consent of the Partners. . . . . . . . . . . . . . . . . . . . . 9
Contributed Partnership Interests. . . . . . . . . . . . . . . .10
Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Convertible Preferred Distribution . . . . . . . . . . . . . . .10
Convertible Preferred Distribution Shortfall . . . . . . . . . .10
Convertible Preferred Rights . . . . . . . . . . . . . . . . . .11
Convertible Preferred Stock. . . . . . . . . . . . . . . . . . .11
Convertible Preferred Unit Redemption Amount . . . . . . . . . .11
Convertible Preferred Units. . . . . . . . . . . . . . . . . . .11
Current Per Share Market Price . . . . . . . . . . . . . . . . .11
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . .11
Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
General Partner. . . . . . . . . . . . . . . . . . . . . . . . .12
Gross Asset Value. . . . . . . . . . . . . . . . . . . . . . . .13
Hart Scott Act . . . . . . . . . . . . . . . . . . . . . . . . .14
Horizon Limited Partnership. . . . . . . . . . . . . . . . . . .14
"HORIZON PROPERTIES. . . . . . . . . . . . . . . . . . . . . . .14
Immediate Family . . . . . . . . . . . . . . . . . . . . . . . .14
Incentive Option . . . . . . . . . . . . . . . . . . . . . . . .14
Incentive Option Agreement . . . . . . . . . . . . . . . . . . .14
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Limited Partner. . . . . . . . . . . . . . . . . . . . . . . . .15
Liquidating Events . . . . . . . . . . . . . . . . . . . . . . .15
Liquidating Trustee. . . . . . . . . . . . . . . . . . . . . . .15
Major Decisions. . . . . . . . . . . . . . . . . . . . . . . . .15
Majority-in-Interest of the Partners . . . . . . . . . . . . . .15
- i -
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Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . .15
Minimum Gain Capital Account . . . . . . . . . . . . . . . . . .15
Net Cash Flow. . . . . . . . . . . . . . . . . . . . . . . . . .16
Net Income or Net Loss . . . . . . . . . . . . . . . . . . . . .17
Nonrecourse Deductions . . . . . . . . . . . . . . . . . . . . .19
Nonrecourse Liabilities. . . . . . . . . . . . . . . . . . . . .19
Original Agreement . . . . . . . . . . . . . . . . . . . . . . .19
Partner Minimum Gain . . . . . . . . . . . . . . . . . . . . . .19
Partner Nonrecourse Debt . . . . . . . . . . . . . . . . . . . .19
Partner Nonrecourse Deductions . . . . . . . . . . . . . . . . .19
Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . .19
Partnership Interest . . . . . . . . . . . . . . . . . . . . . .19
Partnership Minimum Gain . . . . . . . . . . . . . . . . . . . .20
Partnership Payment Date . . . . . . . . . . . . . . . . . . . .20
Partnership Record Date. . . . . . . . . . . . . . . . . . . . .20
Partnership Units. . . . . . . . . . . . . . . . . . . . . . . .20
Permitted Transferee . . . . . . . . . . . . . . . . . . . . . .20
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Preferred Distribution . . . . . . . . . . . . . . . . . . . . .21
Preferred Distribution Shortfall . . . . . . . . . . . . . . . .21
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . .21
Preferred Unit Redemption Amount . . . . . . . . . . . . . . . .21
Preferred Units. . . . . . . . . . . . . . . . . . . . . . . . .21
"PRIME/HORIZON MERGER. . . . . . . . . . . . . . . . . . . . . .21
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Property Partnership Interests . . . . . . . . . . . . . . . . .22
Property Partnerships. . . . . . . . . . . . . . . . . . . . . .22
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . .22
Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . .22
Regulatory Allocations . . . . . . . . . . . . . . . . . . . . .22
REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
REIT Expenses. . . . . . . . . . . . . . . . . . . . . . . . . .22
REIT Requirements. . . . . . . . . . . . . . . . . . . . . . . .23
Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
SEC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Section 704(c) Tax Items . . . . . . . . . . . . . . . . . . . .24
September 9, 1997 Agreement. . . . . . . . . . . . . . . . . . .24
Series C Preferred Distribution. . . . . . . . . . . . . . . . .24
Series C Preferred Distribution Shortfall. . . . . . . . . . . .24
Series C Preferred Purchase Agreement. . . . . . . . . . . . . .24
Series C Preferred Rights. . . . . . . . . . . . . . . . . . . .24
Series C Preferred Stock . . . . . . . . . . . . . . . . . . . .24
Series C Preferred Unit Redemption Amount. . . . . . . . . . . .24
Series C Preferred Units . . . . . . . . . . . . . . . . . . . .25
Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Shopping Center Project. . . . . . . . . . . . . . . . . . . . .25
- ii -
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Special Distribution . . . . . . . . . . . . . . . . . . . . . .25
Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . .25
Substituted Limited Partner. . . . . . . . . . . . . . . . . . .25
Tax Items. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Trading Day. . . . . . . . . . . . . . . . . . . . . . . . . . .26
Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
1.2 EXHIBITS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . .26
ARTICLE II
ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
2.1 FORMATION AND CONTINUATION . . . . . . . . . . . . . . . . . . .26
2.2 NAME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
2.3 CHARACTER OF THE BUSINESS. . . . . . . . . . . . . . . . . . . .27
2.4 LOCATION OF THE PRINCIPAL PLACE OF BUSINESS. . . . . . . . . . .28
2.5 REGISTERED AGENT AND REGISTERED OFFICE . . . . . . . . . . . . .28
2.6 POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE III
TERM; DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . .31
3.1 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
3.2 DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . .31
3.3 BANKRUPTCY OF A LIMITED PARTNER. . . . . . . . . . . . . . . . .32
ARTICLE IV
CONTRIBUTIONS TO CAPITAL; FINANCING . . . . . . . . . . . . . . . . . .32
4.1 GENERAL PARTNER CAPITAL CONTRIBUTION . . . . . . . . . . . . . .32
4.2 LIMITED PARTNER CAPITAL CONTRIBUTIONS. . . . . . . . . . . . . .33
4.3 ADDITIONAL FUNDS; RESTRICTIONS ON GENERAL PARTNER. . . . . . . .33
4.5 STOCK INCENTIVE PLAN . . . . . . . . . . . . . . . . . . . . . .37
4.6 NO THIRD PARTY BENEFICIARY . . . . . . . . . . . . . . . . . . .38
4.7 NO INTEREST; NO RETURN . . . . . . . . . . . . . . . . . . . . .38
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 . . . . . . . . .38
4.9 REDEMPTION OF SERIES C PREFERRED UNITS . . . . . . . . . . . . .41
4.10 REDEMPTION OF CONVERTIBLE PREFERRED UNITS. . . . . . . . . . . .43
ARTICLE V
INTENTIONALLY OMITTED . . . . . . . . . . . . . . . . . . . . . . . . .45
ARTICLE VI
ALLOCATIONS, DISTRIBUTIONS AND OTHER TAX AND ACCOUNTING MATTERS . . . .46
6.1 ALLOCATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .46
6.2 DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .46
6.3 BOOKS OF ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . .50
6.4 REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
6.5 AUDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
- iii -
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6.6 TAX ELECTIONS AND RETURNS. . . . . . . . . . . . . . . . . . . .51
6.7 TAX MATTERS PARTNER. . . . . . . . . . . . . . . . . . . . . . .52
ARTICLE VII
RIGHTS, DUTIES AND RESTRICTIONS OF THE GENERAL PARTNER. . . . . . . . .53
7.1 EXPENDITURES BY PARTNERSHIP. . . . . . . . . . . . . . . . . . .53
7.2 POWERS AND DUTIES OF GENERAL PARTNER . . . . . . . . . . . . . .53
7.3 MAJOR DECISIONS. . . . . . . . . . . . . . . . . . . . . . . . .58
7.4 NO REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . . . .58
7.5 GENERAL PARTNER PARTICIPATION. . . . . . . . . . . . . . . . . .58
7.6 PROSCRIPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .59
7.7 ADDITIONAL PARTNERS. . . . . . . . . . . . . . . . . . . . . . .59
7.8 TITLE HOLDER . . . . . . . . . . . . . . . . . . . . . . . . . .59
7.9 COMPENSATION OF THE GENERAL PARTNER. . . . . . . . . . . . . . .60
7.10 WAIVER AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . .60
7.11 OPERATION IN ACCORDANCE WITH REIT REQUIREMENTS . . . . . . . . .64
ARTICLE VIII
DISSOLUTION, LIQUIDATION AND WINDING-UP . . . . . . . . . . . . . . . .65
8.1 WINDING UP . . . . . . . . . . . . . . . . . . . . . . . . . . .65
8.2 DISTRIBUTION ON DISSOLUTION AND LIQUIDATION. . . . . . . . . . .67
8.3 TIMING REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . . .68
8.4 DEEMED DISTRIBUTION AND RECONTRIBUTION . . . . . . . . . . . . .68
8.5 DISTRIBUTIONS IN KIND. . . . . . . . . . . . . . . . . . . . . .69
8.6 DOCUMENTATION OF LIQUIDATION . . . . . . . . . . . . . . . . . .69
8.7 DEFICIT CAPITAL ACCOUNT BALANCE. . . . . . . . . . . . . . . . .69
ARTICLE IX
TRANSFER OF PARTNERSHIP INTERESTS;
WITHDRAWAL; ADMISSION OF ADDITIONAL PARTNERS. . . . . . . . . . . . . .70
9.1 GENERAL PARTNER TRANSFER; WITHDRAWAL; SUBSTITUTE GENERAL
PARTNER. . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
9.2 TRANSFERS BY LIMITED PARTNERS. . . . . . . . . . . . . . . . . .72
9.3 RESTRICTIONS ON TRANSFER . . . . . . . . . . . . . . . . . . . .74
ARTICLE X
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS. . . . . . . . . . . . .78
10.1 NO PARTICIPATION IN MANAGEMENT; NO PERSONAL LIABILITY. . . . . .78
10.2 DUTIES AND CONFLICTS . . . . . . . . . . . . . . . . . . . . . .79
ARTICLE XI
GRANT OF RIGHTS TO LIMITED PARTNERS . . . . . . . . . . . . . . . . . .80
11.1 GRANT OF RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . .80
11.2 TERMS OF RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . .80
11.3 REISSUANCE OR REALLOCATION OF COMMON UNITS . . . . . . . . . . .81
11.1A GRANT OF RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . .81
11.2A TERMS OF CONVERTIBLE PREFERRED RIGHTS. . . . . . . . . . . . . .82
- iv -
<PAGE>
11.3A REISSUANCE OR REALLOCATION OF CONVERTIBLE PREFERRED UNITS. . . .82
ARTICLE XII
GRANT OF RIGHTS TO LIMITED PARTNERS HOLDING SERIES C
PREFERRED UNITS; REDEMPTION OF SERIES C PREFERRED UNITS . . . . . . . .82
12.1 GRANT OF RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . .83
12.2 TERMS OF RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . .83
12.3 REISSUANCE OR REALLOCATION OF SERIES C PREFERRED UNITS . . . . 83
ARTICLE XIII
PARTNER REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . .84
(a) ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . .84
(b) DUE AUTHORIZATION; BINDING AGREEMENT. . . . . . . . . . . .84
(c) CONSENTS AND APPROVALS. . . . . . . . . . . . . . . . . . .84
ARTICLE XIV
GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .85
14.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
14.2 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . .85
14.3 EFFECT AND INTERPRETATION. . . . . . . . . . . . . . . . . . . .85
14.4 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . .86
14.5 PARTNERS NOT AGENTS. . . . . . . . . . . . . . . . . . . . . . .86
14.6 ENTIRE UNDERSTANDING, ETC. . . . . . . . . . . . . . . . . . . .86
14.7 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .86
14.8 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . .90
14.9 TRUST PROVISION. . . . . . . . . . . . . . . . . . . . . . . . .90
14.10 PRONOUNS AND HEADINGS. . . . . . . . . . . . . . . . . . . . . .90
14.11 ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . . . .90
14.12 REMEDIES CUMULATIVE. . . . . . . . . . . . . . . . . . . . . . .91
14.13 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . .91
14.14 INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . .91
14.15 WAIVER OF ACTION FOR PARTITION . . . . . . . . . . . . . . . . .91
</TABLE>
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
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<PAGE>
SCHEDULES TO EXHIBIT C
1 Exchange Exercise Notice
2 Election Notice
- vi -
<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
<PAGE>
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
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<PAGE>
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
(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,
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<PAGE>
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
- 4 -
<PAGE>
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.
- 5 -
<PAGE>
"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 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
- 6 -
<PAGE>
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
- 7 -
<PAGE>
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 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
- 8 -
<PAGE>
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-
- 9 -
<PAGE>
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).
- 10 -
<PAGE>
"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.
"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
- 11 -
<PAGE>
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.
- 12 -
<PAGE>
"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;
(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).
- 13 -
<PAGE>
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.
- 14 -
<PAGE>
"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.
"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
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<PAGE>
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
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<PAGE>
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
(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
- 17 -
<PAGE>
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
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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,
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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.
"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.
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"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.
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"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 definition
be included within the
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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.
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"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.
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"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.
"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.
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"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
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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
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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 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
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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
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(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 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
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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
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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.
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.
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(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.
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(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
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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
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
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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.
4.4ISSUANCE 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
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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
(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
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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
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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
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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.
(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
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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
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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
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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 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
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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
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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.
ARTICLE V
INTENTIONALLY OMITTED
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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
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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 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.
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(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)
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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
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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 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
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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
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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.
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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
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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,
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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 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
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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;
(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
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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
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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.
(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,
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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
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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
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in which such Partner or other Person may be involved or in 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
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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.
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(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 Partnership to take (or decline to take) any
actions and that the General Partner shall not be liable
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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
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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
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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
(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,
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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;
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(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.
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
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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
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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
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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 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
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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
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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.
(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.
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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
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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
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(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.
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.
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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
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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
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otherwise specifically provided in this Agreement, no Limited 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
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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
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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 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.
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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
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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
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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.
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
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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.
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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 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
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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
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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
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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, 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,
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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
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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.
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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: ______________________________
<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]
<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
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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
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.
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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
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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 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.
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<PAGE>
(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 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
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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).
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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 (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:
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(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
(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
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"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
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method approved under 704(c) of the Code and the applicable regulations as
chosen by the General Partner.
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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.
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"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.
"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 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
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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
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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 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.
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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 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
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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
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"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
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).
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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 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
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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.
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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: ___________________
Number of Offered
Exercising Partner Common Units
------------------ -----------------
Exercising Partners:
____________________________
____________________________
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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].
NUMBER OF OFFERED STOCK CASH PURCHASE
EXERCISING PARTNER(S) COMMON UNITS PURCHASE PRICE PRICE
- --------------------- ----------------- -------------- --------------
Dated: ___________________
PRIME RETAIL, INC., a Maryland corporation
By:___________________________
Its:__________________________
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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
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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.
"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
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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
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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.
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.
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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 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
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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(h) 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
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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 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.
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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: ___________________
Number of Offered
Exercising Partner Series C Preferred Units
----------------- ------------------------
Exercising Partners:
____________________________
____________________________
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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.
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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.
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"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 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
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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
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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
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
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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.
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
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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
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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 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.
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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.
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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: ___________________
Number of Offered
Exercising Partner Convertible Preferred Units
------------------ ---------------------------
Exercising Partners:
____________________________
____________________________
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CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 23, 1998, with respect to the statements
of revenue and certain expenses of Prime Transferred Properties, in
Amendment No. 1 to the Registration Statement (Form S-4) of Sky Merger Corp.
and related Joint Proxy 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 8, 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 report dated April 3, 1998 with respect to the combined
financial statements and schedule of Horizon Group Properties, Inc., included
in Amendment No. 1 to the Registration Statement (Form S-4) of Sky Merger
Corp. and the related Joint Proxy Statement/Prospectus/Information Statement,
and to the incorporation by reference therein of our report 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 Group, Inc.,
included in its Annual Report (Form 10-K/A) for the year ended December 31,
1997 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Chicago, Illinois
May 7, 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. 333-51285, and to file the same, with all exhibits thereto, and other
documents in connectiion 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 99.5
PRIME RETAIL, INC.
100 EAST PRATT STREET
NINETEENTH FLOOR
BALTIMORE, MARYLAND 21202
May , 1998
Dear Fellow Shareholders,
Shareholders of Prime Retail, Inc. are being asked to vote on the proposed
merger of Prime and Horizon Group, Inc. Through the merger and certain related
transactions, Prime will add 22 of Horizon'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.
As a result of the merger, each outstanding share of common stock of Horizon
will be converted into 0.597 of a share of common stock and 0.20 of a share of
Series B preferred stock of Prime. Each outstanding share of stock of Prime will
continue to represent a share of the same class and series of stock in the
surviving company. Immediately prior to the merger, each holder of Series C
preferred shares and common shares of Prime prior to the merger will receive a
special cash distribution of $0.50 per share and each holder of Series B
preferred shares of Prime prior to the merger will receive a special cash
distribution of $0.60 per share.
In addition, Prime's common and convertible preferred shareholders and
Horizon's shareholders will receive, through a taxable distribution, shares of
common stock in Horizon Group Properties, Inc. Horizon Group Properties, Inc. is
a newly formed REIT that will own and operate a portfolio consisting of
Horizon's 13 remaining outlet centers and two of Prime's underperforming
centers. The shares of Horizon Group Properties, Inc. will be quoted in the
Nasdaq Stock Market.
PRIME'S BOARD OF DIRECTORS 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 AND ITS SHAREHOLDERS AND RECOMMENDS THAT ALL
SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER.
Prime's shareholders are also being asked to re-elect three directors to
Prime's Board of Directors, approve certain benefit plans, and ratify the
appointment of Prime's independent accountants.
We encourage you to read the proxy statement and vote your shares promptly.
The meeting of Prime's shareholders will take place on June 12, 1998.
If you have any questions, please call any of the undersigned at (410)
234-0782 or MacKenzie Partners, Inc. toll-free at (800) 322-2885. We appreciate
your support.
<TABLE>
<S> <C> <C>
[SIGNATURE] [SIGNATURE] [SIGNATURE]
Michael W. Reschke Abraham Rosenthal William H. Carpenter, Jr.
Chairman Chief Executive Officer President
</TABLE>
