Rule 424(b)(3)
Registration Statement No. 33-95730
PROSPECTUS
919,462 SHARES
HORIZON GROUP, INC.
COMMON STOCK
PAR VALUE $.01 PER SHARE
This Prospectus relates to 919,462 outstanding shares (the "Resale
Shares") of common stock, par value $.01 per share ("Common Stock"), of Horizon
Group, Inc., a Michigan corporation ("Company"), held by an affiliate of the
Company.
The Resale Shares may hereafter be offered or sold from time to time
for the account of the person named under the caption "Selling Shareholder" on
the New York Stock Exchange, other stock exchanges, or otherwise, at prices and
on terms then obtainable, in broker's transactions, special offerings, exchange
distributions, negotiated transactions, block transactions, or otherwise. (See
"Selling Shareholder" and "Plan of Distribution.") The Company will not realize
any proceeds from any sale of the Resale Shares.
The Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol HGI. On May 29, 1997, the last reported sale price of Common
Stock on the New York Stock Exchange was $13.00.
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 JUNE 2, 1997.
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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 Resale Shares. 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, files 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 also 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 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 HORIZON GROUP, INC., ATTENTION: SECRETARY, 5000 HAKES
DRIVE, NORTON SHORES, MICHIGAN 49441.
INFORMATION INCORPORATED BY REFERENCE
IN THIS PROSPECTUS
The following documents filed with the Commission by the Company
pursuant to the Exchange Act are hereby incorporated by reference in this
Prospectus:
<PAGE>
(a) The Company's Annual Report on Form 10-K (File No.
1-12424) for the fiscal year ended December 31, 1996.
(b) The Company's Quarterly Report on Form 10-Q (File No.
1-12424) for the quarter ended March 31, 1997.
(c) The Company's Current Report on Form 8-K (File No.
1-12424) dated February 26, 1997.
(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 and
prior to the termination of the offering of the Resale Shares 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.
THIS PROSPECTUS, INCLUDING DOCUMENTS INCORPORATED BY REFERENCE,
CONTAINS 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, 1996, AND THE COMPANY'S QUARTERLY REPORT
ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 1997, WHICH ARE INCORPORATED
BY REFERENCE IN THIS PROSPECTUS.
THE COMPANY
The Company is one of the largest developers, owners and operators of
outlet centers in the United States. As of December 1, 1996, the Company owned
and operated 37 outlet centers containing an aggregate of approximately 9.4
million square feet of total gross leasable area
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("GLA") located in 20 states.
Since its inception in 1984, the Company and its predecessors have
acquired or developed outlet centers containing over 9.4 million square feet of
GLA and have developed 34 of its 37 existing centers. Commencing with its
taxable year ended December 31, 1994, the Company has elected to be a treated as
a real estate investment trust ("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 Internal Revenue Code of 1986 (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's properties are held by, and all of the Company's
operations are conducted through Horizon/Glen Outlet Centers Limited
Partnership, a Delaware limited partnership (the "Operating Partnership"). The
Company is the general partner of the Operating Partnership and owns
approximately 81.6% of the units of partnership interest (the "Units") of the
Operating Partnership outstanding as of December 31, 1996. The Units are
redeemable, subject to certain limitations to protect the Company's status as a
REIT, into shares of Common Stock of the Company on a unit-for-share basis.
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 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.
DESCRIPTION OF COMMON STOCK
The following paragraphs summarize certain provisions of Michigan law
and the Company's Articles of Incorporation and Bylaws. The summary of the terms
of the Common Stock 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. As of
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May 8, 1997, there were 23,813,203 shares of Common Stock issued and
outstanding.
COMMON STOCK
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 they 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,
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may only be amended, altered or repealed by the affirmative vote of holders of
not less 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.
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 capital stock ("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 attribution 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
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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. All shares of Excess Stock shall be deemed to have been offered for
sale to the Company or its designee at a price per share equal to the lesser of
(i) the price in the transaction that results in the exchange of Common Stock or
Preferred Stock into Excess Stock, or (ii) the Fair Market Value (which is
defined in the Articles of Incorporation by reference to the average closing
sale price of Common Stock as reported on the New York Stock Exchange) 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.
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 REIT 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
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Incorporation even if the REIT 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.
SELLING SHAREHOLDER
The Resale Shares may be offered from time to time for the account of
Jeffrey A. Kerr. Until February 8, 1997, Mr. Kerr served as Chairman of the
Board of Directors, President and Chief Executive Officer of the Company, and
until April 2, 1997, he served as a Director of the Company. The table sets
forth information as of December 31, 1996 with respect to the beneficial
ownership of the Common Stock by the Selling Shareholder.
<TABLE>
<CAPTION>
SELLING SHAREHOLDER NUMBER OF SHARES OF NUMBER OF SHARES OF NUMBER OF RESALE
COMMON STOCK COMMON STOCK WHICH SHARES WHICH MAY BE
BENEFICIALLY OWNED MAY BE OFFERED OWNED AFTER OFFERING
PRIOR TO OFFERING
<S> <C> <C> <C>
Jeffrey A. Kerr 1,325,706 919,462 407,244*
</TABLE>
* The Company has previously filed a Registration Statement under the
Securities Act with the Commission relating to these shares, which
Registration Statement remains effective as of the date of this
prospectus.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the principal material federal income
tax considerations regarding the Company's Common Stock. 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,
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HER OR IT OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON STOCK OF 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.
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.
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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, the excess, if
any, of (a) the fair market value of such Recognition Asset as of the beginning
of such Recognition Period (the "Built-In Gain"), over (b) the REIT's adjusted
basis in such asset as of the beginning of the Recognition Period 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 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
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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 will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed.
In order to qualify as a REIT, the Company must meet, among others, the
following requirements:
SHARE OWNERSHIP TESTS. The Company's 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 described in Section
401(a) of the Code 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. However, a
pension trust will be treated as a single shareholder for purposes of this test
if one or more "disqualified persons" with respect to such trust hold in the
aggregate 5% or more in value of the REIT's shares and the REIT has accumulated
earnings and profits attributable to any pre-REIT period. For purposes of the
foregoing rule, a disqualified person includes a fiduciary of the trust, an
employer any of whose employees are covered by the plan of which the trust is a
part, an employee organization any of whose employees are covered by the plan of
which the trust is a part, an owner (direct or indirect) of 50% or more of an
employer or employee organization referred to above and certain other affiliates
as of an individual referred to above.
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."
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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, the value of 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 HGI Management Corp. (the "HGI Management Company"),
MG Third Party Services Corp. (the "MG Management Company") and certain other C
corporations (the "Financing Subsidiaries") that are the sole general partners
of certain financing partnerships that have entered into loan transactions with
various lenders. 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, the MG Management Company
and the Financing Subsidiaries. Because the Operating Partnership owns only 5%
of the voting securities of each of the HGI Management Company, the MG
Management Company and the Financing Subsidiaries, the 10% limitation on
holdings of voting securities of any one issuer is not exceeded. In addition,
based upon its comparison of the total estimated value of the HGI Management
Company, the MG Management Company and the Financing Subsidiaries securities
owned by the Operating Partnership to the estimated value of the total assets
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 is not 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
at the end of any quarter in which the Company acquires securities (directly or
through the Operating Partnership), but also at the end of any quarter in which
the Company increases its interest in each of the HGI Management Company, the MG
Management Company, the Financing Subsidiaries or acquires other property. In
this respect, if any partner of the Operating Partnership exercises its option
to redeem or exchange Units for shares of Common Stock, the Company will thereby
increase its proportionate (indirect) ownership interest in each of the HGI
Management Company, the MG Management Company and the Financing Subsidiaries,
thus requiring the Company to reassess 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
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the 5% value test for any quarter with respect to which reassessment 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, the MG Management Company or the Financing
Subsidiaries.
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 allocable 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 REITs as well as gain from
the sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of 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
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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 in which it has a
partial ownership interest. The Company believes that all services provided by
the HGI Management Company and the 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 does not and 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.
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 the 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 the MG Management
Company will be in the form of dividends on the HGI Management Company stock and
the 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
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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 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
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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
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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 classification 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 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. 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.
TAX CONSEQUENCES OF REDEMPTION/EXCHANGE OF UNITS
The partnership agreement of the Operating Partnership (the "Operating
Partnership Agreement") provides each Unit holder (other than the Company) with
the right, subject to certain limitations, to require the Operating Partnership
to redeem all or a portion of his, her or its Units for an equal number of
shares of Common Stock (subject to certain adjustments to prevent dilution) or,
at the option of the Company, the cash equivalent of that number of shares of
Common Stock. Alternatively, the Company can assume the redemption obligation of
the Operating Partnership and exchange an equal number of shares of Common Stock
or its cash equivalent for such Units. (A Unit holder's right to require the
redemption of Units is referred to herein as the "Redemption Right").
ASSUMPTION OF REDEMPTION OBLIGATION BY THE COMPANY. If the Company
assumes and performs the redemption obligation, the Operating Partnership
Agreement provides that the redemption will be treated by the Company, the
Operating Partnership and the Unit holder as a sale of Units by such Unit holder
to the Company. In that event, such sale will be fully taxable to the Unit
holder, and such Unit holder will be treated as realizing for federal income tax
purposes an amount equal to the sum of the cash or the value of the Common Stock
received in the exchange plus the amount of any Operating Partnership
liabilities allocable to the applicable Units at the time of the transfer. The
methodology used by the Operating Partnership to allocate its liabilities to the
Unit holders, which is based on principles set forth in Treasury Regulations,
will likely result in a varying amount of such liabilities being allocated to
different Unit holders.
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Accordingly, it is possible that Unit holders who hold an identical number of
Units are allocated different amounts of liabilities of the Operating
Partnership for federal income tax purposes. The determination of gain or loss
will be based on the difference between the amount realized by the Unit holder
as described above and the adjusted tax basis for such Units. The tax liability
resulting from such gain could exceed the amount of cash received upon
disposition. Generally, a Unit holder's adjusted basis for federal income tax
purposes in his, her or its Units will be equal to the amount of money and fair
market value of property he, she or it contributes to the Operating Partnership,
plus (i) his, her or its allocable share of the liabilities of the Operating
Partnership, plus (ii) his, her or its allocable share of the profits of the
Operating Partnership, less (iii) distributions to such Unit holder by the
Operating Partnership, less (iv) his, her or its allocable share of the losses
of the Operating Partnership.
REDEMPTION OF UNITS FOR CASH. If the Company does not elect to assume
the Operating Partnership's obligation to redeem, and the Operating Partnership
chooses to redeem a Unit holder's Units for cash that is not contributed by the
Company to effect the redemption, the redeeming Unit holder would be treated as
realizing an amount equal to the cash received plus the amount of the Operating
Partnership liabilities allocable to the redeemed Units at the time of
redemption. However, if the Operating Partnership redeems less than all of a
Unit holder's Units for cash that is not contributed by the Company to effect
the redemption, the Unit holder would (i) recognize taxable gain only to the
extent that the cash, plus the amount of the Operating Partnership liabilities
allocable to the redeemed Units, exceeded the Unit holder's adjusted basis in
all of such Unit holder's Units immediately before the redemption, and (ii) not
be permitted to recognize any loss realized on the redemption.
REDEMPTION OF UNITS FOR COMMON STOCK. If the Company does not elect to
assume the Operating Partnership's obligation to redeem, and the Operating
Partnership redeems such Units for shares of Common Stock that the Company
contributes to the Operating Partnership to effect such redemption, the
redemption may be treated for tax purposes as a sale of such Units to the
Company in a fully taxable transaction, although there is no authority that
considers these facts in light of applicable legal precedent, and thus the
matter is not certain. In that event, the redeeming Unit holder would be treated
in the manner described in the preceding paragraph (i.e., as realizing an amount
equal to the value of the shares of Common Stock received in the exchange plus
the amount of any Operating Partnership liabilities allocable to the redeemed
Units at the time of the redemption).
If the redemption of the Units for Common Stock is not treated as a
sale for tax purposes as described above, the distribution of the Common Stock
to the Unit holder would, in general, be a taxable event only to the extent the
amount of Operating Partnership liabilities allocable to the redeemed Units at
the time of the redemption exceeded the Unit holder's adjusted basis in his
Units at the time of such redemption. However, a redemption for a payment of
Common Stock that is effected within five years of (i) with respect to Unit
holders who were former partners of Horizon Outlet Centers Limited Partnership
(the "Horizon Partnership"), the consolidation of the Horizon Partnership and
McG Outlet Centers Limited Partnership ("McArthur/Glen Operating
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Partnership") effective as of July 14, 1995, or (ii) with respect to Unit
holders who were former partners of the McArthur/Glen Operating Partnership, the
date of the organization of the McArthur/Glen Operating Partnership, could
result in the recognition of income to such Unit holder, in an amount equal to
the lesser of (A) the excess of the value of the Common Stock received over the
tax basis of the Unit holder in all of his, her or its Units, as such basis is
reduced by the amount of such Unit holder's share of the Operating Partnership
liabilities allocable to the redeemed Units or (B) the Unit holder's share of
pre-contribution appreciation in assets previously contributed by such partner
to such partner's PREVIOUS partnership (i.e., the Horizon Partnership or
McArthur/Glen Operating Partnership) in exchange for an interest therein,
determined as of the time of such contribution. Except as described below, a
redemption for Common Stock that occurs more than five years after the above
periods should generally result in no gain or loss to a redeeming Unit holder,
except to the extent that gain would result if the Unit holder's share of the
Operating Partnership's liabilities allocable to the redeemed Units exceeded the
adjusted tax basis of the Unit holder in his, her or its Units immediately
before the redemption.
Moreover, even if gain is not recognized under the rules described in
the immediately preceding paragraph, Code Section 731(c) could be applied to
result in the recognition of gain to a Unit holder on the redemption of all or a
portion of his Units in exchange for a payment of Common Stock. Under Code
Section 731(c), distributions of marketable securities generally are treated as
cash distributions. In the case of the distribution of Common Stock pursuant to
the exercise by a Unit holder of his Redemption Right, the Common Stock
distributed would be considered to be marketable securities treated as cash, but
in that case, under Code Section 731(c), the amount of gain that would otherwise
be recognized by the distributee Unit holder would be reduced (but not below
zero) by an amount equal to the excess of (i) the amount of gain that would have
been allocable to such Unit holder under the Operating Partnership Agreement if
all of the Common Stock had been sold by the Operating Partnership rather than
distributed to the Unit holder pursuant to the exercise of the Redemption Right
over (ii) such Unit holder's distributive share of the net gain attributable to
such marketable securities held by the Operating Partnership after the
distribution. Under this exception, a distribution consisting solely of Common
Stock to a Unit holder in connection with the exercise of the Redemption Right
may reduce, but may not eliminate, the taxable gain that would otherwise be
recognized by the Unit holder as a result of such redemption.
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
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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 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
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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
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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 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).
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
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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.
PLAN OF DISTRIBUTION
The Selling Shareholder may offer and sell Resale Shares by means of
the Prospectus in one or more transactions on the NYSE or otherwise, in special
offerings, exchange distributions or secondary distribution pursuant to or in
accordance with the rules of the NYSE, in negotiated transactions through the
writing of options of the Resale Shares or a combination of such methods of
sale; the selling price of the Resale Shares may be at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices.
The Selling Shareholder and any brokers or dealers that act in
connection with the sale of Resale Shares hereunder may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and any
commissions received by them and any profit on the sale of Resale Shares as
principal may be deemed to be underwriting discounts and commissions under the
Securities Act.
The Company will pay all of the expenses of the preparation, printing
and filing of the Registration Statement, any amendments or supplements thereto,
and prospectuses and revised prospectuses as required to cover the transactions
covered hereby, as well as the Company's fees and disbursements of its counsel
and accountants relating to the Registration Statement, but the Company is not
obligated to pay any underwriting discounts and commissions, the legal fees and
expenses of the Selling Shareholder or transfer taxes, if any, relating to the
sale or disposition of Resale Shares by the Selling Shareholder.
The Selling Shareholder may also resell shares of Common Stock in open
market transactions pursuant to the resale provisions of Rule 144 under the
Securities Act or in transactions otherwise permitted under the Securities Act.
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 exemption. Any
employee benefit plan or other entity subject to such provisions of ERISA or the
Code proposing to invest
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in the Resale Shares should consult its legal counsel.
LEGAL MATTERS
Certain legal matters in connection with the Resale Shares, including
the validity of the Resale Shares, 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 4,100 shares of Common Stock.
EXPERTS
The consolidated financial statements and schedule of the Company
incorporated by reference or included in the Company's Annual Report (Form 10-K)
for the year ended December 31, 1996, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon incorporated by
reference or included therein and incorporated herein by reference. Such
financial statements and schedule are, and audited financial statements to be
included in subsequently filed documents will be, incorporated herein in
reliance upon the reports of Ernst & Young LLP pertaining to such financial
statements (to the extent covered by consents filed with the Securities and
Exchange Commission) given upon the authority of such firm as experts in
accounting and auditing.
