<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 22, 1995)
1,500,000 SHARES
HORIZON GROUP, INC.
(FORMERLY HGI REALTY, INC.)
COMMON STOCK
------------------
Horizon Group, Inc. (the "Company") is one of the largest developers,
owners and operators of outlet centers in the United States based on total gross
leasable area ("GLA"), number of tenants and total revenues. As of March 31,
1996, the Company owned and operated 35 outlet centers containing an aggregate
of approximately 8.5 million square feet of total GLA.
All of the shares of Common Stock, $.01 par value per share ("Common
Stock"), offered hereby are being sold by the Company. Upon the closing of the
offering, approximately 17.6% of the outstanding Common Stock (or partnership
units exchangeable for Common Stock) will be beneficially owned by executive
officers and directors of the Company. The Company has restricted the ownership
of more than 7% of its capital stock by most holders in order to maintain its
qualification as a real estate investment trust. See "Description of the Capital
Stock of the Company -- Restrictions on Transfer and Ownership of Common Stock"
in the accompanying Prospectus.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "HGI". On July 17, 1996, the last reported sale price of the Common
Stock on the NYSE was $20.25 per share. The Company has paid regular quarterly
distributions to holders of its Common Stock and has increased its annual
distribution each year since the completion of the Company's initial public
offering in November 1993 ("IPO"). See "Price Range of Common Stock and
Distributions."
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THESE SECURITIES 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 PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
------------------
The Underwriter has agreed to purchase from the Company the Common Stock
offered hereby for an aggregate price of $28,500,000. The Company has granted to
the Underwriter a 30-day option to purchase up to 225,000 additional shares of
Common Stock at a purchase price of $19.00 per share, solely to cover over-
allotments, if any. If such option is exercised in full, the total proceeds to
the Company will be $32,775,000, before deducting expenses payable by the
Company, estimated at approximately $200,000.
The Common Stock offered hereby may be offered by the Underwriter from time
to time in one or more transactions on the NYSE or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, or at negotiated prices. See "Underwriting."
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
------------------
The shares of Common Stock are offered by the Underwriter, subject to prior
sale, when, as and if accepted by the Underwriter and subject to certain
conditions. It is expected that delivery of the Common Stock will be made on or
about July 23, 1996, at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
------------------
SMITH BARNEY INC.
------------------
The date of this Prospectus Supplement is July 17, 1996
<PAGE> 2
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the Common Stock offered hereby. As permitted by the
rules and regulations of the Commission, this Prospectus Supplement and the
accompanying Prospectus 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.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith,
file reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by the Company 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, 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 Common Stock is listed on the NYSE and such reports,
proxy statements and other information concerning the Company can be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
All documents that are incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus 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 Horizon
Group, Inc., 5000 Hakes Drive, Norton Shores, Michigan 49441.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission by the Company pursuant
to the Exchange Act are hereby incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus:
(a) The Company's Annual Report on Form 10-K (File No. 1-12424) for
the fiscal year ended December 31, 1995.
(b) Amendment on Form 10-K/A to the Company's Annual Report on Form
10-K (File No. 1-12424) for the fiscal year ended December 31, 1995.
(c) The Company's Quarterly Report on Form 10-Q (File No. 1-12424) for
the quarter ended March 31, 1996.
(d) Description of the Company's Common Stock, par value $.01 per
share, contained in the Company's registration statement on Form 8-A dated
October 28, 1993.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Offered
Securities (as defined in the accompanying Prospectus) shall be deemed to be
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus and to be a part hereof from the date of filing such documents.
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 Prospectus Supplement and the accompanying
Prospectus to the extent that a statement contained in this Prospectus
Supplement and the accompanying Prospectus or in any other subsequently filed
document that also is or is deemed to be incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement and the accompanying Prospectus.
S-2
<PAGE> 3
The following is qualified in its entirety by the more detailed information
appearing elsewhere in this Prospectus Supplement and the accompanying
Prospectus, or incorporated herein by reference. References to the "Company" in
this Prospectus Supplement and the accompanying Prospectus shall be deemed to
include Horizon Group, Inc. ("Horizon") and Horizon/Glen Outlet Centers Limited
Partnership (the "Operating Partnership"), a Delaware limited partnership of
which Horizon is the general partner, and their respective predecessors.
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference, contain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Future events and actual results, financial and
otherwise, may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Management's Discussion and Analysis
of Results of Operations and Financial Condition" incorporated by reference in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, and the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996, which are incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus.
THE COMPANY
The Company is one of the largest developers, owners and operators of
outlet centers in the United States based on total GLA, number of tenants and
total revenues. As of March 31, 1996, the Company owned and operated 35 outlet
centers containing an aggregate of approximately 8.5 million square feet of
total GLA.
At March 31, 1996, the Company's outlet centers in operation contained
approximately 1,950 stores representing more than 350 tenants having in excess
of 450 different store concepts. These tenants sell such well-known brands as
Ann Taylor, Bass, Bose, Brooks Brothers, Bugle Boy, Champion, Coach,
Corning/Revere, Donna Karan, Eddie Bauer, Esprit, Guess?, Izod, J.Crew, Jones
New York, L'eggs/Hanes/Bali, Lenox, Levi's, Liz Claiborne, Mikasa, Nautica,
Nike, OshKosh B'Gosh, Polo/Ralph Lauren, Spiegel, Tommy Hilfiger and Van Heusen.
No tenant represented more that 3.0% of the Company's base rental revenues for
the three months ended March 31, 1996, with the exception of Phillips-Van Heusen
Corporation at approximately 9.1%. The Company believes that its diverse tenant
mix, which offers both upscale and broadly appealing brand names, will enable it
to attract tenants and shoppers to its multiple locations.
Since its inception in 1984, the Company and its predecessors have acquired
or developed outlet centers containing over 8.5 million square feet of GLA and
have developed 32 of its 35 existing centers. Commencing with its taxable year
ended December 31, 1994, the Company has elected to be treated as a Real Estate
Investment Trust ("REIT") for federal income tax purposes and Horizon believes
that it has operated in such a manner as to qualify for taxation as a REIT under
the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends
to continue to operate in the manner required to continue to be taxed as a REIT.
The Company is self-administered and self-managed.
The Company has grown, and plans to continue to grow, through (i)
developing new and expanding existing outlet centers and other retail concepts,
(ii) selectively acquiring outlet centers, portfolios and other retail concepts,
(iii) actively managing its portfolio to maintain occupancies, increase rents,
reduce occupancy costs and increase tenant sales, (iv) utilizing an asset
management approach to property operations which includes intensive advertising
and promotional efforts, and (v) maintaining a capital structure that
facilitates growth.
The Company's executive offices are located at 5000 Hakes Drive, Norton
Shores, Michigan 49441, and its telephone number is (616) 798-9100.
S-3
<PAGE> 4
RECENT DEVELOPMENTS
In April 1996, the Company completed the restructuring process contemplated
by the July 14, 1995 merger between the Company and McArthur/Glen Realty Corp.
The restructuring consolidated the Company's three regional operating divisions
into two and eliminated an aggregate of 29 corporate management and staff
positions. In connection with the restructuring, Alan Glen, Chairman of the
Board, George T. Haworth, Executive Vice President and Gary E. Geisler and
Margaret M. Ernst, Senior Vice Presidents, resigned. Joseph Cattivera, former
Western Region President, became Executive Vice President and William H. Neville
and Paul M. Sobel, became Presidents of the newly expanded Eastern and Western
Regions, respectively.
Effective June 17, 1996, the Company changed its name from HGI Realty, Inc.
to Horizon Group, Inc.
On June 28, 1996, the Company entered into a $205 million revolving credit
facility agreement with a subsidiary of First Chicago NBD Corporation ("FCNBD")
and certain other banks (the "New Credit Facility"). The New Credit Facility,
which combines two prior revolving credit facilities with the same banks,
expires in June 1999. At the Company's election, interest on the New Credit
Facility is charged at the rate of 1/4 of 1 percent over the prime rate, or 2
percent over the London interbank offered rate ("LIBOR"). The interest in excess
of the prime rate or LIBOR rate is subject to reduction in certain instances,
including the rating of certain debt of the Company, a reduction in the
Company's debt to capitalized value and additional equity investments in the
Company. Borrowings under the New Credit Facility are primarily used for
acquisitions, property expansion and development activities and are
collateralized by certain properties owned by the Company. On June 30, 1996, the
aggregate commitment of the New Credit Facility was not fully collateralized,
resulting in a borrowing base of approximately $184.8 million.
The Company received a commitment, dated July 1, 1996, from Heitman Capital
Management Corporation ("Heitman"), acting as an advisor for an institutional
advisory client, to form a new venture (the "Venture") for the purposes of
acquiring and owning the Company's Finger Lakes Outlet Center (the "Property").
The commitment provides that Heitman will invest a total of $42.5 million which
will be distributed to the Company upon its contribution of the Property and
current expansion phases under development to the Venture. The Company will
develop these additional phases of the Property pursuant to a development
agreement with the Venture and will manage and lease the Property. The
commitment also provides that Heitman has the right to convert its interest in
the Venture into 1,950,000 shares of Common Stock. The commitment is subject to
the execution of a definitive venture agreement and the completion of final due
diligence by both parties. There can be no assurances that the Venture will be
formed in a timely manner or at all. Norman Perlmutter, a director of the
Company, is Chairman of the Board and Chief Executive Officer of Heitman
Financial Limited of which Heitman is a wholly-owned subsidiary.
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby are estimated at $28,300,000 million ($32,575,000 million if the
Underwriter's over-allotment option is exercised in full). The Company presently
intends to use the net proceeds to reduce floating rate debt outstanding under
the New Credit Facility and a $20 million revolving credit facility with First
of America, N.A. which expires in January of 1997 (collectively, the "Credit
Facilities"). The debt outstanding under the Credit Facilities was incurred to
fund the Company's development and acquisition activities and working capital
requirements. Such debt had a weighted average interest rate of approximately
8.5% as of June 30, 1996. The Company may immediately reborrow under the Credit
Facilities in order to fund additional development and acquisition activities or
working capital requirements.
S-4
<PAGE> 5
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock has been traded on the NYSE under the symbol "HGI" since
the Company's IPO. The following table sets forth the quarterly high and low
sale prices per share reported on the NYSE, as well as the quarterly
distributions declared per share.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
4th Quarter........................................................ $25 3/8 $22 1/2 $ .247
Year Ended December 31, 1994:
1st Quarter........................................................ 29 23 .4175
2nd Quarter........................................................ 29 24 1/4 .4175
3rd Quarter........................................................ 27 7/8 23 1/2 .46
4th Quarter........................................................ 26 1/8 20 7/8 .46
Year Ended December 31, 1995:
1st Quarter........................................................ 26 3/8 21 7/8 .505
2nd Quarter........................................................ 24 3/8 20 5/8 .616
3rd Quarter........................................................ 25 5/8 23 1/4 .505
4th Quarter........................................................ 24 1/4 21 1/2 .505
Year Ending December 31, 1996:
1st Quarter........................................................ 23 1/4 20 3/4 .505
2nd Quarter........................................................ 22 19 1/2 .530
3rd Quarter (through July 17)...................................... 21 19 3/4 --
</TABLE>
As of June 30, 1996, the Company had 662 record holders of Common Stock.
The Company intends to continue to pay regular quarterly dividends to its
shareholders. The Company reviews its dividend on a quarterly basis in light of
actual results of operations and other factors. Distributions by the Company are
determined by the Board of Directors and will depend on a number of factors,
including the amount of funds from operations, the financial condition of its
properties, any decision by the Board of Directors to reinvest cash available
for distribution rather than to distribute such funds, capital requirements of
the Operating Partnership, the annual distribution requirements under the REIT
provisions of the Code, and such other factors as the Board of Directors deems
relevant.
S-5
<PAGE> 6
UNDERWRITING
Under the terms and subject to the conditions set forth in the Underwriting
Agreement, dated the date hereof, by and between the Company and Smith Barney
Inc. (the "Underwriter"), the Underwriter has agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriter, the Common Stock
offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Common Stock is subject to approval of
certain legal matters by counsel and to certain other conditions. The
Underwriter is obligated to take and pay for all shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below)
if any such shares are taken.
The Underwriter has advised the Company that it proposes to offer the
Common Stock offered hereby for sale, from time to time, to purchasers directly
or through agents, or through brokers in brokerage transactions on the NYSE, or
to underwriters or dealers in negotiated transactions or in a combination of
such methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices.
Brokers, dealers, agents and underwriters that participate in the
distribution of the Common Stock offered hereby may be deemed to be underwriters
under the Securities Act. Those who act as underwriter, broker, dealer or agent
in connection with the sale of the Common Stock offered hereby will be selected
by the Underwriter and may have other business relationships with the Company
and its subsidiaries or affiliates in the ordinary course of business.
The Company has granted to the Underwriter an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to an
additional 225,000 shares of Common Stock at a purchase price of $19.00 per
share. The Underwriter may exercise such option to purchase additional shares of
Common Stock solely for the purpose of covering over-allotments, if any,
incurred in connection with the distribution of the Common Stock offered hereby.
Subject to certain exceptions, the Company, its officers and directors, and
certain shareholders of the Company designated by the Underwriter have agreed
that they will not, directly or indirectly, offer, sell, contract to sell or
otherwise dispose of any Common Stock or any security convertible into or
exchangeable for Common Stock prior to the expiration of 30 days from the date
hereof, without the prior written consent of the Underwriter.
The Company paid to Smith Barney Inc. an advisory fee and underwriting
commissions in connection with the IPO and an advisory fee in connection with
the evaluation, analysis and structuring of the merger of McArthur/Glen Realty
Corp. with and into the Company on July 14, 1995.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Rudnick & Wolfe, Chicago, Illinois. Attorneys of that
firm who participated in the preparation of this Prospectus and Prospectus
Supplement own a total of approximately 4,000 shares of Common Stock. Skadden,
Arps, Slate, Meagher & Flom, New York, New York, is acting as counsel for the
Underwriter in connection with certain legal matters relating to the sale of the
Common Stock offered hereby.
EXPERTS
The audited financial statements and schedules incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus to the extent and for
the periods indicated in their reports have been audited by Ernst & Young LLP,
independent accountants, and are incorporated by reference herein in reliance
upon the authority of said firm as experts in giving said reports.
S-6
<PAGE> 7
PROSPECTUS
$250,000,000
HGI REALTY, INC.
PREFERRED STOCK, COMMON STOCK AND WARRANTS
HGI Realty, Inc. (the "Company" or "HGI") may from time to time offer in
one or more series its (i) Preferred Stock, par value $.01 per share ("Preferred
Stock"), (ii) Common Stock, par value $.01 ("Common Stock") and (iii) Warrants
to purchase Preferred Stock or Common Stock (collectively, "Warrants") with an
aggregate public offering price of up to $250,000,000 in amounts, at prices and
on terms to be determined at the time of offering. The Preferred Stock, Common
Stock and Warrants (collectively, the "Offered Securities") may be offered,
separately or together, in separate series and amounts, at prices and on terms
to be set forth in a supplement to this Prospectus ("Prospectus Supplement").
Specific terms of the offered securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Preferred
Stock, the specific title and stated value, any distribution, liquidation,
redemption, conversion, voting and other rights, and any initial public offering
price; (ii) in the case of Common Stock, any initial public offering price; and
(iii) in the case of Warrants, the number and terms thereof, the designation and
the number of securities issuable upon their exercise, the exercise price, the
terms of the offering and sale thereof, where applicable, the duration and
detachability thereof. In addition, such specific terms may include limitations
on direct or beneficial ownership and restrictions on transfer of certain types
of the offered securities, in each case as may be appropriate to preserve the
status of the Company as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code").
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, any listing on a securities exchange of, the offered securities
covered by such Prospectus Supplement.
The offered securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the offered
securities, their names and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth in the applicable Prospectus
Supplement. See "Plan of Distribution." No offered securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such series of offered securities.
THESE SECURITIES 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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE DATE OF THIS PROSPECTUS IS AUGUST 22, 1995.
<PAGE> 8
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the Offered Securities. As permitted by the rules and
regulations of the Commission, this Prospectus 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.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith,
file reports, proxy statements and other information with the Commission.
Reports, proxy statements and other information filed by the Company 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, 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.
HGI Common Stock is listed on the New York Stock Exchange ("NYSE") and such
reports, proxy statements and other information concerning the Company can be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, 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 PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED
BY THIS PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION OF AN
OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS
PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS.
ALL DOCUMENTS THAT ARE INCORPORATED BY REFERENCE IN THIS PROSPECTUS 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 HGI REALTY, INC., 1050 WEST WESTERN AVENUE, MUSKEGON,
MICHIGAN 49441.
2
<PAGE> 9
INFORMATION INCORPORATED BY REFERENCE
IN THIS PROSPECTUS
The following documents filed with the Commission by Company pursuant to
the Exchange Act are hereby incorporated by in this Prospectus reference:
(a) The Company's Annual Report on Form 10-K (File No. 1-12424) for
the fiscal year ended December 31, 1994.
(b) Amendment No. 1 to the Company's Annual Report on Form 10-K (File
No. 1-12424) for the fiscal year ended December 31, 1994.
(c) The Company's Quarterly Reports on Form 10-Q (File No. 1-12424)
for the quarters ended March 31, 1995, and June 30, 1995.
(d) The Company's Current Reports on Form 8-K (File No. 1-12424) dated
March 16, 1995, May 16, 1995 and July 24, 1995.
(e) Description of the Company's Common Stock, par value $.01 per
share, contained in the Company's registration statement on Form 8-A dated
October 28, 1993.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Offered Securities shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing such documents.
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 Prospectus to the extent that a statement
contained in this Prospectus or in any other subsequently filed document that
also is or is deemed to be incorporated by reference in this Prospectus modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
3
<PAGE> 10
THE COMPANY
The Company is one of the largest developers, owners and operators of
factory outlet centers in the United States, based on total GLA. The Company
owns and operates 31 factory outlet centers containing an aggregate of
approximately 6.1 million square feet of total GLA located in 19 states.
Commencing with its taxable year ended December 31, 1994, the Company has
elected to be treated as a REIT for federal income tax purposes and the Company
believes that it has been organized and has operated in such a manner as to
qualify for taxation as a REIT under the Code. The Company intends to continue
to operate in the manner required to continue to be taxed as a REIT.
The Company's properties are held by, and all of the Company's operations
are conducted through Horizon/Glen Outlet Centers Limited Partnership (the
"Operating Partnership"), a Delaware limited partnership. The Company is the
general partner of the Operating Partnership and owns approximately 71.6% of the
units of partnership interest of the Operating Company (the "Units") outstanding
as of July 15, 1995. The Units are redeemable, subject to certain limitations to
protect HGI's status as a REIT, into shares of common stock of the Company on a
unit-for-share basis.
The Company's factory outlet center portfolio features a diverse mix of
tenants. The Company's tenants are typically the retailing outlet of large scale
publicly-traded manufacturers. Substantially all of these leases require tenants
to pay their pro rata share of all property operating expenses and real estate
taxes.
Since its inception in 1984, development has been, and it is intended that
it will continue to be, a primary component of the Company and its predecessors'
business. Effective July 14, 1995, the Company merged with McArthur/Glen Realty
Corp. ("McArthur/Glen"), another leading developer, owner and operator of
factory outlet centers (the "Merger"). Immediately preceding the Merger, Horizon
Outlet Centers Limited Partnership and McG Outlet Centers Limited Partnership,
each a limited partnership organized under the laws of Delaware, were
consolidated into the Operating Partnership. As a result of the Merger, the
Company is one of the country's largest developers, owners and operators of
factory outlet centers. The Company believes that the Merger has provided the
Company with greater access to capital markets, increased liquidity in its
capital stock, a broader tenant base and a more diverse portfolio with
operations that are national in scope.
The Company's executive offices are located at 1050 West Western Avenue,
Muskegon, Michigan 49441, and its telephone number is (616) 728-5170.
4
<PAGE> 11
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges of the Company for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------- THREE MONTHS ENDED
1994 1993 1992 1991 1990 MARCH 31, 1995
- ----- ----- ----- ----- ----- ------------------
<S> <C> <C> <C> <C> <C>
4.1:1 1.4:1 1.0:1 0.8:1 0.7:1 2.6:1
</TABLE>
To date, the Company has not issued any Preferred Stock; therefore, the
ratios of earnings to combined fixed charges and Preferred Stock distributions
are unchanged from the ratios presented in this section. For purposes of
computing the ratio of earnings to fixed charges, earnings consist of net income
before minority interest and fixed charges (excluding capitalized interest).
Fixed charges consist of interest costs, whether expensed or capitalized, the
interest component of rental expense, if any, and amortization of debt expense,
including discounts related to any indebtedness (including amounts capitalized).
The Company's earnings were inadequate to cover fixed charges by $35,000,
$995,100, and $1,738,500 for the years ended December 31, 1992 through December
31, 1990, respectively, all of which were prior to the Company's initial public
offering in November of 1993.
USE OF PROCEEDS
Except as otherwise provided in the applicable Prospectus Supplement,
proceeds to the Company from the sale of the Offered Securities will be added to
the working capital of the Company and the Operating Partnership and will be
available for general corporate purposes, which may include the acquisition of
properties as suitable opportunities arise, the expansion, development and
improvement of certain properties owned or to be owned by the Company, the
financing of future new development and the repayment of indebtedness
outstanding at such time.
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<PAGE> 12
DESCRIPTION OF THE CAPITAL STOCK OF THE COMPANY
The following paragraphs summarize certain provisions of Michigan law and
the Articles of Incorporation and Bylaws. The summary of the terms of the
capital stock of the Company set forth below does not purport to be complete and
is subject to and qualified in its entirety by reference to the Articles of
Incorporation and Bylaws of the Company.
GENERAL
The Articles of Incorporation of the Company provide that the Company may
issue up to 60,000,000 shares of capital stock of the Company, consisting of (i)
47,000,000 shares of Common Stock, par value $.01 per share, (ii) 3,000,000
shares of Preferred Stock, par value $.01 per share, and (iii) 10,000,000 shares
of Excess Stock, par value $.01 per share. The Common Stock and the Preferred
Stock are sometimes collectively referred to herein as the "Stock."
COMMON STOCK
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Stock will be
issuable upon conversion of Preferred Stock or upon the exercise of Warrants
issued by the Company.
All of the Common Stock offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other Stock or
series of Stock and to the provisions of the Company's Articles of Incorporation
regarding conversion of Common Stock into Excess Stock, holders of Common Stock
will be entitled to receive distributions if, as and when authorized and
declared by the Board of Directors of the Company out of assets legally
available therefor and to share according to the shareholders' respective rights
and interests, in the assets of the Company legally available for distribution
to its shareholders in the event of its dissolution after payment of, or
adequate provision for, all known debts and liabilities of the Company.
Subject to the provisions of the Articles of Incorporation regarding
conversion of Common Stock into Excess Stock, each outstanding share of Common
Stock entitles the holder to one vote on all matters submitted to a vote of
shareholders, 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 Stock, the holders of such Common Stock will possess the exclusive voting
power of the Company.
Holders of Common Stock have no conversion rights, sinking fund rights,
redemption rights, exchange rights, dividend rights, liquidation preferences or
preemptive rights to subscribe for any securities of the Company.
Subject to the provisions of the Articles of Incorporation regarding
conversion of Common Stock into Excess Stock, shares of a particular class of
issued Common Stock will have equal dividend, distribution, liquidation, voting
and other rights.
Pursuant to the Michigan Business Corporation Act, as amended (the "MBCA"),
a Michigan corporation generally cannot dissolve, merge or sell all or
substantially all of its assets outside the ordinary course of business unless
approved by the affirmative vote of shareholders holding a majority of the
shares entitled to vote on the matter. The MBCA also provides that a Michigan
corporation cannot amend its articles of incorporation unless approved by the
affirmative vote of shareholders holding a majority of the shares entitled to
vote unless a larger percentage is set forth in the corporation's articles of
incorporation.
The Company's Articles of Incorporation provide that it may generally be
amended by the affirmative vote of holders of not less than a majority of the
Common Stock then outstanding and entitled to vote thereon, although certain
specified provisions thereof, such as those pertaining to the removal of
directors, related party transactions, restriction on ownership of Common Stock,
limitation of director liability, indemnification, merger consolidation,
dissolution or sale of substantially all of the Company's assets and certain
reorganizations of the Company, may only be amended, altered or repealed by the
affirmative vote of holders of not less
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<PAGE> 13
than two-thirds of the Common Stock then outstanding and entitled to vote
thereon. Notwithstanding the foregoing, the Articles of Incorporation provide
that, subject to the provisions of any class or series of Stock at the time
outstanding and subject to approval by the affirmative vote of the holders of
not less than a majority of the Stock outstanding and entitled to vote thereon,
the Board of Directors has the power to cause the organization of an entity to
take over the property of the Company and to carry on the Company's affairs, to
merge the Company into such entity and to thereupon terminate the Company.
The transfer agent and registrar for the Common Stock is First Chicago
Trust Company of New York.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Company's Articles of Incorporation. The Board is required by
the MBCA and the Articles of Incorporation to fix for each such series, subject
to the provisions of the Articles of Incorporation regarding conversion of
Preferred Stock into Common Stock, the relative rights, preferences, voting
powers, restrictions, limitations as to distributions, and other rights as are
permitted by Michigan law. The Board could authorize the issuance of Preferred
Stock with terms and conditions which could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of Common
Stock might receive a premium for their Common Stock over the then market price
of such shares. As of the date hereof, no Preferred Stock is outstanding.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
1. The title and stated value of such Preferred Stock;
2. The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
3. The distribution rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
4. The date from which distributions on such Preferred Stock shall
accumulate, if applicable;
5. The procedures for any auction and remarketing, if any, for such
Preferred Stock;
6. The provision for a sinking fund, if any, for such Preferred Stock;
7. The provision for redemption, if applicable, of such Preferred Stock;
8. Any listing of such Preferred Stock on any securities exchange;
9. The terms and conditions, if applicable, upon which such Preferred Stock
will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
10. A discussion of federal income tax considerations applicable to such
Preferred Stock;
11. The relative ranking and preferences of such Preferred Stock as to
distribution rights (including whether any liquidation preference as to
the Preferred Stock will be treated as a liability for purposes of
determining the availability of assets of the company for distributions
to holders of shares ranking junior to the Preferred Stock as to
distribution rights) and rights upon liquidation, dissolution or
winding up of the affairs of the Company;
12. Any limitations on issuance of any series of preferred shares ranking
senior to or on a parity with such series of Preferred Stock as to
distribution rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company;
13. Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT for federal income tax purposes; and
14. Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
7
<PAGE> 14
RESTRICTIONS ON TRANSFER AND OWNERSHIP OF COMMON STOCK
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), for all years after the last 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. Because the Board of Directors currently believes it will
be essential for the Company to continue to qualify as a REIT under the Code,
the Board of Directors has adopted provisions of the Articles of Incorporation
imposing restrictions on the transfer and ownership of Stock.
The Articles of Incorporation generally prohibit any shareholder from
having beneficial ownership, either directly or by virtue of the Code's
applicable rules, of more than 7% in value of the Company's outstanding Stock
(the "Ownership Limit"). Subject to certain limitations, the directors may
increase the Ownership Limit from time to time. Certain persons 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 Articles of Incorporation 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 ownership restrictions contained in the Articles of Incorporation (i)
prohibit any person who is not an Existing Holder from having beneficial
ownership of Stock, 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 Stock, either directly or by virtue of the
applicable rules, in excess of the applicable Existing Holder Limit, (iii)
prohibit the Stock from being owned by less than 100 persons, and (iv) prohibit
the Company from being "closely held" within the meaning of Section 856(h) of
the Code (collectively, "Ownership Restrictions"). If the Ownership Restrictions
are violated by a sale or transfer, such sale or transfer is void ab initio
unless the Company determines such sale or transfer will not jeopardize the
Company'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 Ownership Restrictions is
required to immediately give written notice to the Company of such event or
proposed event in order for the Company to determine the effect of such event or
proposed event on the Company's status as a REIT.
In the absence of appropriate safeguards, certain events could result in a
violation of the Ownership Restrictions ("Triggering Events"). Thus, the
Company's Articles of Incorporation provide that, upon the occurrence of a
Triggering Event, certain shares of Common Stock or Preferred Stock may
automatically be converted into Excess Stock. All Excess Stock will be deemed to
be owned by the Company 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 Excess Stock shall have no rights to or
in such shares of Excess Stock other than the right, subject to certain
limitations, to designate the person to whom such Excess Stock is to be
transferred. The Company has the right to redeem Excess Stock for the lesser of
(i) their Fair Market Value (which is defined in the Articles of Incorporation
by reference to the average closing sale price of Stock as reported on the New
York Stock Exchange) for the five trading days immediately prior to the sale, or
(ii) the Fair Market Value for the five trading days immediately prior to the
date upon which the Company or a designee accepts such offer. Unless and until
any Excess Stock shall have been so transferred or redeemed, such Excess Stock
shall remain Excess Stock, 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 Excess Stock is to be transferred. Any person who engages in a
Triggering Event is required to immediately give written notice of such event to
the Company.
All certificates representing shares of Common Stock will bear a legend
referring to the Ownership Restrictions.
8
<PAGE> 15
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 Stock
are required to file an affidavit with the Company containing the information
specified in the Articles of Incorporation within 30 days after January 1 of
each year. In addition, each shareholder shall upon demand be required to
disclose to the Company such information as the 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
governmental agency.
The Ownership Restrictions will not automatically be removed from the
Articles of Incorporation 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 Ownership Restrictions would
require an amendment to the Articles of Incorporation. Such an amendment to the
Articles of Incorporation would require the affirmative vote of holders owning
not less than two-thirds of the Stock then outstanding and entitled to vote
thereon. In addition to preserving the Company's status as a real estate
investment trust, the Ownership Restrictions may have the effect of precluding
an acquisition of control of the Company without the approval of the directors.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Stock or
Common Stock. Warrants may be issued independently or together with any Offered
Securities and may be attached to or separate from such securities. Each series
of Warrants will be issued under a separate warrant agreement (each a "Warrant
Agreement") to be entered into between the Company and a warrant agent ("Warrant
Agent"). The Warrant Agent will act solely as an agent of the Company in
connection with the Warrants of such series and will not assume any obligation
or relationship of agency or trust for or with any holders or beneficial owners
of Warrants. The following sets forth certain general terms and provisions of
the Warrants offered hereby. Further terms of the Warrants and the applicable
Warrant Agreement will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the following terms,
where applicable, of the Warrants in respect of which this Prospectus is being
delivered:
1. the title of such Warrants;
2. the aggregate number of such Warrants;
3. the price or prices at which such Warrants will be issued;
4. the currencies in which the price of such Warrants may be payable;
5. the designation, aggregate principal amount and terms of the securities
purchasable upon exercise of such Warrants;
6. the designation and terms of the Offered Securities with which such
Warrants are issued and the number of such Warrants issued with each
such security;
7. the currency or currencies, including composite currencies, in which the
principal of or any premium or interest on the securities purchasable
upon exercise of such Warrants will be payable;
8. if applicable, the date on and after which such Warrants and the related
securities will be separately transferable;
9. the price at which, and currency or currencies, including composite
currencies, in which, the securities purchasable upon exercise of such
Warrants may be purchased;
10. the date on which the right to exercise such Warrants shall commence
and the date on which such right shall expire;
11. the minimum or maximum amount of such Warrants which may be exercised
at any one time;
12. information with respect to book-entry procedures, if any;
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<PAGE> 16
13. a discussion of certain federal income tax considerations; and
14. any other terms of such Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Warrants.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the principal material federal income tax
considerations regarding the Offered Securities. The discussion in this section
is not tax advice, is for general information only and is based on existing
provisions of the Code, existing and proposed Treasury Regulations promulgated
under the Code ("Treasury Regulations"); existing court decisions and rulings
and other administrative rulings and interpretations.
This discussion does not purport to deal with all aspects of taxation that
may be relevant to particular shareholders in light of their personal investment
or tax circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS, HER OR ITS OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM, HER OR IT OF THE
PURCHASE, OWNERSHIP AND SALE OF PREFERRED STOCK, COMMON STOCK AND WARRANTS TO
PURCHASE PREFERRED OR COMMON STOCK IN THE COMPANY, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE
AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
If certain detailed conditions imposed by the REIT provisions of the Code
are met, entities, such as the Company, that invest primarily in real estate and
that otherwise would be treated for federal income tax purposes as corporations,
are generally not taxed at the corporate level on their "real estate investment
trust taxable income" that is currently distributed to shareholders. This
treatment substantially eliminates the "double taxation" (i.e., at both the
corporation and shareholder levels) that generally results from the use of
corporations. Commencing with its taxable year ended December 31, 1994, and
thereafter, the Company has elected to be treated as a REIT for federal income
tax purposes and the Company believes that it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code.
The Company intends to continue to operate in the manner required to continue to
be taxed as a REIT.
If the Company fails to qualify as a REIT in any taxable year, however, it
will be subject to federal income taxation as if it were a domestic corporation,
and its shareholders will be taxed in the same manner as shareholders of
ordinary corporations. In this event, the Company could be subject to
potentially significant tax liabilities, and, therefore, the amount of cash
available for distribution to its shareholders would be reduced or eliminated.
Based upon certain representations described below, in the opinion of
Rudnick & Wolfe, counsel to the Company, the Company currently is and will
continue to be organized in conformity with the requirements for qualification
as a REIT, and its proposed method of operation as represented by the Company
will enable it to satisfy the requirements for such qualification. This opinion
is conditioned upon certain representations made by the Company as to certain
factual matters relating to the Company's organization and manner of operations.
In addition, this opinion is based on the law existing and in effect on the date
hereof. The Company's qualification and taxation as a REIT will depend upon the
Company's ability to meet, on a continuing basis, through actual operating
results, distribution levels and diversity of stock ownership, the various REIT
qualification tests imposed under the Code. Counsel will not review compliance
with these tests on a continuing basis. No assurance can be given that the
Company will satisfy such tests on a continuing basis.
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<PAGE> 17
TAXATION OF THE COMPANY
General. If the Company qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its taxable income that is
currently distributed to its shareholders. The Company may, however, be subject
to tax at normal corporate rates upon any taxable income or capital gain not
distributed.
An existing corporation will qualify as a REIT only if, at the close of its
taxable year, it has no earnings and profits accumulated with respect to any
taxable year during which it was not qualified as a real estate investment
trust.
Notwithstanding its qualifications as a REIT, the Company will be subject
to federal income tax in certain circumstances. First, the Company will be taxed
at regular corporate rates on any undistributed real estate investment trust
taxable income, including undistributed net capital gains. Second, if during the
10-year period (a "Recognition Period") beginning on the first day of the first
taxable year for which the Company qualified as a REIT, the Company recognizes
gain on the disposition of any asset (a "Recognition Asset") held by the Company
as of the beginning of such Recognition Period, then, to the extent of the
excess of (a) the fair market value of such Recognition Asset as of the
beginning of such Recognition Period (the "Built-In Gain"), such gain will be
subject to tax at the highest regular corporate rate pursuant to Treasury
Regulations which have not yet been promulgated; provided, however, that any
such gain may be offset by the amount, if any, of any losses recognized by the
Company during the same taxable year on the disposition of any Recognition Asset
to the extent that (x) the Company's adjusted basis in such Recognition Asset as
of the beginning of such Recognition Period exceeds (y) the fair market value of
such Recognition Asset upon its disposition (the "Built-In Loss"). Furthermore,
the total amount of Built-In Gain that may be recognized by the Company is
limited to the extent of the excess of (i) the fair market value of all of the
assets of the Company as of the beginning of the Recognition Period, over (ii)
the aggregate adjusted basis of such assets at such time (the "Net Unrealized
Built-In Gain"). Third, if the Company acquires any asset from a C corporation
(i.e., generally a corporation subject to full corporate-level tax) in a
transaction in which the Company's basis in the asset is determined by reference
to the basis of the asset in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by the Company, then, to
the extent the Built-In Gain on the sale of such asset exceeds any Built-In Loss
arising from the disposition during the same taxable year of other assets
acquired in the same transaction, such gain will be subject to tax at the
highest corporate rate pursuant to Treasury Regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain during such Recognition Period assumes the Company will make an
election to obtain such tax consequences pursuant to IRS Notice 88-19. Fourth,
under certain circumstances, the Company may be subject to the "alternative
minimum tax" on its items of tax preference. Fifth, if the Company has (i) net
income from the sale or other disposition of "foreclosure property" which is
generally real property and any personal property incident to such real property
acquired as a result of a default either on a lease or on indebtedness by which
such property is secured and with respect to which an appropriate election is
made, except that property generally ceases to be foreclosure property after a
two-year period, or earlier, in certain cases or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Sixth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Seventh, if the Company should fail to satisfy either the 75% gross income test
or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on the net income attributable to the
greater of the respective amounts by which the Company fails the 75% or 95%
test. Eighth, if the Company fails to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed.
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<PAGE> 18
In order to qualify as a REIT, the Company must meet, among others, the
following requirements:
Share Ownership Tests. The Company's Common Stock must be held by a minimum
of 100 persons for at least 335 days in each taxable year (or a proportional
number of days in any short taxable year). In addition, at all times during the
second half of each taxable year, no more than 50% in value of the capital stock
of the Company may be owned, directly or indirectly and by applying certain
constructive ownership rules, by five or fewer individuals. For purposes of this
test, any Company shareholder which is a pension trust will generally not be
treated as a single shareholder; instead, each beneficiary of such trust will be
treated as holding the Company Common Stock in proportion to his actuarial
interest in the trust. These stock ownership requirements do not apply to the
first taxable year of the Company for which a REIT election is made.
In order to ensure compliance with the foregoing stock ownership tests, the
Company has placed certain restrictions on the transfer of Common Stock to
prevent additional concentration of stock ownership. Moreover, to evidence
compliance with these requirements, under Treasury Regulations, the Company must
maintain records which disclose the actual ownership of its outstanding Common
Stock. In fulfilling its obligations to maintain records, the Company must and
will demand written statements each year from the record holders of designated
percentages of Common Stock disclosing the actual owners of such Common Stock
(as prescribed by Treasury Regulations). Those persons failing or refusing to
comply with the Company's written demand must submit with his, her or its tax
returns a similar statement disclosing the actual ownership of Common Stock and
certain other information. In addition, the Company's Articles of Incorporation
provide restrictions regarding the transfer of its shares that are intended to
assist the Company in continuing to satisfy the ownership requirements. See
"Description of Capital Stock of the Company -- Restrictions on Transfer and
Ownership of Common Stock."
Asset Tests. At the close of each quarter of the Company's taxable year,
the Company must satisfy two tests relating to the nature of its assets
(determined in accordance with generally accepted accounting principles). First,
at least 75% of the value of the Company's total assets must be represented by
interests in real property, interest in mortgages on real property, shares in
other REIT's, cash, cash items, government securities and qualified temporary
investments. Second, although the remaining 25% of the Company's assets
generally may be invested without restriction, securities in this class may not
exceed either (i) in the case of securities of any one non-government issuer, 5%
of the value of the Company's total assets or (ii) 10% of the outstanding voting
securities of any one such issuer. Where the Company invests in a partnership
(such as the Operating Partnership), it will be deemed to own a proportionate
share of the partnership's assets. See "-- Tax Aspects of the Company's
Investments in the Operating Partnership -- General." Accordingly, the Company's
investment in properties through its interest in the Operating Partnership is
intended to constitute qualified assets for purposes of the 75% asset test.
The Operating Partnership owns 100% of the non-voting stock and 5% of the
voting stock of each of the HGI Management Corp. (the "HGI Management Company")
and MG Third Party Services Corp. (the "MG Management Company"). As described
above, by virtue of its partnership interest in the Operating Partnership, the
Company will be deemed to own a pro rata share of the securities of each of the
HGI Management Company and the MG Management Company. Because the Operating
Partnership will own only 5% of the voting securities of each of the HGI
Management Company and the MG Management Company, the 10% limitation on holdings
of voting securities of any one issuer will not be exceeded. In addition, based
upon its comparison of the total estimated value of the HGI Management Company
and the MG Management Company securities to be owned by the Operating
Partnership to the estimated value of the total assets to be owned by the
Operating Partnership and the Company, the Company believes that limitation
restricting the Company's ownership of the securities of any one issuer to 5% of
the value of the Company's total assets will not be exceeded. Counsel for the
Company, in rendering its opinion as to the qualification of the Company as a
REIT, is relying on representations of the Company with respect to the value of
such securities and assets. The 5% value limitation must be satisfied not only
on the date that the Company (directly or through the Operating Partnership)
acquires securities of the HGI Management Company or the MG Management Company
but also at the end of any quarter in which the Company so increases its
interest in each of the HGI Management Company and the MG Management Company or
so acquires other property. In this respect, if any partner of the Operating
Partnership exercises its option to exchange units of the
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<PAGE> 19
Operating Partnership for shares of Common Stock, the Company will thereby
increase its proportionate (indirect) ownership interest in each of the HGI
Management Company and the MG Management Company, thus requiring the Company to
recalculate its ability to meet the 5% test in any quarter in which such
exchange option is exercised. Although the Company plans to take steps to ensure
that it satisfies the 5% value test for any quarter with respect to which
retesting is to occur, there can be no assurance that such steps will always be
successful or will not require a reduction in the Operating Partnership's
overall interest in the HGI Management Company for the MG Management Company.
Gross Income Tests. There are three separate percentage tests relating to
the sources of the Company's gross income which must be satisfied for each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its share of income and
loss of the partnership, and the gross income of the partnership will retain the
same character in the hands of the Company as it has in the hands of the
partnership. See "-- Tax Aspects of the Company's Investment in the Operating
Partnership -- General." The three tests are as follows:
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i) rents
from real property (as modified below); (ii) interest on obligations secured 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 the Company's trade or business ("dealer property"); (iv) dividends or other
distributions on shares in other REIT's 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 the mortgage secured by such property ("foreclosure property");
and (vii) commitment fees received for agreeing to make loans secured by
mortgages on real property or to purchase or lease real property.
Rents received from a tenant will not qualify as rents from real property
in satisfying the 75% test (or the 95% gross income test described below) if the
Company, or an owner of 10% or more of the Company, 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, 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, although an
amount received or accrued generally will not be excluded from "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Finally, for rents received to qualify as rents from real
property, the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom the Company derives no income, except that the
"independent contractor" requirement does not apply to the extent that the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only, or are not otherwise
considered "rendered to the occupant for his convenience."
Each of the HGI Management Company and the MG Management Company (each of
which does not satisfy the independent contractor standard), as a management
agent for the Operating Partnership, provide certain services with respect to
properties that the Operating Partnership does not own or has a partial
ownership interest. The Company believes that all services provided by the HGI
Management Company and MG Management Company to the Operating Partnership are
and will continue to be of the type 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
properties to fail to qualify as rents from real property for purposes of the
75% and 95% gross income tests.
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company'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 other 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 are included for
purposes of the 95% test, but not for purposes of the 75% test.
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<PAGE> 20
For purposes of determining whether the Company complies with the 75% and
95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (excluding
foreclosure property); however, it does not include a sale of property if such
property is held by the Company for at least four years and certain other
requirements (relating to the number of properties sold in a year, their tax
bases, and the cost of improvements made thereto) are satisfied. See "--
Taxation of the Company -- General" and "-- Tax Aspects of the Company's
Investment in the Operating Partnership -- General."
The Company believes that, for purposes of both the 75% and 95% gross
income tests, its investment in properties through the Operating Partnership
will give rise to qualifying income in the form of rents, and that gains on
sales of properties, or of the Company's interest in the Operating Partnership,
generally will also constitute qualifying income.
The HGI Management Company and MG Management Company also receive fee
income in consideration of the performance of property management and other
services with respect to properties partially owned or not owned by the
Operating Partnership; however, substantially all of the income derived by the
Operating Partnership from the HGI Management Company and MG Management Company
will be in the form of dividends on the HGI Management Company stock and MG
Management Company stock owned by the Operating Partnership. Although such
dividends and interest income will satisfy the 95%, but not the 75%, gross
income test (as discussed above), the Company anticipates that the amount of
non-qualifying income on its other investments, including such dividend and
interest income, will not result in the Company failing either the 75% or 95%
gross income test.
Even if the Company 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) the Company's failure to comply
was due to reasonable cause and not willful neglect; (ii) the Company 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, however, the Company will nonetheless be subject to a 100% tax
on the greater of the amount by which it fails either the 75% or 95% gross
income test, multiplied by a fraction intended to reflect the Company's
profitability.
The 30% Test. The Company must derive less than 30% of its gross income for
each taxable year from the sale or disposition of (i) real property held for
less than four years (other than foreclosure property and property disposed of
in involuntary conversions); (ii) stock or securities held for less than one
year; and (iii) property in a prohibited transaction. The Company believes that
it will not have difficulty in complying with this test.
Annual Distribution Requirements. In order to qualify as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
"REIT taxable income" of the Company (computed without regard to the dividends
paid deduction and the Company's net capital gain) and (ii) 95% of the net
income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of noncash income. In addition, if during the 10-year Recognition
Period, the Company recognizes gain on the disposition of any Recognition Asset
held by the Company as of the beginning of such Recognition Period, then the
Company will be required, pursuant to Treasury Regulations which have not yet
been promulgated in final form, to distribute to its shareholders at least 95%
of the excess (after the payment of any applicable taxes), of (a) the fair
market value of such Recognition Asset as of the beginning of such Recognition
Period over (b) the Company's adjusted basis in such Recognition Asset as of the
beginning of such Recognition Period; provided, however, that any such excess
amount may be offset by the amount, if any, of any losses recognized by the
Company during the same taxable year on the disposition of any Recognition Asset
to the extent that (x) the Company's adjusted basis in such Recognition Asset as
of the beginning of such Recognition Period exceeds (y) the fair market value of
such Recognition Asset upon its disposition. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. To
the extent that the
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Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed ordinary and capital gain income from prior periods, the Company
would be subject to a nondeductible 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company intends to make
timely distributions sufficient to satisfy all annual distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at the Company's REIT taxable income. Further, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciable property which exceeds its
allocable share of cash attributable to that sale. If either of the foregoing
situations arise, the Company may have less cash available for distribution than
is necessary to meet its annual 95% distribution requirement or to avoid tax
with respect to capital gain or the excise tax imposed on certain undistributed
income. To meet the 95% distribution necessary to qualify as a REIT or to avoid
tax with respect to the capital gain or the excise tax imposed on certain
undistributed income, the Company may find it appropriate to arrange for
short-term (or possibly long-term) borrowings to pay distributions or to pay
distributions in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; provided,
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
Failure to Qualify for Taxation as a REIT. If the Company fails to qualify
for taxation as a REIT in any taxable year, and the relief provisions do not
apply, the Company will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporation rates. Distributions
to shareholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. In such event,
to the extent of current and accumulated earnings and profits, all distributions
to shareholders will be taxable as ordinary income, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which the Company ceased to
qualify as a REIT. It is not possible to state whether, in any circumstance, the
Company would be entitled to such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP
General. Substantially all of the Company's investments will be held
through the Operating Partnership. In general, partnerships are "pass-through"
entities which are not subject to federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of the partnership and without regard to deduction and
credit of a partnership, and are potentially subject to tax thereon, without
regard to whether the partners receive a distribution from the partnership. The
Company will include in its income its proportionate share of the foregoing
Operating Partnership items for purposes of the various REIT income tests and in
computation of its REIT taxable income. Moreover, for purposes of the REIT asset
tests, the Company will include its proportionate share of assets held by the
Operating Partnership. See "Taxation of the Company -- General."
Entity Classification. The Company's interest in the Operating Partnership
involves special tax considerations, including the possibility of a challenge by
the IRS of the status of the Operating Partnership as a partnership (as opposed
to an association taxable as a corporation) for federal income tax purposes. If
the Operating Partnership is 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 the Company's assets and items of gross
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<PAGE> 22
income would change, which would preclude the Company from satisfying the asset
tests and the income tests (see "-- Taxation of the Company -- Asset Tests" and
"-- Gross Income Tests"), and in turn would prevent the Company from qualifying
as a REIT. See "-- Taxation of the Company -- Failure to Qualify For Taxation as
a REIT" above for a discussion of the effect of the Company's failure to meet
such tests for a taxable year. In addition, any change in the Operating
Partnership's status for tax purposes might be treated as a taxable event in
which case the Company might incur a tax liability without any related cash
distributions.
An organization formed as a partnership will be treated as a corporation
for federal income tax purposes if it has more than two of the four corporate
characteristics that the Treasury Regulations use to distinguish a partnership
from a corporation. These four characteristics are (i) continuity of life, (ii)
centralization of management, (iii) limited liability and (iv) free
transferability of interests. The Operating Partnership has not requested, and
does not intend to request, a ruling from the IRS that it will be treated as a
partnership for federal income tax purposes.
TAXATION OF SHAREHOLDERS
Taxation of Taxable Domestic Shareholders. As long as the Company qualifies
as a REIT, distributions made to the Company's taxable United States
shareholders out of current or accumulate earnings and profits (and not
designated as capital gain dividends) will be taken into account by such United
States shareholders as ordinary income and corporate recipients will not be
eligible for the dividends received deduction. Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held its Common
Stock. However, corporate shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Distributions in excess of
current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Stock, but rather will reduce the adjusted basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a shareholder's Common Stock,
such distributions will be included in income as long-term capital gain (or
short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
In general, any loss upon a sale or exchange of Common Stock by a
shareholder who has held such shares 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 the Company required to be treated by such
shareholder as long-term capital gain.
Backup Withholding. The Company will report to its United States
shareholders and the IRS the amount of distributions paid during each calendar
year, and the amount of tax withheld, if any. Under the backup withholding
rules, a shareholder may be subject to backup withholding at the rate of 31%
with respect to distributions paid unless such holder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder that does
not provide the Company with its correct taxpayer identification number may also
be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be credited against the shareholder's income tax liability. In
addition, the Company may be required to withhold a portion of capital gain
distributions to any shareholders who fail to certify their nonforeign status to
the Company. See "-- Taxation of Foreign Shareholders."
Taxation of Tax-Exempt Shareholders. Distributions by the Company to a
shareholder that is a tax-exempt entity should not constitute "unrelated
business taxable income" ("UBTI"), as defined in Code
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<PAGE> 23
Section 512(a), provided that the tax-exempt entity has not financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
the Code and the shares are not otherwise used in an unrelated trade or business
of the tax-exempt entity. Notwithstanding the foregoing, under certain
circumstances, a pension trust owning more than 10% of the Company's Common
Stock will be required to treat a percentage of its dividend income from the
Company as UBTI. The applicable percentage is equal to the amount of gross
income of the Company that would be treated as arising from an unrelated trade
or business if the Company were a pension trust, divided by the total gross
income of the Company. This dividend provision will apply only if (i) the
Company satisfied the five-or-fewer share ownership test described above only by
relying on the special rule that treats beneficiaries of a pension trust as
individual shareholders, as opposed to the trust itself, and (ii) either one
pension trust owns more than 25% in value of the Company or a group of pension
trusts individually holding more than 10% of the value of the Company
collectively owns more than 50% of the value of the Company.
Taxation of Foreign Shareholders. The rules governing United States federal
income taxation of non-resident alien individuals, foreign corporations, foreign
partnerships and other foreign shareholders (collectively, "Non-U.S.
Shareholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. Prospective Non-U.S. Shareholders should consult
their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in shares, including any reporting
requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the shares is treated as effectively connected with the
Non-U.S. Shareholder's conduct of a United States trade or business, the
Non-U.S. Shareholder generally will be subject to a tax at graduated rates, in
the same manner as United States shareholders are taxed with respect to such
distributions (and may also be subject to the 30% branch profits tax in the case
of a shareholder that is a foreign corporation). The Company expects to withhold
United States income tax at a rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a non-U.S. Shareholder to the extent that such distributions do
not exceed the adjusted basis of the non-U.S. Shareholder's shares, but rather
will reduce the adjusted basis of such shares. To the extent that distributions
in excess of current and accumulated earnings and profits exceed the adjusted
basis of a Non-U.S. Shareholder's shares, such distributions will give rise to
tax liability if the Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of his shares in the Company, as described
below. If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the distributions will be subject to withholding at the same rate as
dividends. However, amounts thus withheld are refundable if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
United States real property interests are taxed to a Non-U.S. Shareholder as if
such gain was effectively connected with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
United States shareholders (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax
in the hands of a foreign corporate shareholder not entitled to treaty
exemption. The Company is currently required by applicable Treasury Regulations
to withhold 34% of any distribution that could be designated by
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<PAGE> 24
the Company as a capital gains dividend. This amount is creditable against the
Non-U.S. Shareholder FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the shares was held directly or
indirectly by foreign persons. It is currently anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of shares will not
be subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
United States Shareholders with respect to such gain, or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains. If the gain on the sale of shares
were to be subject to taxation under FIRPTA, then, as noted above, the Non-U.S.
Shareholder will be subject to the same treatment as United States shareholders
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
WARRANTS
A holder generally will not recognize income or loss upon the acquisition
of a Warrant. A holder who receives shares upon the exercise of a Warrant should
not recognize gain or loss except to the extent of any cash received for
fractional shares. Such a holder would have a tax basis in the shares acquired
pursuant to a Warrant equal to the amount of the purchase price allocated to the
Warrant plus the amount paid for the shares pursuant to the Warrant. The holding
period for the shares acquired pursuant to a Warrant would begin on the date of
exercise. Upon the subsequent sale of the shares acquired pursuant to a Warrant
or upon a sale of a Warrant, the holder thereof would generally recognize
capital gain or loss in an amount equal to the difference between the amount
realized on the sale and its tax basis in such shares or Warrant, as the case
may be. Such gain or loss would be long-term capital gain or loss if the holding
period for the shares or Warrant sold is more than one year on the date of sale.
The foregoing assumes that Warrants will not be held as a hedge, straddle or as
a similar offsetting position with respect to shares of the Company and that
Code Section 1092 will not apply.
OTHER TAX CONSIDERATIONS
Possible Legislative or Other Actions Affecting Tax
Consequences. Prospective shareholders should recognize that the present federal
income tax treatment of an investment in the Company may be modified by
legislative, judicial or administrative action at any time and that any such
action may affect investments and commitments previously made. The rules dealing
with federal income taxation are constantly under review by persons involved in
the legislative process and by the IRS and the Treasury Department, resulting in
revisions of regulations and revised interpretations of established concepts as
well as statutory changes. Revisions in federal tax laws and interpretations
thereof could adversely affect the tax consequences of an investment in the
Company.
State and Local Taxes. The Company 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 or local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
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PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale or may sell the Offered Securities to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, at prices related to the prevailing market prices
at the time of sale or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of Offered
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of Offered Securities for whom they may act
as agent. Underwriters may sell Offered Securities to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Offered Securities may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against the contribution toward certain
civil liabilities, including liabilities under the Securities Act.
If so indicated in a Prospectus Supplement, the Company will authorize
agents, underwriters or dealers to solicit offers by certain institutional
investors to purchase Offered Securities of the series to which such Prospectus
Supplement relates providing for payment and delivery on a future date specified
in such Prospectus Supplement. There may be limitations on the minimum amount
which may be purchased by any such institutional investor or on the portion of
the aggregate principal amount of the particular Offered Securities which may be
sold pursuant to such arrangements. Institutional investors to which such offers
may be made, when authorized, include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and such other institutions as may be approved by the Company. The
obligations of any such purchasers pursuant to such delayed delivery and payment
arrangements will not be subject to any conditions except that (i) the purchase
by an institution of the particular Offered Securities shall not at the time of
delivery be prohibited under the laws of any jurisdiction in the United States
to which such institution is subject and (ii) if the particular Offered
Securities are being sold to underwriters, the Company shall have sold to such
underwriters the total principal amount of such Offered Securities or number of
Warrants less the principal amount or number thereof, as the case may be,
covered by such arrangements. Underwriters will not have any responsibility in
respect of the validity of such arrangements or the performance of the Company
or such institutional investors thereunder.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
ERISA MATTERS
The Company may be considered a "party in interest" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and a
"disqualified person" under corresponding provisions of the Code with respect to
certain employee benefit plans. Certain transactions between an employee benefit
plan and a party in interest or a disqualified person may result in "prohibited
transactions" within the meaning of ERISA and the Code, unless such transactions
are effected pursuant to an applicable
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<PAGE> 26
exemption. Any employee benefit plan or other entity subject to such provisions
of ERISA or the Code proposing to invest in the Offered Securities should
consult its legal counsel.
LEGAL MATTERS
Certain legal matters in connection with the Offered Securities, including
the validity of the Offered Securities, will be passed upon for the Company by
Rudnick & Wolfe, Chicago, Illinois. Attorneys of that firm who participated in
the preparation of this Prospectus own a total of 4,000 shares of HGI Common
Stock.
EXPERTS
The audited financial statements and schedules incorporated by reference in
this Prospectus and elsewhere in this Registration Statement to the extent and
for the periods indicated in their reports have been audited by Ernst & Young
LLP (as successor to Kenneth Leventhal & Company) and Deloitte & Touche LLP,
independent accountants, and are incorporated by reference herein in reliance
upon the authority of said firms as experts in giving said reports.
Future financial statements of the Company and the reports thereon of Ernst
& Young LLP also will be incorporated by reference in this Prospectus in
reliance upon the authority of that firm as experts in giving those reports to
the extent said firm has audited those financial statements and consented to the
use of their reports thereon.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... S-2
Information Incorporated by Reference... S-2
The Company............................. S-3
Recent Developments..................... S-4
Use of Proceeds......................... S-4
Price Range of Common Stock and
Distributions......................... S-5
Underwriting............................ S-6
Legal Matters........................... S-6
Experts................................. S-6
PROSPECTUS
Available Information................... 2
Information Incorporated by Reference in
this Prospectus....................... 3
The Company............................. 4
Ratios of Earnings To Fixed Charges..... 5
Use of Proceeds......................... 5
Description of the Capital Stock of the
Company............................... 6
Description of Warrants................. 9
Federal Income Tax Considerations....... 10
Plan of Distribution.................... 19
ERISA Matters........................... 19
Legal Matters........................... 20
Experts................................. 20
</TABLE>
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1,500,000 SHARES
HORIZON GROUP, INC.
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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SMITH BARNEY INC.
JULY 17, 1996
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