<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1996
REGISTRATION NO. 333-1666
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRIME RETAIL, INC.
(Exact name of Registrant as specified in governing instruments)
100 EAST PRATT STREET
NINETEENTH FLOOR
BALTIMORE, MARYLAND 21202
(410) 234-0782
(Address of principal executive offices)
MICHAEL W. RESCHKE
CHAIRMAN OF THE BOARD
PRIME RETAIL, INC.
100 EAST PRATT STREET
NINETEENTH FLOOR
BALTIMORE, MARYLAND 21202
(410) 234-0782
(Name and address of agent for service)
--------------------------
COPIES TO:
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<S> <C>
Wayne D. Boberg, Esq. J. Warren Gorrell, Jr., Esq.
Steven J. Gavin, Esq. Bruce W. Gilchrist, Esq.
Winston & Strawn Hogan & Hartson L.L.P.
35 West Wacker Drive Columbia Square
Chicago, Illinois 60601 555 13th Street, NW
Washington, DC 20004
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--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________________
If this Form is post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PRIME RETAIL, INC.
Cross Reference Sheet Pursuant to Rule 404(a) of the Securities Act and Item
501(b) of Regulation S-K, Showing the Location or Heading in the Prospectus of
the Information Required by Part I of Form S-11.
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ITEMS NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
- ------------------------------------------------------ -------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover Page and Outside Back
Cover Page of Prospectus; Available
Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Outside Front Cover Page; Prospectus
Summary; Risk Factors; The Company
4. Determination of Offering Price............ Outside Front Cover Page; Underwriting
5. Dilution................................... Dilution
6. Selling Security Holders................... Principal Security Holders and Selling
Security Holder of the Company
7. Plan of Distribution....................... Outside Front Cover Page; Underwriting
8. Use of Proceeds............................ Use of Proceeds; Business and Properties
9. Selected Financial Data.................... Selected Financial Data
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11. General Information as to Registrant....... Prospectus Summary; The Company
12. Policy with Respect to Certain
Activities................................ Prospectus Summary; The Company; Policies
With Respect To Certain Activities
13. Investment Policies of Registrant.......... Prospectus Summary; The Company; Policies
With Respect To Certain Activities
14. Description of Real Estate................. Prospectus Summary; The Company; Business
and Properties
15. Operating Data............................. Prospectus Summary; The Company; Business
and Properties
16. Tax Treatment of Registrant and its
Security Holders.......................... Prospectus Summary; Certain Federal Income
Tax Considerations
17. Market Price of and Distribution on the
Registrant's Common Equity and Related
Stockholder Matters....................... Price Range of Common Stock and
Distribution History; Description of
Capital Stock; Shares Available for Future
Sale
18. Description of Registrant's Securities..... Description of Capital Stock; Certain
Provisions of Maryland Law and of the
Company's Charter and Bylaws; Underwriting
19. Legal Proceedings.......................... Business and Properties
</TABLE>
<PAGE>
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<CAPTION>
ITEMS NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
- ------------------------------------------------------ -------------------------------------------
<C> <S> <C>
20. Security Ownership of Certain Beneficial
Owners and Management..................... Management; Principal Security Holders and
Selling Security Holder of the Company
21. Directors, Executive Officers, Promoters
and Control Persons....................... Management
22. Executive Compensation..................... Management
23. Certain Relationships and Related
Transactions.............................. Certain Relationships and Transactions
24. Selection, Management and Custody of
Registrant's Investments.................. Policies With Respect To Certain Activities
25. Policies with Respect to Certain
Transactions.............................. Policies With Respect To Certain Activities
26. Limitations of Liability................... Management
27. Financial Statements and Information....... Prospectus Summary; Selected Financial
Data; Financial Statements
28. Interests of Named Experts and Counsel..... Legal Matters
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 25, 1996
[LOGO] PRIME RETAIL, INC. [LOGO]
3,795,328 SHARES
COMMON STOCK
---------------------
Of the 3,795,328 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering"), 3,705,000 shares are being
sold by Prime Retail, Inc. (the "Company") and 90,328 shares are being offered
by KILICO Realty Corporation (the "Selling Stockholder"). The Company will not
receive any proceeds from shares sold by the Selling Stockholder. The Company is
a self-administered and self-managed real estate investment trust ("REIT")
engaged in the ownership, development, construction, acquisition, leasing,
marketing and management of factory outlet centers. All of the Company's
business and operations are conducted through Prime Retail, L.P. (the "Operating
Partnership"). The Company has paid and intends to continue to pay regular
quarterly distributions to the holders of the Common Stock.
On June 24, 1996 the Company's offer to exchange (the "Exchange Offer")
shares of its Common Stock for outstanding shares of the Company's 8.5% Series B
Cumulative Participating Convertible Preferred Stock, $.01 par value per share
(the "Convertible Preferred Stock") expired by its terms and 4,076,498 (or
58.1%) of the outstanding shares of Convertible Preferred Stock were tendered to
be exchanged for 6,522,394 shares of Common Stock. On June 25, 1996 the Company
accepted all shares tendered for exchange pursuant to the terms and conditions
of the Exchange Offer.
The Common Stock is quoted in the Nasdaq National Market under the trading
symbol "PRME". On June 24, 1996, the last reported sale price of the Common
Stock on the Nasdaq National Market was $11.50 per share. See "Price Range of
Common Stock and Distribution History."
Ownership of the Common Stock is restricted in the charter of the Company
(the "Charter"), subject to certain exceptions, to 9.9% of the outstanding
shares of Common Stock. See "Description of Capital Stock -- Restrictions on
Ownership and Transfer."
SEE "RISK FACTORS" COMMENCING ON PAGE 18 HEREOF FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE COMMON
STOCK, INCLUDING THE FOLLOWING RISKS:
- the Company may be unable to repay or refinance aggregate debt of $172.8
million maturing by December 31, 1996 or may be unable to finance the
Company's planned development activities;
- the Company's inability to pay any distributions in respect of the Common
Stock unless current and accumulated dividends and distributions,
respectively, on all shares of the Company's 10.5% Series A Senior
Cumulative Preferred Stock (the "Senior Preferred Stock") and Convertible
Preferred Stock have been paid in full;
- the Company's inability to increase distributions in respect of the Common
Stock unless and until the Company has achieved and maintained certain
cash flow levels as set forth in the Operating Partnership Agreement (as
defined herein);
- the Company's presentation of Funds from Operations (as defined herein)
may not be comparable to similarly titled measures used by competitors and
based on the recent clarification of the definition of Funds from
Operations by The National Association of Real Estate Investment Trusts
("NAREIT"), the Company may report lower Funds from Operations under the
new NAREIT definition;
- the conflicts of interest between the Company and the limited partners of
the Operating Partnership and their affiliates and between the Company and
its officers and directors, and the potential significant influence of
such limited partners or their affiliates over the affairs of the Company;
- the immediate and substantial dilution of net tangible book value in the
amount of $11.31 per share to purchasers of Common Stock as a result of
the Offering and the Exchange Offer; and
- the taxation of the Company as a regular corporation if it fails to
qualify as a REIT.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT (1) THE COMPANY (2) STOCKHOLDER
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Per Share of Common Stock.............. $ $ $ $
Total (3).............................. $ $ $ $
</TABLE>
- --------------------------
(1) The Company, the Operating Partnership and the Selling Stockholder have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act").
(2) Before deducting estimated offering expenses of $ payable by the
Company.
(3) The Company has granted the Underwriters an option, exercisable for 30 days
after the date hereof, to purchase up to 555,750 additional shares of Common
Stock at the Price to Public per share, less the Underwriting Discount,
solely to cover over-allotments. If such option is exercised in full, the
Price to Public, Underwriting Discount and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
--------------------------
The Common Stock is offered by the Underwriters, subject to prior sale, when
as and if delivered to and accepted by the Underwriters, subject to the right to
withdraw, modify, correct and reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made in Washington, D.C. on
or about , 1996.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
The date of this Prospectus is , 1996.
<PAGE>
[ARTWORK]
------------------------
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.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF
COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY...................................................................................................... 1
The Company........................................................................................................... 1
Risk Factors.......................................................................................................... 2
Business and Properties............................................................................................... 3
Strategies for Growth................................................................................................. 6
Structure of the Company and the Operating Partnership................................................................ 7
The Exchange Offer.................................................................................................... 10
The Offering.......................................................................................................... 12
Tax Status of the Company............................................................................................. 13
Summary Selected Financial Data....................................................................................... 14
RISK FACTORS............................................................................................................ 18
Leverage; Uncertainty of Ability to Fund Debt Repayments and Future Development....................................... 18
Floating Rate Debt.................................................................................................... 19
Ability to Pay Common Stock Distributions and Increase Common Stock Distributions..................................... 19
Risk Resulting from Change in Definition of Funds From Operations; Risk that the Company's Definition of Funds From
Operations May Not Be Comparable to Definition Used By Competitors................................................... 20
Conflicts of Interest and Influence of Limited Partners and Officers and Directors.................................... 20
Immediate and Substantial Dilution Resulting to Purchasers of Common Stock............................................ 21
Adverse Impact of the Failure to Continue to Qualify as a REIT........................................................ 22
Effect of REIT Distribution Requirements.............................................................................. 22
Consequences of Failure to Continue to Qualify as Partnerships........................................................ 22
Historical Net Losses and the Future Net Losses....................................................................... 23
Risks Related to the Brief History of the Outlet Center Industry, the Competition within the Industry and the
Company's Limited Operating History and Rapid Growth................................................................. 23
Risks of Development Activities....................................................................................... 24
Risks Associated with the Grove City Purchase......................................................................... 24
No Limitation on Incurrence of Debt................................................................................... 25
Ability to Change Certain Policies Without Stockholder Approval....................................................... 25
Risk of Changes in Price of Common Stock.............................................................................. 26
General Real Estate Investment Risks.................................................................................. 26
Possible Liability Relating to Environmental Matters.................................................................. 27
Limits on Changes in Control.......................................................................................... 27
Possible Adverse Effects on Stock Price Arising from Shares Available for Future Sale................................. 28
Ownership Limit Necessary to Maintain REIT Qualification.............................................................. 28
THE COMPANY............................................................................................................. 29
Strategies for Growth................................................................................................. 30
Competitive Advantages in Pursuing New Development Opportunities...................................................... 32
Structure of the Company and the Operating Partnership................................................................ 33
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY.................................................................... 35
USE OF PROCEEDS......................................................................................................... 36
CAPITALIZATION.......................................................................................................... 37
DILUTION................................................................................................................ 40
SELECTED FINANCIAL DATA................................................................................................. 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 45
Introduction.......................................................................................................... 45
Portfolio Growth...................................................................................................... 45
Results of Operations................................................................................................. 45
Liquidity and Capital Resources....................................................................................... 54
BUSINESS AND PROPERTIES................................................................................................. 62
General............................................................................................................... 62
The Company's Outlet Centers.......................................................................................... 62
</TABLE>
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PAGE
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<S> <C>
Community Shopping Centers............................................................................................ 78
Lease Expirations for the Company's Entire Portfolio of Properties.................................................... 79
Competition........................................................................................................... 79
Relationship with Municipalities...................................................................................... 80
Mortgage and Other Debt Financing of the Company...................................................................... 80
Joint Venture Financing............................................................................................... 85
Certain Tax Information............................................................................................... 86
Insurance............................................................................................................. 86
Employees............................................................................................................. 86
Legal Proceedings..................................................................................................... 86
Environmental Matters................................................................................................. 87
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................................................................. 87
Investment Objectives and Policies.................................................................................... 87
Distribution and Dividend Policy...................................................................................... 88
Financing Policies.................................................................................................... 88
Conflict of Interest Policies......................................................................................... 89
Working Capital Reserves.............................................................................................. 90
Policies with Respect to Other Activities............................................................................. 90
MANAGEMENT.............................................................................................................. 91
Directors............................................................................................................. 91
Committees of the Board of Directors.................................................................................. 92
Compensation of Directors............................................................................................. 92
Executive Officers.................................................................................................... 93
Biographies of Executive Officers..................................................................................... 93
Compensation of Executives............................................................................................ 96
Employment Agreements and Change of Control Agreements................................................................ 96
Option Grants in 1995................................................................................................. 97
Stock Incentive Plans................................................................................................. 98
Compensation Committee Interlocks and Insider Participation........................................................... 100
CERTAIN RELATIONSHIPS AND TRANSACTIONS.................................................................................. 101
OPERATING PARTNERSHIP AGREEMENT......................................................................................... 104
Management............................................................................................................ 104
Transferability of Interests.......................................................................................... 104
Additional Funds...................................................................................................... 104
Registration Rights................................................................................................... 104
Tax Matters........................................................................................................... 105
Operations............................................................................................................ 105
Distributions......................................................................................................... 105
Limited Partner Exchange Rights....................................................................................... 106
Indemnification....................................................................................................... 106
Duties and Conflicts.................................................................................................. 106
Representations and Warranties........................................................................................ 106
Term.................................................................................................................. 107
PRINCIPAL SECURITY HOLDERS AND SELLING SECURITY HOLDER OF THE COMPANY................................................... 107
DESCRIPTION OF CAPITAL STOCK............................................................................................ 110
Authorized Shares..................................................................................................... 110
Senior Preferred Stock................................................................................................ 111
Convertible Preferred Stock........................................................................................... 114
Common Stock.......................................................................................................... 119
Restrictions on Ownership and Transfer................................................................................ 120
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS.............................................. 123
Classification of the Board of
Directors............................................................................................................ 123
</TABLE>
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PAGE
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Removal of Directors.................................................................................................. 124
Business Combinations................................................................................................. 124
Control Shares Acquisitions........................................................................................... 124
Amendment to the Charter.............................................................................................. 125
Advance Notice of Director Nominations and New Business............................................................... 125
SHARES AVAILABLE FOR FUTURE SALE........................................................................................ 126
Registration Rights................................................................................................... 127
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................................................................... 127
General............................................................................................................... 128
Taxation of the Company............................................................................................... 128
Requirements for Qualification........................................................................................ 129
Failure to Qualify.................................................................................................... 134
Taxation of Taxable U.S. Stockholders................................................................................. 134
Taxation of Tax-Exempt Stockholders................................................................................... 135
Taxation of Non-U.S. Stockholders..................................................................................... 136
Information Reporting Requirements and Backup Withholding Tax......................................................... 137
Tax Aspects of the Company's Investments in Partnerships.............................................................. 137
Partnership Classification............................................................................................ 138
Income Taxation of the Partnerships and Their Partners................................................................ 138
Other Tax Considerations.............................................................................................. 140
LEGAL MATTERS........................................................................................................... 140
EXPERTS................................................................................................................. 140
AVAILABLE INFORMATION................................................................................................... 140
INDEX TO FINANCIAL STATEMENTS........................................................................................... F-1
UNDERWRITING............................................................................................................ U-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) THE COMPLETION OF THE
OFFERING AT A PRICE PER SHARE TO THE PUBLIC OF $11.75, (II) THE EXCHANGE BY THE
SELLING STOCKHOLDER OF 90,328 COMMON UNITS (AS DEFINED HEREIN) FOR A LIKE NUMBER
OF SHARES OF COMMON STOCK, (III) CONSUMMATION OF THE EXCHANGE OFFER WHICH
EXPIRED ON JUNE 24, 1996 WITH 4,076,498 (OR 58.1%) OF THE OUTSTANDING SHARES OF
CONVERTIBLE PREFERRED STOCK TENDERED TO BE EXCHANGED FOR 6,522,394 SHARES OF
COMMON STOCK (IV) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED,
(V) THE PAYMENT OF THE SPECIAL DISTRIBUTION (AS DEFINED HEREIN) TO HOLDERS OF
COMMON STOCK EXISTING AFTER COMPLETION OF THE EXCHANGE OFFER BUT PRIOR TO THE
OFFERING, AND (VI) THE CONSUMMATION OF THE COMMON UNIT CONTRIBUTION (AS DEFINED
HEREIN). ALL REFERENCES TO THE "COMPANY" IN THIS PROSPECTUS MEAN THE COMPANY AND
THOSE ENTITIES OWNED OR CONTROLLED BY THE COMPANY, INCLUDING THE OPERATING
PARTNERSHIP, PRIME RETAIL SERVICES LIMITED PARTNERSHIP (THE "SERVICES
PARTNERSHIP"), PRIME RETAIL FINANCE, INC. AND PRIME RETAIL FINANCE II, INC.
(TOGETHER WITH PRIME RETAIL FINANCE, INC., THE "FINANCE CORPORATIONS"), UNLESS
THE CONTEXT INDICATES OTHERWISE.
THE COMPANY
The Company is a self-administered and self-managed REIT that develops, owns
and operates factory outlet centers in the United States. The Company's
portfolio includes 17 outlet centers in 14 states with more than 4.3 million
square feet of gross leasable area(1) ("GLA") that was 94% leased with fully
executed leases for 1,155 retail stores as of March 31, 1996. Since the
Company's initial public offering in March 1994 (the "Initial Public Offering"),
the Company's portfolio of factory outlet centers has grown by 100.8%, or
approximately 2,174,000 square feet of GLA, representing the development of
seven new factory outlet centers, the expansion of six existing centers and the
acquisition of one new outlet center. The Company intends to continue to build
on its reputation and experience in the outlet center business and to capitalize
on current trends in value-oriented retailing. During 1996, the Company expects
to open between 700,000 and 900,000 square feet of additional GLA through the
construction of two new factory outlet centers and the completion of several
planned expansions of its existing centers; however, there can be no assurance
that the Company's new construction and planned expansions will be completed in
1996. The Company's growth has continued since the Initial Public Offering even
though merchant sales per square foot, on a national basis and for the Company,
have decreased or remained flat. See "Business and Properties" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company believes the growth of its GLA from the construction of new
centers and expansions is attributable to its ability to develop innovative
strategies to differentiate itself from competing outlet centers and retail
stores. The Company's centers reflect architecture and design styles consistent
with the traditions and styles of the communities where the centers are located.
Garden walkways, village-style layouts, fountains, playgrounds, concierges and
customer service centers are among the amenities that are typical in the
Company's factory outlet centers. Such amenities are designed to create an
atmosphere which promotes longer customer visits and more frequent repeat
visits.
Factory outlet centers are part of a retail sector known as value retailing.
The factory outlet stores that lease space in the Company's outlet centers are
principally operated by manufacturers and generally carry the same name as the
designer or manufacturer of the products sold. Outlet stores sell directly to
the consumer and generally feature a full selection of designer and brand name
goods at discounts ranging from 25% to 50% below regular department store and
specialty store prices. Outlet stores are differentiated from other value
retailers in that they offer higher price points, have a wider selection of
current merchandise and target middle- and upper-income clientele. The benefits
manufacturers receive by selling directly to the
- ------------------------
(1) GLA is the total square footage available for lease by a shopping center for
actual occupancy by a store or retail concern. GLA encompasses the entire
square footage within the floor's perimeter, measured to the exterior face
of the permanent exterior walls, excluding access areas and other
nonrentable space.
1
<PAGE>
consumer include (i) maintaining brand image, (ii) gaining more control over the
distribution of overstocked, discounted or out-of-season merchandise or
manufacturing overages, while reducing conflicts with full priced goods in
department stores, (iii) marketing and assessing demand for new merchandise, and
(iv) providing a showcase setting for their full product line. See "Business and
Properties -- General."
The Company's senior management and other personnel, substantially all of
whom have extensive experience in their respective areas of site selection,
development, construction, finance, leasing, marketing and property management,
also have contributed to the Company's growth. After completion of the Offering,
the executive officers of the Company will beneficially own shares of Common
Stock and interests in the Operating Partnership that, subject to the
satisfaction of certain conditions, are exchangeable for Common Stock
representing 40.4% of the outstanding Common Stock.
As a fully integrated real estate firm, the Company provides development,
construction, finance, leasing, marketing and management services for all of its
properties (the "Properties"). The Properties are held and all of the Company's
business and operations are conducted through the Operating Partnership. The
Company controls the Operating Partnership as its sole general partner. The
Operating Partnership owns a 99% general partnership interest and the Company
(directly or indirectly) holds the remaining 1% partnership interest in
partnerships that own thirteen of the Company's seventeen existing factory
outlet centers and each of the Company's three community shopping centers. The
Operating Partnership participates in joint venture partnerships with respect to
the remaining four factory outlet centers. The partnerships which directly own
the Company's interests in the Properties are collectively referred to herein as
the "Property Partnerships." See "The Company -- Structure of the Company and
the Operating Partnership" and "Business and Properties."
The Company's principal executive offices are located at 100 East Pratt
Street, Nineteenth Floor, Baltimore, Maryland 21202 and its telephone number at
such location is (410) 234-0782. The Company is a Maryland corporation which was
organized on July 16, 1993.
RISK FACTORS
Prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to making an investment decision regarding the Common Stock
offered hereby. These include, among others, the following risks:
- the Company may be unable to repay or refinance aggregate debt of $172.8
million maturing by December 31, 1996 or may be unable to finance the
Company's planned development activities;
- the Company's inability to pay any distributions in respect of the Common
Stock unless current and accumulated dividends and distributions,
respectively, on all shares of the Company's Senior Preferred Stock and
the Company's Convertible Preferred Stock have been paid in full;
- the Operating Partnership's inability to increase distributions to the
Company allocable to the Common Stock until the Company has achieved and
maintained certain cash flow levels as set forth in the limited
partnership agreement governing the Operating Partnership (the "Operating
Partnership Agreement");
- certain limited partners of the Operating Partnership that are affiliated
with the Company will, as a result of the Exchange Offer, benefit from the
increase in the amount of cash available for distribution with respect to
their limited partnership interests after conversion of the Convertible
Preferred Stock pursuant to the Exchange Offer;
- the Company's presentation of Funds from Operations may not be comparable
to similarly titled measures used by competitors, and based on the recent
clarification of the definition of Funds from Operations by NAREIT, the
Company may report lower Funds from Operations under the new definition;
2
<PAGE>
- the conflicts of interest between the Company and the limited partners of
the Operating Partnership and their affiliates and between the Company and
its officers and directors, and the potential significant influence of
such limited partners or their affiliates over the affairs of the Company;
- the immediate and substantial dilution of $11.31 per share in the net
tangible book value of Common Stock purchased in the Offering and dilution
to existing holders of Common Stock as a result of the Exchange Offer;
- the taxation of the Company as a regular corporation if it fails to
qualify as a REIT, and the resulting decrease in the funds available to
pay dividends and distributions to stockholders;
- the net losses applicable to the Company's common shareholders in each of
the last five calendar years on a historical basis and the possibility of
future net losses;
- the relatively short history of the outlet center industry and the limited
operating history and rapid growth of the Company's outlet center
portfolio may not be indicative of future operating performance;
- the potential adverse impact on sales at the Company's outlet centers due
to external factors such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences;
- the potential for cost overruns, delays and the lack of predictability
with respect to the generation of revenues associated with the Company's
property development activities;
- the potential adverse consequences to the Company of failing to consummate
the purchase of the remaining partnership interest in the Property
Partnership which owns Grove City Factory Shops;
- the absence of any limitation in the organizational documents of the
Company limiting the level of debt the Company may incur, which could
allow the Company to become highly leveraged, which in turn could
adversely affect the ability of the Company to pay dividends and
distributions to stockholders and could increase the risk of default under
its indebtedness;
- the ability of the Board of Directors to change policies of the Company,
including investment, financing and distribution policies, without a vote
of the stockholders, which could result in policies that do not fully
reflect the interests of all stockholders;
- the potential increase in market interest rates from current rates, which
may lead prospective purchasers of Common Stock to demand higher yields
from future dividends and may adversely affect the market price of the
Common Stock;
- the potential adverse impact of changes in the local economic climate on
the revenues and value of the Company's properties and the possibility
that the Company will be unable to lease space as it becomes available on
economically favorable terms;
- the potential of unknown or future environmental liabilities;
- the restriction on ownership of stock and certain other provisions in the
Company's Charter and bylaws of the Company, as amended (the "Bylaws"),
including a staggered Board of Directors, which could deter the
acquisition of control by a third party without the consent of the Board
of Directors; and
- the possible reduction in the market price of the Common Stock due to
future sales of substantial amounts of shares, the availability of shares
for future sale or general market conditions.
BUSINESS AND PROPERTIES
The Company is engaged in the ownership, development, construction,
acquisition, leasing, marketing and management of factory outlet centers. The
Company strives to differentiate itself from competitors in the outlet center
industry by developing larger outlet centers with highly accessible locations, a
larger and more diverse merchandising mix, extensive food and recreational
amenities and quality architecture and
3
<PAGE>
landscaping, all designed to create an upscale environment in which to showcase
merchandise and encourage shopping. The average outlet center in the Company's
portfolio contained 254,765 square feet of GLA at December 31, 1995, compared to
an industry average of 156,655 square feet as reported at January 1996 by VALUE
RETAIL NEWS, an industry trade magazine whose advisory board includes Messrs.
Rosenthal and Carpenter. Management believes that the considerable size of its
outlet centers, coupled with the Company's established merchant base of national
and international manufacturers of designer and brand-name merchandise,
significantly enhances the competitive position of the Company's outlet centers.
The Company's factory outlet centers feature a diversified mix of nationally
recognized manufacturers of designer and brand-name merchandise including
AnnTaylor/AnnTaylor Loft, Bose, Brooks Brothers, Corning-Revere, Danskin, Donna
Karan, Eddie Bauer, Ellen Tracy, Esprit, First Choice/Escada, Guess?, J. Crew,
Jones New York, Levi's/Dockers Outlet, Mikasa, Nautica, Nike, Phillips-Van
Heusen (including Bass, Gant, Geoffrey Beene, Izod and Van Heusen), Polo/Ralph
Lauren, Reading China & Glass, Reebok, Off 5th (Saks Fifth Avenue), Sara Lee
(including Champion, Coach Leather, L'eggs, Hanes, Bali, Playtex, Sara Lee
Bakery and Socks Galore), Sony, Springmaid Wamsutta, Tommy Hilfiger and VF
Corporation (including Lee, Wrangler, Barbizon and Vanity Fair). As a group, the
foregoing merchants accounted for approximately 25.7% of the gross revenues of
the Company during the quarter ended March 31, 1996, and occupied approximately
32.8% of the total leased GLA contained in the Company's outlet centers at March
31, 1996. Individual merchants noted above ranged from approximately 0.1% to
6.0% of the Company's gross revenues during the quarter ended March 31, 1996,
and occupied approximately 0.1% to 7.3% of the Company's total leased GLA at
March 31, 1996. During the quarter ended March 31, 1996, no group of merchants
under common control accounted for more than 6.0% of the gross revenues of the
Company or occupied more than 7.3% of the total leased GLA of the Company at
March 31, 1996. Management has established close working relationships with its
merchants to better understand and anticipate the merchants' immediate and
long-term merchandising strategies and retail space requirements. One of the
means by which the Company has established and maintains these close working
relationships is by the sponsorship of The Manufacturers
Forum-Registered Trademark-, an organization of over 100 manufacturers that
conducts industry meetings on the factory outlet center industry.
The Company's portfolio of Properties, including factory outlet centers
under construction, is as follows:
PORTFOLIO OF PROPERTIES
(As of March 31, 1996)
<TABLE>
<CAPTION>
NUMBER OF
OWNERSHIP GRAND GLA STORES PERCENTAGE
FACTORY OUTLET CENTERS INTEREST (1) PHASE OPENING DATE (SQ. FT.) OPENED LEASED (11)
- -------------------------------- ------------- --------- ------------ --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Warehouse Row Factory Shops 99% I November 95,000 28 92%
(2)(3) 65% II 1989 26,000 6 94
Chattanooga, Tennessee August 1993
--------- ----- ---
121,000 34 93
San Marcos Factory Shops 100% I August 1990 177,000 57 99
San Marcos, Texas II August 1991 67,000 18 93
III August 1993 117,000 26 100
IIIB November 20,000 2 91
IIIC 1994 35,000 2 100
November
1995
--------- ----- ---
416,000 105 98
Gulf Coast Factory Shops 100% I October 1991 187,000 57 99
Ellenton, Florida II August 1993 123,000 33 99
--------- ----- ---
310,000 90 99
Triangle Factory Shops 100% I October 1991 181,000 45 100
Raleigh-Durham, North Carolina
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
OWNERSHIP GRAND GLA STORES PERCENTAGE
FACTORY OUTLET CENTERS INTEREST (1) PHASE OPENING DATE (SQ. FT.) OPENED LEASED (11)
- -------------------------------- ------------- --------- ------------ --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Coral Isle Factory Shops (4) 100% I December 94,000 31 100
Naples/Marco Island, Florida II 1991 32,000 10 100
December
1992
--------- ----- ---
126,000 41 100
Castle Rock Factory Shops (5) 100% I November 181,000 55 100
Castle Rock, Colorado II 1992 94,000 24 99
III August 1993 95,000 29 100
November
1993
--------- ----- ---
370,000 108 100
Ohio Factory Shops (5) 100% I July 1993 186,000 53 98%
Jeffersonville, Ohio II November 100,000 23 98
IIB 1993 13,000 3 100
November
1994
--------- ----- ---
299,000 79 98
Gainesville Factory Shops 100% I August 1993 210,000 62 92
Gainesville, Texas II November 106,000 25 92
1994
--------- ----- ---
316,000 87 92
Nebraska Crossing Factory Shops 100% I October 1993 192,000 53 96
(4)
Gretna, Nebraska
Oxnard Factory Outlet (6) 30% I June 1994 148,000 36 94
Oxnard, California
Grove City Factory Shops (7) 50% I August 1994 235,000 72 100
Grove City, Pennsylvania II November 95,000 21 100
III 1994 85,000 20 100
November
1995
--------- ----- ---
415,000 113 100
Huntley Factory Shops 100% I August 1994 192,000 51 98
Huntley, Illinois II November 90,000 13 57
1995
--------- ----- ---
282,000 64 85
Florida Keys Factory Shops 100% I September 208,000 56 89
Florida City, Florida 1994
Indiana Factory Shops 100% I November 208,000 51 87
Daleville, Indiana 1994
Magnolia Bluff Factory Shops (8) 100% I July 1995 238,000 66 91
Darien, Georgia IIA November 56,000 5 50
1995
--------- ----- ---
294,000 71 83
Arizona Factory Shops (9) 50% I September 217,000 62 94
Phoenix, Arizona 1995
Gulfport Factory Shops (10) 100% I November 228,000 60 92
Gulfport, Mississippi 1995
--------- ----- ---
TOTAL FACTORY OUTLET CENTERS (12) 4,331,000 1,155 94%
--------- ----- ---
--------- ----- ---
<CAPTION>
NEW CENTERS UNDER CONSTRUCTION
AND SCHEDULED OPENING DATES (13)
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Buckeye Factory Shops November 205,000
Medina County, Ohio 1996
Carolina Factory Shops November 235,000
Gaffney, South Carolina 1996
</TABLE>
- ------------------------
NOTES:
(1) This percentage represents the Company's ownership interest in the Property
Partnership that directly owns or leases the Property indicated.
5
<PAGE>
(2) The Company owns a 2% partnership interest as the sole general partner in
Phase I of this property but is entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. Ford Motor Credit
Company holds a 35% limited partnership interest and the Company holds a 65%
general partnership interest in the partnership that owns Phase II of this
property.
(3) Phase I of this mixed-use development also includes 154,000 square feet of
office space and Phase II also includes 5,000 square feet of office space.
The total office space of 159,000 square feet of GLA is not included in this
table and such space was 100% leased as of March 31, 1996.
(4) Acquired by the Company from unrelated third parties upon consummation of
the Initial Public Offering.
(5) The Company acquired the remaining 60% interest of an unrelated third party
upon consummation of the Initial Public Offering.
(6) On September 30, 1994, the Company purchased a 30% interest from unrelated
third parties in the joint venture partnership that owns this factory outlet
center.
(7) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party. The Company has entered into an
agreement dated as of May 6, 1996 with its joint venture partner to purchase
all of the joint venture partner's ownership interest in the limited
partnership that owns this Property on or before February 28, 1997.
Following the completion of such purchase, the Company will own 100% of this
Property. No assurance can be given that this transaction will be
consummated as scheduled. See "Business and Properties -- Grove City Factory
Shops."
(8) The Property Partnership operates this Property pursuant to a long-term
lease under which the Property Partnership receives the economic benefit of
a 100% ownership interest. See "Business and Properties -- Magnolia Bluff
Factory Shops."
(9) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(10) The real property on which this outlet center is located is subject to a
long-term ground lease. The Property Partnership receives the economic
benefit of a 100% ownership interest. See "Business and Properties --
Gulfport Factory Shops."
(11) Fully executed leases as of March 31, 1996 as a percent of square feet of
GLA.
(12) The Company also owns three community centers containing 424,000 square
feet of GLA in the aggregate that were 96% leased as of March 31, 1996.
(13) No assurance can be given that these factory outlet centers will be opened
on schedule with the indicated GLA.
STRATEGIES FOR GROWTH
The Company intends, on a long-term basis, to increase its Funds from
Operations ("FFO" or "Funds from Operations") and the value of its portfolio of
factory outlet centers through the active management and expansion of existing
factory outlet centers, and the selective development and acquisition of new
factory outlet centers. Funds from Operations represents net income (loss)
(computed in accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Funds from Operations does not represent cash
flow from operating activities in accordance with GAAP and is not indicative of
cash available to fund all of the Company's cash needs. Funds from Operations
should not be considered as an alternative to net income or any other GAAP
measure as an indicator of performance and should not be considered as an
alternative to cash flow as a measure of liquidity or the ability to service
debt or pay dividends. The Company intends to continue to increase its Funds
from Operations over time by (i) selectively expanding, developing and acquiring
factory outlet centers that offer strong prospects for cash flow growth and
capital appreciation subject to the availability of
6
<PAGE>
debt financing on favorable terms and additional equity capital, and (ii)
managing, leasing and marketing its portfolio of retail properties to increase
the effective base and percentage rents. While no assurance can be given that
the Company will successfully implement the foregoing objectives, the Company
intends to employ the following strategies:
- DEVELOPMENT OF NEW OUTLET CENTERS. The Company develops new outlet
centers on sites with favorable demographics, access to interstate
highways, good visibility and favorable market conditions that generally
can accommodate a minimum of 300,000 square feet of GLA over multiple
phases.
- STRATEGIC EXPANSIONS OF EXISTING CENTERS. The Company selectively expands
its existing factory outlet centers in phased developments that respond to
merchant and consumer demand, thereby maximizing returns from these outlet
centers through higher effective rents from new merchants based on the
proven success and customer drawing power of existing phases. As of March
31, 1996, the Company owned, or held under long-term lease, land
contiguous to its outlet centers sufficient to construct additional phases
totaling approximately 1,450,000 square feet of GLA. The Company also
holds options to purchase property adjoining its existing factory outlet
centers upon which additional expansions could be constructed.
- ACTIVE PROPERTY MANAGEMENT. The Company monitors and seeks to enhance the
operating performance of its centers through intensive merchant and
property management, and by providing experienced and professional on-site
personnel.
- INNOVATIVE MARKETING AND PROMOTION. The Company markets its outlet
centers and other properties with promotional materials and advertising
strategies that target and attract customers.
- COMMITMENT TO MERCHANTS AND THE MANUFACTURERS
FORUM-REGISTERED TRADEMARK-. The Company strives to maintain and
establish long-term relationships with its merchants through responsive
service and by taking advantage of networking opportunities such as those
provided through The Manufacturers Forum-Registered Trademark-.
- ACQUISITION OF EXISTING OUTLET CENTERS. The Company explores
opportunities to acquire factory outlet centers or interests therein that
are compatible with the Company's existing portfolio and offer attractive
yields, potential cash flow growth and capital appreciation. The Company
draws upon its development, operating and marketing expertise to improve
such centers through expansion and/or remerchandising or reletting.
- AMENITIES. The Company believes it is an industry leader in providing
amenities and customer services designed to enhance the quality and length
of customers' visits and promote repeat trips to its outlet centers by
making each outlet center an attractive destination for shoppers and their
families and guests. The Company's outlet centers were among the first in
the industry to include recreational facilities and conveniences such as
food courts, automated teller machines and playgrounds.
STRUCTURE OF THE COMPANY AND THE OPERATING PARTNERSHIP
The business and operations of the Company are conducted through the
Operating Partnership. The Company controls the Operating Partnership as the
sole general partner. The Operating Partnership owns a 99% general partnership
interest and the Company holds the remaining 1% partnership interest in the
Property Partnerships that own thirteen of the Company's seventeen existing
outlet centers and each of the Company's three community shopping centers. The
Operating Partnership indirectly holds general partnership interests ranging
from 30% to 99% in the Property Partnerships that own the Company's four
remaining outlet centers.
Immediately following the Offering, the Company will hold all of the Senior
Preferred Units (the "Senior Preferred Units") and Convertible Preferred Units
(the "Convertible Preferred Units") of partnership interest in the Operating
Partnership. In addition, the Company will own 60.8% of the Common Units of
partnership interest in the Operating Partnership (the "Common Units"). The
balance of the Common Units will be held by the limited partners of the
Operating Partnership (the "Limited Partners").
7
<PAGE>
Each Senior Preferred Unit and Convertible Preferred Unit (collectively, the
"Preferred Units") entitles the Company to receive distributions from the
Operating Partnership in an amount equal to the dividend declared or paid in
respect of a share of Senior Preferred Stock and Convertible Preferred Stock,
respectively, prior to the payment by the Operating Partnership of distributions
in respect of Common Units. See "Description of Capital Stock." Pursuant to the
Operating Partnership Agreement, the Operating Partnership must pay a
preferential distribution (the "Preferential Distribution") of $0.295 in each
quarter (plus any Preferential Distribution that is unpaid in any previous
quarter) for each Common Unit held by the Company (the total of such units is
equal to the number of outstanding shares of Common Stock) before any
distributions may be paid in respect of the Common Units held by the Limited
Partners of the Operating Partnership. The Operating Partnership Agreement
provides that any quarterly distributions made by the Operating Partnership in
excess of the Preferential Distribution must first be allocated pro rata among
the Common Units held by the Limited Partners up to $0.295 for each such Common
Unit and then be allocated pro rata among all of the Common Units. The Operating
Partnership Agreement further provides that the Preferential Distribution will
terminate only after the Operating Partnership has paid quarterly distributions
of at least $0.295 in respect of all of the Common Units during four successive
quarters without distributing more than 90% of its Funds from Operations in
respect of the Convertible Preferred Units and Common Units after payment in
full of the distributions for the Senior Preferred Units in any such quarter.
Once the Preferential Distribution is terminated, distributions with respect to
the Common Units will be allocated pro rata among all of the holders thereof.
Following the Offering, Funds from Operations must equal at least $10,356,093
(the "FFO Threshold Amount") per quarter for four successive quarters for the
Preferential Distribution to terminate. After giving pro forma effect to the
Offering, the Company's Funds from Operations for each of the four quarters in
the year ended December 31, 1995 were $8,803,129, $8,656,539, $9,079,315, and
$9,672,726, respectively, and for the quarter ended March 31, 1996 was
$9,685,646. Until the Company generates Funds from Operations on a quarterly
basis in excess of the FFO Threshold Amount, the Company does not intend to pay
any distribution per share of Common Stock in excess of $0.295 per quarter
(other than the Special Distribution (as defined herein)), and any increase in
the Company's Funds from Operations up to the FFO Threshold Amount will continue
to inure solely to the benefit of the Limited Partners.
Subject to certain conditions, each Common Unit held by a Limited Partner
may be exchanged for one share of Common Stock (subject to adjustment) or, at
the option of the Company, cash equal to the fair market value of a share of
Common Stock at the time of exchange. Pursuant to the Operating Partnership
Agreement, 8,576,675, or approximately 93% of the Common Units held by the
Limited Partners, are prohibited from being exchanged into Common Stock (or
cash) until the later of March 22, 1997 or the termination of the Preferential
Distribution without the consent of the Company and Friedman, Billings, Ramsey &
Co., Inc. Immediately prior to the Offering, the Selling Stockholder shall
exchange 90,328 Common Units for a like number of shares of Common Stock. The
remaining 553,797 Common Units held by PGI may be exchanged at any time. See
"Operating Partnership Agreement."
8
<PAGE>
Following the Offering, the ownership of the common equity of the Company
and the Operating Partnership (without giving effect to the conversion of any
Convertible Preferred Units in the Operating Partnership) will be as shown in
the following illustration:
[Graphic - Flow Chart]
Chart shows the ownership of Prime Retail, Inc. before conversion of Common
Units and after conversion of Common Units by: (1) PGI [footnote 1]: 1.9% and
36.9%, respectively, (2) Messrs. Rosenthal and Carpenter: 0% and 3.5%,
respectively, and (3) Public Holders of Common Stock: 98.1% and 59.6%,
respectively. The chart also shows that Prime Retail, Inc. is the General
Partner of Prime Retail, L.P. and that the Limited Partners hold the remaining
interests. The chart further shows the ownership of Prime Retail, L.P. before
conversion of Common Units and after conversion of Common Units by: (1) the
Company: 60.8% and 100%, respectively, (2) PGI: 35.8% and 0%, respectively, and
(3) Messrs. Rosenthal and Carpenter: 3.4% and 0%, respectively. Finally, the
chart shows that Prime Retail, L.P. is the General Partner of the Property
Partnerships, [footnote 2].
(1) PGI means The Prime Group, Inc. and its affiliates.
(2) The Operating Partnership owns a 99% general partnership interest and the
Company holds the remaining 1% partnership interest in the Property
Partnerships that own thirteen of the Company's seventeen existing outlet
centers and each of the Company's three community shopping centers. The
Operating Partnership indirectly holds general partnership interests ranging
from 30% to 99% in the Property Partnerships that own the Company's four
remaining outlet centers.
9
<PAGE>
THE EXCHANGE OFFER
On June 24, 1996 the Company's Exchange Offer expired by its terms and
4,076,498 (or 58.1%) of the outstanding shares of Convertible Preferred Stock
were tendered to be exchanged for 6,522,394 shares of Common Stock representing
a rate of 1.6 shares of Common Stock for each share of Convertible Preferred
Stock. On June 25, 1996, the Company accepted all shares tendered for exchange
pursuant to the terms and conditions of the Exchange Offer. The principal
purposes of the Exchange Offer was to (i) increase the size of the public market
for the Common Stock in order to enhance its liquidity and allow investors to
acquire larger aggregate investments without exceeding the Common Stock
Ownership Limit (as defined herein) and (ii) increase the portion of the
Company's shareholders' equity represented by Common Stock in order to provide
for a more traditional capital structure for a REIT.
In connection with the consummation of the Exchange Offer, the Company is
surrendering to the Operating Partnership a number of Convertible Preferred
Units equal to the number of shares of Convertible Preferred Stock exchanged
pursuant to the Exchange Offer, and the Operating Partnership issued to the
Company a number of Common Units equal to the number of shares of Common Stock
issued by the Company pursuant to the Exchange Offer.
SPECIAL DISTRIBUTION
As a condition to the Exchange Offer, the Company intends to declare a
special one-time cash distribution of $0.145 on each share of Common Stock
outstanding after the consummation of the Exchange Offer but prior to the
consummation of the Offering (the "Special Distribution"). As a consequence of
the Exchange Offer, holders of Common Stock and the Limited Partners will
benefit from a reduction in the preferred dividends payable with respect to the
Convertible Preferred Stock. However, the Exchange Offer's exchange rate of 1.6
to 1.0 represents a premium over the rate at which shares of Convertible
Preferred Stock are otherwise convertible into shares of Common Stock on and
after March 31, 1997. Because each share of Convertible Preferred Stock is by
its terms convertible into approximately 1.196 shares of Common Stock at any
time on or after March 31, 1997, the consummation of the Exchange Offer on the
basis of the greater rate of 1.6 shares of Common Stock for each share of
Convertible Preferred Stock accepted for exchange reduced the ownership interest
of the Company's existing holders of Common Stock. Because the Operating
Partnership issued to the Company a number of Common Units equal to the number
of shares of Common Stock issued pursuant to the Exchange Offer at a rate that
exceeds the number of Common Units otherwise issuable to the Company upon
conversion of the Convertible Preferred Stock into Common Stock pursuant to its
terms, the premium offered in the Exchange Offer also has a dilutive effect on
the Common Units held by the Limited Partners. To partially offset the dilution
to the existing holders of Common Stock and to partially offset the lower
distribution payable to the holders of the Convertible Preferred Stock accepting
the Exchange Offer, the Company intends to declare and pay the Special
Distribution. Neither the Limited Partners nor the purchasers of Common Stock
sold in the Offering are entitled to participate in the Special Distribution.
COMMON UNIT CONTRIBUTION
Certain Limited Partners of the Operating Partnership (collectively, the
"Contributing Limited Partners") consisting of Abraham Rosenthal, Chief
Executive Officer of the Company, William H. Carpenter, Jr., President and Chief
Operating Officer of the Company, and an affiliate of PGI (the "PGI Affiliate"),
have contributed to the Operating Partnership for cancellation an aggregate of
625,000 of their Common Units to partially offset the dilutive effects of the
premium offered in the Exchange Offer (the "Common Unit Contribution"). The
Contributing Limited Partners believe the Exchange Offer is in the best
interests of the Company and its stockholders. Therefore, the Contributing
Limited Partners agreed to make the Common Unit Contribution in order to
facilitate the Exchange Offer and to partially offset the dilution to the
holders of Common Stock that resulted from the Exchange Offer.
The cancellation of each Common Unit contributed pursuant to the Common Unit
Contribution will mitigate the dilutive effect of the Exchange Offer on the
Company's existing holders of Common Stock. As of March 31, 1996, fully diluted
percentage ownership of existing holders of Common Stock was 14.03%. Before
giving effect to the Common Unit Contribution (and without giving effect to the
Offering), the
10
<PAGE>
Exchange Offer would have resulted in a decrease in the fully diluted percentage
ownership of the existing stockholders to 12.99%. After giving effect to the
Common Unit Contribution (but without giving effect to the Offering), the
Exchange Offer resulted in a decrease in the fully diluted percentage ownership
of the existing Common Stockholders to 13.37%. Therefore, the contribution and
cancellation of 625,000 Common Units pursuant to the Common Unit Contribution
mitigated approximately 36.5% of the dilution that resulted from the Exchange
Offer.
LIMITED PARTNER CONSENT
In order to consummate the Exchange Offer, the Limited Partners of the
Operating Partnership consented to an amendment to the Operating Partnership
Agreement (the "Operating Partnership Amendment") (i) providing for the exchange
of Convertible Preferred Units (as defined herein) for newly issued Common Units
on the basis of 1.6 to 1.0 and (ii) permitting the payment of the Special
Distribution without also making a distribution to the Limited Partners. The
Operating Partnership Agreement has also been amended to provide that
distributions to the Limited Partners will not be affected by common equity
offerings of the Company closing other than on the first day of a quarter.
BENEFITS TO THE LIMITED PARTNERS RESULTING FROM THE EXCHANGE OFFER
As a result of the Exchange Offer (but without giving effect to the
Offering), the required dividends payable by the Company in respect of the
Convertible Preferred Stock have been reduced and the Limited Partners will
benefit from the increase in the amount of Funds from Operations available for
distribution with respect to the Common Units. For example, if the Exchange
Offer had been completed on January 1, 1995, without giving effect to the
Offering, the distributions per Common Unit payable to the Limited Partners
would have increased from $0.66 to $0.82.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.............. 3,795,328 shares (assuming the Underwriters'
over-allotment option to purchase up to 555,750 shares
of Common Stock is not exercised). See "Underwriting."
Of this amount, 3,705,000 shares of Common Stock are
being offered by the Company and 90,328 shares of Common
Stock are being offered by the Selling Stockholder. For
a more detailed description of the terms of the Common
Stock see "Description of Capital Stock -- Common
Stock."
Common Stock to be Outstanding
after the Offering and the
Exchange Offer................... 13,192,722 shares, excluding 8,505,472 shares of Common
Stock exchangeable (at the Company's option in lieu of
cash) for a like number of Common Units held by the
Limited Partners and 1,185,000 shares of Common Stock
reserved for issuance pursuant to the Company's Stock
Incentive Plans. See "Description of Capital Stock --
Convertible Preferred Stock," "-- The Exchange Offer"
and "Management -- Stock Incentive Plans."
Distributions..................... The Company intends to continue to pay regular quarterly
distributions to the holders of Common Stock. Until the
Company generates quarterly Funds from Operations in
excess of the FFO Threshold Amount, other than with
respect to the Special Distribution, the Company does
not intend to pay quarterly distributions per share of
Common Stock in excess of $0.295 which, if annualized,
would equal $1.18 per share (plus any Preferential
Distribution not paid in a previous quarter). See
"Policies With Respect to Certain Activities --
Distribution and Dividend Policy."
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Restriction on Ownership.......... Ownership of more than 9.9% of the outstanding shares of
Common Stock, whether directly or constructively, by any
one person (subject to certain exceptions, including an
exception for ownership resulting from the conversion of
Convertible Preferred Stock) is restricted in order to
preserve the Company's status as a REIT for federal
income tax purposes. No holder of Common Stock who
exceeds the Common Stock Ownership Limit (as defined)
because of the holder's conversion of Convertible Pre-
ferred Stock will be permitted to own shares of
Convertible Preferred Stock or Common Stock that would
result in the holder owning more than 9.9% of the fully
diluted Common Stock (assuming full conversion of all
Convertible Preferred Stock but not the exchange of
Common Units for Common Stock). See "Description of
Capital Stock -- Restrictions on Ownership and
Transfer."
Rank.............................. The Common Stock ranks junior to the Senior Preferred
Stock and the Convertible Preferred Stock with respect
to dividends and upon liquidation, dissolution or
winding up of the Company.
Nasdaq National Market Symbol..... "PRME."
Use of Proceeds from the
Offering......................... The net proceeds from the Offering, after expenses
associated with the Offering, will be approximately
$40.2 million (assuming a public offering price of
$11.75 per share and that the Underwriters'
over-allotment option is not exercised). The Company
will not receive any proceeds from the sale of shares by
the Selling Stockholder. The Company will use the net
proceeds of the Offering to acquire 3,705,000 additional
Common Units (4,260,750 additional Common Units if the
overallotment option granted to the Underwriters is
exercised) in the Operating Partnership, all of which
will be entitled to the Preferential Distribution. The
Company will account for the acquisition of such
additional Common Units by increasing its investment in
the Operating Partnership by the amount of the net
proceeds of the Offering. The Operating Partnership will
use the funds it receives from the Company to repay
certain outstanding indebtedness. See "Use of Proceeds"
and "Capitalization."
</TABLE>
TAX STATUS OF THE COMPANY
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ended December 31, 1994. Subject to the qualifications stated
herein and in its opinion, Winston & Strawn ("Tax Counsel") has given the
Company an opinion that the Company is organized in conformity with the
requirements for qualification as a REIT, and the Company's method of operation
has enabled it to meet the requirements for qualification and taxation as a REIT
under the Code and its method of operation enables it to continue to meet the
requirements for qualification as a REIT. An opinion of counsel is not binding
on the Internal Revenue Service (the "IRS") and no assurance can be given that
the IRS will not challenge the status of the Company as a REIT. It must be
emphasized that Tax Counsel's opinion is based on various assumptions and is
conditioned upon representations made by the Company as to factual matters,
including those related to its business and properties as set forth in this
Prospectus. Tax Counsel has not independently verified the Company's
representations. See "Certain Federal Income Tax Considerations" for a more
detailed discussion.
12
<PAGE>
As a REIT, the Company generally will not be subject to federal income tax
at the corporate level on income it distributes currently to its stockholders,
so long as it distributes at least 95% of its taxable income (excluding any net
capital gain) each year. During 1995, the Company distributed $24,337,000 in the
aggregate to its shareholders (or $2.625, $2.125 and $1.18 per share to holders
of Senior Preferred Stock, Convertible Preferred Stock and Common Stock,
respectively). In order to maintain its status as a REIT for purposes of the
above 95% distribution test, the Company would have been required to distribute
no less than $15,240,000 (or $2.625 and $1.31 per share to holders of Senior
Preferred Stock and Convertible Preferred Stock, respectively). None of the
distributions paid on the Common Stock were required to be made in order for the
Company to satisfy the above 95% distribution test. Under certain circumstances,
the Company may be required to make distributions in excess of its cash flow
available for distribution. REITs are subject to a number of organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. See "Certain Federal Income Tax Considerations" and "Risk Factors" for a
more detailed discussion of the consequences of the failure of the Company to
qualify as a REIT. Even if the Company continues to qualify for taxation as a
REIT, the Company may be subject to certain federal, state and local taxes on
its income and property.
The Company's distributions have historically exceeded earnings and profits
due to non-cash expenses, primarily depreciation and amortization, incurred by
the Company. Based on the Company's consolidated cash flow available for
distributions for the year ended December 31, 1995, 100% of the distributions
paid to the holders of Common Stock represented a return of capital for federal
income tax purposes. Accordingly, such distributions were not subject to federal
income tax under current law to the extent such distributions did not exceed a
stockholder's tax basis in such stock. Such nontaxable distributions did,
however, have the effect of a reduction in such shareholder's tax basis in its
Common Stock, and the gain or loss recognized on the subsequent sale of such
shares or upon liquidation of the Company will be increased or reduced
accordingly. Assuming the Exchange Offer had been consummated on January 1, 1995
with the exchange of the maximum number of shares of Convertible Preferred Stock
permitted to be exchanged, 100% of the distributions paid to the holders of
Common Stock would have represented a return of capital for federal income tax
purposes, based on the Company's consolidated cash flow available for
distributions for the year ended December 31, 1995. The percentage of Common
Stock distributions that represents a nontaxable return of capital may vary
substantially from year to year. For a discussion of the tax treatment of
distributions to holders of Common Stock, see "Certain Federal Income Tax
Considerations -- Taxation of Taxable U.S. Stockholders" and "-- Taxation of
Non-U.S. Stockholders."
SUMMARY SELECTED FINANCIAL DATA
The following summary selected financial data for the three months ended
March 31, 1996 and 1995, the year ended December 31, 1995, the periods from
January 1, 1994 to March 21, 1994 and March 22, 1994 to December 31, 1994 and
the three years in the period ended December 31, 1993 are derived from the
consolidated financial statements of the Company and the combined financial
statements of Prime Retail Properties (the "Predecessor"). Combined financial
statements for the three years ended December 31, 1993 and the period January 1,
1994 to March 21, 1994 are included for the Predecessor. The combined financial
statements for the Predecessor combine the balance sheet data and results of
operations of eleven predecessor partnerships, the 40% equity interest in two
predecessor partnerships that previously owned properties, and the management
and development operations acquired by the Company from PGI in connection with
the Initial Public Offering (the "Management and Development Operations").
Because of the Initial Public Offering and the related transactions pertaining
to the formation of the Company, results of operations for the Company after
March 21, 1994 are not comparable to results for prior periods. Results for
interim periods may not be indicative of results for a full year. The following
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements, notes thereto and other financial information included
elsewhere in this Prospectus.
13
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
PRIME RETAIL, INC. AND THE PREDECESSOR
(AMOUNTS IN 000'S, EXCEPT PER SHARE AND RATIO AMOUNTS)
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
----------------------------------------
THE PREDECESSOR
THREE MONTHS -------------------------------------
ENDED MARCH PERIOD PERIOD YEAR ENDED DECEMBER 31,
31, YEAR ENDED MARCH 22 JAN. 1 TO
-------------- DEC. 31, TO DEC. 31, MARCH 21, -------------------------
1996 1995 1995 1994 1994 1993 1992 1991
------ ------ ---------- ----------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues............................... $21,131 $17,274 $77,398 $45,369 $ 6,330 $21,800 $15,690 $ 7,534
Operating expenses........................... 11,372 9,453 41,682 24,927 4,896 15,013 11,826 5,814
------ ------ ---------- ----------- --------- ------- ------- -------
Operating income............................. 9,759 7,821 35,716 20,442 1,434 6,787 3,864 1,720
Other expenses (1)........................... 6,702 4,679 22,910 10,988 3,842 10,660 10,921 6,297
------ ------ ---------- ----------- --------- ------- ------- -------
Income (loss) before minority interests...... 3,057 3,142 12,806 9,454 (2,408) (3,873) (7,057) (4,577)
Loss allocated to minority interests......... 1,477 1,466 5,364 5,204 -- -- -- --
------ ------ ---------- ----------- --------- ------- ------- -------
Net income (loss)............................ 4,534 4,608 18,170 14,658 $(2,408) $(3,873) $(7,057) $(4,577)
--------- ------- ------- -------
--------- ------- ------- -------
Income allocated to preferred shareholders... 5,236 5,236 20,944 16,290
------ ------ ---------- -----------
Net loss applicable to common shareholders... $ (702) $ (628) $(2,774) $(1,632)
------ ------ ---------- -----------
------ ------ ---------- -----------
Net loss per common share outstanding (2) $(0.24) $(0.22) $ (0.96) $ (0.57)
------ ------ ---------- -----------
------ ------ ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
---------------------------------------- THE PREDECESSOR
-------------------------------------
BALANCE AT BALANCE
MARCH 31, BALANCE AT BALANCE AT AT BALANCE AT DECEMBER 31,
-------------- DEC. 31, DEC. 31, MARCH 21, -------------------------
1996 1995 1995 1994 1994 1993 1992 1991
------ ------ ---------- ----------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental property (before accumulated
depreciation)............................... $463,458 $389,019 $454,480 $376,181 $180,170 $185,394 $131,413 $120,024
Total assets................................. 455,706 396,629 463,724 385,930 186,034 190,685 145,989 133,796
Total debt................................... 306,020 233,479 305,954 214,025 188,378 184,037 142,005 119,373
SUPPLEMENTAL DATA:
Funds from Operations (3).................... $8,916 $8,033 $33,133 $24,762 $ 834 $ 4,887 $ (436) $(1,043)
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends (4)........... -- -- -- -- -- -- -- --
Excess of Combined Fixed Charges and
Preferred Stock Dividends over Earnings
(4)......................................... $(2,813) $(2,862) $(11,312) $(8,185) $(2,366) $(4,423) $(7,500) $(7,328)
Ratio of Funds from Operations to Combined
Fixed Charges and Preferred Stock Dividends
(5)......................................... 1.24x 1.19x 1.20x 1.27x 1.27x 1.45x -- --
Excess of Combined Fixed Charges and
Preferred Stock Dividends over Funds from
Operations (5).............................. -- -- -- -- -- -- $ (879) $(3,794)
Book value per common share (6).............. $(9.34) $(8.82) $ (9.21) $ (8.70) -- -- -- --
Net cash provided by (used in) operating
activities.................................. 9,219 7,733 36,399 17,458 $(1,873) $14,450 (7,309) (383)
Net cash used in investing activities........ (11,748) (20,234) (81,978) (149,435) (1,239) (54,210) (14,099) (71,370)
Net cash (used in) provided by financing
activities.................................. (9,809) 11,501 57,547 134,936 4,087 39,907 22,596 71,666
Factory outlet leasable area (sq. ft.) at end
of period (7)............................... 4,331 3,382 4,331 3,382 1,839 1,839 888 707
AS ADJUSTED SUPPLEMENTAL DATA (8):
Funds from Operations (3).................... $9,686 $36,212
Ratio of Funds from Operations to Combined
Fixed
Charges and Preferred Stock Dividends
(5)....................................... 1.62x 1.60x
Net income applicable to common
shareholders................................ $ 354 $ 1,678
Net income per common share outstanding...... 0.03 0.13
Book value per common share (6).............. 0.82 0.89
</TABLE>
- ----------------------------------
NOTES:
(1) Other expenses includes interest expense and other charges.
(2) Net loss per common share is based on 2,875, 2,875, 2,875 and 2,850 shares
outstanding for the three months ended March 31, 1996 and 1995, the year
ended December 31, 1995 and the period from March 22, 1994 to December 31,
1994, respectively.
(3) Management believes that to facilitate a clear understanding of the
consolidated historical operating results of the Company, Funds from
Operations should be considered in conjunction with net income (loss) as
presented in the financial statements included in this Prospectus.
Management generally considers FFO to be an appropriate measure of the
performance of an equity real estate investment trust. FFO represents net
income (loss) (computed in accordance with GAAP), excluding gains or losses
from debt restructuring and sales of property plus depreciation and
amortization and after adjustments for unconsolidated investment
partnerships and joint ventures. In March 1995, NAREIT issued a
clarification of its definition of FFO. Although the Company reports FFO
under both the old and the clarified definition, FFO presented in this table
does not give effect to the clarification. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Funds from Operations." The Company cautions that the
calculation of FFO may vary from entity to entity and as such the
presentation of FFO by the Company may not be comparable to other similarly
titled measures of other reporting companies. FFO does not represent cash
flow from operating activities in accordance with GAAP and is not indicative
of cash available to fund all of the Company's cash needs. FFO should not be
considered as an alternative to net income or any
14
<PAGE>
other GAAP measure as an indicator of performance and should not be
considered as an alternative to cash flow as a measure of liquidity or the
ability to service debt or pay dividends. A reconciliation of income (loss)
before allocation to minority interests and preferred shareholders to FFO is
as follows:
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
----------------------------------------
THREE MONTHS THE PREDECESSOR
-------------------------------------
ENDED MARCH PERIOD PERIOD YEAR ENDED DECEMBER 31,
31, YEAR ENDED MARCH 22 JAN. 1 TO
-------------- DEC. 31, TO DEC. 31, MARCH 21, -------------------------
1996 1995 1995 1994 1994 1993 1992 1991
------ ------ ---------- ----------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before allocations to minority
interests and preferred shareholders........ $3,057 $3,142 $12,806 $ 9,454 $(2,408) $(3,873) $(7,057) $(4,577)
FFO ADJUSTMENTS:
Depreciation and amortization................ 4,387 3,605 15,438 9,803 2,173 7,632 6,397 3,487
Amortization of deferred financing costs and
interest rate protection contracts.......... 1,112 1,068 4,524 2,945 695 362 192 47
Unconsolidated joint venture adjustments
(i)......................................... 360 218 365 2,560 374 766 32 --
------ ------ ---------- ----------- --------- ------- ------- -------
FFO before allocation to minority interests
and preferred shareholders.................. $8,916 $8,033 $33,133 $24,762 $ 834 $ 4,887 $ (436) $(1,043)
------ ------ ---------- ----------- --------- ------- ------- -------
------ ------ ---------- ----------- --------- ------- ------- -------
</TABLE>
---------------------------------------
NOTE:
(i) Amounts include net preferential partner distributions from a joint
venture partnership of $81, $162 and $2,538 for the three months ended
March 31, 1995, the year ended December 31, 1995 and the period from
March 22, 1994 to December 31, 1994, respectively.
(4) For purposes of these computations, earnings consist of income (loss) before
minority interests less income from unconsolidated investment partnerships,
plus fixed charges (excluding capitalized interest). Combined fixed charges
and preferred stock dividends consist of interest costs whether expensed or
capitalized and amortization of debt issuance costs and preferred stock
dividends.
(5) Management believes that to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be
considered in conjunction with net income (loss) as presented in the
financial statements included in this Prospectus. Management generally
considers FFO to be an appropriate measure of the performance of an equity
real estate investment trust. For purposes of these computations, FFO
consists of FFO adjusted for interest incurred, amortization of capitalized
interest, amortization of debt issuance costs, amortization of interest rate
protection contracts, interest earned on interest rate protection contracts
and capitalized interest plus combined fixed charges and preferred stock
dividends (as defined in note 4 above).
(6) Calculated as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------
OFFERING, SPECIAL AS OF MARCH
DISTRIBUTION, 31, 1995
COMMON UNIT CONTRIBUTION -----------
HISTORICAL AND EXCHANGE OFFER HISTORICAL
----------- --------------------------- -----------
<S> <C> <C> <C>
Total shareholders' equity.................................................. $ 119,934 $ 148,760 $ 126,175
Liquidation preference:
Senior Preferred Stock.................................................... (57,500) (57,500) (57,500)
Convertible Preferred Stock............................................... (175,375) (73,463) (175,375)
----------- ---------- -----------
Common shareholders' equity................................................. $(112,941) $ 17,797 $(106,700)
----------- ---------- -----------
----------- ---------- -----------
Common stock................................................................ 2,875 13,193 2,875
Common units................................................................ 9,221 8,505 9,221
----------- ---------- -----------
12,096 21,698 12,096
----------- ---------- -----------
----------- ---------- -----------
Book value per common share................................................. $ (9.34) $ 0.82 $ (8.82)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1995
----------------------------------------
OFFERING, SPECIAL
DISTRIBUTION, 1994
COMMON UNIT CONTRIBUTION -----------
HISTORICAL AND EXCHANGE OFFER HISTORICAL
----------- --------------------------- -----------
<S> <C> <C> <C>
Total shareholders' equity.................................................. $ 121,484 $ 150,310 $ 127,651
Liquidation preference:
Senior Preferred Stock.................................................... (57,500) (57,500) (57,500)
Convertible Preferred Stock............................................... (175,375) (73,463) (175,375)
----------- ---------- -----------
Common shareholders' equity................................................. $(111,391) $ 19,347 $(105,224)
----------- ---------- -----------
----------- ---------- -----------
Common stock................................................................ 2,875 13,193 2,875
Common units................................................................ 9,221 8,505 9,221
----------- ---------- -----------
12,096 21,698 12,096
----------- ---------- -----------
----------- ---------- -----------
Book value per common share................................................. $ (9.21) $ 0.89 $ (8.70)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
(7) Includes factory outlet centers with an aggregate GLA of 901 square feet
operated under joint venture partnerships with unrelated third parties. See
"Business and Properties."
(8) Amounts include the effect of the Offering, the Special Distribution, the
Common Unit Contribution and the application of the net proceeds therefrom
and the consummation of the Exchange Offer as if such transactions were
completed on January 1, 1995. Amounts include the effect of the Offering,
the Special Distribution, the Common Unit Contribution and the application
of the net proceeds therefrom and the consummation of the Exchange Offer as
if such transactions were completed on January 1, 1996.
16
<PAGE>
RISK FACTORS
In addition to the other information presented in this Prospectus,
prospective investors should carefully consider, among other things, the matters
described below.
LEVERAGE; UNCERTAINTY OF ABILITY TO FUND DEBT REPAYMENTS AND FUTURE DEVELOPMENT
Cash flow will not be sufficient to fund the repayment of the Company's debt
obligations at maturity or the Company's planned development, acquisition,
construction and expansion of outlet centers. The Company's aggregate
indebtedness was $306.0 million at March 31, 1996, $172.8 million of which
represents mortgage indebtedness maturing by December 31, 1996. The Company has
$2.5, $2.2, $2.3 and $90.2 million of debt maturing in fiscal years 1997, 1998,
1999 and 2000, respectively, and $36.0 million maturing after December 31, 2000.
Moreover, the Company expects to open between 700,000 and 900,000 additional
square feet of GLA in 1996 at an estimated remaining cost of completion as of
March 31, 1996 ranging between $75.0 to $95.0 million. Management believes that
the Company has sufficient capital and capital commitments to fund the remaining
development costs associated with the 1995 openings (approximately $7.0 million
as of March 31, 1996) and the openings planned for 1996. These funding
requirements are expected to be met, in large part, with the proceeds of the
First Mortgage Loan, the Mezzanine Loan, the Revolving Loan, the Corporate Line
(as such terms are defined herein), the Offering and funding commitments from
two development joint ventures with an unrelated third party. As of March 31,
1996, the Company did not have binding commitments for the funding of the two
development joint ventures. In the event such funding is not available from the
unrelated third party, the Company will not be able to complete all of its
anticipated development for 1996 unless the Company obtains financing from other
sources. There can be no assurance that the terms of any debt financings for the
two development joint ventures will be as favorable as the Company has
experienced in its previous joint ventures.
The Company has accepted a loan commitment (the "1996 Nomura Loan
Commitment") with Nomura Asset Capital Corporation ("Nomura") which provides
for, among other things, (i) a variable-rate seven-year cross-collateralized
first mortgage loan (the "First Mortgage Loan") in the principal amount of
$226.5 million and (ii) a variable-rate seven-year cross-collateralized second
mortgage loan (the "Mezzanine Mortgage Loan") in the principal amount of $33.5
million. The Company expects to close the First Mortgage Loan and the Mezzanine
Mortgage Loan in July 1996. The 1996 Nomura Loan Commitment is subject to
Nomura's customary real estate due diligence review of the thirteen factory
outlet centers comprising the collateral and the completion of appropriate
documentation. In connection with the 1996 Nomura Loan Commitment, the Company
will pay Nomura a commitment fee at closing in the amount of $3.5 million. The
First Mortgage Loan and the Mezzanine Mortgage Loan are expected to be
securitized by Nomura on or prior to September 30, 1996. If the Company and
Nomura have not completed a securitization of the First Mortgage Loan and the
Mezzanine Mortgage Loan within six months of the closing of the First Mortgage
Loan and the Mezzanine Mortgage Loan, Nomura may demand payment of such loans in
full six months after delivery of a demand notice. In the event that the
securitization does occur but the net cash flow from the thirteen mortgaged
outlet centers is less than a mutually agreed upon amount and the securitization
results in less than $260.0 million in proceeds, the Company will be required to
pay to Nomura such difference at the closing of the securitization. There can be
no assurance that the Company will be successful in consummating such
refinancing or securitization.
The First Mortgage Loan and the Mezzanine Mortgage Loan will bear a variable
rate of interest based on the London Interbank offered rate for thirty (30) day
deposits in U.S. dollars ("30-day LIBOR"). The First Mortgage Loan will require
monthly payments of principal and interest based on a thirty-year amortization
of principal and the Mezzanine Mortgage Loan will require monthly payments of
principal and interest based on the full amortization of principal within seven
years. The First Mortgage Loan and the Mezzanine Mortgage Loan are expected
initially to have a weighted average annual interest rate of approximately
7.66%; provided, however, there can be no assurance that the securitization will
be completed on such terms. In the event the securitization does not occur
before September 30, 1996 or in the event the
17
<PAGE>
Company elects to terminate the securitization and repay the loans because the
terms of the securitization are unacceptable to the Company, the interest rate
on the Mezzanine Mortgage Loan will increase to a variable rate per annum equal
to 30-day LIBOR plus 5.20%.
The Company will incur a non-recurring loss of approximately $10.1 million
that will be recorded in the three months ending June 30, 1996. This loss
results from the expected prepayment of the 1994 Mortgage Loan (as defined), the
Revolving Loan, the anticipated termination of the 1995 Nomura Loan Commitments
(as defined) (for which the Company had paid $3.3 million in nonrefundable
financing fees) and the repayment in full of the Interim Loan (as defined). The
loss includes the estimated unamortized cost of certain interest rate protection
contracts of $3.7 million as of July 31, 1996 that will be terminated upon
repayment of the debt underlying the contracts, debt prepayment penalties of
$0.8 million and other deferred financing costs of $4.5 million, less the
estimated fair market value of the interest rate protection contracts of
approximately $2.2 million based on their fair market value at May 30, 1996.
Upon termination and sale of the interest rate protection contracts, the Company
will receive proceeds based on the then fair market value of such contracts. In
addition, the 1996 Nomura Loan Commitment requires the Company to purchase
interest rate protection contracts with regard to the First Mortgage Loan and
the Mezzanine Mortgage Loan when and if 30-day LIBOR exceeds 6.50%. The future
fair market value of interest rate protection contracts is susceptible to
valuation fluctuations based on market changes in interest rates and the
maturity date of the underlying contracts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Sources and Uses of Cash."
FLOATING RATE DEBT
At March 31, 1996, $25.0 million, or 8.2%, of the Company's indebtedness
bore interest at a weighted average fixed interest rate of 7.27% and $281.0
million, or 91.8%, of such indebtedness, including $28.3 million of tax-exempt
bonds, bore interest at a weighted average variable interest rate of 7.14%. At
March 31, 1996, the Company held interest rate protection contracts on $28.3
million of floating rate tax-exempt indebtedness and $97.3 million of other
floating rate indebtedness, or approximately 44.7% of its total floating rate
indebtedness. These contracts expire in 1999 and 2000, respectively. In
addition, the Company held additional interest rate protection contracts on
$43.9 million of the $97.3 million floating rate indebtedness to further reduce
the Company's exposure to increases in interest rates. The Company is exposed to
credit losses in the event of counterparty nonperformance under the interest
rate protection contracts, but does not anticipate realizing any such losses
based on the creditworthiness of the counterparties. See Note 7 -- "Bonds and
Notes Payable" of notes to consolidated financial statements for a summary of
the significant terms of the Company's interest rate protection contracts.
Fluctuations in interest rates have and will continue to have an effect on
the amount of income before minority interests and funds available for
distribution. An increase in interest rates would result in higher interest
expense for the Company and consequently reduce income before minority interests
and the amount of funds available for distribution. Based on the weighted
average debt outstanding during the year ended December 31, 1995, if the
weighted average cost of funds increased or decreased by 0.125%, income before
minority interests would have increased or decreased by approximately $0.316
million or approximately $0.02 per common share outstanding. Based on the
weighted average debt outstanding during the quarter ended March 31, 1996, if
the weighted average cost of funds increased or decreased by 0.125%, income
before minority interests would have increased or decreased by approximately
$0.088 million or approximately $0.01 per common share outstanding.
ABILITY TO PAY COMMON STOCK DISTRIBUTIONS AND INCREASE COMMON STOCK
DISTRIBUTIONS
The Company is not permitted to pay any distributions in respect of the
Common Stock unless all current and any accumulated dividends and distributions,
respectively, in respect of the Senior Preferred Stock and the Convertible
Preferred Stock have been paid in full. The ability of the Company to pay its
annual distribution of $1.18 per share of Common Stock has been, and is expected
to continue to be, dependent upon distributions from the Operating Partnership
to the Company based on the Preferential Distribution associated with the Common
Units held by the Company. If distributions were made pro rata among the holders
of Common Units, the distribution payable per share of Common Stock during the
year
18
<PAGE>
ended 1995 would have been $0.78. The Preferential Distribution allocable to
Common Units held by the Company will terminate at such time, if any, as the
Company (after taking into account certain limitations) has paid quarterly
distributions of at least $0.295 per Common Unit during four successive
quarters. Until the Company generates Funds from Operations on a quarterly basis
in excess of the FFO Threshold Amount, the Company does not intend to pay any
distribution per share of Common Stock in excess of $0.295 per quarter (other
than the Special Distribution) and any increase in the Company's FFO up to the
FFO Threshold Amount per quarter will continue to inure solely to the benefit of
the Limited Partners. See "The Company -- Structure of the Company and the
Operating Partnership" and "Operating Partnership Agreement -- Distributions."
None of the distributions paid on the Common Stock in respect of 1995 and prior
taxable years of the Company were required to be made in order for the Company
to satisfy the annual distribution requirement of a REIT for federal income tax
purposes. Thus, all dividends paid on the Senior Preferred Stock and a portion
of the distributions paid on the Convertible Preferred Stock of $2.625 and
$1.31, respectively, have been sufficient, to date, to satisfy such requirement.
Since the Initial Public Offering, the Company's distributions in respect of
its capital stock have exceeded the Company's net income (computed in accordance
with GAAP) by approximately $8,463,000 as of March 31, 1996. The Company's
distribution policy requires certain adjustments to net income. These
adjustments have resulted in funds available for distribution that exceeded net
income for the three months ended March 31, 1996, the year ended December 31,
1995 and for the period from March 22, 1994 through December 31, 1994. The
Company expects that such distributions will continue to exceed net income for
the foreseeable future. Future distributions in excess of net income will reduce
the Company's shareholders' equity and consequently, the book value of the
shares of Common Stock offered hereby.
Annualized cumulative dividends on the Company's Senior Preferred Stock and
annualized cumulative distributions on the Convertible Preferred Stock (after
giving effect to the Exchange Offer) are $6,037,500 and $6,244,317,
respectively. The Convertible Preferred Stock is entitled to payment of
distributions at the rate distributions are declared on the Common Stock if such
rate is greater than the stated distribution rate based on the number of shares
of Common Stock into which the Convertible Preferred Stock is convertible
(currently, the conversion rate is 1.196 to 1.0). Accordingly, at such time as
the distribution rate on the Common Stock is greater than $1.78 per share,
holders of Convertible Preferred Stock will be entitled to participate in any
further growth of cash available for distribution together with the holders of
Common Stock.
RISK RESULTING FROM CHANGE IN DEFINITION OF FUNDS FROM OPERATIONS: RISK THAT THE
COMPANY'S DEFINITION OF FUNDS FROM OPERATIONS MAY NOT BE COMPARABLE TO
DEFINITION USED BY COMPETITORS
In March 1995, NAREIT established guidelines clarifying the definition of
Funds from Operations (as so modified, the "New Definition"). The Company
reports FFO both under the old definition and the New Definition. The primary
difference between the old definition and the New Definition is that under the
New Definition, amortization of capitalized debt costs and depreciation of
non-real estate assets are not added back to net income as determined under
GAAP. Under the New Definition, reported FFO will be lower. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Funds from Operations." The Company will continue to report FFO under the old
definition because the Operating Partnership Agreement requires the use of the
old definition in determining whether or not the FFO Threshold Amount has been
reached and whether or not the Preferential Distribution has lapsed. See
"Operating Partnership Agreement -- Distributions."
In addition, other reporting REIT companies under may not adopt the New
Definition or may employ different calculations than those used by the Company
to determine FFO. Therefore, similarly titled measures of other reporting REIT
companies may not be comparable to the Company's presentation of FFO.
CONFLICTS OF INTEREST AND INFLUENCE OF LIMITED PARTNERS AND OFFICERS AND
DIRECTORS
Following the Offering, PGI will own Common Units representing a 35.8%
common equity interest in the Operating Partnership. Because of PGI's ownership
interest in the Operating Partnership and the fact that Michael W. Reschke and
Glenn D. Reschke are executive officers and/or directors of the Company and
19
<PAGE>
also are owners of PGI, PGI may be in a position to exercise significant
influence over the affairs of the Company. PGI owns substantial interests in
income producing properties unrelated to the Properties. Under the terms of his
employment agreement with the Company, Michael W. Reschke is permitted to devote
a considerable portion of his time to the management of such interests. See
"Management" and "Principal Security Holders and Selling Security Holder of the
Company."
Certain conflicts exist between the obligations of Messrs. M. Reschke,
Abraham Rosenthal and William H. Carpenter, Jr., as directors of the Company,
and their interests as Limited Partners. One conflict arises because the Limited
Partners and the Company do not share ratably as holders of Common Units in
distributions made by the Operating Partnership until the Common Units held by
the Limited Partners cease to be subject to the Preferential Distribution. In
this regard, after the Operating Partnership has paid the Preferential
Distribution in any quarter, any additional distributions in respect of the
Common Units are allocated solely to the Limited Partners up to an amount equal
to $0.295 per Common Unit per quarter. As members of the Board of Directors,
Messrs. M. Reschke, Rosenthal and Carpenter may be in a position to influence
the Company to cause the Operating Partnership to pay distributions which are
financially advantageous to the Limited Partners but may not be consistent with
the interests of all stockholders.
As holders of Common Units, the Limited Partners may suffer different and
more adverse tax consequences than the Company upon the sale or refinancing of
certain of the Properties that were contributed to the Company in connection
with the Initial Public Offering (the "Contributed Properties"). Due to their
different interests, the Limited Partners and the Company may have different
objectives regarding the appropriate pricing and timing of any sale or
refinancing of the Contributed Properties. While the Company, as the sole
general partner of the Operating Partnership, has the exclusive authority as to
whether and on what terms to sell or refinance an individual Property, those
members of the Company's management and Board of Directors who directly or
indirectly hold Common Units, including Messrs. M. Reschke, Rosenthal and
Carpenter, may influence the Company not to sell or refinance the Contributed
Properties, even though such sale might otherwise be financially advantageous to
the Company, or may influence the Company to refinance a Property with a high
level of debt. See "Policies With Respect to Certain Activities -- Conflict of
Interest Policies."
IMMEDIATE AND SUBSTANTIAL DILUTION RESULTING TO PURCHASERS OF COMMON STOCK
Purchasers of shares of Common Stock in the Offering will suffer immediate
and substantial dilution of $11.31 per share in the net tangible book value of
the shares from the public offering price that will result in an immediate
increase in the net tangible book value of the Company's common shareholders and
the interests in the Operating Partnership held by the Limited Partners. See
"Dilution."
ADVERSE IMPACT OF THE FAILURE TO CONTINUE TO QUALIFY AS A REIT
The Company believes it qualifies and intends to continue to qualify as a
REIT under the Code. A REIT generally is not subject to federal income tax at
the corporate level on income which it currently distributes to its stockholders
so long as it distributes currently to its stockholders at least 95% of its
taxable income (excluding any net capital gain) each year. See "Certain Federal
Income Tax Considerations."
No assurance can be given that the Company will remain qualified as a REIT.
Qualification as a REIT involves the satisfaction of numerous requirements (in
certain instances, on an annual and quarterly basis) set forth in highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations, and may be affected by various factual
matters and circumstances not entirely within the Company's control. In the case
of a REIT such as the Company that holds its assets in partnership form, the
complexity of these Code provisions and of the applicable Treasury Regulations
that have been promulgated thereunder is even greater. Further, no assurance can
be given that future legislation, new Treasury Regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. See "Certain Federal Income Tax Considerations."
If the Company were to fail to maintain qualification as a REIT in any
taxable year, the Company would not be allowed a deduction in computing its
taxable income for amounts distributed to its stockholders, and
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thus would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, the
Company also would be ineligible for qualification as a REIT for the four
taxable years following the year during which qualification was lost. Such
disqualification would reduce the net earnings of the Company available for
investment or distribution to stockholders due to the additional tax liability
of the Company for the years involved. See "Certain Federal Income Tax
Considerations -- Failure to Qualify."
EFFECT OF REIT DISTRIBUTION REQUIREMENTS
To maintain its status as a REIT for federal income tax purposes, the
Company generally will be required each year to distribute to its stockholders
at least 95% of its taxable income (excluding any net capital gain). In
addition, the Company will be subject to federal income tax to the extent it
distributes less than 100% of its taxable income, including any net capital
gain, and to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income plus 95% of its capital gain net income
plus 100% of its undistributed income from prior taxable years. None of the
distributions paid on the Common Stock in respect of 1995 and prior taxable
years of the Company were required to be made in order for the Company to
satisfy the annual distribution requirement of a REIT for federal income tax
purposes. Thus, distributions paid on the Senior Preferred Stock and on the
Convertible Preferred Stock have been sufficient, to date, to satisfy such
requirement.
The Company intends to continue to pay distributions and dividends to its
stockholders to comply with the 95% distribution requirement of the Code and to
avoid the nondeductible excise tax described above. The Company anticipates that
cash flow from operations, including its share of distributions from the
Operating Partnership and the Services Partnership, will be sufficient to enable
it to pay its operating expenses and meet the distribution requirements of a
REIT, but no assurance can be given that this will be the case. The Company may
be required from time to time, under certain circumstances, to accrue as income
for tax purposes rent or interest earned but not yet received. In such event, or
upon the repayment of principal indebtedness, the Company could have taxable
income without sufficient cash to enable the Company to meet the REIT
distribution requirements. Accordingly, the Company could be required to borrow
funds or liquidate investments on adverse terms in order to comply with such
requirements. See "Certain Federal Income Tax Considerations -- Requirements for
Qualification -- Annual Distribution Requirements."
CONSEQUENCES OF FAILURE TO CONTINUE TO QUALIFY AS PARTNERSHIPS
The Operating Partnership, the Services Partnership and each of the Property
Partnerships are organized as partnerships and the Company expects that such
entities will continue to qualify for treatment as partnerships for federal
income tax purposes. If the Operating Partnership or any of the Property
Partnerships failed to qualify as a partnership for federal income tax purposes
and were instead taxable as a corporation, the Company would cease to qualify as
a REIT and such Partnership would be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. See "Certain Federal Income Tax Considerations -- Failure to
Qualify" and " -- Tax Aspects of the Company's Investment in Partnerships --
Partnership Classification." The imposition of a corporate level tax on the
Operating Partnership or the Property Partnership would reduce the amount of
cash available for distribution to the Company and its stockholders.
HISTORICAL NET LOSSES AND THE POSSIBILITY OF FUTURE NET LOSSES
On a historical basis in accordance with GAAP, the Company has experienced
net losses applicable to common shareholders for the three months ended March
31, 1996, for the year ended December 31, 1995 and for the period March 22, 1994
to December 31, 1994, and the Company's predecessor has experienced net losses
for the period January 1, 1994 to March 21, 1994 and for the years ended
December 31, 1993, 1992 and 1991. These losses are primarily attributable to the
depreciation and amortization expense associated with the Company's portfolio
and interest expense related to the Company's financing activities. The Company
expects to incur net losses applicable to holders of Common Stock for the next
several years and there can be no assurance that the Company will not experience
net losses thereafter.
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RISKS RELATED TO THE BRIEF HISTORY OF THE OUTLET CENTER INDUSTRY, THE
COMPETITION WITHIN THE INDUSTRY AND THE COMPANY'S LIMITED OPERATING HISTORY AND
RAPID GROWTH
THE RELATIVELY SHORT HISTORY OF THE OUTLET CENTER INDUSTRY. The outlet
center business is a relatively young and rapidly growing segment of the
retailing industry. There can be no assurance that this segment of the retail
industry will continue to grow in the future. Further, as this segment of the
retailing industry grows or matures, there can be no assurance that the
advantages offered by this business to consumers and manufacturers will
continue. Growth in this segment also may be limited by certain intrinsic
characteristics of the outlet market. The outlet center business depends, in
part, on the pricing differential between goods sold in the outlet centers and
similar or identical goods sold in traditional department stores or retail
establishments. While this pricing differential results in part because of lower
operating costs resulting from the elimination of distribution channels and the
reduced rent and overhead at outlet centers, there can be no assurance that
traditional retailers will not compete aggressively to regain sales nor can
there be any assurance that the outlet center business will not be adversely
affected by other changes in the distribution and sale of retail goods. See
"Business and Properties -- Competition."
COMPETITION FROM OTHER OUTLET CENTERS. There are numerous developers and
real estate companies that are engaged in the development or ownership of outlet
centers and compete with the Company in seeking merchants for outlet centers.
This results in competition for prime locations and for merchants who operate
outlet center stores, particularly for those manufacturers featuring quality and
designer brand name merchandise with proven customer drawing power.
Because several of the Company's outlet centers are located in relatively
undeveloped areas, there are often other potential sites near the Company's
outlet centers that may be developed into outlet centers by competitors. Five
projects in the Company's portfolio, Gulf Coast Factory Shops (Ellenton,
Florida), Magnolia Bluff Factory Shops (Darien, Georgia), Ohio Factory Shops
(Jeffersonville, Ohio), Oxnard Factory Outlet (Oxnard, California), and San
Marcos Factory Shops (San Marcos, Texas), are located within twelve miles of
competing factory outlet centers and thus are subject to existing competition.
The Company currently plans to expand Gulf Coast Factory Shops, Magnolia Bluff
Factory Shops, and Ohio Factory Shops during 1996, and has plans to complete an
expansion at San Marcos Factory Shops during 1997. The development of an outlet
center with a more convenient location or lower rents may attract the Company's
merchants or cause them to seek more favorable lease terms at or prior to
renewal of their leases and accordingly, may affect adversely the business,
revenues and/or sales volume of the Company's outlet centers. See "Business and
Properties -- Competition."
COMPETITION FROM TRADITIONAL FULL PRICE RETAILERS AND OTHERS. Most of the
merchandise produced by manufacturers is sold through traditional full price
retail channels, such as large department stores and other mass merchandisers.
Manufacturers generally do not wish to jeopardize retail relationships by
locating their outlet stores in locations that directly compete with traditional
retailers. As a result, the Company's centers are typically located at least 20
miles from the nearest regional mall. These locations are generally less
attractive to consumers because they tend to require more travel time. A
reduction of pricing discounts by manufacturers, increased competition by
traditional retailers or a perception by consumers that such pricing
differentials are not significant would reduce the competitive advantage offered
by outlet stores to consumers and, consequently, adversely affect the business,
revenues and/or sales volume of the Company's outlet centers. There can be no
assurance that the factory outlet center business will not be adversely affected
by other changes in the distribution and sale of retail goods, such as discount
shopping clubs, "off-price" retailers, direct mail and telemarketing. See
"Business and Properties -- Competition."
LIMITED OPERATING HISTORY AND RAPID GROWTH. Since the Company opened its
first factory outlet center in 1989, its outlet center portfolio has increased
to more than 4.3 million square feet of GLA. The Company expects to continue to
experience substantial growth through the development of new centers, the
expansion of existing centers and the selective acquisition of centers. The risk
that the Company may be unable to control and manage its growth effectively
could have a material adverse effect on the Company. There can be no assurance
that any of the Company's current development or expansion activities will
ultimately result in profitable operations or that the Company will be able to
continue to achieve its growth objectives.
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RISKS ASSOCIATED WITH THE RETAIL INDUSTRY. The factory outlet center market
is a component of the retail industry. The retail industry is subject to
external factors such as inflation, consumer confidence, unemployment rates and
consumer tastes and preferences. In the event that the retail industry
experiences down cycles, manufacturers and merchants of retail merchandise may
experience economic difficulties and/or may be less likely to renew existing
leases at factory outlet centers or to expand distribution channels into new
factory outlet centers. The weighted average reported merchant sales per square
foot in the Company's factory outlet portfolio decreased 6.4% from 1994 to 1995.
If the weighted average reported merchant sales per square foot decreases
significantly in future periods, it may be less likely for the Company to obtain
lease renewals at favorable rents or to lease additional space in new or
expanded factory outlet centers.
RISKS OF DEVELOPMENT ACTIVITIES
The Company expects to open between 700,000 and 900,000 square feet of
additional GLA in 1996 through the construction of two new outlet centers and
the completion of several planned expansions of its existing centers. As of May
31, 1996, the Company had two new centers (Carolina Factory Shops and Buckeye
Factory Shops) and seven expansions of existing centers under construction that
in the aggregate accounted for 440,000 and 347,000 square feet of GLA,
respectively. There can be no assurance that all of the Company's new
construction and planned expansions will be completed in 1996. The Company
intends to continue to pursue other development activities as opportunities
arise. The Company will incur risks in connection with such development
activities in addition to those applicable to the ownership and operation of the
Properties. These risks include the risks that development opportunities
explored by the Company may be abandoned or delayed, that construction costs of
a project may exceed original estimates, and that occupancy rates and rents at a
completed project will not be sufficient to make the project profitable. The
occurrence of any of the foregoing may adversely affect the ability of the
Company to pay expected distributions or dividends to stockholders. See "The
Company -- Strategies for Growth."
RISKS ASSOCIATED WITH THE GROVE CITY PURCHASE
On May 6, 1996, the Company and the Company's joint venture partner
(together with its affiliates, the "Grove City Partner") entered into a purchase
agreement (the "Grove City Purchase Agreement") providing for the purchase by
the Company on or before February 28, 1997 of all of the Grove City Partner's
ownership interest in Grove City Factory Shops Partnership. As consideration for
such purchase the Company has agreed, at closing, to pay $8.0 million in cash to
the Grove City Partner and to repay all of the outstanding indebtedness secured
by Grove City Factory Shops, which indebtedness is owed to the Grove City
Partner by the Grove City Factory Shops Partnership (including amounts drawn
under a loan with respect to the development of Phase IV). At March 31, 1996,
the outstanding indebtedness relating to the construction of Phases I, II and
III of Grove City Factory Shops was $43.5 million. The Company does not
currently have commitments to finance the purchase price for this partnership
interest and, as of the date of this Prospectus, management does not believe
that the consummation of the Grove City Purchase is probable. No assurance can
be given that the Company will be successful in obtaining such financing or, if
obtained, that such indebtedness will be on terms as favorable to the Company as
the terms of the existing indebtedness of Grove City Factory Shops Partnership.
The Company has agreed to pay the Grove City Partner $2.0 million in
liquidated damages in the event the Company breaches any material
representation, warranty, covenant or agreement or if the Company defaults under
the Grove City Purchase Agreement. In the event the Grove City Purchase
Agreement is terminated for any reason other than by reason of the Grove City
Partner's default thereunder or a condemnation of or casualty to this Property,
the Grove City Partner will be entitled to an $8.0 million preferred
distribution (after payment of outstanding indebtedness and return of capital
contributions with respect to the construction of Phase IV) from the proceeds of
any subsequent sale of the property. See "Business and Properties -- Grove City
Factory Shops."
NO LIMITATION ON INCURRENCE OF DEBT
At the time of the Initial Public Offering, the Company established a policy
of not incurring debt if at that time it would result in a ratio of
debt-to-Total Market Capitalization of more than 50%. In 1995, the Company
modified its policy to increase this limit to 60%. The Company's ratio of
debt-to-Total Market
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Capitalization significantly increased after the Initial Public Offering as a
result of the decreases in the market prices of the Company's equity securities
and the $162.5 million increase in its total debt outstanding at March 31, 1996
compared to March 31, 1994. However, the Company's debt service coverage ratio
during such period did not change significantly. Therefore, the Company approved
an increase in the ratio of debt-to-Total Market Capitalization from 50% to 60%.
The amendment of such policy allows the Company to incur more debt as a ratio of
its Total Market Capitalization. See "Policies with Respect to Certain
Activities -- Financing Policies." The organizational documents of the Company
do not contain any limitation on the amount or ratio of debt-to-Total Market
Capitalization the Company might incur. Accordingly, the Company could again
alter or eliminate the current policy with respect to borrowing. If this debt
limit policy limit ratio were raised again, the Company could become more
highly-leveraged, resulting in an increase in debt service that could reduce the
amount of cash flow that the Company would otherwise generate and, consequently,
adversely affect the Company's ability to pay expected distributions and
dividends to stockholders. The Company does not currently anticipate that such
debt limit policy limit ratio of debt-to-Total Market Capitalization will be
raised further.
The Company chose to use market capitalization because it believes that the
book value of its assets (which is primarily the historic cost of real property
less depreciation) does not accurately reflect its ability to borrow and to meet
debt service requirements. Although the Company will consider factors other than
market capitalization in making decisions regarding the incurrence of debt (such
as the purchase price of properties to be acquired with debt financing, and the
ability of particular properties and the Company as a whole to generate cash
flow to cover expected debt service and to make distributions and dividends),
there can be no assurance that management decisions based on the ratio of
debt-to-Total Market Capitalization will not adversely affect the expected level
of distributions and dividends to stockholders. At March 31, 1996, the Company
had a ratio of debt-to-Total Market Capitalization of approximately 49.3% as
compared to 41.4% at March 31, 1995.
ABILITY TO CHANGE CERTAIN POLICIES WITHOUT STOCKHOLDER APPROVAL
The investment and financing policies of the Company and its policies with
respect to other activities, including acquisitions, developments, expansions,
capitalizations, distributions, and operations, are determined by the Board of
Directors. Although the Board of Directors has no present intention to do so,
the Board of Directors may amend or revise these and other policies from time to
time without a vote of the stockholders of the Company. Change in these policies
could adversely affect the Company's financial condition or results of
operations. The Company cannot, however, change its policy of seeking to
maintain its qualification as a REIT without the approval of the holders of at
least a majority of the outstanding capital stock voting together as a separate
group. See "Policies with Respect to Certain Activities."
RISK OF CHANGES IN PRICE OF COMMON STOCK
One of the factors that influences the market price of the Common Stock is
the annual yield on the price paid for Common Stock from distributions paid by
the Company. An increase in market interest rates may lead prospective
purchasers of the Common Stock to demand a higher annual yield from future
distributions. Such an increase in the required yield from distributions may
adversely affect the market price of the Common Stock. Since the Company's
Initial Public Offering, interest rates have generally increased. For example,
the average prime rate reported by the Federal Reserve for March 1994 and
December 1995 was 6.06% and 8.65%, respectively. The trading volume of the
Common Stock may be limited which also could affect the market price for the
stock. Moreover, numerous other factors, such as government regulatory action
and modification of tax laws, could have a significant effect on the future
market price of the Common Stock. See "Underwriting."
GENERAL REAL ESTATE INVESTMENT RISKS
GENERAL. Investments in the Company will be subject to the risks incident
to the ownership and operation of commercial retail real estate. These include
the risks normally associated with changes in national economic or local market
conditions, competition for merchants from other retail properties, including
other outlet centers, changes in market rental rates, and the need to
periodically renovate, repair and relet space and to pay the costs thereof. See
"Business and Properties -- Competition."
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Equity real estate investments are relatively illiquid compared to most
financial assets and, therefore, tend to limit the ability of the Company to
vary its portfolio promptly in response to changes in economic or other
conditions. Substantially all of the Properties are factory outlet centers and
the Company has no intention of varying the types of real estate in its
portfolio. In addition, certain significant expenditures associated with each
equity investment (such as debt service, real estate taxes and operating and
maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. If any of the Company's outlet centers
fails to succeed, either because the concept of the factory outlet center has
lost favor or because of poor results at an individual center, the ability of
the Company to convert the center to an attractive alternative use or to sell
the center to recoup the Company's investment may be limited. Should such an
event occur, the Company's income and funds available for distribution would be
adversely affected.
BANKRUPTCY OF MERCHANTS. Because rental income is a principal source of
operating revenue for the Company, the Company's financial condition and results
of operations would be adversely affected if a significant number of the
Company's merchants were unable to meet their lease obligations and if,
following such defaults, the Company was unable to relet the space to new
merchants on economically favorable terms. Moreover, the bankruptcy or
insolvency of a single major merchant may have an adverse effect on the income
produced by certain Properties. In the event of default by a lessee, the Company
may experience delays in enforcing its rights as landlord and may incur
substantial costs in protecting its investment and reletting such space in the
Properties.
RENEWAL OF LEASES AND RELETTING OF SPACE. The Company is subject to the
risks that, upon expiration of leases for space located in the Properties, the
leases may not be renewed, the space may not be relet or the terms of renewal or
reletting (including the cost of required renovations or concessions to
merchants) may be less favorable than current lease terms. In general, the
leases relating to the Company's outlet centers have a term of five to seven
years with an option to renew for a period equal to the length of the initial
term. Because substantially all of the Company's outlet centers were constructed
during the past five years, the Company does not have an extensive history of
lease renewals with respect to its current portfolio of leases. Leases
representing 5.38%, 6.32% and 12.18% of total annualized minimum rent
represented by expiring leases in the Company's existing outlet center portfolio
will be up for renewal during the remainder of 1996, and during 1997 and 1998,
respectively, and no assurance can be given that such leases will be renewed on
economically favorable terms. If the Company is unable to promptly relet or
renew the leases for all or a substantial portion of this space, or if the
rental rates upon such renewal or reletting are significantly lower than
expected rates, or if the Company's reserves for renovations and concessions
prove to be inadequate, then the Company's cash flow and, consequently, the
Company's ability to pay expected dividends to stockholders may be adversely
affected.
DEBT FINANCING. The Company is subject to the risks associated with debt
financing, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest, the risk that the Company
will not be able to refinance existing indebtedness on the Properties or that
the terms of such refinancing will not be as favorable to the Company as the
terms of existing indebtedness and the risk that necessary capital expenditures
for purposes such as renovations and reletting space will not be able to be
financed on favorable terms. If a Property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, the Property
could be transferred to the mortgagee with a consequent loss of income and asset
value to the Company.
UNINSURED LOSS. The Company carries comprehensive liability, fire, flood,
extended coverage and rental loss insurance with respect to the Properties with
policy specifications and insured limits customarily carried for similar
properties. There are, however, certain types of losses (such as from wars or,
in certain locations, earthquakes) that may be either uninsurable or not
economically viable. Should an uninsured loss occur, the Company could lose its
capital investment and/or the anticipated profits and cash flow from one or more
Properties.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
are required to meet certain federal requirements related to
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access and use by disabled persons. These requirements became effective in 1992.
The Company may incur additional costs in order to comply with final
regulations. The ultimate amount of any compliance costs is not currently
ascertainable, but such costs are not expected to have a material adverse effect
on the Company.
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or under its property.
Such laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. The
presence of environmentally hazardous substances, or the failure to properly
remediate such substances when released, may adversely affect the owner's
ability to sell such real estate or to borrow using such real estate as
collateral. The Company has not been notified by any governmental authority of
any non-compliance, liability or other claim in connection with any of the
Properties, and the Company is not aware of any other environmental condition
with respect to any of the Properties that could materially adversely affect the
Company's financial condition or results of operations. All of the Properties
have been subject to a Phase I environmental audit. When the Phase I assessment
so recommended, a Phase II audit was conducted. No assurance, however, can be
given that the reports reveal all potential environmental liabilities, that no
prior owner or user created any material environmental condition not known to
the Company or to the independent consultant which conducted the environmental
audits, or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations) will not result in the
imposition of environmental liability. Moreover, such laws are subject to change
and any such change may result in significant unanticipated expenditures, which
could adversely affect the Company's ability to pay dividends to stockholders.
LIMITS ON CHANGES IN CONTROL
Certain provisions contained in the Company's Charter and under Maryland law
may have the effect of discouraging a third party from making an acquisition
proposal for the Company and may thereby inhibit a change in control of the
Company. For example, such provisions may (i) deter tender offers for the Common
Stock, which offers may be attractive to the stockholders, or (ii) deter
purchases of large blocks of Common Stock, thereby limiting the opportunity for
stockholders to receive a premium for their Common Stock over then-prevailing
market price. See "Description of Capital Stock -- Common Stock" and "Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws." These
provisions include the Company's ability to issue preferred stock, the Company's
staggered board of directors, the Ownership Limit and provisions of the Maryland
General Corporation Law ("MGCL") establishing special requirements with respect
to "business combinations" between a Maryland corporation such as the Company,
and an "interested stockholder" and restrictions on voting "control shares"
acquired in certain transactions.
POSSIBLE ADVERSE EFFECTS ON STOCK PRICE ARISING FROM SHARES AVAILABLE FOR FUTURE
SALE
No prediction can be made as to the effect, if any, of future sales of
shares, or the possibility of such sales, on the market price of the Common
Stock. Following the Offering, there will be 13,192,722 outstanding shares of
Common Stock. Sales of substantial amounts of Common Stock (including shares
issued upon the exchange of Common Units and the conversion of the Convertible
Preferred Stock), or the perception that such sales could occur, may adversely
affect prevailing market price for the Common Stock. In connection with the
Initial Public Offering, 9,220,800 Common Units were issued to the Limited
Partners. Pursuant to the Operating Partnership Agreement, 8,576,675, or 93% of
such Common Units are prohibited from being exchanged for Common Stock (or cash)
without the consent of the Company or Friedman, Billings, Ramsey & Co., Inc.
until the later of (i) March 22, 1997 or (ii) the termination of the
Preferential Distribution. The remaining 553,797 Common Units held by PGI may be
exchanged into Common Stock (or cash). Following the expiration of the foregoing
restrictions, any shares of Common Stock obtained upon exchange of such Common
Units may be sold in the public market pursuant to registration rights that have
been granted by the Company or available exemptions from registration. An
aggregate of 3,514,954 shares of Common Stock are issuable with no restrictions
as to the resale thereof upon the conversion of all Convertible Preferred Stock
to be outstanding upon consummation of this Offering. As of March 31, 1996, the
Company has reserved 9,220,800 shares of Common Stock for issuance upon exchange
of Common
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Units and 1,185,000 shares of Common Stock are reserved for issuance pursuant to
the Company's Stock Incentive Plans, and, when issued, these shares will be
available for sale in the public markets from time to time. See "Shares
Available For Future Sale" and "Management -- Stock Incentive Plans."
OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION
For the Company to maintain its qualification as a REIT, not more than 50%
in value of the Company's outstanding capital stock may be owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds) at any time
during the last half of any taxable year of the Company other than the first
taxable year for which the election to be taxed as a REIT has been made (the
"five or fewer" requirement). The Charter of the Company contains certain
restrictions on the ownership and transfer of the Company's capital stock,
described below, which are intended to prevent concentration of stock ownership.
These restrictions, however, do not ensure that the Company will be able to
satisfy the "five or fewer" requirement primarily, though not exclusively, as a
result of fluctuations in values among the different classes of the Company's
capital stock. If the Company fails to satisfy the "five or fewer" requirement,
the Company's status as a REIT will terminate, and the Company will not be able
to prevent such termination.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. Such disqualification would reduce the net
earnings of the Company available for investment or distribution to its
stockholders due to the additional tax liability of the Company for the years
involved. See "Certain Federal Income Tax Considerations -- Failure to Qualify."
The Charter of the Company currently prohibits ownership, either directly or
under the applicable attribution rules of the Code, of more than 9.9% of the
outstanding shares of Common Stock or the acquisition or beneficial ownership of
shares of Convertible Preferred Stock by a holder if, as a result of such
acquisition or beneficial ownership, such holder acquires or beneficially owns
shares of capital stock (including all classes) of the Company in excess of 9.9%
of the value of the Company's outstanding capital stock (the "Convertible
Preferred Stock Ownership Limit") or the ownership of more than 10.0% of the
outstanding shares of Senior Preferred Stock by any holder subject to certain
important exceptions. See "Description of Capital Stock -- Restrictions on
Ownership and Transfer."
The Board of Directors may, subject to the receipt of certain
representations as required by the Charter and a ruling from the IRS or an
opinion of counsel satisfactory to it, waive the ownership restrictions with
respect to a holder if such waiver will not jeopardize the Company's status as a
REIT. Any attempted transfer of shares to a person who, as a result of such
transfer, would violate the Ownership Limit will be deemed void and the shares
purportedly transferred would be converted into shares of a separate class of
capital stock with no voting rights and no rights to distributions. In addition,
ownership, either directly or under the applicable attribution rules of the
Code, of Stock in excess of the Ownership Limit generally will result in the
conversion of those shares into shares of a separate class of capital stock with
no voting rights and no rights to distributions. See "Description of Capital
Stock -- Restrictions on Ownership and Transfer" for additional information
regarding the aforementioned Ownership Limit.
Limiting the ownership of more than 9.9% of the outstanding shares of Common
Stock, the acquisition or beneficial ownership of shares of Convertible
Preferred Stock in excess of the Convertible Preferred Stock Ownership Limit,
and the ownership of more than 10.0% of the outstanding shares of Senior
Preferred Stock by certain stockholders may (i) discourage a change of control
of the Company, (ii) deter tender offers for such stock, which offers may be
attractive to the Company's stockholders, or (iii) limit the opportunity for
stockholders to receive a premium for their stock that might otherwise exist if
an investor attempted to
27
<PAGE>
assemble a block of stock in excess of 9.9% of the outstanding shares of Common
Stock, the Convertible Preferred Stock Ownership Limit, and 10.0% of the
outstanding shares of Senior Preferred Stock or to effect a change of control of
the Company.
THE COMPANY
The Company is a self-administered and self-managed REIT engaged in the
ownership, development, construction, acquisition, leasing, marketing and
management of factory outlet centers. The Company is the sole general partner of
the Operating Partnership through which the Company owns interests in and
provides development, leasing, marketing and management services for seventeen
upscale factory outlet centers and three community shopping centers with a total
of 4,331,000 and 424,000 square feet of GLA at March 31, 1996, respectively.
Factory outlet centers have become a strong, growing segment of the retail
industry, enabling value-oriented shoppers to purchase designer and brand-name
products directly from manufacturers at discounts generally ranging from 25% to
50% below regular department and specialty store prices.
The Company has successfully developed or acquired outlet centers containing
approximately 4.3 million square feet of GLA, including approximately 949,000
square feet of GLA that was completed during 1995. The Company and its
management have been recognized with several industry honors. In 1993, the
Company received the VALUE RETAIL NEWS Award of Excellence in recognition of its
development of outlet centers and in 1994, the Company's outlet center in Castle
Rock, Colorado was voted the number one factory outlet center in the Country by
the VALUE RETAIL NEWS. The Company also ranked as 1994's fourth fastest-growing
retail developer in the United States by CHAIN STORE AGE EXECUTIVE magazine. In
1995, Messrs. Rosenthal and Carpenter were named Entrepreneurs of the Year for
Maryland Real Estate, an award sponsored nationally by Ernst & Young LLP, INC.
magazine and Merrill Lynch & Co. that honors individuals whose ingenuity, hard
work and innovation have created successful and growing business ventures.
The Company pursues development strategies designed to take advantage of
growth opportunities in the factory outlet segment of the retail industry and to
distinguish itself among its competitors. The Company differentiates itself from
competitors in the outlet center industry by developing larger outlet centers
with highly accessible locations, a larger and more diverse merchandising mix,
extensive food and recreational amenities and quality architecture and
landscaping, all designed to create an upscale environment in which to showcase
merchandise and encourage shopping. The Company generally will not start
construction of any new centers, other than site development work, without
obtaining leasing commitments for at least 50% of the GLA.
The average outlet center in the Company's portfolio contained 254,765
square feet of GLA at December 31, 1995, compared to an industry average of
156,655 square feet as reported at January 1996 by VALUE RETAIL NEWS. Management
believes that the considerable size of its outlet centers, coupled with the
Company's established base of national and international manufacturers of
designer and brand-name merchandise, significantly enhances the competitive
position of the Company's factor outlet centers.
The Company's factory outlet centers feature a diversified mix of nationally
recognized manufacturers of designer and brand-name merchandise, including
AnnTaylor/AnnTaylor Loft, Bose, Brooks Brothers, Corning-Revere, Danskin, Donna
Karan, Eddie Bauer, Ellen Tracy, Esprit, First Choice/Escada, Guess?, J. Crew,
Jones New York, Levi's/Dockers Outlet, Mikasa, Nautica, Nike, Phillips-Van
Heusen (including Bass, Gant, Geoffrey Beene, Izod and Van Heusen), Polo/Ralph
Lauren, Reading China & Glass, Reebok, Off 5th (Saks Fifth Avenue), Sara Lee
(including Champion, Coach Leather, L'eggs, Hanes, Bali, Playtex, Sara Lee
Bakery and Socks Galore), Sony, Springmaid-Wamsutta, Tommy Hilfiger and VF
Corporation (including Lee, Wrangler, Barbizon and Vanity Fair). As a group, the
foregoing merchants accounted for approximately 25.7% of the gross revenues of
the Company during the quarter ended March 31, 1996, and occupied approximately
32.8% of the total leased GLA contained in the Company's outlet centers at March
31, 1996. Individual merchants noted above ranged from approximately 0.1% to
6.0% of the Company's gross revenues during the quarter ended March 31, 1996,
and occupied approximately 0.1% to 7.3% of the
28
<PAGE>
Company's total leased GLA at March 31, 1996. During the quarter ended March 31,
1996, no group of merchants under common control accounted for more than 6.0% of
the gross revenues of the Company or occupied more than 7.3% of the total leased
GLA of the Company at March 31, 1996.
Management has developed close working relationships with its merchants to
understand and better anticipate the merchants' immediate and long-term
merchandising strategies and retail space requirements. One of the means by
which the Company has established and maintains these close working
relationships is by sponsorship of The Manufacturers
Forum-Registered Trademark-, an organization of over 100 manufacturers that
conducts between four and six industry meetings per year - two of which meetings
are held at semi-annual conventions. The meetings are organized and hosted by
executives of the Company and are attended by senior executives from member
manufacturers. Industry experts are invited to attend as guest speakers to
discuss ideas, trends, data and other issues pertinent to the ongoing growth of
the factory outlet center business.
The Manufacturers Forum-Registered Trademark- was developed as an
educational tool for both the Company and the member merchants, including new
manufacturers that are investigating opening factory outlet stores, and allows
both the Company and member merchants to stay up-to-date with changes in the
industry. Topics discussed at The Manufacturers Forum-Registered Trademark- lead
to stronger relationships with key merchants and a shared vision with the
manufacturers as to future growth of the industry.
STRATEGIES FOR GROWTH
The Company intends, on a long-term basis, to increase its FFO and the value
of its portfolio of factory outlet centers through the active management and
expansion of existing factory outlet centers and the selective development and
acquisition of new factory outlet centers. FFO does not represent cash flow from
operating activities in accordance with GAAP, is not indicative of cash
available to fund all of the Company's cash needs and should not be considered
as an alternative to net income or any other GAAP measure as an indicator of the
Company's performance or as an alternative to cash flow as a measure of
liquidity or the ability to service debt or pay dividends.
The Company intends to continue to increase its FFO over time by (i)
selectively expanding, developing and acquiring factory outlet centers that
offer strong prospects for cash flow growth and capital appreciation, subject to
the availability of debt financing on favorable terms and additional equity
capital and (ii) managing, leasing and marketing its portfolio of retail
properties to increase the effective base and percentage rents. While no
assurance can be given that the Company will implement the foregoing objectives,
the Company intends to employ the following strategies:
- DEVELOPMENT OF NEW FACTORY OUTLET CENTERS. The Company develops new
factory outlet centers on sites with favorable demographics, access to
interstate highways, good visibility and favorable market conditions that
generally can accommodate a minimum of 300,000 square feet of GLA over
multiple phases. The Company's management has significant experience in
all phases of the development process, including market analysis, site
assemblage, zoning, land use controls, leasing, marketing, financing,
construction management and value engineering. Since the Initial Public
Offering, the Company has developed seven new factory outlet centers with
initial phases totaling 1,526,000 square feet of GLA. During 1996, the
Company expects to complete construction of two new factory outlet
centers.
- STRATEGIC EXPANSIONS OF EXISTING CENTERS. The Company selectively expands
its existing factory outlet centers in phased developments that respond to
merchant and consumer demand, thereby maximizing returns from these outlet
centers through higher effective net rents from new merchants based on the
proven success and customer drawing power of existing phases. In addition,
continual expansion programs allow the Company to accommodate new
manufacturers who enter the factory outlet industry, while creating a
larger "critical mass" to protect a center's competitive position in its
trade area. Since the Initial Public Offering, the Company has completed
expansions of six centers totaling 500,000 square feet of GLA. The Company
expects to develop several additional expansions during 1996. As of March
31, 1996, the Company owned, or held under long-term lease, land
contiguous to
29
<PAGE>
its outlet centers to construct additional phases totaling approximately
1,450,000 square feet of GLA. The Company also holds options to purchase
property adjoining its existing factory outlet centers upon which
additional expansions could be constructed.
- ACTIVE PROPERTY MANAGEMENT. The Company monitors and seeks to enhance the
operating performance of its centers through intensive merchant and
property management, and by providing experienced and professional on-site
management. Property managers and marketing directors work with a
marketing advisory board established by the Company (the "Advisory Board")
to systematically review merchant performance, merchandising mix and
layout with leasing representatives of the Company in order to improve
sales per square foot. Through its intensive management efforts, the
Company attempts to reduce the average per square foot occupancy cost on
its outlet portfolio while at the same time continuing to provide a high
level of merchant and customer service, maintenance and security.
- INNOVATIVE MARKETING AND PROMOTION. The Company markets its factory outlet
centers and other properties with promotional materials and advertising
strategies that target and attract customers. Each factory outlet center
has an experienced marketing director who creates and administers retail
marketing strategies that are designed to highlight each factory outlet
center's unique merchandising strengths, customized to the local customer
base and demographics. The Company advertises its centers using a wide
variety of different media that can include television, radio and print
advertising, promotions, billboards, special events, and an extensive
public relations program. These activities are supported by quantitative
and qualitative market research based on such information gathering
techniques as focus groups and detailed customer surveys. To better
understand the needs and expectations of its customers, the Company
routinely conducts exit surveys, the results of which are closely reviewed
by senior management and, when appropriate, merchants in the center. All
of these activities are monitored and reviewed at least quarterly by the
Advisory Board.
- COMMITMENT TO MERCHANTS AND THE MANUFACTURERS FORUM-REGISTERED TRADEMARK-.
The Company strives to maintain and establish long-term relationships with
its merchants through responsive service and by taking advantage of
networking opportunities such as those provided through The Manufacturers
Forum-Registered Trademark-. The Manufacturers Forum-Registered Trademark-
was developed as an educational tool for both the Company and the member
merchants, including new manufacturers that are investigating opening
outlet stores, and allows both the Company and member merchants to stay
up-to-date with changes in the industry.
- ACQUISITION OF EXISTING FACTORY OUTLET CENTERS. The Company explores
opportunities to acquire factory outlet centers or interests therein that
are compatible with the Company's existing portfolio and offer attractive
yields, potential cash flow growth and capital appreciation. The Company
draws upon its development, operating and marketing expertise to improve
such centers through expansion and/or remerchandising or reletting.
- AMENITIES. The Company believes it is an industry leader in providing
various amenities intended to enhance the quality and length of customers'
visits, particularly for customers visiting the outlet center with
children and other family members. The Company's outlet centers were among
the first in the industry to include recreational facilities and
conveniences such as food courts, automated teller machines and
playgrounds. The Company's latest innovation is an interactive "Sports
Court" which will feature a collection of factory direct shops offering
value-priced sports apparel, equipment and footwear. The common areas of
the Sports Court will include such amenities as a basketball court,
athletic field and putting greens designed to induce interactive shopper
participation by providing shoppers with the means and space to test the
sports merchandise and equipment being offered for sale by Sports Court
merchants. The Company believes that these amenities entice shoppers to
stay at its outlet centers longer than at the average outlet center in the
industry. The Company also believes that these amenities promote repeat
trips to its outlet centers by making the outlet center an attractive
destination for shoppers and their families and guests.
30
<PAGE>
COMPETITIVE ADVANTAGES IN PURSUING NEW DEVELOPMENT OPPORTUNITIES
The Company believes that it has the following competitive advantages in
pursuing new development projects:
- The Company believes that during each of 1993, 1994 and 1995 it was one of
the leading developers of outlet center GLA in the United States. Its
substantial development experience allows the Company to better control
costs, the zoning process, and the construction schedule, thereby reducing
the risks of development. The Company's industry presence and development
experience enables it to evaluate proposed development projects quickly
and comprehensively.
- Through its key relationships with many of the leading outlet center
merchants, the Company is able to solicit significant merchant input
regarding all phases of development, including site selection and layout.
Such input enables the Company to better tailor its projects to the retail
space requirements of its lead merchants and assists the Company in
securing substantial leasing commitments before committing to start
construction.
- The Company continually seeks innovative and flexible financing techniques
to fund development projects through a number of capital sources,
including municipal assistance programs, securitized mortgages, borrowing
under credit lines, joint ventures and securities offerings, although
there can be no assurances as to the availability or terms of future debt
or equity financing of the Company.
- The Company's centers generally are designed as a series of pedestrian
courtyards and walkways lined with store fronts creating a "village
atmosphere." This design promotes greater merchandise visibility and more
pedestrian traffic through the center than "U" or "L" shaped designs
typically used in other outlet centers. Management believes that the
courtyard layout is preferred by customers and encourages visits to the
center for longer periods of time and on a more frequent basis. In
addition, the Company's outlet centers include various amenities intended
to extend the length of customer visits and enhance the overall quality of
the shopping experience, particularly for customers visiting the outlet
center with children and other family members. The Company believes that
these amenities serve an important role in extending the length of
customers' visits and promoting repeat trips to its outlet centers by
making the outlet center an attractive destination for shoppers and their
families and guests.
STRUCTURE OF THE COMPANY AND THE OPERATING PARTNERSHIP
The business and operations of the Company are conducted through the
Operating Partnership. Fee title to each of the Properties is held in the
Property Partnerships (with the exception of Gulfport Factory Shops, where the
Property Partnership has a leasehold interest in the land and owns the
improvements with respect to such property, and Magnolia Bluff Factory Shops,
where the Property Partnership has a leasehold interest in such Properties).
Each of the Property Partnerships is a general or limited partnership in which
the Operating Partnership or a subsidiary of the Company is a general partner.
All of the Property Partnerships (except the Property Partnerships that own
Grove City Factory Shops, Arizona Factory Shops and Oxnard Factory Outlet) are
controlled by the Company and are consolidated in the Company's financial
statements.
In connection with the Initial Public Offering, 7,794,495, 391,090 and
391,090 Common Units were issued to PGI, and Messrs. Rosenthal and Carpenter,
respectively (collectively, the "Prime Common Units"), and an additional 644,125
Common Units were issued to the Selling Stockholder or its affiliates (the
"Additional Common Units"). Subsequent to the Initial Public Offering, PGI
acquired 553,797 of the Additional Common Units in a transaction in which the
Selling Stockholder and one of its affiliates were released from pledge
obligations to a third party lender, and PGI re-pledged such Additional Common
Units to such lender. The balance of the Additional Common Units are being
exchanged by the Selling Stockholder for a like number of shares of Common
Stock. The Company will use the net proceeds of the Offering to acquire
3,705,000 Common Units (4,260,750 Common Units if the over-allotment option
granted to the Underwriters is exercised) in the Operating Partnership, all of
which will be entitled to the Preferential Distribution.
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<PAGE>
Immediately following the Offering, the Company will hold all of the
Preferred Units. In addition, the Company owns 60.8% of the Common Units. The
Company has full and complete control over the management of the Operating
Partnership as the sole general partner and is not subject to removal by the
Limited Partners. The Limited Partners have no authority to transact business
for, or participate in the management activities or, except for limited
instances, decisions, of the Operating Partnership. The Operating Partnership
bears substantially all of the expenses of the Company. See "Operating
Partnership Agreement."
Each Senior Preferred Unit and Convertible Preferred Unit entitles the
Company to receive distributions from the Operating Partnership in an amount
equal to the dividend or distribution declared or paid in respect of a share of
Senior Preferred Stock and Convertible Preferred Stock, respectively, prior to
the payment by the Operating Partnership of distributions in respect of Common
Units. See "Description of Capital Stock." Pursuant to the Operating Partnership
Agreement, the Operating Partnership must pay the Preferential Distribution of
$0.295 in each quarter (plus any Preferential Distribution that is unpaid in any
previous quarter) for each Common Unit held by the Company (the total of such
units is equal to the number of outstanding shares of Common Stock) before any
distributions may be paid in respect of the Common Units held by the Limited
Partners of the Operating Partnership. The Operating Partnership Agreement
provides that any quarterly distributions made by the Operating Partnership in
excess of the Preferential Distribution must first be allocated pro rata among
the Common Units held by the Limited Partners up to $0.295 for each such Common
Unit and then be allocated pro rata among all of the Common Units. The Operating
Partnership Agreement further provides that the Preferential Distribution will
terminate only after the Operating Partnership has paid quarterly distributions
of at least $0.295 in respect of all of the Common Units during four successive
quarters without distributing more than 90% of its Funds from Operations in
respect of the Convertible Preferred Units and Common Units after payment in
full of distributions for the Senior Preferred Units in any such quarter. For
purposes of determining whether or not the Preferential Distribution requirement
has terminated, the Operating Partnership Agreement requires that the old
definition of FFO be utilized. Once the Preferential Distribution is terminated,
distributions with respect to the Common Units will be allocated pro rata among
all of the holders thereof. Following the Offering, Funds from Operations must
equal at least the FFO Threshold Amount per quarter for four successive quarters
for the Preferential Distribution to terminate. After giving pro forma effect to
the Offering, the Company's Funds from Operations for each of the four quarters
in the year ended December 31, 1995 were $8,803,129, $8,656,539, $9,079,315, and
$9,672,726, respectively, and for the quarter ended March 31, 1996 was
$9,685,646. Until the Company generates Funds from Operations on a quarterly
basis in excess of the FFO Threshold Amount, the Company does not intend to pay
any distribution per share of Common Stock in excess of $0.295 per quarter
(other than the Special Distribution), and any increase in the Company's Funds
from Operations up to the FFO Threshold Amount will continue to inure solely to
the benefit of the Limited Partners. Any exchange of interests in the Operating
Partnership for Common Stock or cash will result in a proportionate increase in
the Company's interest in the Operating Partnership.
Subject to certain conditions, each Common Unit held by a Limited Partner
may be exchanged for one share of Common Stock (subject to adjustment) or, at
the option of the Company, cash equal to the fair market value of a share of
Common Stock at the time of exchange. Pursuant to the Operating Partnership
Agreement, 8,576,675, or approximately 93% of the Common Units held by the
Limited Partners, are prohibited from being exchanged into Common Stock (or
cash) until the termination of the Preferential Distribution without the consent
of the Company and Friedman, Billings, Ramsey & Co., Inc. Immediately prior to
the consummation of the Offering, the Selling Stockholder will exchange 90,328
Common Units for a like number of shares of Common Stock. The remaining 553,797
Common Units held by PGI may be exchanged at any time. See "Operating
Partnership Agreement."
FINANCING CORPORATIONS. The Finance Corporations, each of which is a
wholly-owned, single purpose subsidiary, allow the Company to borrow
indebtedness on a more favorable basis utilizing a securitized financing
structure. The Finance Corporations each hold a 1% general partnership interest
in the Property Partnerships the mortgages of which are securitized. The
Operating Partnership holds the remaining 99% interest in such partnerships.
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<PAGE>
SERVICES PARTNERSHIP. The Operating Partnership is the 1% sole general
partner of the Services Partnership. The Operating Partnership owns 100% of the
non-voting preferred stock of the Services Corporation which, in turn, is the
99% limited partner of the Services Partnership. Certain members of management
of the Company own 100% of the voting common stock of Prime Retail Services,
Inc. (the "Services Corporation"). The Services Partnership was formed to own
business lines of the Company that are not directly associated with the
collection of rents. The Services Corporation is subject to federal, state and
local taxes. Through the ownership of the non-voting preferred stock of the
Services Corporation, the Company expects most of the economic benefits of
ownership of such entity to flow to the Operating Partnership.
33
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Common Stock commenced trading on the Nasdaq National Market on March
15, 1994. The initial public offering price was $19.00 per share. The shares
offered hereby have been included for listing on the Nasdaq National Market. The
following table sets forth the high and low closing prices of the Common Stock,
as reported by NASDAQ, and cash distributions paid, during the periods
indicated:
<TABLE>
<CAPTION>
CLOSING PRICES PER
SHARE CASH
-------------------- DISTRIBUTIONS
HIGH LOW PAID (1)
--------- --------- -------------
<S> <C> <C> <C>
1994
March 22, 1994 to March 31, 1994.............................................. $ 20.50 $ 19.00 --
Second Quarter................................................................ 20.50 18.50 $ 0.033(2)
Third Quarter................................................................. 19.50 17.75 0.295
Fourth Quarter................................................................ 18.25 12.75 0.295
1995
First Quarter................................................................. 14.50 12.50 0.295
Second Quarter................................................................ 13.00 11.75 0.295
Third Quarter................................................................. 13.25 12.00 0.295
Fourth Quarter................................................................ 12.88 11.75 0.295
1996
First Quarter................................................................. 12.50 11.00 0.295
Second Quarter (through June 24, 1996)........................................ 12.00 11.00 0.295
</TABLE>
- ------------------------
NOTES:
(1) For 1994 and 1995, all of the cash distributions paid represented a return
of capital. For 1996, the portion of the cash distribution paid that
represented a return of capital is not available.
(2) Distributions paid for period March 22, 1994 through March 31, 1994.
The closing price for the Common Stock as reported on the Nasdaq National
Market as of a recent date is set forth on the cover page of this Prospectus. As
of April 10, 1996 there were 149 record holders of Common Stock.
Based on continuing favorable operations and available cash flow, the
Company intends to continue to pay regular quarterly distributions on its Common
Stock. However, no assurances can be given as to the amount of future
distributions and dividends because such dividends are subject to the Company's
cash flow, earnings, financial condition, capital requirements, and the REIT
distribution requirements of the Code. Instruments governing the Company's
indebtedness contain certain covenants regarding the payment of distributions
and dividends if at any date the debt service coverage ratio, as defined, falls
below a minimum threshold. Common Stock distributions are also subject to the
preferential rights of any other shares or series of shares and to the
provisions of the Charter regarding Preferred Stock, including the Senior
Preferred Stock and the Convertible Preferred Stock. In addition, until the
Company generates quarterly Funds from Operations in excess of the FFO Threshold
Amount, it does not intend to pay a quarterly distribution per share of Common
Stock in excess of $0.295. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- TABLE 10 -- Taxability of
Dividends" for information concerning the tax treatment of distributions and
dividends, "Description of Capital Stock" and "Policies With Respect to Certain
Activities -- Distribution and Dividend Policy."
In connection with the Exchange Offer, which expired on June 24, 1996, the
Company intends to pay a special one-time cash distribution of $0.145 on each
share of Common Stock outstanding after the consummation of the Exchange Offer
but prior to the consummation of the Offering. See "Prospectus Summary --
Exchange Offer -- Special Distribution Condition."
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<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering, after payment of all expenses of the
Offering (including estimated underwriting discount) payable by the Company, are
expected to be approximately $40.2 million ($46.5 million if the Underwriters'
over-allotment option is exercised in full). The Company will use the net
proceeds of the Offering to acquire 3,705,000 additional Common Units (4,260,750
additional Common Units if the over-allotment option granted to the Underwriters
is exercised) in the Operating Partnership, all of which will be entitled to the
Preferential Distribution. The Company will account for the acquisition of such
additional Common Units by increasing its investment in the Operating
Partnership by the amount of the net proceeds of the Offering.
The Operating Partnership will use the funds it receives from the Company to
repay $40.2 million of indebtedness under (i) a $15.0 million unsecured line of
credit (the "Corporate Line") and (ii) a $160 million revolving loan (the
"Revolving Loan") with Nomura. Borrowing commitments under these facilities will
not be reduced as a result of such repayments. See "Business and Properties --
Mortgage and Other Debt Financing."
If the over-allotment option is exercised in full, the Company would use the
additional net proceeds (after payment of underwriting discounts) of
approximately $6.3 million to acquire additional Common Units in the Operating
Partnership. The Operating Partnership, in turn, will use substantially all of
such funds to repay indebtedness under the Revolving Loan.
As of March 31, 1996, the indebtedness to be repaid in connection with the
Offering had a weighted average interest rate of 7.65% per annum and the
weighted average maturity of such borrowings was 0.6 years. For more detail
concerning the annual interest rate, annual debt service and maturity of the
indebtedness being retired with the net proceeds of the Offering, see "Business
and Properties -- Mortgage and Other Debt Financing."
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholder.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 (i) on a historical basis and (ii) as adjusted to reflect the
completion of the Offering, completion of the Common Unit Contribution, and
consummation of the Exchange Offer and Special Distribution, assuming the
estimated loss of $10.1 million relating to the expected prepayment of certain
loan facilities and the termination of the 1995 Nomura Loan Commitments in
connection with the Company's execution of the 1996 Nomura Loan Commitment. See
the historical financial information relating to the Company set forth elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
(IN 000'S, EXCEPT SHARE
INFORMATION)
-----------------------
AS
HISTORICAL ADJUSTED(1)
---------- -----------
<S> <C> <C>
Long-term debt:
Bonds payable.......................................................................... $ 32,900 $ 32,900
Notes payable (2)...................................................................... 273,120 232,872
---------- -----------
Total long-term debt................................................................. 306,020 265,772
Minority interests (3)................................................................... 10,867 10,867
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock, $.01 par value, liquidation
preference of $25 per share (4)....................................................... 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock, $.01 par value,
liquidation preference of $25 per share (4)(5)........................................ 70 29
Common Stock, 75,000,000 shares authorized, $.01 par value (4)(6)(7)..................... 29 132
Additional paid-in capital (8)........................................................... 128,275 168,461
Distributions in excess of net income (9)................................................ (8,463) (19,885)
---------- -----------
Total shareholders' equity............................................................. 119,934 148,760
---------- -----------
Total capitalization................................................................... $ 436,821 $ 425,399
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Reflects the completion of the Offering, including the use of net proceeds
from the Offering as described under "Use of Proceeds," completion of the
Common Unit Contribution and consummation of the Exchange Offer and Special
Distribution. Also reflects the estimated loss of $10.1 million relating to
the expected prepayment of certain loan facilities and the termination of
the 1995 Nomura Loan Commitments in connection with the Company's execution
of the 1996 Nomura Loan Commitment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Sources and
Uses of Cash."
(2) The as adjusted amounts reflect the paydown of notes payable with the
estimated net proceeds of $40.2 million from the Offering.
(3) Immediately following the consummation of the Offering, the Limited Partners
will own 39.2% of the Common Units of partnership interest in the Operating
Partnership.
(4) Shares issued and outstanding as of March 31, 1996 on a historical basis,
and as adjusted to reflect the completion of the Offering, completion of the
Common Unit Contribution and consummation of the Exchange Offer were as
follows:
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED
---------- ------------
<S> <C> <C>
Senior Preferred Stock................................................................. 2,300,000 2,300,000
Convertible Preferred Stock............................................................ 7,015,000 2,938,502
Common Stock........................................................................... 2,875,000 13,192,722
</TABLE>
36
<PAGE>
The following summary provides a reconciliation of Common Stock outstanding
on a historical basis to Common Stock outstanding on an as adjusted basis.
<TABLE>
<CAPTION>
AS ADJUSTED
------------
<S> <C>
Historical shares issued and outstanding............................................................ 2,875,000
Shares issued upon consummation of the Exchange Offer............................................... 6,522,394
Shares issued upon completion of the Offering....................................................... 3,705,000
Shares issued upon completion of the exchange of Common Units for Common Stock by one of the Limited
Partners........................................................................................... 90,328
------------
As adjusted common shares issued and outstanding.................................................... 13,192,722
------------
------------
</TABLE>
(5) The as adjusted amounts were calculated as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
-----------
<S> <C>
Convertible Preferred Stock, historical................................................................. $ 70
Exchange of Convertible Preferred Stock into Common Stock (4,076,498, at $0.01 par value)............... (41)
---
As adjusted Convertible Preferred Stock................................................................. $ 29
---
---
</TABLE>
(6) The as adjusted amounts were calculated as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
-----------
<S> <C>
Common Stock, historical................................................................................ $ 29
Exchange of Convertible Preferred Stock into Common Stock (6,522,394 shares of Common Stock, at $0.01
par value)............................................................................................. 65
Issuance of 3,705,000 shares of Common Stock assuming consummation of the Offering at $0.01 par value... 37
Exchange of Common Units for Common Stock by the Selling Stockholder, at $0.01 par value................ 1
-----
As adjusted Common Stock................................................................................ $ 132
-----
-----
</TABLE>
(7) Does not include shares of Common Stock reserved for issuance as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------
AS
HISTORICAL ADJUSTED
---------- ----------
<S> <C> <C>
Common Stock reserved for issuance upon exchange of issued and outstanding Common Units
held by the Limited Partners........................................................... 9,220,800 8,505,472
Common Stock reserved for issuance upon conversion of Convertible Preferred Stock....... 8,391,148 3,514,954
Common Stock reserved for issuance under the Stock Incentive Plan....................... 1,185,000 1,185,000
</TABLE>
(8) The as adjusted amounts were calculated as follows:
<TABLE>
<CAPTION>
AS
ADJUSTED
----------
<S> <C>
Additional paid-in capital, historical................................................................ $ 128,275
Offering proceeds, net................................................................................ 40,248
Par value of Common Stock............................................................................. (38)
Exchange of Convertible Preferred Stock............................................................... (24)
----------
As adjusted additional paid-in capital................................................................ $ 168,461
----------
----------
</TABLE>
(9) Includes the effects of the Special Distribution of $1,363 based on the
number of shares of Convertible Preferred Stock exchanged pursuant to the
Exchange Offer.
37
<PAGE>
DILUTION
The price per share to the public of Common Stock sold in the Offering
exceeds the net tangible book value per share of Common Stock before the
Offering. Therefore, holders of the Common Stock will realize an immediate
increase of $11.29 per share of Common Stock in the net tangible book value of
their shares of Common Stock while purchasers of shares of Common Stock sold in
the Offering will realize an immediate dilution of $11.31 per share in the net
tangible book value of their shares. Net tangible book value per share is
determined by subtracting total liabilities (including minority interests) plus
the total liquidation preference of the Senior Preferred Stock and the
Convertible Preferred Stock from total tangible assets and dividing the
remainder by the number of shares of Common Stock and Common Units that will be
outstanding after the Offering. The following table illustrates the dilution to
purchasers of shares of Common Stock sold in the Offering. The sale of shares of
Common Stock by the Selling Stockholder will have no effect on dilution.
<TABLE>
<S> <C> <C>
Offering price per share(1).............................................. $ 11.75
Net tangible book value per share before the Offering(2).... $ (10.85)
Increase in pro forma net tangible book value per share
attributable to the Offering(3)............................ 11.29
-----------
Net tangible book value per share after the Offering(4).................. 0.44
-----------
Dilution per share to new public investors(5)............................ $ 11.31
-----------
-----------
</TABLE>
- ------------------------
(1) Before deducting the estimated underwriting discounts and expenses of the
Offering.
(2) Net tangible book value per share of Common Stock before the Offering is
determined by subtracting total liabilities (including minority interests)
plus the total liquidation preference of the Senior Preferred Stock and the
Convertible Preferred Stock from total tangible assets of the Company at
March 31, 1996 divided by 12,095,800 shares, representing the sum of the
shares of Common Stock outstanding and Common Units held by the Limited
Partners.
(3) Based upon the Offering price after deduction of the estimated underwriting
discounts and expenses of the Offering.
(4) Net tangible book value per share after the Offering is determined by
subtracting total liabilities (including minority interests) from total
tangible assets of the Company divided by 21,698,194 shares which represents
the sum of the shares of Common Stock outstanding and Common Units held by
the Limited Partners.
(5) Dilution is determined by subtracting net tangible book value per share of
Common Stock after giving effect to the Offering from the Offering price
paid by a new investor for a share of Common Stock.
38
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the three months ended March 31,
1996 and 1995, the year ended December 31, 1995, the periods from January 1,
1994 to March 21, 1994 and March 22, 1994 to December 31, 1994 and the three
years in the period ended December 31, 1993 are derived from the consolidated
financial statements of the Company and the combined financial statements of the
Predecessor. Combined financial statements for the three years ended December
31, 1993 and the period January 1, 1994 to March 21, 1994 are included for the
Predecessor. The combined financial statements for the Predecessor combine the
balance sheet data and results of operations of eleven predecessor partnerships,
the 40% equity interest in two predecessor partnerships that previously owned
properties, and the Management and Development Operations. Because of the
Initial Public Offering and the related transactions pertaining to the formation
of the Company, results of operations for the Company after March 21, 1994 are
not comparable to results for prior periods. Results for interim periods may not
be indicative of results for a full year. The following financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements,
notes thereto and other financial information included elsewhere in this
Prospectus.
SELECTED FINANCIAL DATA
PRIME RETAIL, INC. AND THE PREDECESSOR
(AMOUNTS IN 000'S, EXCEPT PER SHARE AND RATIO AMOUNTS)
<TABLE>
<CAPTION>
PRIME RETAIL, INC. THE PREDECESSOR
-------------------------------------------- ----------------------------------------
THREE MONTHS PERIOD PERIOD
ENDED MARCH 31, YEAR ENDED MARCH 22 JAN. 1 TO YEAR ENDED DECEMBER 31,
------------------ DEC. 31, TO DEC. 31, MARCH 21, ----------------------------
1996 1995 1995 1994 1994 1993 1992 1991
-------- -------- ---------- ----------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Base rents............................ $ 12,744 $ 10,672 $ 46,368 $ 28,657 $ 3,670 $ 14,298 $ 10,905 $ 5,138
Percentage rents...................... 443 401 1,520 1,404 187 709 654 178
Tenant reimbursements................. 6,139 4,873 22,283 11,858 2,113 5,370 3,675 2,080
Income from investment partnerships... 441 130 1,729 453 336 821 66 --
Interest and other.................... 1,364 1,198 5,498 2,997 24 602 390 138
-------- -------- ---------- ----------- --------- -------- -------- --------
Total revenues.................... 21,131 17,274 77,398 45,369 6,330 21,800 15,690 7,534
EXPENSES
Property operating.................... 4,619 3,770 17,389 9,952 1,927 5,046 3,986 1,591
Real estate taxes..................... 1,473 1,234 4,977 2,462 497 1,558 817 470
Depreciation and amortization......... 4,387 3,605 15,438 9,803 2,173 7,632 6,397 3,487
Corporate general and
administrative....................... 893 844 3,878 2,710 -- -- -- --
Interest.............................. 6,056 4,456 20,821 9,485 3,280 8,928 8,991 5,045
Property management fees.............. -- -- -- -- 299 777 626 266
Other charges......................... 646 223 2,089 1,503 562 1,732 1,930 1,252
-------- -------- ---------- ----------- --------- -------- -------- --------
Total expenses.................... 18,074 14,132 64,592 35,915 8,738 25,673 22,747 12,111
-------- -------- ---------- ----------- --------- -------- -------- --------
Income (loss) before minority
interests............................ 3,057 3,142 12,806 9,454 (2,408) (3,873) (7,057) (4,577)
Loss allocated to minority
interests............................ 1,477 1,466 5,364 5,204 -- -- -- --
-------- -------- ---------- ----------- --------- -------- -------- --------
Net income (loss)..................... 4,534 4,608 18,170 14,658 $(2,408) $ (3,873) $ (7,057) $ (4,577)
--------- -------- -------- --------
--------- -------- -------- --------
Income allocated to preferred
shareholders......................... 5,236 5,236 20,944 16,290
-------- -------- ---------- -----------
Net loss applicable to common
shareholders......................... $ (702) $ (628) $ (2,774) $ (1,632)
-------- -------- ---------- -----------
-------- -------- ---------- -----------
Net loss per common share outstanding
(1).................................. $ (0.24) $ (0.22) $ (0.96) $ (0.57)
-------- -------- ---------- -----------
-------- -------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
-------------------------------------------------
BALANCE AT DECEMBER 31,
BALANCE AT MARCH 31,
----------------------- -----------------------
1996 1995 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental property (before accumulated
depreciation)..................... $463,458 $389,019 $454,480 $376,181
Net investment in rental
property.......................... 419,319 359,174 414,290 349,513
Total assets....................... 455,706 396,629 463,724 385,930
Bonds and notes payable............ 306,020 233,479 305,954 214,025
Total liabilities.................. 324,905 247,905 327,784 233,236
Shareholders' equity (deficit)..... 119,934 126,175 121,484 127,651
<CAPTION>
THE PREDECESSOR
--------------------------------------------
BALANCE AT BALANCE AT DECEMBER 31,
MARCH 21, -------------------------------
1994 1993 1992 1991
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Rental property (before accumulated
depreciation)..................... $180,170 $185,394 $131,413 $120,024
Net investment in rental
property.......................... 164,159 169,674 122,152 115,550
Total assets....................... 186,034 190,685 145,989 133,796
Bonds and notes payable............ 188,378 184,037 142,005 119,373
Total liabilities.................. 198,244 197,400 149,411 130,434
Shareholders' equity (deficit)..... (12,210) (6,715) (3,422) 3,362
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
PRIME RETAIL, INC. THE PREDECESSOR
-------------------------------------------- ----------------------------------------
THREE MONTHS PERIOD PERIOD
ENDED MARCH 31, YEAR ENDED MARCH 22 JAN. 1 TO YEAR ENDED DECEMBER 31,
------------------ DEC. 31, TO DEC. 31, MARCH 21, ----------------------------
1996 1995 1995 1994 1994 1993 1992 1991
-------- -------- ---------- ----------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Funds from Operations (2)............... $ 8,916 $ 8,033 $ 33,133 $ 24,762 $ 834 $ 4,887 $ (436) $ (1,043)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
(3).................................... -- -- -- -- -- -- -- --
Excess of Combined Fixed Charges and
Preferred Stock Dividends over Earnings
(3).................................... $ (2,813) $ (2,862) $(11,312) $ (8,185) $(2,366) $ (4,423) $ (7,500) $ (7,328)
Ratio of Funds from Operations to
Combined Fixed Charges and Preferred
Stock Dividends (4).................... 1.24x 1.19x 1.20x 1.27x 1.27x 1.45x -- --
Excess of Combined Fixed Charges and
Preferred Stock Dividends over Funds
from Operations (4).................... -- -- -- -- -- -- $ (879) $ (3,794)
Book value per common share (5)......... $ (9.34) $ (8.82) $ (9.21) $ (8.70) -- -- -- --
Net cash provided by (used in) operating
activities............................. 9,219 7,733 36,399 17,458 $(1,873) $ 14,450 (7,309) (383)
Net cash used in investing activities... (11,748) (20,234) (81,978) (149,435) (1,239) (54,210) (14,099) (71,370)
Net cash (used in) provided by financing
activities............................. (9,809) 11,501 57,547 134,936 4,087 39,907 22,596 71,666
Distributions declared per common
share.................................. 0.295 0.295 1.18 0.623 -- -- -- --
Factory outlet leasable area (sq. ft.)
at end of period (6)................... 4,331 3,382 4,331 3,382 1,839 1,839 888 707
Number of factory outlet centers at end
of period (6).......................... 17 14 17 14 7 7 5 4
AS ADJUSTED SUPPLEMENTAL DATA (7):
Funds from Operations (2)............... $ 9,686 $ 36,212
Ratio of Funds from Operations to
Combined Fixed Charges and Preferred
Stock Dividends (4).................... 1.62x 1.60x
Net income applicable to common
shareholders........................... $ 354 $ 1,678
Net income per common share
outstanding............................ 0.03 0.13
Book value per common share (5)......... 0.82 0.89
</TABLE>
- ------------------------------
NOTES:
(1) Net loss per common share is based on 2,875, 2,875, 2,875 and 2,850 shares
outstanding for the three months ended March 31, 1996 and 1995, the year
ended December 31, 1995 and the period from March 22, 1994 to December 31,
1994, respectively.
(2) Management believes that to facilitate a clear understanding of the
consolidated historical operating results of the Company, Funds from
Operations should be considered in conjunction with net income (loss) as
presented in the financial statements included in this Prospectus.
Management generally considers FFO to be an appropriate measure of the
performance of an equity real estate investment trust. FFO represents net
income (loss) (computed in accordance with GAAP), excluding gains or losses
from debt restructuring and sales of property, plus depreciation and
amortization and after adjustments for unconsolidated investment
partnerships and joint ventures. In March 1995, the NAREIT issued a
clarification of its definition of FFO. Although the Company reports FFO
under both the old definition and the clarified definition, FFO presented in
this table does not give effect to the clarification. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Funds from Operations." The Company
cautions that the calculation of FFO may vary from entity to entity and as
such the presentation of FFO by the Company may not be comparable to other
similarly titled measures of other reporting companies. FFO does not
represent cash flow from operating activities in accordance with GAAP and is
not indicative of cash available to fund all of the Company's cash needs.
FFO should not be considered as an alternative to net income
40
<PAGE>
or any other GAAP measure as an indicator of performance and should not be
considered as an alternative to cash flow as a measure of liquidity or the
ability to service debt or to pay dividends. A reconciliation of income
(loss) before allocation to minority interests and preferred shareholders to
FFO is as follows:
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
--------------------------------------
THREE MONTHS THE PREDECESSOR
-------------------------------------
ENDED MARCH YEAR PERIOD PERIOD YEAR ENDED
31, ENDED MARCH 22, JAN. 1 TO DECEMBER 31,
-------------- DEC. 31, TO DEC. 31, MARCH 21, -------------------------
1996 1995 1995 1994 1994 1993 1992 1991
------ ------ -------- ----------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before allocations to minority
interests and preferred shareholders............. $3,057 $3,142 $12,806 $ 9,454 $(2,408) $(3,873) $(7,057) $(4,577)
FFO ADJUSTMENTS:
Depreciation and amortization..................... 4,387 3,605 15,438 9,803 2,173 7,632 6,397 3,487
Amortization of deferred financing costs and
interest rate protection contracts............... 1,112 1,068 4,524 2,945 695 362 192 47
Unconsolidated joint venture adjustments (i)...... 360 218 365 2,560 374 766 32 --
------ ------ -------- ----------- --------- ------- ------- -------
FFO before allocation to minority interests and
preferred shareholders........................... $8,916 $8,033 $33,133 $24,762 $ 834 $ 4,887 $ (436) $(1,043)
------ ------ -------- ----------- --------- ------- ------- -------
------ ------ -------- ----------- --------- ------- ------- -------
</TABLE>
----------------------------
NOTE:
(i) Amounts include net preferential partner distributions from a joint
venture partnership of $81, $162 and $2,538 for the three months ended
March 31, 1995, the year ended December 31, 1995 and the period from March
22, 1994 to December 31, 1994, respectively.
(3) For purposes of these computations, earnings consist of income (loss) less
income from unconsolidated investment partnerships, plus fixed charges
(excluding capitalized interest). Combined fixed charges and preferred stock
dividends consist of interest costs whether expensed or capitalized and
amortization of debt issuance costs and preferred stock dividends.
(4) Management believes that to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be
considered in conjunction with net income (loss) as presented in the
financial statements included in this Prospectus. Management generally
considers FFO to be an appropriate measure of the performance of an equity
real estate investment trust. For purposes of these computations, FFO
consists of FFO adjusted for interest incurred, amortization of capitalized
interest, amortization of debt issuance costs, amortization of interest rate
protection contracts, interest earned on interest rate protection contracts
and capitalized interest plus combined fixed charges and preferred stock
dividends (as defined in note 3 above).
(5) Calculated as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------
OFFERING, SPECIAL AS OF MARCH
DISTRIBUTION, 31, 1995
COMMON UNIT CONTRIBUTION -----------
HISTORICAL AND EXCHANGE OFFER HISTORICAL
----------- --------------------------- -----------
<S> <C> <C> <C>
Total shareholders' equity................................... $ 119,934 $ 148,760 $ 126,175
Liquidation preference:
Senior Preferred Stock..................................... (57,500) (57,500) (57,500)
Convertible Preferred Stock................................ (175,375) (73,463) (175,375)
----------- -------- -----------
Common shareholders' equity.................................. $(112,941) $ 17,797 $(106,700)
----------- -------- -----------
----------- -------- -----------
Common stock................................................. 2,875 13,193 2,875
Common units................................................. 9,221 8,505 9,221
----------- -------- -----------
12,096 21,698 12,096
----------- -------- -----------
----------- -------- -----------
Book value per common share.................................. $ (9.34) $ 0.82 $ (8.82)
----------- -------- -----------
----------- -------- -----------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------------------
OFFERING, SPECIAL
DISTRIBUTION,
COMMON UNIT CONTRIBUTION
HISTORICAL AND EXCHANGE OFFER
----------- ---------------------------
<S> <C> <C>
Total shareholders' equity............................................... $ 121,484 $ 150,310
Liquidation preference:
Senior Preferred Stock................................................. (57,500) (57,500)
Convertible Preferred Stock............................................ (175,375) (73,463)
----------- --------
Common shareholders' equity.............................................. $(111,391) $ 19,347
----------- --------
----------- --------
Common stock............................................................. 2,875 13,193
Common units............................................................. 9,221 8,505
----------- --------
12,096 21,698
----------- --------
----------- --------
Book value per common share.............................................. $ (9.21) $ 0.89
----------- --------
----------- --------
</TABLE>
(6) Includes four factory outlet centers with an aggregate GLA of 901 square
feet operated under joint venture partnerships with unrelated third parties.
See "Business and Properties."
(7) Amounts include the effect of the Offering, the Special Distribution, the
Common Unit Contribution and the application of the net proceeds therefrom
and the consummation of the Exchange Offer as if such transactions were
completed on January 1, 1995. Amounts include the effect of the Offering,
the Special Distribution, the Common Unit Contribution and the application
of the net proceeds therefrom and the consummation of the Exchange Offer on
January 1, 1996.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
INTRODUCTION
The following discussion and analysis of the consolidated financial
condition and results of operations of the Company and the Predecessor should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto. The combined financial statements of Prime Retail Properties combine
the balance sheet data and results of operations of eleven property partnerships
(the "Predecessor") which were contributed to Prime Retail, L.P. (the "Operating
Partnership") simultaneously with the completion on March 22, 1994 of the
initial public offerings by the Company (the "Initial Public Offering") of
2,300,000 shares of Series A Senior Cumulative Preferred Stock ("Senior
Preferred Stock") at $25.00 per share, 7,015,000 shares of Series B Cumulative
Participating Convertible Preferred Stock ("Convertible Preferred Stock") at
$25.00 per share, and 2,875,000 shares of Common Stock at $19.00 per share.
Historical results and percentage relationships set forth herein are not
necessarily indicative of future operations.
PORTFOLIO GROWTH
The Company has grown by developing and acquiring factory outlet centers and
expanding its existing factory outlet centers. As summarized under the caption
"Business and Properties", the Company's factory outlet portfolio consisted of
seventeen operating factory outlet centers totaling 4,331,000 square feet of
gross leasable area ("GLA") at March 31, 1996, compared to fourteen factory
outlet centers totaling 3,382,000 square feet of GLA at March 31, 1995. The
Company opened three new factory outlet centers and four expansions of existing
factory outlet centers during the third and fourth quarters of 1995, adding
949,000 square feet of GLA in the aggregate. During 1994, the Company opened
four new factory outlet centers and four expansions adding 1,077,000 square feet
of GLA in the aggregate. In addition, on September 30, 1994, the Company
purchased a 30% interest in the joint venture partnership that owned one factory
outlet center with 148,000 square feet of GLA. The Company also acquired 318,000
square feet of GLA from unrelated third parties in connection with the Initial
Public Offering. The significant increases in the number of operating properties
and total GLA from December 31, 1993 to March 31, 1996 are collectively referred
to as the "Portfolio Expansion."
RESULTS OF OPERATIONS
GENERAL
Due primarily to the Company's Initial Public Offering and related
transactions in March 1994, comparisons between the years ended December 31,
1995, 1994 (consisting of the periods from January 1, 1994 to March 21, 1994 and
March 22, 1994 to December 31, 1994) and 1993 on a historical basis are not
meaningful in understanding the operating results of the Company unless the
periods in 1994 are combined. Therefore, Consolidated Statements of Operations
are presented in TABLE 1 with the 1994 periods combined as if the Company was
formed on January 1, 1994.
The Combined Statement of Operations for the year ended December 31, 1994
should be read in conjunction with the historical financial statements included
herein. The Combined Statement of Operations is not necessarily indicative of
what the actual results of operations of the Company would have been if the
Initial Public Offering had been consummated at January 1, 1994, nor does it
purport to represent the results of operations of the Company for future
periods.
43
<PAGE>
TABLE 1 -- CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(COMBINED)
<S> <C> <C> <C> <C> <C>
REVENUES
Base rents....................................... $ 12,744 $ 10,672 $ 46,368 $ 32,327 $ 14,298
Percentage rents................................. 443 401 1,520 1,591 709
Tenant reimbursements............................ 6,139 4,873 22,283 13,971 5,370
Income from investment partnerships.............. 441 130 1,729 789 821
Interest and other............................... 1,364 1,198 5,498 3,021 602
---------- ---------- ---------- ---------- ----------
Total revenues............................... 21,131 17,274 77,398 51,699 21,800
EXPENSES
Property operating............................... 4,619 3,770 17,389 11,879 5,046
Real estate taxes................................ 1,473 1,234 4,977 2,959 1,558
Depreciation and amortization.................... 4,387 3,605 15,438 11,976 7,632
Corporate general and administrative............. 893 844 3,878 2,710 --
Interest......................................... 6,056 4,456 20,821 12,765 8,928
Property management fees......................... -- -- -- 299 777
Other charges.................................... 646 223 2,089 2,065 1,732
---------- ---------- ---------- ---------- ----------
Total expenses............................... 18,074 14,132 64,592 44,653 25,673
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interests.......... 3,057 3,142 12,806 7,046 (3,873)
Loss allocated to minority interests............. 1,477 1,466 5,364 5,204 --
---------- ---------- ---------- ---------- ----------
Net income (loss)................................ 4,534 4,608 18,170 12,250 $ (3,873)
----------
----------
Income allocated to preferred shareholders....... 5,236 5,236 20,944 16,290
---------- ---------- ---------- ----------
Net loss applicable to common shares............. $ (702) $ (628) $ (2,774) $ (4,040)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share outstanding............ $ (0.24) $ (0.22) $ (0.96) $ (1.42)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding.............. 2,875,000 2,875,000 2,875,000 2,850,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
44
<PAGE>
TABLE 2 -- STATEMENTS OF OPERATIONS ON A WEIGHTED AVERAGE PER SQUARE FOOT BASIS
A summary of the operating results for the years ended December 31, 1995,
1994 and 1993, respectively, is presented in the following table, expressed in
amounts calculated on a weighted average occupied GLA basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(COMBINED)
<S> <C> <C> <C>
GLA at end of period (1)............................................................. 4,134 3,487 2,740
Weighted average occupied GLA........................................................ 3,458 2,591 1,155
Executed leases at end of period..................................................... 3,950 3,341 2,623
Factory outlet centers in operation (3).............................................. 17 14 9
New factory outlet centers opened (3)................................................ 3 5 3
Factory outlet centers expanded (3).................................................. 4 4 5
Community centers in operation....................................................... 3 3 3
States operated in at end of period.................................................. 14 11 7
PORTFOLIO WEIGHTED AVERAGE PER SQUARE FOOT (2):
REVENUES
Base rents........................................................................... $ 13.41 $ 12.48 $ 12.38
Percentage rents..................................................................... 0.44 0.61 0.61
Tenant reimbursements................................................................ 6.44 5.39 4.65
Interest and other................................................................... 2.09 1.47 1.23
--------- --------- ---------
Total revenues................................................................... 22.38 19.95 18.87
EXPENSES
Property operating................................................................... 5.03 4.58 4.37
Real estate taxes.................................................................... 1.44 1.14 1.35
Depreciation and amortization........................................................ 4.46 4.62 6.61
Corporate general and administrative................................................. 1.12 1.05 --
Interest............................................................................. 6.02 4.93 7.73
Other charges........................................................................ 0.60 0.91 2.17
--------- --------- ---------
Total expenses................................................................... 18.67 17.23 22.23
--------- --------- ---------
Income (loss) before minority interests.............................................. $ 3.71 $ 2.72 $ (3.36)
--------- --------- ---------
--------- --------- ---------
FACTORY OUTLET CENTERS WEIGHTED AVERAGE PER SQUARE FOOT (2):
REVENUES
Base rents........................................................................... $ 14.36 $ 13.61 $ 13.59
Percentage rents..................................................................... 0.51 0.77 0.90
Tenant reimbursements................................................................ 7.16 6.35 6.23
Interest and other................................................................... 0.66 0.95 1.68
--------- --------- ---------
Total revenues................................................................... 22.69 21.68 22.40
EXPENSES
Property operating................................................................... 5.54 5.30 5.62
Real estate taxes.................................................................... 1.46 1.08 0.90
Depreciation and amortization........................................................ 4.38 4.32 7.13
Interest............................................................................. 6.81 5.21 8.13
Other charges........................................................................ 0.23 0.79 2.48
--------- --------- ---------
Total expenses................................................................... 18.42 16.70 24.26
--------- --------- ---------
Income (loss) before minority interests.............................................. $ 4.27 $ 4.98 $ (1.86)
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
NOTES:
(1) Includes total GLA in which the Company receives the economic benefit of a
100% ownership interest.
(2) Based on occupied GLA weighted by months of operations.
(3) Includes three factory outlet centers operated under unconsolidated joint
venture partnerships with unrelated third parties.
45
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 TO THE THREE MONTHS
ENDED MARCH 31, 1995
SUMMARY
For the three months ended March 31, 1996, the Company reported net income
of $4,534 on total revenues of $21,131. For the same period in 1995, the Company
reported net income of $4,608 on total revenues of $17,274. For the three months
ended March 31, 1996 and 1995, the loss allocated to common shareholders was
$702, or $0.24 per common share, and $628, or $0.22 per common share,
respectively.
REVENUES
Total revenues were $21,131 for the three months ended March 31, 1996, as
compared to $17,274 for the three months ended March 31, 1995, an increase of
$3,857, or 22.3%. Base rents increased $2,072, or 19.4%, in 1996 compared to
1995. These increases are primarily due to the Portfolio Expansion.
Straight-line rents (included in base rents) were $156 and $182 for the months
ended March 31, 1996 and 1995, respectively.
Tenant reimbursements, which represent the contractual recovery from tenants
of certain operating expenses, increased by $1,266, or 26.0%, during the three
months ended March 31, 1996 over the same period in 1995. These increases are
primarily due to the Portfolio Expansion. Tenants reimbursements as a percentage
of recoverable operating expenses, which include property operating expenses and
real estate taxes, increased to 100.8% from 97.4% during the three months ended
March 31, 1996 and 1995, respectively. This positive trend reflects the
Company's continued efforts to contain operating expenses at its properties
while requiring merchants to pay their pro-rata share of these expenses.
Income from investment partnerships increased by $311 for the three months
ended March 31, 1996 over the same period in 1995. This increase is primarily
due to the openings of Grove City Factory Shops (Phase III -- November 1995) and
Arizona Factory Shops (Phase I -- September 1995). Interest and other income
increased by $166, or 13.9%, to $1,364 during the three months ended March 31,
1996 as compared to $1,198 for the three months ended March 31, 1995. The
increase is attributable to higher lease termination income, late fee income,
property management fees, interest income and ancillary income of $380, $60,
$46, $39 and $31, respectively, offset by lower leasing commissions and
construction management fees of $390.
EXPENSES
Property operating expenses increased by $849, or 22.5%, to $4,619 for the
three months ended March 31, 1996 compared to $3,770 for the same period in
1995. Real estate taxes increased by $239, or 19.4%, to $1,473 for the three
months ended March 31, 1996, from $1,234 in the same period for 1995. The
increases in property operating expenses and real estate taxes are primarily due
to the Portfolio Expansion. As shown in TABLE 5, depreciation and amortization
expense increased by $782, or 21.7%, to $4,387 for the three months ended March
31, 1996, compared to $3,605 for 1995. This increase results from the
depreciation and amortization of assets associated with the Portfolio Expansion.
As shown in TABLE 6, interest expense for the three months ended March 31,
1996, increased by $1,600, or 35.9%, to $6,056 compared to $4,456 for the same
period in 1995. This increase is primarily the result of an increase of $72,541
in total debt outstanding at March 31, 1996 compared to total debt outstanding
at March 31, 1995. Also reflected in the increase was increased amortization of
deferred financing costs of $44; a decrease in interest earned from interest
rate protection contracts of $159; and an increase in the amount of interest
capitalized in connection with new development projects of $32. The weighted
average interest rate for bonds and notes payable at March 31, 1996 and 1995 was
7.15% and 7.78% respectively.
Other charges increased by $423, or 189.7%, to $646 for the three months
ended March 31, 1996 compared to $223 for the same period in 1995. This increase
reflects higher provisions for uncollectible accounts receivable and potentially
unsuccessful pre-development efforts of $167 and $65, respectively, as well as
increases in marketing costs and miscellaneous operating expenses of $111 and
$80, respectively.
46
<PAGE>
In connection with re-leasing space to new merchants, the Company incurred
capital expenditures of $19 and $162 during the three months ended March 31,
1996 and 1995, respectively.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER
31, 1994
Income before minority interests was $12,806 for the year ended December 31,
1995, as compared to $7,046 for the year ended December 31, 1994, an increase of
$5,760, or 81.7%. This increase was primarily the result of Portfolio Expansion,
including the effect of the acquisition of certain properties in connection with
the Initial Public Offering.
Total revenues were $77,398 for the year ended December 31, 1995, as
compared to $51,699 for the year ended December 31, 1994, an increase of
$25,699, or 49.7%. Base rents increased $14,041, or 43.4%, in 1995 compared to
1994. Straight-line rents (included in base rents) were $931 and $(112) for the
years ended December 31, 1995 and 1994, respectively. These increases are
primarily due to the Portfolio Expansion, including the effect of the
acquisition of certain properties in connection with the Initial Public
Offering. The average base rent for new factory outlet leases negotiated and
executed by the Company was $14.90 and $15.06 per square foot for the years
ended December 31, 1995 and 1994, respectively.
As summarized in TABLE 3, merchant sales reported to the Company increased
by $226.4 million, or 38.8%, to $809.6 million from $583.2 million for the years
ended December 31, 1995 and 1994, respectively. The increase in total reported
merchant sales is primarily due to the Portfolio Expansion, including the effect
of the acquisition of certain properties in connection with the Initial Public
Offering. However, the weighted average reported merchant sales per square foot
decreased by 6.4% to $235.99 per square foot compared to $252.15 per square foot
for the years ended December 31, 1995 and 1994, respectively. The Company
believes that this decrease is primarily due to the overall softness of national
retail sales in 1995. Management believes that the decline in the weighted
average merchant sales per square foot in 1995 does not represent a continuing
trend which may materially adversely impact the Company's results of operations.
The Company's factory outlet centers contained an average of 254,765 and 241,571
square feet of GLA at December 31, 1995 and 1994, respectively. The increase in
total occupancy cost per square foot is primarily due to the increases in base
rents per square foot and tenant reimbursements per square foot during 1995 when
compared to 1994. The increase in the cost of merchant occupancy to reported
sales is primarily due to a decrease in the weighted average reported merchant
sales per square foot for the entire factory outlet portfolio. As a result of
the decrease in the weighted average reported merchant sales per square foot
during 1995 when compared to 1994, percentage rent income decreased $71, or
4.5%.
TABLE 3 -- SUMMARY OF REPORTED MERCHANT SALES
A summary of reported factory outlet merchant sales and related data for
1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Total reported merchant sales (in millions) (1)........................... $ 809.6 $ 583.2 $ 338.3
----------- ----------- -----------
----------- ----------- -----------
Weighted average reported merchant sales per square foot (2):
All store sales......................................................... $ 235.99 $ 252.15 $ 270.37
----------- ----------- -----------
----------- ----------- -----------
Same space sales........................................................ $ 243.86 $ 246.07
----------- -----------
----------- -----------
Total merchant occupancy cost per square foot (3)......................... $ 21.64 $ 20.17 $ 20.74
----------- ----------- -----------
----------- ----------- -----------
Cost of merchant occupancy to reported sales (4).......................... 9.17% 8.00% 7.67%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
NOTES:
(1) Total reported merchant sales summarizes gross sales generated by merchants
and includes changes in merchant mix and the effect of new space created
from the acquisition and opening of new and expanded factory outlet centers.
Most of the factory outlet centers were expanded or constructed during
47
<PAGE>
the time periods contained in TABLE 3 and reported sales for such new
openings and expansions were reported only for the partial period and were
not annualized. TABLE 3 should be read in conjunction with the information
summarized under the caption "Business and Properties."
(2) Weighted average reported sales per square foot is based on reported sales
divided by the weighted average square footage occupied by the merchants
reporting those sales. Same space sales is defined as the weighted average
reported merchant sales per square foot for space open since January 1,
1994.
(3) Total merchant occupancy cost includes base rents, percentage rents and
tenant reimbursements.
(4) Computed as follows: total merchant occupancy cost divided by total weighted
average reported merchant sales per square foot.
Tenant reimbursements, which represent the contractual recovery from tenants
of certain operating expenses, increased by $8,312, or 59.5%, in 1995 over 1994.
These increases are primarily due to the Portfolio Expansion, including the
effect of the acquisition of certain properties in connection with the Initial
Public Offering.
As shown in TABLE 4, tenant reimbursements as a percentage of recoverable
operating expenses increased to 99.6% in 1995 from 94.2% in 1994. This increase
reflects the Company's continued efforts to contain operating expenses at its
properties while requiring merchants to pay their pro rata share of these
expenses. TABLE 4 highlights the positive trend of increasing recoveries from
merchants as a percentage of total recoverable expenses:
TABLE 4 -- TENANT RECOVERIES AS A PERCENTAGE OF TOTAL RECOVERABLE EXPENSES
<TABLE>
<CAPTION>
PERCENTAGE OF
EXPENSES RECOVERED
YEAR FROM TENANTS (1)
- -------------------------------------------------------------------------- ---------------------
<S> <C>
1995...................................................................... 99.6%
1994 (2).................................................................. 94.2%
1993...................................................................... 81.3%
</TABLE>
- ------------------------
NOTES:
(1) Total recoverable expenses include property operating expenses and real
estate taxes.
(2) Combined.
Income from investment partnerships increased by $940 for the year ended
December 31, 1995 due to the openings of Grove City Factory Shops (Phase I --
August 1994; Phase II -- November 1994; Phase III -- November 1995) and Arizona
Factory Shops (Phase I -- September 1995) and the purchase of a 30% interest in
Oxnard Factory Outlet during the third quarter of 1994. Interest and other
income increased by $2,477, or 82.0%, to $5,498 during the year ended December
31, 1995 as compared to the year ended December 31, 1994. The increase is due to
higher leasing commissions, development and construction management fees,
property management fees, interest income and ancillary income of $1,433, $499,
$357, $107 and $197, respectively, offset by a decrease in real estate brokerage
commissions of $222. Additionally, the increase reflects a $106 gain on the sale
of land during the year ended December 31, 1995. During the years ended December
31, 1995 and 1994, the Company recorded net preferential partner distributions
of $162 and $2,538, respectively, from a joint venture partnership in connection
with the development of a factory outlet center.
Property operating expenses increased by $5,510, or 46.4%, to $17,389 for
the year ended December 31, 1995 compared to $11,879 for the same period in
1994. Real estate taxes increased by $2,018, or 68.2%, to $4,977 for the year
ended December 31, 1995, from $2,959 in the same period for 1994. The increases
in property operating expenses and real estate taxes are primarily due to the
Portfolio Expansion, including the effect of the acquisition of certain
properties in connection with the Initial Public Offering. Depreciation and
amortization expense increased by $3,462, or 28.9%, to $15,438 for the year
ended December 31, 1995, compared to $11,976 for 1994. This increase resulted
from the impact of the Portfolio Expansion, including
48
<PAGE>
the effect of the acquisition of certain properties in connection with the
Initial Public Offering, which was offset in part by a change in the estimated
useful lives of certain improvements which reduced depreciation and amortization
expense by $657 and $2,040 for the years ended December 31, 1995 and 1994,
respectively. See Note 2 -- "Summary of Significant Accounting Policies" of the
Notes to Financial Statements.
TABLE 5 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE
The components of depreciation and amortization expense for the three months
ended March 31, 1996 and 1995 and for the years ended December 31, 1995, 1994
and 1993 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(COMBINED)
<S> <C> <C> <C> <C> <C>
Building and improvements...................................... $ 2,228 $ 1,918 $ 8,159 $ 5,758 $ 3,389
Land improvements.............................................. 479 335 1,440 879 342
Tenant improvements............................................ 1,106 833 3,563 3,127 2,970
Furniture and fixtures......................................... 156 108 554 295 128
Leasing commissions (1)........................................ 418 411 1,722 1,917 803
--------- --------- --------- --------- ---------
Total...................................................... $ 4,387 $ 3,605 $ 15,438 $ 11,976 $ 7,632
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
NOTE:
(1) In accordance with GAAP, leasing commissions are classified as intangible
assets. Therefore, the amortization of leasing commissions are reported as a
component of depreciation and amortization expense.
TABLE 6 -- COMPONENTS OF INTEREST EXPENSE
The components of interest expense for the three months ended March 31, 1996
and 1995 and for the years ended December 31, 1995, 1994 and 1993 are summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(COMBINED)
<S> <C> <C> <C> <C> <C>
Interest incurred.............................................. $ 5,641 $ 4,212 $ 19,354 $ 10,313 $ 9,277
Interest capitalized........................................... (613) (581) (2,336) (964) (711)
Interest earned on interest rate protection contracts.......... (84) (243) (721) (224) --
Amortization of deferred financing costs....................... 793 749 3,248 2,843 362
Amortization of interest rate protection contracts............. 319 319 1,276 797 --
--------- --------- --------- --------- ---------
Total...................................................... $ 6,056 $ 4,456 $ 20,821 $ 12,765 $ 8,928
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
As shown in TABLE 6, interest expense for the year ended December 31, 1995,
increased by $8,056, or 63.1%, to $20,821 compared to $12,765 for the same
period in 1994. This increase is primarily the result of an increase of $91,929
in debt outstanding at December 31, 1995 compared to debt balances at December
31, 1994, and a general increase in interest rates during 1995. Also reflected
in the increase was increased amortization of deferred financing costs and
interest rate protection contracts of $884. In addition, during the year ended
December 31, 1994, deferred financing costs of approximately $1,313 were fully
amortized as a result of debt refinancings. These increases were offset, in
part, by an increase in amounts earned from interest rate protection contracts
of $497 and an increase in the amount of interest capitalized in connection with
new development projects of $1,372. The weighted average interest rate for bonds
and notes payable at December 31, 1995 and 1994 was 7.81% and 7.58%,
respectively.
49
<PAGE>
TABLE 7 -- CAPITAL EXPENDITURES
The components of capital expenditures for the three months ended March 31,
1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993 are
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- ---------- ---------
(COMBINED)
<S> <C> <C> <C> <C> <C>
New developments........................................... $ 4,693 $ 11,079 $ 57,027 $ 63,601 $ 27,991
Property acquisitions, net (1)............................. -- -- -- 115,883 --
Renovations and expansions................................. 4,266 1,597 21,432 10,978 25,931
Re-leasing tenant allowances............................... 19 162 616 563 265
--------- --------- --------- ---------- ---------
Total.................................................. $ 8,978 $ 12,838 $ 79,075 $ 191,025 $ 54,187
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
</TABLE>
- ------------------------
NOTE:
(1) Amount includes the net assets acquired by the Company in connection with
the Initial Public Offering consisting of (i) the purchase of the 60%
previously unowned interest in two joint venture partnerships ($84,642),
(ii) the purchase of two factory outlet centers ($37,874), (iii) the
purchase of a community center ($15,256), and (iv) the purchase of land and
the contribution of assets by certain Limited Partners ($1,977) reduced by
certain property excluded from the Initial Public Offering ($23,866).
TABLE 8 -- CONSOLIDATED QUARTERLY SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
1995
----------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Total revenues.................................... $21,329 $20,005 $18,790 $17,274
Total expenses.................................... 17,960 16,773 15,727 14,132
------- ------- ------- -------
Income before minority interests.................. 3,369 3,232 3,063 3,142
Loss allocated to minority interests.............. 1,213 1,290 1,395 1,466
------- ------- ------- -------
Net income........................................ 4,582 4,522 4,458 4,608
Income allocated to preferred shareholders........ 5,236 5,236 5,236 5,236
------- ------- ------- -------
Loss applicable to common shares.................. $ (654 ) $ (714 ) $ (778 ) $ (628)
------- ------- ------- -------
------- ------- ------- -------
Loss per common share outstanding (1)............. $(0.23 ) $(0.25 ) $(0.27 ) $(0.22)
------- ------- ------- -------
------- ------- ------- -------
Weighted average common shares outstanding........ 2,875 2,875 2,875 2,875
------- ------- ------- -------
------- ------- ------- -------
Distributions paid per common share............... $0.295 $0.295 $0.295 $0.295
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
1994
----------------------------------------
PERIOD FROM
MARCH 22,
1994
TO
FOURTH THIRD SECOND MARCH 31,
QUARTER QUARTER QUARTER 1994
------- ------- ------- -------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Total revenues.................................... $17,034 $14,168 $12,871 $ 1,296
Total expenses.................................... 13,908 11,041 10,082 884
------- ------- ------- -------------
Income before minority interests.................. 3,126 3,127 2,789 412
Loss allocated to minority interests.............. 1,609 1,622 1,839 134
------- ------- ------- -------------
Net income........................................ 4,735 4,749 4,628 546
Income allocated to preferred shareholders........ 5,236 5,236 5,236 582
------- ------- ------- -------------
Loss applicable to common shares.................. $ (501 ) $ (487 ) $ (608 ) $ (36)
------- ------- ------- -------------
------- ------- ------- -------------
Loss per common share outstanding (1)............. $(0.17 ) $(0.17 ) $(0.21 ) $ (0.01)
------- ------- ------- -------------
------- ------- ------- -------------
Weighted average common shares outstanding........ 2,875 2,875 2,834 2,500
------- ------- ------- -------------
------- ------- ------- -------------
Distributions paid per common share............... $0.295 $0.295 $0.033 $ --
------- ------- ------- -------------
------- ------- ------- -------------
</TABLE>
- ------------------------------
NOTE:
(1) Net loss per common share is net of applicable preferred dividends. Fully
diluted per share amounts are not presented since the effect would be
anti-dilutive.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER
31, 1993
Income before minority interests was $7,046 for the year ended December 31,
1994, as compared to a loss before minority interests of $3,873 for the year
ended December 31, 1993. The increase was primarily the result of the Portfolio
Expansion, including the effect of the acquisition of certain properties in
connection with the Initial Public Offering, as well as interest expense savings
of $3,748 due to the repayment of certain outstanding debt using the proceeds
from the Initial Public Offering.
Total revenues were $51,699 for the year ended December 31, 1994, as
compared to $21,800 for 1993, an increase of $29,899, or 137%. Base rents
increased $18,029, or 126%, in 1994 compared to 1993. Straight-line
50
<PAGE>
rents (included in base rents) were $(112) and $509 for the years ended December
31, 1994 and 1993, respectively. Percentage rents increased $882, or 124%, in
1994 compared to 1993. These increases are primarily due to the Portfolio
Expansion, including the effect of the acquisition of certain properties in
connection with the Initial Public Offering. The average base rent for new
factory outlet leases negotiated and executed by the Company was $15.06 and
$14.73 per square foot for the years ended December 31, 1994 and 1993,
respectively.
As summarized in TABLE 3, merchant sales reported to the Company increased
$244.9 million, or 72%, to $583.2 million from $338.3 million for the years
ended December 31, 1994 and 1993, respectively. The increase is primarily due to
the Portfolio Expansion and the improvement in merchant mix at certain factory
outlet centers. The decrease in total merchant occupancy cost per square foot is
primarily due to various cost containment programs implemented in 1994 and the
expansion space opened by the Company during 1994 (aggregating 234,000 square
feet of GLA). The expansion space resulted in a larger base of total GLA to
allocate the fixed operating costs of the factory outlet centers. The average
factory outlet center in the Company's portfolio of properties contained 241,571
and 239,667 square feet of GLA at December 31, 1994 and 1993, respectively. The
increase in the cost of merchant occupancy to reported sales is primarily due to
the decrease in the weighted average reported merchant sales per square foot for
the entire factory outlet portfolio of $252.15 and $270.37 for the years ended
December 31, 1994 and 1993, respectively. The decrease in the weighted average
reported merchant sales per square foot for the entire factory outlet portfolio
is primarily due to the timing of certain openings that occurred during the
second half of 1993 which resulted in higher weighted average sales per square
foot in the fourth quarter of 1993.
Tenant reimbursements, which represent the contractual recovery from tenants
of certain operating expenses, increased by $8,601, or 160%, in 1994 over 1993.
This increase is primarily due to the Portfolio Expansion, including the effect
of the acquisition of certain properties in connection with the Initial Public
Offering, as well as the Company's efforts to recover a higher percentage of
recoverable operating expenses. Income from investment partnerships was $789 for
the year ended December 31, 1994 due to the opening of Grove City Factory Shops
and the purchase of a 30% interest in Oxnard Factory Outlet during the third
quarter of 1994. Interest and other income increased by $2,419, or 402%, to
$3,021, during the year ended December 31, 1994 as compared to the same period
in 1993. The increase is primarily due to increases in municipal assistance
income, real estate brokerage commissions, interest income and lease termination
fees of $795, $597, $549 and $226, respectively. During the year ended December
31, 1994, the Company recorded net preferential partner distributions of $2,538
in connection with the development of a factory outlet center.
Property operating expenses increased by $6,833, or 135%, to $11,879 for the
year ended December 31, 1994 compared to $5,046 for the same period in 1993.
Real estate taxes increased by $1,401, or 90%, to $2,959 for the year ended
December 31, 1994, from $1,558 in the same period for 1993. The increases in
property operating expenses and real estate taxes are primarily due to the
Portfolio Expansion, including the effect of the acquisition of certain
properties in connection with the Initial Public Offering. Depreciation and
amortization expense increased by $4,344, or 57%, to $11,976 for the year ended
December 31, 1994, compared to $7,632 for 1993. This increase results from the
impact of the Portfolio Expansion, including the effect of the acquisition of
certain properties in connection with the Initial Public Offering, which was
offset in part by a change in the estimated useful lives of certain improvements
which reduced depreciation and amortization expense by $2,040 for the year ended
December 31, 1994. See Note 2 -- "Summary of Significant Accounting Policies" of
the Notes to Consolidated Financial Statements. TABLE 5 summarizes the
components of depreciation and amortization expense for the years ended December
31, 1994 and 1993.
As shown in TABLE 6, interest expense for the year ended December 31, 1994
increased by $3,837, or 43%, to $12,765 compared to $8,928 for the same period
in 1993. This increase is primarily the result of an increase of approximately
$29,988 in debt outstanding at December 31, 1994 over the debt outstanding at
December 31, 1993, and an increase in interest rates offset, in part, by amounts
earned from interest rate protection contracts of $224 during 1994. Also
reflected in the increase was increased amortization of deferred financing costs
and interest rate protection contracts of $3,278. In addition, during the year
ended
51
<PAGE>
December 31, 1994, deferred financing costs of approximately $1,313 were fully
amortized as a result of debt refinancings. The weighted average interest rate
for bonds and notes payable at December 31, 1994 and 1993 was 7.58% and 4.72%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
For the three months ended March 31, 1996, net cash provided by operating
activities was $9,219. Cash used in investing activities was $11,748 for the
three months ended March 31, 1996. The primary use of these funds was for costs
associated with the development and construction of two new factory outlet
centers and seven expansions of existing factory outlet centers scheduled to
open during the remainder of 1996; costs associated with the completion of two
factory outlet centers and three expansions opened during 1995; and costs for
pre-development activities associated with future developments. Net cash used in
financing activities was $9,809 for the three months ended March 31, 1996. The
principal uses of these funds were the payment of certain deferred financing
costs of $1,679, including $1,277 to a financial institution in connection with
proposed financing activities; distributions to minority interests (including
distributions to the limited partner unit holders) of $2,112; and preferred and
common stock distributions of $6,084.
On March 2, 1995, the Company closed on the $160,000 Revolving Loan with
Nomura. The Revolving Loan bears interest at 30-day LIBOR plus 2.25%, requires
monthly interest-only payments and matures on December 31, 1996. The Company can
extend the maturity of the Revolving Loan for a period of one year subject to
its satisfaction of certain conditions. The Revolving Loan is guaranteed by the
Operating Partnership and seven Property Partnerships, and is
cross-collateralized by first mortgages on seven factory outlet centers and
certain related assets. The Revolving Loan prohibits additional collateralized
indebtedness on the pledged properties and requires compliance with certain
monetary and non-monetary covenants. The Revolving Loan agreement contains
certain covenants regarding the payment of distributions and dividends if at any
date the debt service coverage ratio, as defined, falls below a minimum
threshold. As of March 31, 1996, the Company was in compliance with monetary,
non-monetary and debt service coverage covenants. The principal balance
outstanding under the Revolving Loan at March 31, 1996 was $145,478 and the
interest rate was 7.56%.
The amount available to be drawn by the Company under the Revolving Loan at
any time during the term of the facility is calculated based upon the net cash
flow from the collateral, as defined. The collateral pool of the Revolving Loan
can be expanded, subject to lender approval, by adding properties, including
properties under development, that satisfy certain criteria relating to, among
other things, the level of executed leases and the amount of projected net cash
flow. At March 31, 1996, the Revolving Loan was fully drawn based on executed
leases and projected net cash flow of the collateral, as defined. The Company
intends to use the net proceeds of approximately $40,248 from the Common Stock
Offering to repay outstanding borrowings under the Revolving Loan.
Effective December 31, 1995, the Company's $16,000 fixed rate mortgage loan
that was scheduled to mature on that date was modified to extend the maturity
date to July 31, 1996 at a fixed rate of interest of 8.00%. On January 30, 1996,
the Company obtained from a commercial mortgage company a commitment for a
mortgage loan in an amount not to exceed $7,000 for an eight-year term (the
"Refinancing Loan"). The Refinancing Loan will bear a fixed interest rate based
on eight-year Treasury notes plus 2.60% and requires monthly principal and
interest payments based on a 16-year amortization schedule. The Company intends
to close on the Refinancing Loan by July 31, 1996 and pay in full such maturing
loan by using the net proceeds of the Refinancing Loan and approximately $9,000
of the net proceeds from one or more facilities contemplated by the 1996 Nomura
Loan Commitment.
On May 7, 1996, the Corporate Line was renewed and increased to $15,000. The
purpose of the Corporate Line is to provide working capital to facilitate the
funding of short-term operating cash needs of the Company. The Corporate Line
bears interest at 30-day LIBOR plus 2.50% and matures on July 11, 1997. No
amounts were outstanding at March 31, 1996 under the Corporate Line.
52
<PAGE>
On December 18, 1995, the Company obtained from Nomura a commitment for a
ten-year $233,000 first mortgage loan and a commitment for a five-year $22,500
term loan (the "1995 Nomura Loan Commitments"). On December 18, 1995, the
Company also obtained from Nomura a $35,000 interim loan (the "Interim Loan")
collateralized by second mortgages on two existing factory outlet centers. The
Interim Loan bears interest at 30-day LIBOR plus 2.25%, matures on July 31,
1996, and requires monthly interest-only payments prior to maturity. The
principal balance outstanding at March 31, 1996 was $10,000.
The Company has accepted the 1996 Nomura Loan Commitment which provides for,
among other things, (i) the First Mortgage Loan in the principal amount of
$226.5 million and (ii) the Mezzanine Mortgage Loan in the principal amount of
$33.5 million. The Company expects to close the First Mortgage Loan and the
Mezzanine Mortgage Loan in July 1996. The 1996 Nomura Loan Commitment is subject
to Nomura's customary real estate due diligence review of the thirteen factory
outlet centers comprising the collateral and the completion of appropriate
documentation. In connection with the 1996 Nomura Loan Commitment, the Company
will pay Nomura a commitment fee at closing in the amount of $3.5 million. There
can be no assurance that the Company will be successful in consummating such
refinancing.
The First Mortgage Loan will bear a variable rate of interest equal to
30-day LIBOR plus 1.24% (plus trustee and servicing fees, which are expected to
be 0.07% in the aggregate). The Mezzanine Mortgage Loan will bear a variable
rate of interest equal to 30-day LIBOR plus 3.25%. The First Mortgage Loan and
the Mezzanine Mortgage Loan are expected to be securitized by Nomura on or
before September 30, 1996 (the "Securitization Closing Date"). In the event the
Securitization Closing Date does not occur by September 30, 1996, or in the
event the Company elects to terminate the securitization and repay the loans
because the terms of the securitization are unacceptable to the Company, the
interest rate on the Mezzanine Mortgage Loan will increase to a variable rate
per annum equal to 30-day LIBOR plus 5.20%. Until the Securitization Closing
Date, no payments of principal will be required under the First Mortgage Loan
and the Mezzanine Mortgage Loan. After the Securitization Closing Date, the
First Mortgage Loan will require monthly payments of principal and interest
based on a thirty-year amortization of principal and the Mezzanine Mortgage Loan
will require monthly payments of principal and interest based on the full
amortization of principal within seven years. The First Mortgage Loan and the
Mezzanine Mortgage Loan will be cross-collateralized by senior and junior
mortgages, respectively, encumbering thirteen of the Company's existing factory
outlet centers. The proceeds from the closing of the First Mortgage Loan and the
Mezzanine Mortgage Loan will be used to repay outstanding borrowings under the
Revolving Loan, the 1994 Mortgage Loan (which may not be prepaid prior to July
1, 1996), the Interim Loan and a portion of the Company's $16.0 million fixed
rate mortgage loan. The remaining proceeds will be used for the purchase of
interest rate protection contracts, the costs and expenses of the refinancing
and for working capital purposes.
In connection with the commitment to provide the First Mortgage Loan and the
Mezzanine Mortgage Loan, the Company and Nomura have agreed that, subject to
certain conditions, the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the securitization of the First Mortgage Loan.
If the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the
Senior Certificates (as defined below), the appropriate party will make a
payment to the other based on the present value of such deviation applied
against the principal balance of the Senior Certificates. If the Securitization
Closing Date does not occur within six months of the closing of the First
Mortgage Loan and the Mezzanine Mortgage Loan, Nomura may demand payment of such
loans in full six months after delivery of such demand notice. It is anticipated
that the First Mortgage Loan will be securitized at investment grade levels
through the issuance of Real Estate Mortgage Investment Company ("REMIC")
certificates (the "Senior Certificates") and the Mezzanine Mortgage Loan will be
securitized through the issuance of REMIC certificates or another acceptable
securitization vehicle (the "Junior Certificates"). In addition, the 1996 Nomura
Loan Commitment requires that, prior to the securitization, the Company purchase
interest rate protection contracts with regard to the First Mortgage Loan and
the Mezzanine Mortgage Loan when and if 30-day LIBOR exceeds 6.50%. After
securitization, the Company will be required to purchase interest rate
protection contracts for the seven-year term of such loans and for the principal
amount of the Senior Certificates. It is estimated that the proceeds from the
sale of the Senior Certificates and the Junior Certificates and the proceeds
from the cash flow loan (described below) will approximate $260.0 million. In
the event that loan proceeds available from the Senior Certificates and the
Junior Certificates are less than $260.0 million, Nomura has agreed to provide,
subject to certain conditions (including the consent of the
53
<PAGE>
applicable rating agencies), a loan based on the cash flow of the Property
Partnerships which own the thirteen factory outlet centers in the principal
amount of the difference between $260.0 million and such loan proceeds. In the
event that the net cash flow from the thirteen outlet centers is less than a
mutually agreed upon amount and the securitization results in less than $260.0
million in proceeds, the Company will be required to pay to Nomura such
difference at the closing of the securitization. The Company intends to purchase
the Junior Certificates with the proceeds of financing provided through a Nomura
repurchase agreement (the "Repo Financing"). The Repo Financing will require
monthly payments of interest only and will be for a term of two years and will
be recourse to the Operating Partnership. The Repo Financing will be subject to
daily mark-to-market and margin calls. Interest will be payable for 75% of the
market value of the Junior Certificates (which at date of inception shall be par
value) at the rate of 30-day LIBOR plus 1.95% and for the balance of the market
value of the Junior Certificates (which at date of inception shall be par value)
at the rate of 30-day LIBOR plus 7.0%. The weighted average annual interest rate
(including the estimated annual amortization of interest rate protection
contracts) on the $260.0 million of securitized loans is initially expected to
be approximately 7.66%.
The existing Revolving Loan with Nomura will not be terminated as a result
of the transactions contemplated by the 1996 Nomura Loan Commitment; however,
the collateral currently pledged thereunder will be released and pledged to
Nomura under the First Mortgage Loan and the Mezzanine Mortgage Loan. The
Revolving Loan will be available, subject to sufficient collateral being pledged
to Nomura, for acquisitions, expansions and new outlet centers.
Upon terms acceptable to the Company and the rating agencies involved in the
securitization, an amount between $25.0 million to $50.0 million in addition to
the $260.0 million of securitized loans may be raised by the securitization and,
if so, will be held in escrow by Nomura. These funds may be drawn upon by the
Company, subject to the satisfaction of certain objective standards acceptable
to the Company and such rating agencies, for the cost of construction of
expansions at the thirteen mortgaged outlet centers.
In connection with the execution of the 1996 Nomura Loan Commitment, the
Company expects to incur a non-recurring loss of approximately $10.1 million
that will be recorded during the three months ending June 30, 1996. This loss
results from the expected prepayment of the Revolving Loan, the 1994 Mortgage
Loan, the anticipated termination of the 1995 Nomura Loan Commitments for which
the Company paid $3.3 million in nonrefundable financing fees, and the repayment
in full of the Interim Loan. The loss includes the estimated unamortized cost of
certain interest rate protection contracts of $3.7 million as of July 31, 1996
that will be terminated upon repayment of the debt underlying the contracts,
debt prepayment penalties of $0.8 million and other deferred financing costs of
$4.5 million, less the estimated fair market value of the interest rate
protection contracts of approximately $2.2 million based on their fair market
value at May 30, 1996. Upon termination and sale of the interest rate protection
contracts, the Company will receive proceeds based on the then fair market value
of such contracts. The future fair market value of interest rate protection
contracts is susceptible to valuation fluctuations based on market changes in
interest rates and the maturity date of the underlying contracts.
The Company believes that the loan facilities to be provided by Nomura
pursuant to the 1996 Nomura Loan Commitment will provide annual interest savings
in excess of $4.0 million based on interest rates as of June 4, 1996 when
compared to the terms provided by the 1995 Nomura Loan Commitments. In addition
to a more attractive interest rate, other benefits include no lock-out period
with respect to prepayment, no prepayment penalties after two years, collateral
substitution provisions and a larger escrow of funds for the expansion of the
mortgaged outlet centers.
PLANNED DEVELOPMENT
Management believes that there is sufficient demand for continued
development of new factory outlet centers and expansions of certain existing
factory outlet centers. The Company expects to open between approximately
700,000 and 900,000 square feet of GLA during 1996. Of this amount, 440,000
square feet of GLA relates to the development of two new factory outlet centers
and the balance relates to planned
54
<PAGE>
expansions of existing factory outlet centers. At March 31, 1996, the aggregate
remaining capital expenditures for the new factory outlet centers and expansions
expected to open in 1996 ranged between approximately $75,000 and $95,000. The
aggregate remaining capital expenditures for new factory outlet centers and
expansions opened during the year ended December 31, 1995 (aggregating 949,000
square feet of GLA) approximated $7,000.
TABLE 9 -- FACTORY OUTLET CENTERS AND EXPANSIONS UNDER CONSTRUCTION (1)
TABLE 9 summarizes the projected opening dates and total GLA of the factory
outlet centers and expansions of existing centers under construction as of May
31, 1996. The total estimated construction cost for such projects is
approximately $89,000.
<TABLE>
<CAPTION>
PROJECTED 1996
PROJECT LOCATION PHASE OPENING DATES GLA
- ------------------------------------------ ------------------------ --------- --------------- ---------
<S> <C> <C> <C> <C>
Buckeye Factory Shops..................... Medina County, OH I November 205,000
Carolina Factory Shops.................... Gaffney, SC I November 235,000
---------
Total New Centers under Construction.... 440,000
Grove City Factory Shops.................. Grove City, PA IV 4th Quarter 118,000
Arizona Factory Shops..................... Phoenix, AZ II 4th Quarter 95,000
Ohio Factory Shops........................ Jeffersonville, OH IIIA 3rd Quarter 35,000
Gulfport Factory Shops.................... Gulfport, MS IIA 4th Quarter 35,000
Gulf Coast Factory Shops.................. Ellenton, FL III 4th Quarter 30,000
Indiana Factory Shops..................... Daleville, IN IIA 4th Quarter 28,000
Triangle Factory Shops.................... Raleigh-Durham, NC IIA 3rd Quarter 6,000
---------
Total Expansions under Construction..... 347,000
---------
Total New Centers and Expansions under
Construction........................... 787,000
---------
---------
</TABLE>
- ------------------------
NOTE:
(1) No assurance can be given that these factory outlet centers will be opened
on schedule with the indicated GLA. Additionally, no assurance can be given
that the estimated construction costs will not be exceeded.
Management believes that the Company has sufficient capital and capital
commitments to fund the remaining development costs associated with the 1995
openings and the openings planned for 1996. These funding requirements are
expected to be met, in large part, with the proceeds of one or more loan
facilities contemplated by the 1996 Nomura Loan Commitment, the Corporate Line,
the Offering and funding commitments from two development joint ventures with an
unrelated third party. There can be no assurance that the Company will be
successful in consummating the transactions contemplated by the 1996 Nomura Loan
Commitment. If adequate financing for such development and expansion is not
available, the Company may not be able to develop new centers or expand existing
centers at currently planned levels.
With regard to planned new factory outlet centers and expansions scheduled
to open in 1997, which are expected to contain approximately 800,000 square feet
of GLA in the aggregate, at a total development cost of approximately $88,000,
the Company expects to fund approximately 37% of these new projects through
joint ventures with an unrelated third party. The Company expects to fund the
development cost for the balance of its new 1997 projects from: (a)
approximately 70% to 75% of cost from proceeds available on line of credit
facilities, and (b) the balance of cost (25% to 30%) from a variety of potential
sources, including excess proceeds from securitized loan transactions, retained
FFO, and the potential sale of common or preferred equity in the public or
private capital markets. As of March 31, 1996, there were no material
commitments with regard to the 1997 planned development activity.
55
<PAGE>
DEBT REPAYMENTS AND PREFERRED STOCK DIVIDENDS
The Company's aggregate indebtedness was $306,020 and $305,954 at March 31,
1996 and December 31, 1995, respectively. At March 31, 1996, such indebtedness
had a weighted average maturity of 3.8 years and bore interest at a weighted
average interest rate of 7.15% per annum. At March 31, 1996, $24,984, or 8.2%,
of such indebtedness bore interest at fixed rates and $281,036, or 91.8%, of
such indebtedness, including $28,250 of tax-exempt bonds, bore interest at
variable rates.
At March 31, 1996, the Company held interest rate protection contracts on
$28,250 of floating rate tax-exempt indebtedness and $97,309 of other floating
rate indebtedness (or approximately 44.7% of its total floating rate
indebtedness). These contracts expire in 1999 and 2000, respectively. In
addition, the Company held additional interest rate protection contracts on
$43,900 of the $97,309 floating rate indebtedness to further reduce the
Company's exposure to increases in interest rates. See Note 2 -- "Summary of
Significant Accounting Policies" and Note 7 -- "Bonds and Notes Payable" of the
Notes to Consolidated Financial Statements for additional information concerning
the accounting policies and significant terms of the interest rate protection
contracts.
The Company's ratio of debt to total market capitalization (defined as total
long term debt divided by the sum of: (a) the aggregate market value of the
outstanding shares of Common Stock, assuming the full exchange of Common Units
into Common Stock; (b) the aggregate market value of the outstanding shares of
Convertible Preferred Stock; (c) the aggregate liquidation preference of the
Senior Preferred Stock at $25.00 per share; and (d) the total long-term debt of
the Company) was 49.3% at March 31, 1996.
The Company is obligated to repay $172,834 of mortgage indebtedness during
the remainder of 1996. The Company may extend for one year the term of its
Revolving Loan which is currently scheduled to expire on December 31, 1996.
Annualized cumulative dividends on the Company's Senior Preferred Stock and
Convertible Preferred Stock (after giving effect to the Exchange Offer) are
$6,037 and 6,244, respectively. These dividends are payable quarterly, in
arrears.
The Company anticipates that cash flow from operations, together with cash
available from borrowings and other sources, including proceeds from debt
refinancing, will be sufficient to satisfy its debt service obligations,
expected distribution and dividend requirements and operating cash needs for the
next year.
TABLE 10 -- TAXABILITY OF DIVIDENDS
TABLE 10 summarizes the taxability of distributions and dividends paid
during the year ended December 31, 1995 and for the period from March 22, 1994
to December 31, 1994. Distributions paid by the Company out of its current or
accumulated earnings and profits (and not designated as capital gains dividends)
will constitute taxable dividends to each holder. To the extent the Company
makes distributions (not designated as capital gains dividends) in excess of its
current and accumulated earnings and profits, such distributions will be treated
first as a tax-free return of capital to each holder, reducing the adjusted
basis which such holder has in his shares of stock by the amount of such
distributions (but not below zero), with distributions in excess of a holder's
adjusted basis in his stock taxable as capital gains (provided that the shares
have been held as a capital asset).
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 22, 1994 TO
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -------------------
<S> <C> <C>
SENIOR PREFERRED STOCK
Ordinary income................................................ 100.0% 100.0%
Return of capital.............................................. -- --
CONVERTIBLE PREFERRED STOCK
Ordinary income................................................ 75.6% 78.5%
Return of capital.............................................. 24.4% 21.5%
COMMON STOCK
Ordinary income................................................ -- --
Return of capital.............................................. 100.0% 100.0%
</TABLE>
56
<PAGE>
No assurances can be made that future dividends and distributions will be
treated similarly. Each holder of Stock may have a different basis in its Stock
and accordingly, each holder is advised to consult its tax advisors.
ECONOMIC CONDITIONS
Substantially all of the merchants' leases contain provisions that somewhat
mitigate the impact of inflation. Such provisions include clauses providing for
increases in base rent and clauses enabling the Company to receive percentage
rentals based on merchants' gross sales. Substantially all leases require
merchants to pay their proportionate share of operating expenses, including
common area maintenance, real estate taxes and promotion, thereby reducing the
Company's exposure to increased costs and operating expenses resulting from
inflation. At March 31, 1996, the Company maintained interest rate protection
contracts to protect against increases in interest rates on certain floating
rate indebtedness (see "Debt Repayments and Preferred Stock Dividends").
The Company intends to reduce operating and leasing risks by managing its
existing portfolio of properties with the goal of improving its tenant mix,
rental rates and lease terms and attracting high fashion, upscale manufacturers
and national brand-name manufacturers as merchants.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF", which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS No. 121 in
the first quarter of 1996 and its adoption had no effect on the consolidated
financial statements of the Company.
In October 1995, the FASB issued SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", which provides an alternative to Accounting Principles Board
("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", in accounting for
stock-based compensation issued to employees. The Company will continue to
account for stock option grants in accordance with APB No. 25.
FUNDS FROM OPERATIONS
Management believes that to facilitate a clear understanding of the
Company's operating results, Funds from Operations should be considered in
conjunction with net income (loss) presented in accordance with GAAP. FFO is
defined as net income (loss) (determined in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization after adjustments for unconsolidated partnerships
and joint ventures.
The Company generally considers FFO to be an appropriate measure of
performance for an equity real estate investment trust. Historical FFO may or
may not be indicative of future FFO. FFO does not represent cash generated from
operating activities in accordance with GAAP (which, unlike FFO, generally
reflects all cash effects of transactions and other events that enter into the
determination of net income), is not necessarily indicative of cash flow
available to fund cash needs and should not be considered an alternative to net
income or other GAAP measures as an indication of the Company's performance or
an alternative to cash flow as a measure of liquidity or the ability to service
debt or pay dividends.
The Company cautions that the calculation of FFO may vary from entity to
entity and as such the presentation of FFO by the Company may not be comparable
to other similarly titled measures of other reporting companies.
TABLE 11 provides a reconciliation of income before allocations to minority
interests and preferred shareholders to FFO, under both the old definition and
the New Definition, for the three months ended March 31, 1996 and 1995. FFO (old
definition) increased $883, or 11.0%, to $8,916 for the three months ended March
31, 1996 from $8,033 for the three months ended March 31, 1995. This increase is
primarily attributable to the Portfolio Expansion. TABLE 12 provides a
reconciliation of income (loss) before allocation to minority interests and
preferred shareholders to FFO before allocation to minority interests
57
<PAGE>
and preferred shareholders for the years ended December 31, 1995, 1994 and 1993.
FFO (old definition) increased 29.4% to $33,133 for the year ended December 31,
1995 from $25,596, for the year ended December 31, 1994. The increase in FFO
(old definition) primarily reflects the Portfolio Expansion, including the
effect of the acquisition of certain properties in connection with the Initial
Public Offering. FFO (old definition) increased to $25,596 from $4,887, or 424%,
for the year ended December 31, 1994 compared to the year ended December 31,
1993. The increase in FFO (old definition) was primarily due to the Portfolio
Expansion, including the effect of the acquisition of certain properties in
connection with the Initial Public Offering, and net preferential partner
distributions totaling $2,538 during 1994.
In March 1995, NAREIT established guidelines clarifying the definition of
FFO (as modified, the "New Definition"). The Company reports FFO under both the
old definition and the New Definition. For the Company, the primary impact of
adopting the New Definition will be a reduction in FFO since the amortization of
capitalized debt costs and depreciation of non-real estate assets are not added
back to income before minority interests and preferred shareholders. TABLE 11
also presents the Company's FFO under the old definition and the New Definition
for the three months ended March 31, 1996 and 1995. TABLE 12 presents the
Company's FFO under the old definition and the New Definition for the years
ended December 31, 1995, 1994 and 1993.
TABLE 11 -- FUNDS FROM OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
OLD DEFINITION NEW DEFINITION
-------------- --------------
THREE MONTHS ENDED MARCH 31,
------------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income before allocations to minority interests and preferred
shareholders.............................................................. $3,057 $3,142 $3,057 $3,142
FFO ADJUSTMENTS:
Depreciation and amortization.............................................. 4,387 3,605 4,231 3,497
Amortization of deferred financing costs and interest rate protection
contracts................................................................. 1,112 1,068 -- --
Unconsolidated joint venture adjustments (1)............................... 360 218 327 210
------ ------ ------ ------
FFO before allocations to minority interests and preferred shareholders.... $8,916 $8,033 $7,615 $6,849
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ------------------------
NOTE:
(1) Includes net preferential partner distributions received from a joint
venture partnership of $81 for the three months ended March 31, 1995.
58
<PAGE>
TABLE 12 -- FUNDS FROM OPERATIONS -- YEARS ENDED DECEMBER 31, 1995, 1994 AND
1993
<TABLE>
<CAPTION>
OLD DEFINITION NEW DEFINITION
------------------------------- -------------------------------
1995 1994 1993 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(COMBINED) (COMBINED)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before allocations to minority
interests and preferred shareholders........... $ 12,806 $ 7,046 $ (3,873) $ 12,806 $ 7,046 $ (3,873)
FFO ADJUSTMENTS:
Depreciation and amortization................... 15,438 11,976 7,632 14,884 11,681 7,504
Unconsolidated joint venture adjustments (1).... 365 2,934 766 306 2,888 720
Amortization of deferred financing costs and
interest rate protection contracts............. 4,524 3,640 362 -- -- --
--------- --------- --------- --------- --------- ---------
FFO before allocations to minority interests and
preferred shareholders......................... $ 33,133 $ 25,596 $ 4,887 $ 27,996 $ 21,615 $ 4,351
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
NOTE:
(1) Includes net preferential partner distributions from a joint venture
partnership of $162 and $2,538 for the years ended December 31, 1995 and
1994, respectively.
The payout ratio for the three months ended March 31, 1996 and the years
ended December 31, 1995 and 1994 (calculated as distributions made by the
Company for the applicable period divided by FFO (old definition)), was 91.7%,
91.8% and 88.9%, respectively. For purposes of determining whether the Company's
FFO is sufficient to terminate the Preferential Distribution under the Operating
Partnership Agreement, FFO will be calculated based on the old definition of
FFO. See "Operating Partnership Agreement."
TABLE 13 -- CONSOLIDATED QUARTERLY SUMMARY OF FUNDS FROM OPERATIONS (OLD
DEFINITION)
<TABLE>
<CAPTION>
1995
-------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income before allocations to minority
interests and preferred shareholders... $3,369 $3,232 $3,063 $3,142
FFO ADJUSTMENTS:
Depreciation and amortization........... 4,177 3,917 3,739 3,605
Unconsolidated joint venture adjustments
(1).................................... 144 56 (53) 218
Amortization of deferred financing costs
and interest rate protection
contracts.............................. 1,213 1,105 1,138 1,068
------- ------- ------- -------
FFO before allocations to minority
interests and preferred shareholders... $8,903 $8,310 $7,887 $8,033
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
1994
-------------------------------------------
PERIOD FROM
MARCH 22,
1994
TO
FOURTH THIRD SECOND MARCH 31,
QUARTER QUARTER QUARTER 1994
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Income before allocations to minority
interests and preferred shareholders... $3,126 $3,127 $2,789 $412
FFO ADJUSTMENTS:
Depreciation and amortization........... 3,569 3,355 2,483 396
Unconsolidated joint venture adjustments
(1).................................... 135 1,125 1,300 --
Amortization of deferred financing costs
and interest rate protection
contracts.............................. 902 515 1,528 --
------- ------- ------- -----
FFO before allocations to minority
interests and preferred shareholders... $7,732 $8,122 $8,100 $808
------- ------- ------- -----
------- ------- ------- -----
</TABLE>
- ------------------------------
NOTE:
(1) Includes net preferential partner distributions received from a joint
venture partnership of $81, $81, $200, $1,038 and $1,300 for the three
months ended June 30, 1995, March 31, 1995, December 31, 1994, September 30,
1994 and June 30, 1994, respectively.
59
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company's strategy is to build on its reputation and experience in the
outlet center business and to capitalize on the current trend in value-oriented
retailing through strategic outlet center expansions and the selective
development and acquisition of additional outlet centers. As a fully-integrated
real estate company, the Company provides development, construction, finance,
leasing, marketing and property management services for all of its properties.
OVERVIEW OF THE VALUE RETAILING INDUSTRY.
The Company's outlet centers are part of a retail industry sector known as
value retailing. Value retailing generally consists of three segments: factory
outlet stores, discount retailers and off-price retailers.
- Factory outlet stores are operated principally by manufacturers and sell
directly to the consumer. Outlet stores generally carry the same name as
the designer and feature a full selection of designer and brand-name goods
at discounts generally ranging from 25% to 50% below regular department
and specialty store prices.
- Discount retailers offer inexpensive non-branded goods and some
manufacturers' seconds at low to mid-level price points.
- Off-price retailers buy excess inventory and seconds from manufacturers,
and as a result, offer a narrow selection in a number of assorted brand
names, which can vary daily or weekly in every store.
Outlet stores are distinguished from the other two value retailing segments
principally by the manner in which their goods are sourced. Discount and
off-price retailers buy their goods from manufacturers, whereas outlet stores
are operated directly by manufacturers. Outlet stores are further distinguished
from discount retailers by generally higher price points and a generally more
affluent target clientele, and from off-price retailers by a wider and more
current selection of merchandise and a generally higher level of customer
service.
In addition to the profitability from selling merchandise directly to the
public at outlet centers, manufacturers receive the following benefits from
outlet retailing:
- Maintaining brand image through attractive presentation of merchandise and
association with other designer label goods;
- Gaining more control over the distribution of overstocked, discounted or
out-of-season merchandise, reducing conflicts with full-priced goods in
department stores;
- Marketing and assessing demand for new merchandise; and
- Providing a showcase setting forth their full product line.
While manufacturers have become aware of the benefits of selling excess
inventory through outlet stores, consumer attitudes towards outlet centers also
have been changing. Consumers increasingly have been demanding quality
merchandise at lower prices which, when combined with a "bargain-hunting"
mentality and a renewed focus on value, has served to attract consumers to value
retailing. Management believes that all of these factors will contribute to the
growth of outlet centers.
THE COMPANY'S OUTLET CENTERS
CONSTRUCTION AND DEVELOPMENT OF OUTLET CENTERS.
The general criteria used by the Company for selecting new sites for outlet
centers consist of a number of factors, including:
- Proximity to major metropolitan areas (minimum resident population of 2.5
million within a 100 mile radius);
- Distance from traditional centers (usually at least 20 miles from the
outlet center);
60
<PAGE>
- Volume of tourists within the trade area (minimum of three million
annually);
- Access to and location on interstate highways (at an interchange with
daily traffic counts of not less than 25,000 vehicles); and
- Potential for multi-phase expansion (to accommodate a minimum of 300,000
square feet of GLA).
Generally, the Company will build such outlet centers in multiple phases,
with the initial phase containing approximately 200,000 square feet of GLA.
Thereafter, typically one or two additional phases are developed and built to
meet demand.
The Company builds and landscapes its outlet centers to conform to the
architectural style and regional characteristics of the surrounding community.
The Company's centers generally are designed as a series of pedestrian
courtyards and walkways lined with store fronts creating a "village atmosphere."
The pedestrian courtyards feature gardens, fountains, extensive landscaping,
exterior lighting, public seating and quality finishes. This design promotes
greater merchandise visibility and more pedestrian traffic through the center
than "U" or "L" shaped designs typically used in other outlet centers.
Management believes that the courtyard layout is preferred by customers and
encourages visits to the center for longer periods of time and on a more
frequent basis.
The Company's outlet centers include various amenities intended to enhance
the quality and length of customers' visits, particularly for customers visiting
the outlet center with children and other family members. The Company's outlet
centers were among the first in the industry to include recreational facilities
and conveniences such as food courts, automated teller machines and playgrounds.
The Company believes that these amenities serve an important role in extending
the length of customers' visits and promoting repeat trips to its outlet centers
by making the outlet center an attractive destination for both shoppers and non-
shoppers.
The Company typically obtains leasing commitments for a large part of the
space in each outlet center before acquiring the site and beginning
construction. The Company generally begins construction, other than site
development work, only after it obtains leasing commitments for at least 50% of
the space in the first phase of a new outlet center.
The Company's outlet centers are constructed using high-quality, durable
materials designed for longevity with minimal maintenance. Construction of the
first phase of an outlet center generally has taken seven to nine months from
ground-breaking until the opening of the first merchant store. Management of the
Company works closely with lead merchants during all phases of the development
of an outlet center, including site selection, design and marketing. After
identifying an acceptable site, the Company typically obtains an option to
acquire the site which allows the Company to complete pre-development work, such
as title searches, soil analysis, environmental studies, preliminary
architectural design and site planning without risking significant capital. In
lieu of entering into an option to acquire a site, the Company typically will
enter into a contract to acquire the site when the Company determines that any
forfeitable deposit or damages are no greater than the option payment it
otherwise would have incurred had it entered into an option. The Company employs
its own construction managers to arrange for and supervise all aspects of the
construction of a new outlet center. Construction managers spend the majority of
their time in the field, working with construction contractors who are hired
locally by the Company for each project. Management believes that this approach
reduces construction costs, makes the process more efficient, and benefits the
relationship between the Company and the local community.
New space typically is delivered to merchants as a "vanilla box," meaning a
space with finished demising partitions, bathrooms and a finished ceiling. The
merchant has the latitude to make its own modifications within this space,
subject to the Company's approval. Generally, the Company may provide a tenant
allowance for new merchants at an outlet center as part of such merchant's
initial lease. The actual amount of the tenant allowance varies depending on a
number of factors, including the amount of GLA leased, the phase of the center
being leased and the market conditions and overall performance of the center. As
a general policy, the Company does not provide any other lease incentives,
concessions or abatements.
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<PAGE>
LEASE TERMS.
In general, the leases relating to the Company's outlet centers have a term
of five to seven years. Most leases provide for the payment of percentage rents
for annual sales in excess of certain thresholds. In addition, the Company's
typical leases provide for the recovery of all of a merchant's proportionate
share of actual common area maintenance ("CAM"), refuse removal, insurance, and
real estate taxes as well as a collection for advertising and promotion and an
administrative fee. CAM includes such items as common area utilities, security,
parking lot cleaning, maintenance and repair of common areas, capital
replacement reserves, landscaping, seasonal decorations, public restroom
maintenance and certain administrative expenses.
MERCHANTS.
In management's view, the merchant mix is one of the most important factors
in promoting an outlet center's success. Virtually all aspects of the Company's
outlet centers, ranging from site selection to architectural design, are planned
to attract and retain a diverse mix of nationally and internationally recognized
manufacturers of upscale designer and brand-name products.
Crucial to the development of a new outlet center is having lead merchants
committed to the outlet center early in the process. In management's view, lead
merchants are manufacturers that during the development of an outlet center
attract other high-quality manufacturers to the outlet center and ensure a
well-balanced and diversified mix of merchants that will attract consumers to
the outlet center. For the three months ended March 31, 1996, no group of
merchants under common control accounted for more than 6.0% of the gross
revenues of the Company or, at March 31, 1996, occupied more than 7.3% of the
total GLA of the Company.
The following list includes some of the lead merchants in the Company's
outlet centers based on leases executed as of March 31, 1996:
<TABLE>
<CAPTION>
NUMBER % OF LEASED
MERCHANT OF STORES GLA
- ------------------------------------------------------------ --------------- -------------
<S> <C> <C>
PHILLIPS-VAN HEUSEN (1)
BASS...................................................... 15 2.44%
VAN HEUSEN................................................ 15 1.59%
GEOFFREY BEENE............................................ 17 1.83%
IZOD...................................................... 12 0.61%
GANT...................................................... 5 0.34%
--- -----
SUBTOTAL PHILLIPS-VAN HEUSEN............................ 64 6.81%
DRESS BARN, INC.
WESTPORT, LTD./WESTPORT WOMAN............................. 18 3.01%
SBX....................................................... 2 0.22%
--- -----
SUBTOTAL DRESS BARN..................................... 20 3.23%
CASUAL CORNER GROUP, INC.
CASUAL CORNER OUTLET...................................... 15 1.68%
CASUAL CORNER WOMAN....................................... 6 0.38%
PETITE SOPHISTICATE....................................... 14 0.87%
--- -----
SUBTOTAL CASUAL CORNER GROUP, INC....................... 35 2.93%
SARA LEE
L'EGGS/HANES/BALI /PLAYTEX................................ 14 1.56%
CHAMPION.................................................. 5 0.41%
COACH LEATHER............................................. 7 0.44%
SARA LEE BAKERY........................................... 1 0.06%
SOCKS GALORE.............................................. 1 0.03%
--- -----
SUBTOTAL SARA LEE....................................... 28 2.50%
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
NUMBER % OF LEASED
MERCHANT OF STORES GLA
- ------------------------------------------------------------ --------------- -------------
<S> <C> <C>
VF CORPORATION
VANITY FAIR/LEE/WRANGLER.................................. 4 1.81%
BARBIZON.................................................. 2 0.11%
--- -----
SUBTOTAL VF CORPORATION................................. 6 1.92%
MIKASA...................................................... 13 2.56%
BUGLE BOY................................................... 15 2.23%
OSHKOSH B'GOSH/GENUINE KIDS................................. 20 1.96%
DESIGNS, INC./BOSTON TRADER................................. 9 1.91%
READING CHINA & GLASS....................................... 3 1.77%
SPRINGMAID WAMSUTTA......................................... 9 1.60%
CORNING-REVERE.............................................. 13 1.58%
CARTERS..................................................... 12 1.55%
JONES NEW YORK/EVAN PICONE.................................. 20 1.54%
ANNTAYLOR/ANNTAYLOR LOFT.................................... 8 1.48%
COUNTY SEAT................................................. 6 1.07%
REEBOK...................................................... 5 1.06%
OFF 5TH (SAKS FIFTH AVENUE)................................. 2 0.94%
NIKE........................................................ 4 0.93%
GUESS?...................................................... 7 0.92%
JOCKEY...................................................... 10 0.86%
DANSKIN..................................................... 7 0.85%
AMERICAN EAGLE OUTFITTERS................................... 7 0.71%
LEVI'S/DOCKERS OUTLET....................................... 6 0.68%
ESPRIT...................................................... 3 0.67%
POLO/RALPH LAUREN........................................... 3 0.66%
BROOKS BROTHERS............................................. 5 0.64%
EDDIE BAUER................................................. 3 0.57%
SONY........................................................ 4 0.54%
J. CREW..................................................... 3 0.46%
HE-RO GROUP................................................. 4 0.46%
DONNA KARAN................................................. 3 0.32%
BOSE........................................................ 3 0.28%
TOMMY HILFIGER.............................................. 3 0.26%
NORDIC TRACK................................................ 4 0.26%
LAURA ASHLEY................................................ 2 0.21%
ELLEN TRACY................................................. 2 0.16%
ANNE KLEIN.................................................. 2 0.16%
NAUTICA..................................................... 2 0.14%
FIRST CHOICE/ESCADA......................................... 2 0.08%
--- -----
TOTAL....................................................... 377 49.45%
--- -----
--- -----
</TABLE>
- ------------------------
NOTE:
(1) In an effort to position itself for future growth and increased
profitability, Phillips-Van Heusen Corporation ("PVH") announced in
September 1995 the closing of approximately 200 of its approximately 1,000
outlet stores. PVH did not specifically identify the stores involved but
indicated the closings will occur over the next several years, targeting
underperforming stores. Three PVH stores aggregating approximately 9,500
square feet of GLA have been closed at the Company's outlet centers pursuant
to early termination rights in such leases. The Company has executed new
leases for most of such space.
63
<PAGE>
Based on ongoing discussions with PVH's management the Company does not
believe that any store closings stemming from this announcement will have a
material effect on the Company's results of operations or financial
condition. PVH also indicated that it would continue to open new stores in
the strongest outlet centers at appropriate distances from traditional
retail malls. PVH's management continues to work with the Company on future
outlet store openings.
Lead merchants are placed in strategic locations designed to draw customers
into the outlet center and to encourage them to shop at more than one store. The
Company continually examines the placement of merchants within each center and,
in collaboration with its merchants, adjusts the size and location of their
space within the center to improve sales per square foot.
The Company identifies merchants with potential credit problems at an early
stage by closely monitoring every merchant's performance. The Company has worked
successfully to limit its delinquencies and bad debt losses. During the year
ended December 31, 1995, total bad debt expense was approximately $346,000.
During the quarter ended March 31, 1996, total bad debt expense was
approximately $224,000. The Company has not lost any material revenue related to
merchant bankruptcies or other lease defaults.
THE MANUFACTURERS FORUM-REGISTERED TRADEMARK-.
Management has developed close working relationships with its merchants to
understand and better anticipate the merchants' immediate and long-term
merchandising strategies and retail space requirements. To this end, in 1989 the
Company established The Manufacturers Forum-Registered Trademark-, an
organization of over 100 manufacturers that conducts between four and six
industry meetings per year on the factory outlet center industry -- two of which
meetings are held at semi-annual conventions. The meetings are organized and
hosted by executives of the Company and are attended by senior executives from
the member manufacturers. Industry experts are invited to attend as guest
speakers to discuss ideas, trends, data and other issues pertinent to the
ongoing growth of the outlet center business.
The Manufacturers Forum-Registered Trademark- was developed as an
educational tool for both the Company and the member merchants, including new
manufacturers that are investigating opening outlet stores, and allows both the
Company and member merchants to stay up-to-date with changes in the industry.
Topics discussed at The Manufacturers Forum-Registered Trademark- lead to
stronger relationships with key merchants and a shared vision with the
manufacturers as to future growth of the industry.
PROPERTY MANAGEMENT.
In order to ensure that the outlet centers are maintained according to the
Company's standards, the Company manages all of its outlet centers with on-site
property management staff. Members of the property management team closely
monitor the sales performance of each merchant. Monthly sales reports are
prepared on a merchant-by-merchant basis for each outlet center. The data is
analyzed for trends and merchants are evaluated on their performance. The
management team holds both formal and informal communication sessions with
merchants throughout the year and is involved in promotions and marketing.
Property managers and marketing directors work with the Advisory Board to
systematically review merchant performance, merchandising mix and layout with
leasing representatives of the Company in order to improve sales per square
foot.
The Company works continually to preserve and enhance its relationships with
its merchants by providing a high level of merchant services at each center.
On-site property managers are trained to maintain uniform quality through
rigorous property maintenance which seeks to ensure attractive landscaping,
cleanliness and appropriate security measures.
Merchants are responsible for their own utilities. They also are billed
monthly for their proportionate share of CAM expenses and other expenses such as
insurance, property taxes and advertising and promotion expenses related to the
property. Maintenance is important to merchants who want their brand names to be
associated with an attractive environment and to upscale consumers who prefer to
shop in a pleasant setting. The Company believes that its consistent ability to
provide well-managed centers is a central factor in the loyalty of its core
merchant group.
64
<PAGE>
In addition to the on-site staff, the Company employs a Director of
Operations, located at the Company's headquarters in Baltimore, to supervise the
on-site management personnel and to develop Company policies and procedures with
respect to its Properties.
LEASING ACTIVITIES.
The Company's leasing activities are conducted by a dedicated leasing staff
of ten professionals, staffed by region. The Company strives to keep its outlet
centers fully leased while obtaining the maximum amount of rent for its space
throughout the year. Leasing personnel also are actively involved in assisting
the Company in identifying new markets in which the Company may acquire or
develop new outlet centers. After a site is identified, the leasing personnel
work with the Company's merchants to meet the Company's goal of generally having
leasing commitments for at least 50% of the GLA of a project before starting
construction, other than site development work, on the outlet center. Once a
property opens, leasing personnel continue to evaluate the merchant mix at each
outlet center to determine whether the outlet center is obtaining the maximum
amount of rent for its space. They also prepare to fill space that may become
available upon expiration of a lease.
MARKETING.
The Company actively markets its outlet centers to the general public. Each
outlet center has an on-site marketing manager to implement a comprehensive
marketing program and to continuously measure and evaluate the results of each
component of the program. Merchants contribute promotional and advertising funds
that are used to promote the outlet centers through billboard advertising,
direct-mail promotions, brochures distributed at rest stops and tourist
information centers, and advertisements in tourist and regional publications.
The on-site marketing managers also arrange for radio and limited local
television advertising. The outlet centers are frequently advertised in both
local newspapers and in national publications. Grand opening celebrations and
advertising campaigns, which often include local radio and television coverage,
are organized for the grand opening of each new outlet center and subsequent
phases.
In addition to the on-site staff, the Company employs a Director of
Marketing, located at the Company's headquarters in Baltimore, to supervise the
on-site marketing personnel and to develop national marketing programs and
policies for its Properties. The Director of Marketing also arranges bus
charters and coordinates with tour operators who schedule group visits to the
Properties. The Company also employs regional marketing directors for each
region of the country. All of the Company's marketing activities are monitored
and reviewed at least quarterly by the Advisory Board.
PORTFOLIO OF PROPERTIES
(AS OF MARCH 31, 1996)
<TABLE>
<CAPTION>
NUMBER
OWNERSHIP GRAND OPENING GLA (SQ. OF STORES
FACTORY OUTLET CENTERS INTEREST (1) PHASE DATE FT.) OPENED
- ------------------------------------------------ --------------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Warehouse Row Factory Shops (2)(3) 99% I November 1989 95,000 28
Chattanooga, Tennessee 65% II August 1993 26,000 6
--------- -----
121,000 34
San Marcos Factory Shops 100% I August 1990 177,000 57
San Marcos, Texas II August 1991 67,000 18
III August 1993 117,000 26
IIIB November 1994 20,000 2
IIIC November 1995 35,000 2
--------- -----
416,000 105
Gulf Coast Factory Shops 100% I October 1991 187,000 57
Ellenton, Florida II August 1993 123,000 33
--------- -----
310,000 90
Triangle Factory Shops 100% I October 1991 181,000 45
Raleigh-Durham, North Carolina
<CAPTION>
PERCENTAGE
FACTORY OUTLET CENTERS LEASED (11)
- ------------------------------------------------ ---------------
<S> <C>
Warehouse Row Factory Shops (2)(3) 92%
Chattanooga, Tennessee 94
---
93
San Marcos Factory Shops 99
San Marcos, Texas 93
100
91
100
---
98
Gulf Coast Factory Shops 99
Ellenton, Florida 99
---
99
Triangle Factory Shops 100
Raleigh-Durham, North Carolina
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
NUMBER
OWNERSHIP GRAND OPENING GLA (SQ. OF STORES
FACTORY OUTLET CENTERS INTEREST (1) PHASE DATE FT.) OPENED
- ------------------------------------------------ --------------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Coral Isle Factory Shops (4) 100% I December 1991 94,000 31
Naples/Marco Island, Florida II December 1992 32,000 10
--------- -----
126,000 41
Castle Rock Factory Shops (5) 100% I November 1992 181,000 55
Castle Rock, Colorado II August 1993 94,000 24
III November 1993 95,000 29
--------- -----
370,000 108
Ohio Factory Shops (5) 100% I July 1993 186,000 53
Jeffersonville, Ohio II November 1993 100,000 23
IIB November 1994 13,000 3
--------- -----
299,000 79
Gainesville Factory Shops 100% I August 1993 210,000 62
Gainesville, Texas II November 1994 106,000 25
--------- -----
316,000 87
Nebraska Crossing Factory Shops (4) 100% I October 1993 192,000 53
Gretna, Nebraska
Oxnard Factory Outlet (6) 30% I June 1994 148,000 36
Oxnard, California
Grove City Factory Shops (7) 50% I August 1994 235,000 72
Grove City, Pennsylvania II November 1994 95,000 21
III November 1995 85,000 20
--------- -----
415,000 113
Huntley Factory Shops 100% I August 1994 192,000 51
Huntley, Illinois II November 1995 90,000 13
--------- -----
282,000 64
Florida Keys Factory Shops 100% I September 1994 208,000 56
Florida City, Florida
Indiana Factory Shops 100% I November 1994 208,000 51
Daleville, Indiana
Magnolia Bluff Factory Shops (8) 100% I July 1995 238,000 66
Darien, Georgia IIA November 1995 56,000 5
--------- -----
294,000 71
Arizona Factory Shops (9) 50% I September 1995 217,000 62
Phoenix, Arizona
Gulfport Factory Shops (10) 100% I November 1995 228,000 60
Gulfport, Mississippi
--------- -----
TOTAL FACTORY OUTLET CENTERS (12) 4,331,000 1,155
--------- -----
--------- -----
<CAPTION>
PERCENTAGE
FACTORY OUTLET CENTERS LEASED (11)
- ------------------------------------------------ ---------------
<S> <C>
Coral Isle Factory Shops (4) 100%
Naples/Marco Island, Florida 100
---
100
Castle Rock Factory Shops (5) 100
Castle Rock, Colorado 99
100
---
100
Ohio Factory Shops (5) 98
Jeffersonville, Ohio 98
100
---
98
Gainesville Factory Shops 92
Gainesville, Texas 92
---
92
Nebraska Crossing Factory Shops (4) 96
Gretna, Nebraska
Oxnard Factory Outlet (6) 94
Oxnard, California
Grove City Factory Shops (7) 100
Grove City, Pennsylvania 100
100
---
100
Huntley Factory Shops 98
Huntley, Illinois 57
---
85
Florida Keys Factory Shops 89
Florida City, Florida
Indiana Factory Shops 87
Daleville, Indiana
Magnolia Bluff Factory Shops (8) 91
Darien, Georgia 50
---
83
Arizona Factory Shops (9) 94
Phoenix, Arizona
Gulfport Factory Shops (10) 92
Gulfport, Mississippi
---
94%
---
---
NEW CENTERS UNDER
CONSTRUCTION AND SCHEDULED OPENING DATES (13)
- ------------------------------------------------
Buckeye Factory Shops November 1996 205,000
Medina County, Ohio
Carolina Factory Shops November 1996 235,000
Gaffney, South Carolina
<CAPTION>
NEW CENTERS UNDER
CONSTRUCTION AND SCHEDULED OPENING DATES (13)
- ------------------------------------------------
Buckeye Factory Shops
Medina County, Ohio
Carolina Factory Shops
Gaffney, South Carolina
</TABLE>
- ------------------------
NOTES:
(1) This percentage represents the Company's ownership interest in the Property
Partnership that directly owns or leases the Property indicated.
66
<PAGE>
(2) The Company owns a 2% partnership interest as the sole general partner in
Phase I of this property but is entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. Ford Motor Credit
Company holds a 35% limited partnership interest and the Company holds a
65% general partnership interest in the partnership that owns Phase II of
this property.
(3) Phase I of this mixed-use development also includes 154,000 square feet of
office space and Phase II also includes 5,000 square feet of office space.
The total office space of 159,000 square feet of GLA is not included in
this table and such space was 100% leased as of March 31, 1996.
(4) Acquired by the Company from unrelated third parties upon consummation of
the Initial Public Offering.
(5) The Company acquired the remaining 60% interest of an unrelated third party
upon consummation of the Initial Public Offering.
(6) On September 30, 1994, the Company purchased a 30% interest from unrelated
third parties in the joint venture partnership that owns this factory
outlet center.
(7) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party. The Company has entered into an
agreement dated as of May 6, 1996 with its joint venture partner to
purchase all of the joint venture partner's ownership interest on or before
February 28, 1997. Following the completion of such purchase, the Company
will own 100% of this Property. No assurance can be given that this
transaction will be consummated as scheduled. See "Business and Properties
-- Grove City Factory Shops."
(8) The Property Partnership operates this Property pursuant to a long-term
lease under which the Property Partnership receives the economic benefit of
a 100% ownership interest. See "Business and Properties -- Magnolia Bluff
Factory Shops."
(9) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(10) The real property on which this outlet center is located is subject to a
long-term ground lease. The Property Partnership receives the economic
benefit of a 100% ownership interest. See "Business and Properties --
Gulfport Factory Shops."
(11) Fully executed leases as of March 31, 1996 as a percent of square feet of
GLA.
(12) The Company also owns three community centers containing 424,000 square
feet of GLA in the aggregate that were 96% leased as of March 31, 1996.
(13) No assurance can be given that these factory outlet centers will be opened
on schedule with the indicated GLA.
The following is a description of all of the Company's outlet centers and
the office component at Warehouse Row Factory Shops. The Company (directly or
indirectly) owns 100% of the interests in Property Partnerships which own
thirteen of the seventeen Properties. The Company participates in joint ventures
with third party developers with respect to the remaining four Properties
(Warehouse Row Factory Shops, Grove City Factory Shops, Arizona Factory Shops
and Oxnard Factory Outlet). All of the Properties are owned by the Property
Partnerships in fee simple except Magnolia Bluff Factory Shops and Gulfport
Factory Shops (the ownership of which is described below).
WAREHOUSE ROW FACTORY SHOPS. This outlet center is located in downtown
Chattanooga, Tennessee one-half mile from the Market Street exit on Interstate
24, approximately 100 miles north of Atlanta. The outlet center is a certified
historic restoration of former warehouse properties. Phase I of the mixed-use
development contains 95,000 square feet of retail space and 154,000 square feet
of multi-tenant Class A office space constructed on 2.2 acres. Phase I of
Warehouse Row Factory Shops opened in November 1989 and, as of March 31, 1996,
was 92% leased to 28 outlet center merchants. The office component of Phase I
has an entrance on the main level and occupies the top three floors of this
project. The principal tenants of the office component, which as of March 31,
1996 was 100% leased, are the Tennessee Valley Authority and the United States
Attorney's Office. Phase II of the outlet center is located on four acres across
the street from Phase I and contains 26,000 square feet of retail space and, as
of March 31, 1996 was 94% leased to 6 outlet center merchants. Phase II also
contains 5,000 square feet of office space and as of March 31, 1996 was 100%
67
<PAGE>
leased to five tenants. Pursuant to existing lease agreements until 2004, 71% of
the office space in Phases I and II of the project will remain leased. The
Company owns a multi-story parking garage adjacent to the center pursuant to a
ground lease with the City of Chattanooga. The nearest competing outlet center
is located 30 miles from this outlet center.
Warehouse Row Factory Shops Phase I was financed, in part, with an Urban
Development Action Grant Loan in the principal amount of $4,650,000 (the "UDAG
Loan"). In addition to certain fixed payments of principal and interest, the
UDAG Loan entitles the City of Chattanooga to contingent interest equal to 25%
of net cash flow from the project after a preferred return of 15% per year on
the cash invested in this phase in excess of any debt financing to the partners
of the Property Partnerships and to 25% of the net proceeds from any sale or
refinancing of this Property after repayment of the cash equity invested in
Phase I. Because of the preferred return, management believes that no contingent
interest will accrue under the UDAG Loan for the foreseeable future. Phase I is
owned by Property Partnerships in which the Company holds 2% partnership
interests as the sole general partner. These partnership interests entitle the
Company to 99% of the Property's operating cash flow. Certain limited partners
of the Property Partnerships have significant interests in the net proceeds from
any disposition of this outlet center. The Company has no current intention to
sell this Property and is prohibited from selling this property without the
consent of such limited partners prior to December 31, 1996. After December 31,
1996, the Operating Partnership may purchase the interest of such limited
partners for a purchase price equal to the fair market value of a 1% interest in
these Property Partnerships. An affiliate of the Selling Stockholder owns the
remaining interest not owned by the Company in one of the partnerships.
Warehouse Row Factory Shops Phase II was financed through a partnership with
Ford Motor Credit Company. Ford Motor Credit Company holds a 35% limited
partnership interest and the Company holds a 65% general partnership interest in
such partnership. Prior to any distribution to the Company, Ford Motor Credit
Company is entitled to receive annually $211,050. Upon the sale or financing of
such property, Ford Motor Credit Company is entitled to receive the proceeds of
such sale or financing up to $2,765,000 plus the cumulative difference between
the actual amounts annually distributed to Ford Motor Credit Company and
$211,050 per year.
The Company owns a multi-story parking garage containing 462 parking spaces
at this outlet center that is operated by Central Parking, an unrelated parking
garage operator. The net revenue from the parking garage for the quarter ended
March 31, 1996 and for the year ended December 31, 1995 was $36,495 and
$109,195, respectively. The land on which the parking garage is located is
leased by the Company from the City of Chattanooga pursuant to a fully paid
ground lease. The initial term of this lease expired on April 30, 1995. The
Company has an option to purchase this land for a fixed price of $658,100. In
connection with the proposed development of Phase III of the center, the City of
Chattanooga and the Company are negotiating an extension of the lease and option
to purchase as one of the public incentives to induce the Company to develop
Phase III.
SAN MARCOS FACTORY SHOPS. This outlet center is located on 56 acres in San
Marcos, Texas at the intersection of Interstate 35 and Center Point Road,
approximately 30 miles south of Austin, the state capital, and 50 miles north of
San Antonio. This center opened in August 1990 and was developed in multiple
phases. As of March 31, 1996 the center consisted of 416,000 square feet of GLA
and was 98% leased to 105 merchants. Attached to the center is an additional
60,000 square feet of GLA on seven acres, owned by VF Corporation, which
manufactures such brand names as Lee, Wrangler Jeans and Vanity Fair. VF
Corporation contributes contracted amounts to the common area maintenance and
marketing of the outlet center pursuant to a reciprocal easement agreement. The
nearest competing outlet center is located at the same interstate intersection
as San Marcos Factory Shops and there is another competing outlet center located
within 12 miles.
The Company intends to expand this outlet center by the construction of an
interactive Sports Court during 1996 and 1997. The Sports Court is expected to
contain approximately 100,000 square feet of GLA at a total estimated
construction cost of $12,150,000. Financing for this project will be provided
primarily through one or more facilities contemplated by the 1996 Nomura Loan
Commitment. No assurances can be
68
<PAGE>
given that the Sports Court will be constructed on schedule or that the total
estimated construction costs will not be exceeded. The Sports Court will feature
a collection of factory direct shops offering value-priced sports apparel,
equipment and footwear. The common areas of the Sports Court will include such
amenities as a basketball court, athletic field and putting greens designed to
induce interactive shopper participation by providing shoppers with the means
and space to test the sports merchandise and equipment being offered for sale by
Sports Court merchants.
A partnership of PGI and certain other parties owns 63 acres of undeveloped
land across Interstate 35 from San Marcos Factory Shops. The Company has a right
of first refusal to purchase the land from that partnership if the partnership
intends to sell the land for retail use. The Company has no plans at present to
develop this tract.
GULF COAST FACTORY SHOPS. This outlet center is located on 48 acres in
Ellenton, Florida at the intersection of Interstate 75 and Highway 301, 40 miles
south of Tampa/St. Petersburg and 20 miles north of Sarasota. The center opened
in October 1991 and has been developed in two phases. As of March 31, 1996, the
center contained 310,000 square feet of GLA and was 99% leased to 90 merchants.
See "-- Expansions under Construction." The nearest competing outlet center is
located 12 miles from this outlet center.
TRIANGLE FACTORY SHOPS. This outlet center is located on 25 acres in
Morrisville, North Carolina at the intersection of Interstate 40 and Airport
Boulevard, 16 miles northwest of Raleigh and 11 miles southeast of Durham. This
property was originally a mall containing 134,000 square feet of GLA occupied by
discount retailers. The Company acquired this property on February 5, 1991,
substantially renovated the structure, expanded it to 181,000 square feet of
GLA, converted the mall to a factory outlet center and re-leased the space to
manufacturers. See "-- Expansions under Construction." The outlet center
re-opened in October 1991 and, as of March 31, 1996, was 100% leased to 45
merchants. The nearest competing outlet center is located 40 miles from this
outlet center.
CORAL ISLE FACTORY SHOPS. This outlet center was acquired in March 1994 and
is located on 20 acres in Marco Island, Florida on Route 951, one mile west of
Highway 41, approximately 20 miles south of Naples, Florida. The center opened
in December 1991 and has been developed in two phases. As of March 31, 1996, the
center contained 126,000 square feet of GLA and was 100% leased to 41 merchants.
The nearest competing outlet center is located 40 miles from this outlet center.
CASTLE ROCK FACTORY SHOPS. This outlet center is located on 44 acres in
Castle Rock, Colorado at the intersection of Interstate 25 and Meadows Parkway,
30 miles south of downtown Denver and 40 miles north of Colorado Springs. The
center opened in November 1992 and has been developed in three phases. As of
March 31, 1996, the center contained 370,000 square feet of GLA and was 100%
leased to 108 merchants. The Company developed this factory outlet center in a
joint venture with an unrelated third party and acquired the third party's 60%
interest in March 1994. The nearest competing outlet center is located 75 miles
from this outlet center.
OHIO FACTORY SHOPS. This outlet center is located on 51 acres in
Jeffersonville, Ohio at the intersection of Interstate 71 and U.S. Route 35,
approximately 36 miles south of Columbus, 52 miles north of Cincinnati and 34
miles east of Dayton. The center opened in July 1993 and has been developed in
two phases. As of March 31, 1996, the center contained 299,000 square feet of
GLA and was 98% leased to 79 merchants. See "-- Expansions under Construction."
The Company developed this factory outlet center in a joint venture with an
unrelated third party and acquired the third party's 60% interest in March 1994.
The nearest competing outlet center is located four miles from this outlet
center.
GAINESVILLE FACTORY SHOPS. This outlet center is located on 129 acres in
Gainesville, Texas at the intersection of Interstate 35 and Route 1202, two
miles north of Highway 82, approximately 60 miles north of Dallas, Texas. The
center opened in August 1993 and has been developed in two phases. As of March
31, 1996, the center contained 316,000 square feet of GLA and was 92% leased to
87 merchants. The nearest competing outlet center is located 30 miles from this
outlet center.
69
<PAGE>
NEBRASKA CROSSING FACTORY SHOPS. This outlet center was acquired by the
Company in March 1994 and is located on 46 acres near Gretna, Nebraska at the
intersection of Interstate 80 and Highway 31, approximately 25 miles west of
Omaha and 35 miles east of Lincoln. The center opened in October 1993 and has
been developed in one phase. As of March 31, 1996, the center contained 192,000
square feet of GLA and was 96% leased to 53 merchants. The nearest competing
outlet center is located 60 miles from this outlet center.
OXNARD FACTORY OUTLET. This outlet center is located on approximately 14
acres in Oxnard, California on Highway 101, the "Ventura Freeway", 40 miles
northwest of Los Angeles. The center opened in June 1994 and has been developed
in one phase. As of March 31, 1996, the center contained 148,000 square feet of
GLA and was 94% leased to 36 merchants. This property was developed by unrelated
third parties. In September 1994, the Company acquired a 30% interest in the
partnership that owns this factory outlet center, and the Company manages the
day-to-day operations of the center. Income and losses are allocated pursuant to
the partnership agreement which principally is in relation to each partner's
interest in the partnership. The nearest competing outlet center is five miles
from this outlet center.
GROVE CITY FACTORY SHOPS. This outlet center is located on 121 acres in
Grove City, Pennsylvania at the intersection of Interstate 79 and Route 208, 40
miles north of Pittsburgh and 90 miles east of Cleveland, Ohio. The center
opened in August 1994 and has been developed in three phases. As of March 31,
1996, the center contained 415,000 square feet of GLA and was 100% leased to 113
merchants. The nearest competing outlet center is 85 miles from this outlet
center.
The Company and the Grove City Partner formed a joint venture to develop
this outlet center. Pursuant to the joint venture, the Grove City Partner agreed
to finance the total construction cost of up to $46.3 million for the first
three phases of this center. The construction loan is secured by a first
mortgage on the Property, which bears interest at LIBOR plus 1.0%, and has a
remaining term ranging from two and one-half to four years. A partnership was
formed to hold title to the Property and the Company and the Grove City Partner
each own 50% interests in the partnership. The joint venture agreement further
provides that until December 31, 1997 neither the Company nor the Grove City
Partner will develop a factory outlet center within a 100 mile radius of the
Grove City Factory Shops or develop any other real estate project within a five
mile radius of such project without first offering the other party the
opportunity to participate in the development (i) pursuant to terms
substantially similar to the terms of the Grove City Factory Shops joint venture
in the event the project would otherwise be wholly-owned by the Company or (ii)
pursuant to the terms offered to any third party that is contemplated to be a
joint venture partner in such proposed project. This non-compete covenant will
survive in accordance with its terms notwithstanding the purchase described
below.
On May 6, 1996, the Company and the Grove City Partner entered into the
Grove City Purchase Agreement pursuant to which the Company has agreed, subject
to certain conditions, to purchase (the "Grove City Purchase") on or before
February 28, 1997 all of the Grove City Partner's ownership interest in Grove
City Factory Shops Partnership, the Property Partnership which owns the Grove
City Factory Shops. Following the completion of such transaction, the Company
will own 100% of Grove City Factory Shops Partnership. As consideration for the
Grove City Partner's partnership interest, the Company has agreed, at closing,
to pay $8.0 million in cash to the Grove City Partner and to repay all of the
then outstanding indebtedness secured by Grove City Factory Shops which
indebtedness is owed to the Grove City Partner by the Grove City Factory Shops
Partnership (including amounts drawn under the Phase IV construction loan
discussed below). At March 31, 1996, the outstanding indebtedness relating to
the construction of Phases I, II and III of Grove City Factory Shops was $43.5
million.
The Grove City Purchase Agreement also provides for the Grove City Partner
and the Company to finance, develop and construct a fourth phase of the center
which will contain approximately 118,000 square feet of GLA. Under the Grove
City Purchase Agreement, an affiliate of the Grove City Partner will make a
construction loan to the Company in the aggregate principal amount of $11.0
million for the construction of Phase IV. Construction of Phase IV commenced in
May 1996 and is expected to be completed during the fourth quarter of 1996 at an
expected cost of completion of $13.5 million. The Company is obligated to fund
70
<PAGE>
any construction costs in excess of $11.0 million. No assurance can be given
that this expansion will be completed on schedule, with the indicated GLA, or
that the total estimated construction cost will not be exceeded.
Under the Grove City Purchase Agreement, if the Company breaches any
material representation, warranty, covenant or agreement or if the Company
defaults under the Grove City Purchase Agreement, the Company is obligated to
pay liquidated damages to the Grove City Partner in the amount of $2.0 million.
In the event the Grove City Purchase Agreement is terminated for any reason
other than by reason of the Grove City Partner's default thereunder or a
condemnation of or casualty to this property, the Grove City Partner will be
entitled to an $8.0 million preferred distribution (after payment of outstanding
indebtedness and return of capital contribution with respect to Phase IV) from
the proceeds of any subsequent sale of the property. No assurance can be given
that conditions to the Grove City Purchase will be met or that such purchase
will be completed. Specifically, because the Company has not yet secured
commitments to finance such transaction, management does not believe that as of
the date of this Prospectus the consummation of the Grove City Purchase is
probable.
HUNTLEY FACTORY SHOPS. This outlet center is located on 77 acres in
Huntley, Illinois at the intersection of Interstate 90 and Route 47, 50 miles
northwest of downtown Chicago and 30 miles east of Rockford, Illinois. The
center opened in August 1994 and has been developed in two phases. As of March
31, 1996, the center contained 282,000 square feet of GLA and was 85% leased to
64 merchants. The nearest competing outlet center is 20 miles from this outlet
center.
The Company has an option to acquire from a partnership affiliated with PGI
up to seven acres to develop additional phases of this outlet center for an
aggregate exercise price of approximately $750,000, although no assurance can be
given that the Company will exercise such options or construct additional
phases.
FLORIDA KEYS FACTORY SHOPS. This outlet center is located on 46 acres in
Florida City, Florida at the intersection and terminus of the Florida Turnpike
and Highway 1 (the entrance to the Florida Keys), 35 miles south of Miami. The
center opened in September 1994 and has been developed in one phase. As of March
31, 1996, the center contained 208,000 square feet of GLA and was 89% leased to
56 merchants. The nearest competing outlet center is 60 miles from this center.
INDIANA FACTORY SHOPS. This outlet center is located on 61 acres in
Daleville, Indiana at the intersection of Interstate 69 and Route 67, 34 miles
northeast of Indianapolis and 60 miles south of Fort Wayne. The center opened in
November 1994 and has been developed in one phase. See "-- Expansions under
Construction." As of March 31, 1996, the center contained 208,000 square feet of
GLA and was 87% leased to 51 merchants. The nearest competing outlet center is
located 25 miles from this outlet center.
MAGNOLIA BLUFF FACTORY SHOPS. This outlet center is located on 45 acres in
Darien, Georgia at the intersection of Interstate 95 and Route 251, 45 miles
south of Savannah, Georgia and 80 miles north of Jacksonville, Florida. The
center opened in July 1995 and has been developed in two phases. As of March 31,
1996, the center contained 294,000 square feet of GLA and was 83% leased to 71
merchants. The nearest competing outlet center is located 12 miles from this
outlet center.
The Company leases the real property and improvements comprising this
factory outlet center from the local industrial development authority. The lease
expires in 2008, at which point the Company may purchase the real property and
improvements comprising this factory outlet center for nominal consideration.
The Company's management believes that the terms of this lease will not
materially limit the growth in cash flow to be received by the Company from this
property.
ARIZONA FACTORY SHOPS. This outlet center is located on 55 acres in
Phoenix, Arizona at the intersection of Interstate 17 and Desert Hills Road, 30
miles north of downtown Phoenix and 95 miles south of Flagstaff. The center
opened in September 1995 and has been developed in one phase. As of March 31,
1996, the center contained 217,000 square feet of GLA and was 94% leased to 62
merchants. See "-- Expansions under Construction." The Company and an unrelated
third party jointly developed this center and each currently owns a 50% interest
in the partnership which owns title to this property. Under the terms of the
71
<PAGE>
partnership agreement, profits and losses are allocated to each partner based on
its relative partnership interest, after giving effect to any special allocation
provided for in the partnership agreement. The nearest competing outlet center
is located 30 miles from this outlet center.
Pursuant to the partnership agreement, the Company's partner financed the
total construction cost of $25.1 million for this center. The construction loan
is secured by a first mortgage on the property, which bears interest at LIBOR
plus 1.0%, and has a remaining term of five years. The partnership agreement
further provides that until December 31, 1998, neither the Company nor its
partner will develop a factory outlet center within a 100 mile radius of the
Arizona Factory Shops or develop any other real estate project within a five
mile radius of such project without first offering the other party the
opportunity to participate in the development (i) pursuant to terms
substantially similar to the terms of the Arizona Factory Shops partnership
agreement in the event the project would otherwise be wholly-owned by the
Company or (ii) pursuant to the terms offered to any third party that is
contemplated to be a partner in such proposed project.
GULFPORT FACTORY SHOPS. This outlet center is located on 100 acres in
Gulfport, Mississippi at the intersection of Interstate 10 and Route 49, 60
miles east of New Orleans and 60 miles west of Mobile. The center opened in
November 1995 and has been developed in one phase. As of March 31, 1996, the
center contained 228,000 square feet of GLA and was 92% leased to 60 merchants.
See "-- Expansions under Construction." The nearest competing outlet center is
located 45 miles from this outlet center.
The property on which this outlet center is located is subject to a ground
lease. The lease expires in 2035, subject to the Property Partnership's option
to renew the lease for an additional 25 years. The Company's management believes
that the terms of this lease will not materially limit the growth in cash flow
to be received by the Company from this property.
FUTURE DEVELOPMENT
The Company has commenced construction of two new factory outlet centers
containing approximately 440,000 square feet of GLA that are scheduled to open
in 1996.
BUCKEYE FACTORY SHOPS. This outlet center will be located on approximately
44 acres in Medina County, Ohio at the intersection of Interstate 71 and Route
83, 40 miles southwest of Cleveland, 30 miles west of Akron and 35 miles
northeast of Mansfield. Phase I is expected to contain 205,000 square feet of
GLA at a total estimated construction cost of $22,600,000 and is scheduled to
open by November 1996. Construction of this outlet center commenced in April
1996. No assurance can be given that this outlet center will be constructed on
schedule or that the total estimated construction cost will not be exceeded. The
nearest competing outlet center is located 45 miles from this outlet center
site.
CAROLINA FACTORY SHOPS. This outlet center will be located on approximately
62 acres in Gaffney, South Carolina at the intersection of Interstate 85 and
Route 105, 45 miles southwest of Charlotte, 15 miles northeast of Spartanburg
and 35 miles northeast of Greenville. Phase I is expected to contain 235,000
square feet of GLA at a total estimated construction cost of $24,900,000 and is
scheduled to open by November 1996. Construction of this outlet center commenced
in March 1996. No assurance can be given that this outlet center will be
constructed on schedule or that the total estimated construction cost will not
be exceeded. The nearest competing outlet center is located 22 miles from this
outlet center site.
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<PAGE>
EXPANSIONS UNDER CONSTRUCTION
As of May 31, 1996, the Company had the following expansions to existing
centers under construction:
<TABLE>
<CAPTION>
EXPECTED 1996
PROJECT LOCATION PHASE OPENING DATES GLA
- ----------------------------------------------------- ------------------------ --------- -------------- ---------
<S> <C> <C> <C> <C>
Grove City Factory Shops............................. Grove City, PA IV 4th Quarter 118,000
Arizona Factory Shops................................ Phoenix, AZ II 4th Quarter 95,000
Ohio Factory Shops................................... Jeffersonville, OH IIIA 3rd Quarter 35,000
Gulfport Factory Shops............................... Gulfport, MS IIA 4th Quarter 35,000
Gulf Coast Factory Shops............................. Ellenton, FL III 4th Quarter 30,000
Indiana Factory Shops................................ Daleville, IN IIA 4th Quarter 28,000
Triangle Factory Shops............................... Raleigh-Durham, NC IIA 3rd Quarter 6,000
---------
Total 347,000
---------
---------
</TABLE>
Other planned expansions are in various stages of development and there can
be no assurance that any of these projects will be completed or opened, or that
there will not be delays in the opening or completion of any of these planned
expansions.
The Company expects to finance a significant portion of its planned
development and expansion activity with the proceeds of one or more facilities
contemplated by the 1996 Nomura Loan Commitment and other financings. Based on
the Company's construction cost experience and the current development
expectations for new factory outlet centers and planned expansions for 1996, the
Company estimates, as of March 31, 1996, that the aggregate remaining capital
expenditures for the new factory outlet centers and expansions expected to open
in 1996 range between approximately $75,000,000 and $95,000,000. If the Company
is unable to obtain such financing, it may not be able to develop new centers or
expand existing centers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Planned Development" for additional information regarding the estimated
construction costs and financing plan.
LEASE RENTALS AND OTHER TERMS FOR OUTLET CENTERS
The following table sets forth information concerning the average base
rental per square foot of leased GLA of the Company's outlet centers as of
December 31 for the years 1991 through 1995 and the quarter ended March 31,
1996.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE AVERAGE BASE
SQUARE FEET AVERAGE PERCENT RENTAL PER
PERIOD AVAILABLE OF GLA LEASED SQUARE FOOT
- -------------------------------------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
Quarter ended March 31, 1996...................... 4,331,000 94.45% $ 14.03
1995.............................................. 3,633,606 95.10 14.10
1994.............................................. 2,513,038 94.28 13.35
1993.............................................. 1,193,259 92.95 13.60
1992.............................................. 727,060 82.70 13.08
1991.............................................. 392,209 76.86 12.32
</TABLE>
Merchant leases generally provide for the payment of percentage rents for
annual sales in excess of certain threshold amounts.
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<PAGE>
LEASE EXPIRATIONS AT OUTLET CENTERS
The following table shows lease expirations for the next ten years at the
Company's seventeen outlet centers, not including office space at Warehouse Row
Factory Shops (as of March 31, 1996 and assuming no lease renewals or
extensions):
<TABLE>
<CAPTION>
LEASE EXPIRATIONS OUTLET CENTERS
-------------------------------------------------------------
% OF TOTAL
ANNUALIZED ANNUALIZED
NUMBER OF MINIMUM RENT MINIMUM RENT
LEASES APPROXIMATE OF EXPIRING REPRESENTED BY
YEAR EXPIRING GLA LEASES EXPIRING LEASES
- ----------------------------------- ------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
1996............................... 87 255,956 $ 3,199,185 5.38%
1997............................... 90 274,904 3,762,970 6.32%
1998............................... 148 470,174 7,249,938 12.18%
1999............................... 221 704,137 10,531,767 17.70%
2000............................... 287 884,101 13,753,643 23.11%
2001............................... 159 543,756 8,702,554 14.63%
2002............................... 77 239,499 4,083,019 6.86%
2003............................... 24 155,977 2,113,673 3.55%
2004............................... 39 232,757 2,929,913 4.92%
2005............................... 33 177,837 2,671,711 4.49%
</TABLE>
ADDITIONAL INFORMATION CONCERNING CERTAIN OF THE PROPERTIES
As of March 31, 1996, each of San Marcos Factory Shops and Castle Rock
Factory Shops, either had a book value equal to or greater than 10% of the total
assets of the Company or gross revenues from such Property accounted for more
than 10% of the Company's aggregate gross revenues. Set forth below for each
such property is the following information: (i) merchants that occupy 10% or
more of the GLA of each Property; (ii) average occupancy and average annual base
rent per square foot for the previous five years (or such shorter period as the
center has been open); (iii) depreciation; (iv) federal tax basis; (v) real
estate tax rates; and (vi) lease expirations for the next ten years (assuming no
lease renewals or extensions).
SAN MARCOS FACTORY SHOPS. No single merchant occupies more than 10% of the
GLA at San Marcos Factory Shops. The average occupancy rates during the quarter
ended March 31, 1996, and the years 1995, 1994, 1993, 1992, and 1991 were 94.6%,
98.3%, 97.7%, 97.2%, 97.2%, and 82.8%, respectively, and the average annual base
rent per square foot of GLA during those periods was $14.54, $14.45, $13.97,
$14.34, $13.75, and $12.39, respectively.
Depreciation on the project is computed using the Modified Accelerated Cost
Recovery System under the Code over the estimated useful life of the real
property and land improvements which ranges from 15 to 39 years. The average
annual rate for real property is 2.56% and a variable rate for land improvement
ranges from 2.95% to 9.5%. At March 31, 1996, the federal gross tax basis of the
depreciable real property and depreciable personal property associated with the
Property was $79,945,051. The real estate tax rate per $1,000 of assessed value
is $9.42 (net of real property tax abatement) and real estate tax expense for
the quarter ended March 31, 1996 and the year ended December 31, 1995 was
$106,350 and $154,020, respectively.
74
<PAGE>
The following table sets forth lease expiration data for San Marcos Factory
Shops (as of March 31, 1996 and assuming no lease renewals or extensions):
<TABLE>
<CAPTION>
LEASE EXPIRATIONS SAN MARCOS FACTORY SHOPS
---------------------------------------------------------------
% OF TOTAL
ANNUALIZED ANNUALIZED
MINIMUM RENT MINIMUM RENT
NUMBER OF APPROXIMATE OF EXPIRING REPRESENTED BY
YEAR LEASES EXPIRING GLA LEASES EXPIRING LEASES
- ----------------------------------- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
1996............................... 16 47,147 $ 702,510 11.23%
1997............................... 5 11,470 198,250 3.17
1998............................... 18 67,034 1,044,228 16.70
1999............................... 9 24,019 412,618 6.60
2000............................... 31 96,113 1,591,659 25.45
2001............................... 13 72,491 1,202,137 19.22
2002............................... 7 10,694 219,459 3.51
2003............................... 4 15,709 293,538 4.69
2004............................... 2 35,994 379,197 6.06
2005............................... -- -- -- --
</TABLE>
CASTLE ROCK FACTORY SHOPS. No single merchant occupies more than 10% of the
GLA at Castle Rock Factory Shops. The average occupancy rates during the quarter
ended March 31, 1996 and the years 1995, 1994, 1993 and the two months in which
the center was open in 1992 were 99.1%, 98.7%, 98.8%, 99.7% and 99.6%,
respectively, and the average annual base rent per square foot of GLA during
those periods was $14.93, $14.71, $14.38, $14.31 and $13.45, respectively.
Depreciation on the project is computed using the Modified Accelerated Cost
Recovery System under the Code over the estimated useful life of the real
property and land improvements which ranges from 15 to 39 years. The average
annual rate for real property is 2.56% and a variable rate for land improvement
ranges from 2.95% to 9.5%. At March 31, 1996, the federal gross tax basis of the
depreciable real property and depreciable personal property associated with the
Property was $44,059,019. The real estate tax rate per $1,000 of assessed value
is $89.09 and real estate tax expense for the quarter ended March 31, 1996 and
for the year ended December 31, 1995 was $218,231 and $840,976, respectively.
The following table sets forth lease expiration data for Castle Rock Factory
Shops (as of March 31, 1996 and assuming no lease renewals or extensions):
<TABLE>
<CAPTION>
LEASE EXPIRATIONS CASTLE ROCK FACTORY SHOPS
---------------------------------------------------------------
% OF TOTAL
ANNUALIZED ANNUALIZED
MINIMUM RENT MINIMUM RENT
NUMBER OF APPROXIMATE OF EXPIRING REPRESENTED BY
YEAR LEASES EXPIRING GLA LEASES EXPIRING LEASES
- ----------------------------------- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
1996............................... 2 2,647 $ 39,144 0.68%
1997............................... 35 117,286 1,735,408 29.98
1998............................... 22 69,730 1,164,469 20.12
1999............................... 8 19,458 330,010 5.70
2000............................... 23 67,458 1,179,996 20.39
2001............................... 9 27,262 522,548 9.03
2002............................... 5 22,043 316,844 5.47
2003............................... 3 33,482 385,113 6.65
2004............................... 2 7,041 114,138 1.97
2005............................... -- -- -- --
</TABLE>
75
<PAGE>
COMMUNITY SHOPPING CENTERS
The following is a description of the three community shopping centers owned
by the Company. All of the Company's community shopping centers are owned in
fee. The Company's management believes that each of its community shopping
centers is adequately insured in accordance with industry standards.
Melrose Place is located on 1.6 acres in Knoxville, Tennessee on Old
Kingston Pike along Interstate 40 and Kingston Pike, approximately 4 miles west
of downtown Knoxville. The center opened in September 1987. The Shops at Western
Plaza is located on approximately 14 acres on Old Kingston Pike, 3.5 miles west
of downtown Knoxville and 1.2 miles east of Melrose Place. The center initially
was completed in 1957 and was substantially renovated and expanded in 1987 to
its present size. Northgate Plaza is located on 24 acres in Lombard, Illinois,
at the intersection of Interstate 355 and North Avenue, approximately 30 miles
west of downtown Chicago. The center opened in June 1992.
The following table sets forth certain summary information with respect to
each of the Company's community shopping centers:
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
PROPERTY (DATE CONSTRUCTED OR RENOVATED) LOCATION INTEREST GLA LEASED
- ---------------------------------------- ---------------- -------------- --------- ---------------
<S> <C> <C> <C> <C>
Melrose Place (1987) Knoxville, TN 100% 21,000 92%
The Shops at Western Plaza (1987) (1) Knoxville, TN 100 198,000 98
Northgate Plaza (1991) (2) Lombard, IL 100 205,000 96
</TABLE>
- ------------------------
NOTES:
(1) Project was opened in 1957, substantially renovated in 1987 and acquired by
PGI in June 1993.
(2) This property occupies one of two buildings which together comprise a retail
shopping center. The other building is owned by an unaffiliated third party.
For the quarter ended March 31, 1996, total revenues from the Company's
community shopping centers were $912,988, representing 4.32% of the Company's
total revenues for such period. For the year ended December 31, 1995, total
revenues from the Company's community shopping centers were $3,245,729,
representing 4.19% of the Company's total revenues for such period.
LEASE RENTALS AND OTHER RENTAL TERMS FOR COMMUNITY SHOPPING CENTERS
The following table sets forth the weighted average square feet of available
GLA, average percent of GLA leased and average base rent at the Company's
community shopping centers:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE BASE
AVERAGE SQUARE RENT PER
FEET OF AVERAGE PERCENT OCCUPIED
AVAILABLE GLA OF GLA LEASED SQUARE FOOT
-------------- ---------------- -------------
<S> <C> <C> <C>
Quarter ended March 31, 1996.................. 424,033 96.38% $ 7.20
1995.......................................... 424,033 86.95 6.70
1994.......................................... 424,033 92.10 6.32
1993.......................................... 260,852 90.97 6.67
1992 (1)...................................... 72,046 99.13 7.08
1991.......................................... 21,179 89.05 17.22
</TABLE>
- ------------------------
NOTE:
(1) Reflects the opening of Northgate Plaza and the leasing of 88,400 square
feet of GLA to Menards for approximately six months in 1992.
76
<PAGE>
LEASE EXPIRATIONS FOR THE COMPANY'S ENTIRE PORTFOLIO OF PROPERTIES
The following table shows lease expirations at the Properties (as of March
31, 1996 and assuming no lease renewals or extensions):
<TABLE>
<CAPTION>
LEASE EXPIRATIONS OF THE ENTIRE PORTFOLIO
-------------------------------------------------------------
% OF TOTAL
ANNUALIZED ANNUALIZED
NUMBER OF MINIMUM RENT MINIMUM RENT
LEASES APPROXIMATE OF EXPIRING REPRESENTED BY
YEAR EXPIRING GLA LEASES EXPIRING LEASES
- ----------------------------------- ------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
1996............................... 96 270,893 $ 3,484,940 5.49%
1997............................... 103 312,037 4,057,376 6.39%
1998............................... 163 532,351 7,645,410 12.05%
1999............................... 231 747,107 10,892,884 17.16%
2000............................... 292 897,848 14,030,128 22.11%
2001............................... 161 554,877 8,768,175 13.82%
2002............................... 77 239,499 4,083,019 6.43%
2003............................... 28 168,747 2,491,473 3.93%
2004............................... 46 281,670 3,595,450 5.67%
2005............................... 35 282,362 2,985,365 4.70%
</TABLE>
COMPETITION
The Company's outlet centers compete for customers primarily with outlet
centers built and operated by different developers, traditional shopping malls
and "off-price" retailers. The Company carefully considers the degree of
existing and planned competition in a proposed trade area before developing a
new outlet center. Merchants of outlet centers carefully avoid direct
competition with major retailers and their own full-price stores. Generally this
is accomplished by locating outlet centers at least 20 miles from the nearest
regional mall. For this reason, the Company's outlet centers compete only to a
limited extent with traditional retail malls in or near metropolitan areas.
The Company's outlet centers compete to a limited extent with various
full-price and off-price retailers in the highly fragmented retailing industry.
However, management believes that the majority of the Company's customers visit
outlet centers specifically for designer and brand-name goods at discounted
prices. Traditional full-and off-price retailers are often unable to provide
such a variety of products at attractive prices.
Because several of the Company's outlet centers are located in relatively
undeveloped areas, there are often other potential sites near the Company's
outlet centers that may be developed into outlet centers by competitors. Five
projects in the Company's portfolio: Gulf Coast Factory Shops (Ellenton,
Florida), Magnolia Bluff Factory Shops (Darien, Georgia), Ohio Factory Shops
(Jeffersonville, Ohio), Oxnard Factory Outlet (Oxnard, California), and San
Marcos Factory Shops (San Marcos, Texas), are located within twelve miles of
competing factory outlet centers and thus are subject to existing competition.
The presence of competing factory outlet centers in a particular location may
evidence a strong market for factory outlet shopping in a particular area rather
than necessarily create an adverse impact on an existing center. For example, as
of March 31, 1996, despite the competition, Gulf Coast Factory Shops was 99%
leased; Magnolia Bluff Factory Shops was 83% leased; Ohio Factory Shops was 98%
leased; Oxnard Factory Outlet was 94% leased; and San Marcos Factory Shops was
98% leased. The Company currently plans to expand Magnolia Bluff Factory Shops,
Gulf Coast Factory Shops and Ohio Factory Shops during 1996, and has plans to
complete an expansion at San Marcos Factory Shops during 1997. Notwithstanding
the Company's experience to date, the development of an outlet center with a
more convenient location or lower rents may attract the Company's merchants or
cause them to seek more favorable lease terms at or prior to renewal of their
leases and, accordingly, may affect adversely the business, revenues and/or
sales volume of the Company's outlet centers.
The Company's community shopping centers compete with similar community
shopping centers located in the same geographic trade areas.
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<PAGE>
RELATIONSHIP WITH MUNICIPALITIES
Because of the favorable impact that the Company's properties may have on a
local community's economy by generating sales and property taxes and increasing
employment in the area, local communities often assist the Company with respect
to zoning, economic incentives or favorable business development legislation.
The Company explores opportunities to obtain incentives from local, county and
state governments in connection with the development of its factory outlet
centers, and such incentives often fund the cost of off-site sewer and water
services to the site, required highway improvements and, on occasion, the cost
of land and various on-site improvements.
MORTGAGE AND OTHER DEBT FINANCING OF THE COMPANY
On June 30, 1994, the Company entered into a $100.0 million mortgage loan
agreement (the "1994 Mortgage Loan") with Nomura. The 1994 Mortgage Loan bears
interest at 30-day LIBOR plus 2.235%, requires monthly principal and interest
payments pursuant to a twenty-five year amortization schedule, and matures on
July 1, 2000. The 1994 Mortgage Loan is non-recourse and cross-collateralized by
first mortgages on six factory outlet centers (Ohio Factory Shops, Coral Isle
Factory Shops, Gulf Coast Factory Shops, Nebraska Crossing Factory Shops, San
Marcos Factory Shops, and Triangle Factory Shops). The Company is prohibited
from placing any additional secured indebtedness on these properties. In
connection with the 1994 Mortgage Loan financing, the Company purchased six year
interest rate protection contracts on $99.9 million of floating rate
indebtedness to protect against increases in the underlying 30-day LIBOR rate
above 7.0% for the first through fifth years and 8.0% for the sixth year.
On March 2, 1995 the Company closed on the $160.0 million Revolving Loan
from Nomura. The Revolving Loan matures on December 31, 1996. If the Company
meets certain conditions, it can exercise a one-year extension on the Revolving
Loan. The amount available to be drawn by the Company under the Revolving Loan
at any time during the term of the facility is calculated based upon the net
cash flow of the collateral, as defined. The collateral pool of the Revolving
Loan can be expanded by adding properties including properties under development
subject to certain limitations such as the level of executed leases and the
amount of projected net cash flow.
On May 7, 1996, the Corporate Line was renewed and increased to $15.0
million. The purpose of the Corporate Line is to provide working capital to
facilitate the funding of short term operating cash needs of the Company. The
Corporate Line matures on July 11, 1997.
On December 18, 1995, the Company obtained the 1995 Nomura Loan Commitments
(which will be replaced by the 1996 Nomura Loan Commitment) and also obtained
the Interim Loan. The Interim Loan matures on July 31, 1996 and requires monthly
interest-only payments prior to maturity. The Interim Loan will be repaid from
proceeds of one or more facilities contemplated by the 1996 Nomura Loan
Commitment.
The Company has accepted the 1996 Nomura Loan Commitment which provides for,
among other things, (i) the First Mortgage Loan in the principal amount of
$226.5 million and (ii) the Mezzanine Mortgage Loan in the principal amount of
$33.5 million. The Company expects to close the First Mortgage Loan and the
Mezzanine Mortgage Loan in July 1996. The 1996 Nomura Loan Commitment is subject
to Nomura's customary real estate due diligence review of the thirteen factory
outlet centers comprising the collateral and the completion of appropriate
documentation. In connection with the 1996 Nomura Loan Commitment, the Company
will pay Nomura a commitment fee at closing in the amount of $3.5 million. There
can be no assurance that the Company will be successful in consummating such
refinancing.
The First Mortgage Loan will bear a variable rate of interest equal to
30-day LIBOR plus 1.24% (plus trustee and servicing fees, which are expected to
be 0.07% in the aggregate). The Mezzanine Mortgage Loan will bear a variable
rate of interest equal to 30-day LIBOR plus 3.25%. The First Mortgage Loan and
the Mezzanine Mortgage Loan are expected to be securitized by Nomura on or prior
to the Securitization Closing Date. In the event the Securitization Closing Date
does not occur by September 30, 1996, or in the event the Company elects to
terminate the securitization and repay the loans because the terms of the
securitization are unacceptable to the Company, the interest rate on the
Mezzanine Mortgage Loan will
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increase to a variable rate per annum equal to 30-day LIBOR plus 5.20%. Until
the Securitization Closing Date no payments of principal will be required under
the First Mortgage Loan and the Mezzanine Mortgage Loan. After the
Securitization Closing Date, the First Mortgage Loan will require monthly
payments of principal and interest based on a thirty-year amortization of
principal and the Mezzanine Mortgage Loan will require monthly payments of
principal and interest based on the full amortization of principal within seven
years. The First Mortgage Loan and the Mezzanine Mortgage Loan will be
cross-collateralized by senior and junior mortgages, respectively, encumbering
thirteen of the Company's existing factory outlet centers. The proceeds from the
closing of the First Mortgage Loan and the Mezzanine Mortgage Loan will be used
to repay outstanding borrowings under the Revolving Loan, the 1994 Mortgage Loan
(which may not be prepaid prior to July 1, 1996), the Interim Loan and a portion
of the Company's $16.0 million fixed rate mortgage loan. The remaining proceeds
will be used for the purchase of interest rate protection contracts, the costs
and expenses of the refinancing and for working capital purposes.
In connection with the commitment to provide the First Mortgage Loan and the
Mezzanine Mortgage Loan, the Company and Nomura have agreed that, subject to
certain conditions, the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the securitization of the First Mortgage Loan.
If the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the
Senior Certificates, the appropriate party will make a payment to the other
based on the present value of such deviation applied against the principal
balance of the Senior Certificates. If the Securitization Closing Date does not
occur within six months of the closing of the First Mortgage Loan and the
Mezzanine Mortgage Loan, Nomura may demand payment of such loans in full six
months after delivery of such demand notice. It is anticipated that the First
Mortgage Loan will be securitized at investment grade levels through the
issuance of Senior Certificates and the Mezzanine Mortgage Loan will be
securitized through the issuance of Junior Certificates. In addition, the 1996
Nomura Loan Commitment requires that, prior to the securitization, the Company
purchase interest rate protection contracts with regard to the First Mortgage
Loan and the Mezzanine Mortgage Loan when and if 30-day LIBOR exceeds 6.50%.
After securitization, the Company will be required to purchase interest rate
protection contracts for the seven-year term of such loans and for the principal
amount of the Senior Certificates. It is estimated that the proceeds from the
sale of the Senior Certificates and the Junior Certificates and the proceeds
from the cash flow loan (described below) will approximate $260.0 million. In
the event that loan proceeds available from the Senior Certificates and the
Junior Certificates are less than $260.0 million, Nomura has agreed to provide,
subject to certain conditions (including the consent of the applicable rating
agencies), a loan based on the cash flow of the Property Partnerships which own
the thirteen factory outlet centers in the principal amount of the difference
between $260.0 million and such loan proceeds. In the event that the net cash
flow from the thirteen outlet centers is less than a mutually agreed upon amount
and the securitization results in less than $260.0 million in proceeds, the
Company will be required to pay to Nomura such difference at the closing of the
securitization. The Company intends to purchase the Junior Certificates with the
proceeds of the Repo Financing. The Repo Financing will require monthly payments
of interest only and will be for a term of two years and will be recourse to the
Operating Partnership. The Repo Financing will be subject to daily
mark-to-market and margin calls. Interest will be payable for 75% of the market
value of the Junior Certificates (which at date of inception shall be par value)
at the rate of 30-day LIBOR plus 1.95% and for the balance of the market value
of the Junior Certificates (which at date of inception shall be par value) at
the rate of 30-day LIBOR plus 7.0%. The weighted average annual interest rate
(including the estimated annual amortization of interest rate protection
contracts) on the $260.0 million of securitized loans is initially expected to
be approximately 7.66%.
The existing Revolving Loan with Nomura will not be terminated as a result
of the transactions contemplated by the 1996 Nomura Loan Commitment; however,
the collateral currently pledged thereunder will be released and pledged to
Nomura under the First Mortgage Loan and the Mezzanine Mortgage Loan. The
Revolving Loan will be available, subject to sufficient collateral being pledged
to Nomura, for acquisitions, expansions and new outlet centers.
Upon terms acceptable to the Company and the rating agencies involved in the
securitization, an amount between $25.0 million to $50.0 million in addition to
the $260.0 million of securitized loans may be
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raised by the securitization and, if so, will be held in escrow by Nomura. These
funds may be drawn upon by the Company, subject to the satisfaction of certain
objective standards acceptable to the Company and such rating agencies, for the
cost of construction of expansions at the thirteen mortgaged outlet centers.
In connection with the execution of the 1996 Nomura Loan Commitment, the
Company expects to incur a non-recurring loss of approximately $10.1 million
that will be recorded during the three months ending June 30, 1996. This loss
results from the expected prepayment of the Revolving Loan, the 1994 Mortgage
Loan, the anticipated termination of the 1995 Nomura Loan Commitments (for which
the Company paid $3.3 million in nonrefundable financing fees) and the repayment
in full of the Interim Loan. The loss includes the estimated unamortized cost of
certain interest rate protection contracts of $3.7 million as of July 31, 1996
that will be terminated upon repayment of the debt underlying the contracts,
debt prepayment penalties of $0.8 million and other deferred financing costs of
$4.5 million, less the estimated fair market value of the interest rate
protection contracts of $2.2 million based on their fair market value at May 30,
1996. Upon termination and sale of the interest rate protection contracts, the
Company will receive proceeds based on the then fair market value of such
contracts. The future fair market value of interest rate protection contracts is
susceptible to valuation fluctuations based on market changes in interest rates
and the maturity date of the underlying contracts.
The Company believes that the loan facilities to be provided by Nomura
pursuant to the 1996 Nomura Loan Commitment will provide annual interest savings
in excess of $4.0 million based on interest rates as of June 4, 1996 when
compared to the terms provided by the 1995 Nomura Loan Commitments. In addition
to a more attractive interest rate, other benefits include no lock-out period
with respect to prepayment, no prepayment penalties after two years, collateral
substitution provisions and a larger escrow of funds for the expansion of the
mortgaged outlet centers.
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The following table sets forth certain information regarding the mortgage
debt, other debt and tax-exempt financing of the Company:
<TABLE>
<CAPTION>
ACTUAL DEBT
ANNUAL SERVICE PAID
INTEREST PRINCIPAL FOR THE ESTIMATED BALLOON
RATE AT BALANCE AS OF QUARTER ENDED MATURITY PAYMENT
DESCRIPTION NOTES 3/31/96 3/31/96 3/31/96 DATE DUE AT MATURITY
- ----------------------------------- ----- ----------- ------------- -------------- ------------ -----------------
(000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C>
Variable rate tax-exempt bonds (the
"Bonds"), collateralized by
properties in Chattanooga, TN and
Knoxville, TN..................... (1) 3.40% $ 28,250 $ 256 (1) $ 28,250(1)
Urban Development Action Grant
Loans, collateralized by property
in Chattanooga, TN................ (2) 3.00% 4,650 35 (2) 1,462(2)
Revolving Loan, LIBOR plus 2.25%,
interest-only payments,
collateralized by seven properties
located throughout the United
States............................ 7.56% 145,478 2,852 12/31/96 145,478(3)
Interim Loan, LIBOR plus 2.25%
interest only-payments, secured by
second mortgages on properties in
Castle Rock, CO and Huntley, IL... 7.56% 10,000 162 7/31/96 10,000
Corporate Line $10,000,000
available at March 31, 1996, LIBOR
plus 2.50%, interest-only
payments, unsecured............... (4) 7.80% -- -- 7/11/97 --(4)
Mortgage Loan, LIBOR plus 2.235%,
monthly installments of $694,000
including interest, collateralized
by six properties located
throughout the United States...... 7.55% 97,309 2,385 7/1/00 88,708
Mortgage, interest-only payments,
collateralized by property in
Lombard, IL....................... 8.00% 16,000 213 7/31/96 16,000
Mortgage, 7.5%, monthly
installments of $29,000 including
interest, collateralized by
property in Knoxville, TN......... 7.50% 3,833 86 6/22/00 3,556
Unsecured promissory note,
interest-only payments............ 8.25% 500 -- 3/13/97 500
------------- ------ --------
$ 306,020 $ 5,989 $ 293,954
------------- ------ --------
------------- ------ --------
</TABLE>
- ------------------------
NOTES:
(1) Floating rate adjusted weekly or monthly by a third party remarketing agent.
The Bonds consist of four issues. For two issues in the aggregate principal
amount of $19,250,000, the floating rate shall be no less than 80% and no
more than 120% of the average of the rate of no less than ten other
tax-exempt bond issues of a similar credit rating. For two issues in the
aggregate principal amount of $9,000,000, the floating rate shall be no less
than 90% or more than 120% of the average of the rate of no less than five
other comparable tax-exempt bond issues. Two issues in the aggregate
principal amount of $19,250,000 mature in December 2012 and two other issues
in the aggregate principal amount of $9,000,000 mature in December 2014. In
March 1994, the Company purchased five-year interest rate caps to protect
the
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Company against increases in a specified underlying tax-exempt bond index
above 3.0% the first year, 3.5% the second year, 4.0% the third year, 4.5%
the fourth year and 5.0% the fifth year. The Estimated Balloon Payment Due
at Maturity for these Bonds in the table above reflects the aggregate
principal amount due for all four issues. At March 31, 1996, the Bonds were
collateralized by letters of credit (the "Letters of Credit") issued by a
group of financial institutions pursuant to a master letter of credit
agreement. A letter of credit fee of 0.925% per annum of the stated amount
of the Letters of Credit is payable quarterly in advance to such financial
institutions. The Letters of Credit were collateralized by a reimbursement
agreement under the master letter of credit agreement (the "Reimbursement
Agreement") which obligates an insurance company affiliated with the Selling
Stockholder to reimburse the financial institutions for any funds drawn on
the Letters of Credit. In addition, in March 1994, the issuing partnerships,
the Operating Partnership and an insurance company affiliated with the
Selling Stockholder entered into standby bond purchase and indemnity
agreements (the "Standby Agreements") in order to address the scheduled
expirations of various credit enhancements, including the Letters of Credit,
through March 21, 1999. See "Certain Relationships and Transactions --
Relationship with Selling Stockholder."
(2) The loans are due under four separate promissory notes. Two notes in the
aggregate principal amount of $3,823,000 mature in August 2016 and two other
notes in the aggregate principal amount of $827,000 mature in September
2019. No interest was payable on the notes with an aggregate principal
amount of $3,823,000 until September 1995 however interest accrued on such
notes at 3% per annum until that time. After September 1995, interest is
payable monthly at 3% per annum for two years. Thereafter, payments of
principal and interest will be payable monthly in an amount that would fully
amortize the loan at a rate of 6% per annum over a period of 21 years with a
balloon payment due in August 2016 provided that the Company may be required
to pay the remaining balance of the loan in August 2014. With respect to the
remaining promissory notes in an aggregate principal amount of $827,000,
interest accrues at 3% per annum through September 1994. After September
1994, interest is payable at 3% per annum for three years. Thereafter,
payments of principal and interest are payable monthly in an amount that
would fully amortize the loan at a rate of 6% per annum over a period of 22
years with the final installment due in September 2019 provided that the
Company may be required to pay the remaining balance of the loan in
September 2017. The Estimated Balloon Payment Due at Maturity for these
notes in the table above reflects the principal amount due at the first call
date. In addition, the notes that aggregate $3,823,000 entitle the City of
Chattanooga to a contingent interest in a cash flow from the project under
certain circumstances. See "-- Warehouse Row Factory Shops."
(3) The Estimated Balloon Payment at Maturity for the Revolving Loan does not
reflect the repayment of $40,248,000 of indebtedness from the net proceeds
of the Offering.
(4) Effective May 7, 1996, the Corporate Line was renewed and increased to
$15,000,000. The maturity date of the Corporate Line is July 11, 1997 at
which time the entire outstanding balance, if any, will be due and payable.
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JOINT VENTURE FINANCING
The Company has entered into joint venture investment partnerships with an
unrelated third party. The investment partnerships obtain financing for the
development of the joint venture projects from the unrelated third party. The
following table sets forth certain information regarding this joint venture
financing:
<TABLE>
<CAPTION>
ACTUAL DEBT
ANNUAL SERVICE PAID
INTEREST PRINCIPAL RECOURSE FOR THE ESTIMATED
RATE AT BALANCE AS AMOUNT AS OF QUARTER ENDED BALLOON PAYMENT
DESCRIPTION NOTES 3/31/96 OF 3/31/96 3/31/96 (5) 3/31/96 MATURITY DATE DUE AT MATURITY
- ------------------------------ ----- ------------ ----------- ------------- ------------- ------------- ----------------
(000'S) (000'S) (000'S) (000'S)
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona Factory Shops
Partnership -- note payable,
LIBOR plus 1.00%,
collateralized by property in 6.13% to
Phoenix, AR.................. (1 ) 7.13% $ 25,030 $12,515 $ 131 2/23/00 $22,445
Grove City Factory Shops
Partnership -- notes payable
and construction line of
credit, $1,801,200 available
at March 31, 1996, LIBOR plus
1.00%, collateralized by 6.25% to
property in Grove City, PA... (2 ) 7.19% 43,501 21,751 865 (2) 41,588(2)
Oxnard Factory Outlet Partners
-- notes payable, LIBOR plus
1.00%, collateralized by 6.88% to
property in Oxnard, CA....... (3 ) 7.00% 15,549 4,665 780 (3) 14,443(3)
Oxnard Factory Outlet Partners
-- note payable,
collateralized by property in
Oxnard, CA................... (4 ) 4.00% 510 153 -- 6/9/04 510
----------- ------------- ------ -------
$ 84,590 $39,084 $1,776 $78,986
----------- ------------- ------ -------
----------- ------------- ------ -------
</TABLE>
- ------------------------
NOTES:
(1) Represents a note payable related to an existing construction loan. Interest
charged on the note payable is based on LIBOR plus 1.00%, adjusted according
to the underlying LIBOR contracts. Commencing March 1996, interest is due
and payable monthly and monthly principal payments of $55,000 are required.
(2) Consists of three separate facilities. The first two facilities represent
notes payable related to fully drawn construction loans with outstanding
balances at March 31, 1996 of $26,271,000 and $9,811,000. Draws outstanding
on the third facility at March 31, 1996 totaled $7,418,800, with remaining
availability of $1,801,200. Interest charged on each facility is based on
LIBOR plus 1.00%, adjusted according to the underlying LIBOR contracts.
Interest on each facility is due and payable monthly. A principal prepayment
of $376,000 was made on the first facility in June 1995 and commencing July
1995, monthly principal payments of $57,000 have been made as required, with
a balloon payment of $24,447,000 due on November 10, 1998 (date of
maturity). With respect to the second facility, commencing July 1995,
monthly principal payments of $21,000 have been made as required, with a
balloon payment of $8,929,000 due on September 30, 1999 (date of maturity).
With respect to the third facility monthly principal payments of $21,000 are
required commencing August 1996. Assuming the third facility is fully drawn,
the estimated balloon payment due on August 10, 2000 (date of maturity) will
be approximately
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<PAGE>
$8,212,000. The Estimated Balloon Payment Due at Maturity for all three
facilities in the table above reflects the aggregate balloon payments due at
their respective maturity dates. Such indebtedness will also become due and
payable upon the completion of the Grove City Purchase. See "Business and
Properties -- Grove City Factory Shops."
(3) Consists of two notes payable related to fully drawn construction loans with
outstanding balances of $15,149,500 and $399,500 at March 31, 1996. Interest
charged on each note payable is based on LIBOR plus 1.00%, adjusted
according to the underlying LIBOR contracts. Interest is due and payable
monthly. Commencing July 1995, a combined monthly principal payment of
$33,500 is required with balloon payments totaling $14,443,000 in the
aggregate due on December 1 and 13, 1998 (dates of maturity).
(4) Interest accrues commencing on June 9, 1994. Payments are required
quarterly, commencing on October 15, 1999. Payments shall be in the amount
of 20% of net cash flow, as defined, for the calendar quarter preceding the
quarter in which payment is due. Payments shall be applied first to charges
assessed by the lender, if any, second to interest and third to principal.
(5) The Company guarantees the outstanding principal balance to the extent of
its respective direct or indirect ownership interest in the related joint
venture project. The Company has a 50% interest in Arizona Factory Shops
Partnership and Grove City Factory Shops Partnership. The Company has a 30%
interest in Oxnard Factory Outlet Partners.
CERTAIN TAX INFORMATION
The Company's aggregate gross tax basis of depreciable real property and
depreciable personal property for federal income tax purposes in the Properties
was $477.3 million, $475.2 million and $406.7 million as of March 31, 1996,
December 31, 1995 and December 31, 1994, respectively. Depreciation on the
Properties is computed using the Modified Accelerated Cost Recovery System under
the Code over the estimated useful life of the real property and land
improvements which ranges from 15 to 39 years. The average annual rate for real
property is 2.56% and a variable rate for land improvement ranges from 2.95% to
9.50%. The aggregate real estate tax expenses on the Properties for calendar
year 1995 was approximately $5.0 million. Virtually all of the Company's leases
contain provisions requiring merchants to pay as additional rent a proportionate
share of real estate taxes, including real estate tax increases resulting from
improvements in the applicable Property, and certain other operating expenses.
INSURANCE
Management believes that each of the Properties is covered by adequate fire,
flood, and property insurance provided by reputable companies and with
commercially reasonable deductibles and limits.
EMPLOYEES
As of December 31, 1995, the Company had 389 employees. The Company believes
that its relations with its employees are good.
LEGAL PROCEEDINGS
A lawsuit was filed against the Company and PGI on June 14, 1995 in the U.S.
District for the Northern District of West Virginia (the "West Virginia
Litigation"). The plaintiffs allege that the proposed development by the Company
of a factory outlet center in Hagerstown, Maryland violates the terms of a
confidentiality agreement entered into by the plaintiffs and PGI during 1993
when PGI was considering purchasing a factory outlet center in Martinsburg, West
Virginia owned by the plaintiffs. The plaintiffs are claiming an unspecified
amount of damages in excess of $10 million, as well as injunctive relief to
prohibit the Company from developing any factory outlet center in the
surrounding area. The defendants have filed a motion for summary judgment;
however, no ruling has been made as of the date of this Prospectus. The Company
has agreed to indemnify PGI from any monetary loss suffered by PGI in connection
with this proceeding which arises by virtue of the Company's activities. The
outcome of this litigation is not susceptible to easy or certain prediction. The
Company shall continue to defend itself vigorously in this lawsuit.
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<PAGE>
The Company is involved in various legal matters incidental to its business.
The outcome of litigation is not susceptible to easy or certain prediction.
While an unfavorable outcome in a particular proceeding could have a significant
effect on the Company's consolidated results of operations in a future reporting
period, the Company believes ultimate resolution of these matters, including the
West Virginia Litigation, would not, either singly or in the aggregate,
significantly affect the Company's results of operations, liquidity or financial
position.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous substances on their property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous substances. The costs of remediation or removal may be substantial,
and the presence of the hazardous substances, or the failure to promptly
remediate them, may adversely affect the owner's ability to sell the real estate
or to borrow using the real estate as collateral. In connection with its
ownership and operation of the Properties, the Company may be potentially liable
for the costs of removal or remediation of hazardous substances.
The Company has not been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous substances in
connection with any properties in which any of such entities now has or
heretofore had an interest. However, no assurances can be given that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Properties will not
be affected by merchants and occupants of the Properties, by the condition of
properties in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of investment objectives and policies,
financing policies, conflict of interest policies and policies with respect to
certain other activities of the Company. The policies with respect to these
activities have been determined by the Board of Directors of the Company and may
be amended or revised from time to time at the discretion of the Board of
Directors without a vote of the stockholders of the Company. No assurance can be
given that the Company's investment objectives will be attained or that the
value of the Company will not decrease.
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to provide regular quarterly cash
dividends to its stockholders and achieve long-term capital appreciation through
increases in cash flow of the Company's properties. The Company seeks to
accomplish these objectives through the ownership and the enhanced operation of
the Properties, the selective development and acquisition of additional retail
properties, particularly outlet centers, and, where appropriate, renovations and
expansions of these properties. The Company seeks opportunities to develop
factory outlet centers throughout the United States and the Caribbean. The
Company is currently pursuing and/or evaluating the development of new centers
in Florida, Maryland, Tennessee, Missouri, Massachusetts, Utah and Puerto Rico.
One of the key criteria for new investments will be that they offer the
opportunity for growth in per share FFO. All of the Company's investment
activities are conducted through the Operating Partnership and the Property
Partnerships, although the Company also may hold temporary cash investments from
time to time pending investment or distribution to stockholders. The Company's
investments are not restricted to any geographic area or any specific type of
property. The Company does not have any limit on the amount or percentage of
assets invested in any property.
The Company may purchase or lease properties for long-term investment,
expand and improve the properties presently owned, or sell such properties, in
whole or in part, when circumstances warrant. The Company also may participate
with other entities in property ownership, through partnerships or other types
of co-ownership arrangements. Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority over the equity
interest of the Company.
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While the Company's investment policy emphasizes equity real estate
investments, it may, in its discretion, invest in mortgages, stock of other real
estate investment trusts and other real estate interests. Although the Company
does not currently intend to invest in real estate mortgages, such mortgage
investments may include first and second mortgages that may be participating or
convertible, and may or may not be insured or guaranteed. The Company does not
currently intend to invest in the securities of other issuers except in
connection with the Company's acquisitions of indirect interests in properties
(normally through partnership interests in special purpose partnerships owning
title to properties) and investments in short-term income producing investments
such as overnight repurchase agreements and 30-day commercial paper. Any such
investments in the securities of other issuers will be subject to the percentage
of ownership limitations and gross income tests necessary for REIT
qualification. See "Certain Federal Income Tax Considerations -- Requirements
for Qualification." In any event, the Company does not intend that its
investment in securities will require it to register as an "investment company"
under the Investment Company Act of 1940, and the Company would intend to divest
securities before any such registration would be required.
DISTRIBUTION AND DIVIDEND POLICY
The Company's policy is to pay regular quarterly distributions with respect
to its Common Stock equal to approximately 90% of its funds available for
distribution after payment of distributions on its Senior Preferred Stock.
Distributions and dividends are determined by the Board of Directors and are
dependent on a number of factors, including continuing favorable operations at
the Properties. No assurance can be given that distributions or dividends will
continue to be paid or as to the amount of such distributions or dividends. In
addition, until the Company generates quarterly Funds from Operations in excess
of the FFO Threshold Amount, the Company does not intend to pay quarterly
distributions with respect to the Common Stock in excess of $0.295 per share
(other than the Special Distribution). The Company's dividend policy with
respect to the Senior Preferred Stock is to pay $2.625 per annum per share and
the Company's dividend policy with respect to the Convertible Preferred Stock is
to pay $2.125 per annum per share. No assurance can be given that distributions
or dividends will continue to be paid or as to the amount of such distributions
or dividends.
FINANCING POLICIES
At March 31, 1996, the Company had a ratio of debt-to-Total Market
Capitalization of approximately 49.3%. The debt-to-Total Market Capitalization
ratio, which is based upon market values of equity and, accordingly, fluctuates
with changes in the price of the Stock, differs from debt-to-book capitalization
ratios which are based upon book values. As adjusted for the Offering, the
Exchange Offer and the Common Unit Contribution, the pro forma debt-to-book
capitalization ratio at March 31, 1996 was 42.7%.
At the time of the Initial Public Offering, the Company established a policy
of not incurring debt if at such time it would result in a ratio of
debt-to-Total Market Capitalization of more than 50%. In 1995, the Company
modified its policy to increase this limit to 60%. The Company's ratio of
debt-to-Total Market Capitalization significantly increased after the Initial
Public Offering as a result of the decreases in the market prices of the
Company's equity securities and the $162.5 million increase in its total debt
outstanding at March 31, 1996 compared to March 31, 1994. However, the Company's
debt service coverage ratio during such period did not change significantly.
Therefore, the Company approved an increase in the ratio of debt-to-Total Market
Capitalization from 50% to 60%. The amendment of such policy allows the Company
to incur more debt as a ratio of its Total Market Capitalization. The
organizational documents of the Company, however, do not limit the amount or
percentage of indebtedness that the Company may incur. The Company may from time
to time modify its debt policy in light of then current economic conditions,
relative costs of debt and equity capital, the market values of its properties,
general conditions in the market for debt and equity securities, fluctuations in
the fair market prices of the Common Stock, growth and acquisition opportunities
and other factors. Accordingly, the Company may increase or decrease its
debt-to-Total Market Capitalization ratio above or below the limit described
above. See "Risk Factors -- No Limitation on Debt." If the Board of Directors
determines that additional funding is required, the Company may raise such funds
through additional equity offerings, debt financing or retention of cash flow
(subject to provisions in the Code concerning taxability of undistributed REIT
taxable income), or a combination of these methods.
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In the event that the Board of Directors determines to raise additional
equity capital, it has the authority, without stockholder approval, except for
the issuance of Preferred Stock senior to or on parity with the Senior Preferred
Stock or senior to the Convertible Preferred Stock, to issue additional shares
of Common Stock or Preferred Stock of the Company in any manner and on such
terms and for such consideration it deems appropriate, including in exchange for
property. Existing stockholders would have no preemptive right to purchase
shares issued in any offering and any such offering might cause a dilution of a
stockholder's investment in the Company.
It is anticipated that any additional borrowings will be made through the
Operating Partnership, the Finance Corporations, the Property Partnerships or
new property partnerships, although the Company also may incur indebtedness
which may be re-loaned to the Operating Partnership. Indebtedness incurred by
the Company may be in the form of bank borrowings, secured and unsecured, and
publicly and privately placed debt instruments. Indebtedness incurred by the
Operating Partnership, the Finance Corporations, the Property Partnerships or
any new property partnership may be in the form of purchase money obligations to
the sellers of properties, publicly or privately placed debt instruments,
financing from banks, institutional investors or other lenders, any of which
indebtedness may be unsecured or may be secured by mortgages or other interests
in the property owned by the Operating Partnership, the Finance Corporations,
the Property Partnerships or any new property partnership. Such indebtedness may
be recourse to all or any part of the property of the Company, the Operating
Partnership, the Finance Corporations, the Property Partnerships or any new
property partnership, or may be limited to the particular property to which the
indebtedness relates. The proceeds from any borrowings by the Company, the
Operating Partnership, the Finance Corporations, any Property Partnership or any
new property partnership may be used for the payment of distributions, for
working capital, to refinance existing indebtedness or to finance acquisitions,
expansions or development of new properties; provided that the Company cannot
borrow to pay distributions to stockholders except through the Operating
Partnership.
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into various agreements
designed to reduce conflicts of interest involving the owners and management of
the Company. For a discussion of such conflicts, see "Risk Factors -- Conflicts
of Interest and Influence of Limited Partners and Officers and Directors."
Michael W. Reschke, the Chairman of the Board of the Company and the
principal stockholder of PGI, devotes a considerable portion of his time to the
management of PGI's continuing commercial real estate operations. Mr. M. Reschke
and PGI have agreed that, so long as PGI and/or its affiliates own a 5% or
greater economic interest in the Company or Mr. M. Reschke is Chairman of the
Board of the Company, neither Mr. M. Reschke nor PGI (including its affiliates)
will develop or acquire any interest in any retail property that is within the
primary business of the Company as determined from time to time by a majority
vote of the independent directors of the Company. Excluded from the foregoing
restrictions are all properties in which PGI had an interest prior to the
Initial Public Offering, any retail projects developed or acquired by PGI in
Spain, and PGI's or Mr. M. Reschke's ownership of less than 5% of any class of
securities listed on a national securities exchange or the Nasdaq National
Market.
Messrs. Rosenthal and Carpenter have entered into employment agreements that
contain noncompetition provisions designed to reduce potential conflicts of
interest. These provisions prohibit Messrs. Rosenthal and Carpenter from
engaging directly or indirectly in the primary business of the Company (as
described above) during the period each is employed with the Company and for an
additional 24 month period following any termination of such employment either
by the Company for cause or by the officer voluntarily. See "Management."
PGI and/or certain other parties hold direct or indirect interests in
certain developed and undeveloped properties situated adjacent to or near two of
the Properties. In order to address potential conflicts that may arise by virtue
of the future development or use of such properties the respective owners of
such properties
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have granted certain rights of first refusal and purchase options to the Company
with respect to some of such properties. The exercise of any such rights or
options will be subject to the approval of a majority of the Independent
Directors Committee.
The Company has formed the Independent Directors Committee to consider and
take such actions and make such approvals as are appropriate to reduce or
eliminate any potential or apparent conflict of interest which may arise in
connection with any proposed action or transaction involving the Company. See
"Management -- Committees of the Board of Directors."
As holders of Common Units, the Limited Partners may suffer different and
more adverse tax consequences than the Company upon the sale or refinancing of
the Contributed Properties and therefore the Limited Partners and the Company
may have different objectives regarding the appropriate pricing and timing of
any sale or refinancing of the Contributed Properties. The decision to proceed
with any such sale or refinancing will be made by the Board of Directors. The
Operating Partnership Agreement provides that the Company has no obligation to
consider the separate interests of the Limited Partners, including tax
consequences to Limited Partners, in deciding whether to sell a property. See
"Risk Factors -- Conflicts of Interest and Influence of Limited Partners or
Officers or Directors."
In addition, pursuant to Maryland law (the jurisdiction under which the
Company is incorporated) and the Bylaws of the Company, the directors will be
obligated to offer to the Company any opportunity which comes to such director
and which the Company could reasonably be expected to have an interest in
pursuing. In addition, under Maryland law, any contract or transaction between
the Company and any director or any entity in which the director has a material
financial interest will be voidable unless (a) it is approved after disclosure
of the interest, by an affirmative vote of a majority of disinterested directors
or by the affirmative vote of a majority of the votes cast by disinterested
stockholders, or (b) it is fair and reasonable to the Company.
WORKING CAPITAL RESERVES
The Company maintains working capital reserves (and when not sufficient,
access to borrowings) in amounts the Executive Committee of the Board of
Directors determines to be adequate to meet normal contingencies in connection
with the operation of the Company's business.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer its shares or other equity or debt
securities in exchange for property and to repurchase or otherwise reacquire its
shares or any other securities. While the Company to date has not effected any
such types of transactions, it and may engage in such activities in the future.
Similarly, the Company may offer additional interests in the Operating
Partnership that are exchangeable into Common Stock or, at the Company's option,
cash in exchange for property. The Company also may make loans to the Operating
Partnership. The Company expects to issue Common Stock to holders of interests
in the Operating Partnership upon exchange thereof, subject to certain
restrictions and limitations. Any such election by the Company with respect to
Common Units held by PGI, Messrs. Rosenthal and Carpenter or any other officer
or director of the Company or certain other parties will be made with the
approval of the independent directors. The Company has no formal policy with
respect to loans to other persons. The Company has not made loans to any
entities or persons, including its officers and directors other than to Messrs.
Rosenthal and Carpenter as described in "Certain Relationships and Transactions"
and to certain other employees of the Company in the ordinary course of its
business which are not material to the Company. The Company expects to continue
to make loans to its employees from time to time in the ordinary course of its
business which either singly or in the aggregate, will not be material to the
Company. The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers and does not intend to do
so. At all times, the Company intends to make investments in such manner as to
be consistent with the requirements of the Code for the Company to continue to
qualify as a REIT unless, because of changing circumstances or changes in the
Code (or in Treasury Regulations), the Board of Directors with the consent of
the holders of the majority of the votes entitled to be cast on such matter,
determine that it is no longer in the best interests of the Company to continue
to be qualified as a REIT.
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MANAGEMENT
DIRECTORS
The directors of the Company, their ages and their positions and offices are
set forth in the following table.
<TABLE>
<CAPTION>
TERM
NAME EXPIRES AGE POSITION
- ------------------------------ ----------- --- -------------------------------------------------
<S> <C> <C> <C>
Michael W. Reschke 1997 40 Chairman of the Board, Director
Abraham Rosenthal 1999 46 Chief Executive Officer, Director
William H. Carpenter, Jr. 1998 45 President, Chief Operating Officer, Director
Terence C. Golden 1997 51 Director
Kenneth A. Randall 1998 68 Director
James R. Thompson 1999 60 Director
Marvin S. Traub 1999 70 Director
</TABLE>
- ------------------------
For biographical information concerning the directors who are also executive
officers of the Company, see "Management -- Biographies of Executive
Officers." The following is a biographical summary of the experiences of the
independent directors of the Company:
TERENCE C. GOLDEN. Terence C. Golden, a Director of the Company since the
Initial Public Offering, has been Chief Executive Officer and President of Host
Marriott Corporation, Bethesda, Maryland since September 1995 as well as
Chairman of the Board of Bailey Realty Corporation ("BRC") in Washington, D.C.
since 1991. Prior to forming BRC, Mr. Golden held the position of Chief
Financial Officer of The Oliver Carr Company from 1989 to 1991. From 1985 to
1988, Mr. Golden was appointed by President Reagan and confirmed by the U.S.
Senate to the office of Administrator of General Services Administration. From
1984 through 1985, Mr. Golden was Assistant Secretary at the U.S. Department of
Treasury. Mr. Golden was one of the founding partners of Trammell Crow
Residential Companies and was its Managing Partner from 1976 through 1984. Mr.
Golden also serves as a director of D.R. Horton, Inc. and Cousins Properties,
Inc. Mr. Golden received an M.B.A. degree from Harvard Business School (1970),
an M.S. degree in Nuclear Engineering at the Massachusetts Institute of
Technology (1967), and a B.S. degree in Mechanical Engineering from the
University of Notre Dame (1966).
KENNETH A. RANDALL. Kenneth A. Randall, a Director of the Company since the
Initial Public Offering, was the Chairman of ICL Inc. from 1980 to 1982, Vice
Chairman of Northeast Bancorp, Inc. from 1977 to 1987, the Chairman and Chief
Executive Officer of United Virginia Bankshares Incorporated from 1970 to 1976
and the Chairman of the FDIC from 1965 to 1970. Mr. Randall was President and
Chief Executive Officer of The Conference Board, Inc. from 1976 to 1982. Mr.
Randall currently serves on the board of directors of Dominion Resources, Inc.,
Dominion Energy, Inc., Enron/Dominion Cogen, Inc., Lumbermans Mutual Casualty
Company, American Motorist Insurance Company, and American Manufacturers Mutual
Insurance Company. Mr. Randall also serves as trustee of the principal
Oppenheimer mutual funds. Mr. Randall attended Weber State University and
received a B.A. degree and an M.S. degree from Brigham Young University.
GOVERNOR JAMES R. THOMPSON. James R. Thompson, a Director of the Company
since the Initial Public Offering, is the Chairman of the law firm of Winston &
Strawn and has been a partner with the firm since 1991. Prior to joining Winston
& Strawn, Governor Thompson served as the Governor of Illinois from 1977-1991.
Governor Thompson serves on the board of directors of FMC Corporation, the
Chicago Board of Trade, Jefferson Smurfit Corporation (U.S.), International
Advisory Council of the Bank of Montreal, Pechiney International, Wackenhut
Corrections Corporation, Union Pacific Resources Company and Hollinger
International, Inc. Governor Thompson received his Juris Doctorate degree from
the Northwestern University Law School.
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MARVIN S. TRAUB. Marvin S. Traub, a Director of the Company since the
Initial Public Offering, has been President of Marvin Traub Associates, Inc.
since 1992. In addition, Mr. Traub joined Financo in 1994 as Senior Advisor.
Prior to establishing Marvin Traub Associates, Inc., Mr. Traub was Chairman of
Bloomingdales from 1978-1992 and was Vice Chairman of Federated Department
Stores from 1988-1992. Mr. Traub was a director and Chairman of the Executive
Committee of The Conran Stores, Inc. The Conran Stores, Inc. filed a petition
for protection under U.S. bankruptcy laws on January 10, 1994. Mr. Traub
received an M.B.A. degree (with distinction) from Harvard Business School after
receiving a B.A. degree (magna cum laude) from Harvard University.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The functions of the Audit Committee, which consists of
Messrs. Golden and Randall, include making recommendations concerning the
engagement of independent public accountants, reviewing with the independent
accountants the plans and results of the audit engagement, approving
professional services provided by the independent public accountants, reviewing
the independence of the independent public accountants, considering the range of
audit and non-audit fees, and reviewing the adequacy of the Company's internal
accounting controls.
EXECUTIVE COMMITTEE. The Executive Committee is comprised of Messrs. M.
Reschke, Rosenthal and Carpenter and has been granted certain authority to
acquire and dispose of real property and the power to authorize, on behalf of
the Board of Directors, the execution of certain contracts and agreements,
including those related to certain borrowings by the Company. The Executive
Committee meets monthly (or more frequently if necessary) and all actions by the
committee are reported at the next meeting of the Board of Directors.
EXECUTIVE COMPENSATION AND STOCK INCENTIVE PLAN COMMITTEE. The Executive
Compensation and Stock Incentive Plan Committee consists of Messrs. Golden and
Randall and has responsibility for determining the compensation for the
Company's executive officers and implementing and administering the Company's
Stock Incentive Plans.
INDEPENDENT DIRECTORS COMMITTEE. The Independent Directors Committee
consists of Messrs. Golden, Randall and Traub and Governor Thompson and has the
responsibility to (i) consider and approve any proposed action or transaction
involving the Company and PGI; (ii) consider and take such actions and make such
approvals and recommendations as are required to be considered, taken or made by
the Company's independent directors under either the Operating Partnership
Agreement or corporate governance documents relating to the Company, or
otherwise; and (iii) consider and take such actions and make such approvals as
are appropriate to reduce or eliminate any potential or apparent conflict of
interest which may arise in connection with any proposed action or transaction
involving the Company.
COMPENSATION OF DIRECTORS
The Company pays its Directors who are not employees of the Company or
affiliated with PGI or the Company a fee for their services as Directors. Such
persons receive annual compensation of $10,000 plus a fee of $2,500 for
attendance in person at each meeting of the Board of Directors, a fee of $500
for participating by telephone in each substantial meeting of the Board of
Directors or of any Committee of the Board of Directors, and a fee of $1,000 for
attending any meeting of any Committee of the Board of Directors; provided,
however, no additional compensation is paid for participating by telephone or
attending any meeting of any Committee of the Board of Directors if such meeting
occurs on the same day as a meeting of the Board of Directors. Such persons also
receive reimbursement of all travel and lodging expenses related to their
attendance at both Board and committee meetings.
Pursuant to the 1994 Stock Incentive Plan, the Company granted options to
purchase 20,000 shares of Common Stock to non-employee Directors as follows
(with the number of shares of Common Stock to be issued upon exercise thereof
indicated parenthetically): Terence C. Golden (5,000), Kenneth A. Randall
(5,000), James R. Thompson (5,000) and Marvin S. Traub (5,000). The exercise
price of such options is $19.00 per share, which represents the Initial Public
Offering price for the Common Stock, and such options
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are exercisable at any time prior to the earlier of (a) March 22, 2004 or (b)
the expiration of one year from the date of such non-employee Director's
termination of service as a Director. See "Compensation of Executives -- Stock
Incentive Plans."
Pursuant to the 1995 Stock Incentive Plan, the Company granted options to
purchase an aggregate of 20,000 shares of Common Stock (the "Initial 1995
Grants") to outside directors of the Company as follows (with the number of
shares of Common Stock to be issued upon exercise thereof indicated
parenthetically): Terence C. Golden (5,000), Kenneth A. Randall (5,000),
Governor James R. Thompson (5,000) and Marvin S. Traub (5,000). Each Initial
1995 Grant was fully vested upon the date of grant and will terminate upon the
earlier to occur of (a) May 18, 2005 or (b) the expiration of one year from the
date of termination of service of the optionee as a Director of the Company. The
exercise price per share for such options is $12.45 per share (based on the fair
market value of Common Stock on the grant date as determined in accordance with
the 1995 Stock Incentive Plan).
The Company has entered into a consulting agreement with Marvin Traub
Associates, Inc., an entity owned and controlled by Marvin S. Traub, a Director
of the Company. The consulting agreement provides that for so long as Mr. Traub
remains a Director of the Company he will provide consulting and advisory
services in connection with the Company's development activities and merchant
relations and that Marvin Traub Associates, Inc. will receive a monthly fee of
$5,000 for such services. Upon Mr. Traub's election as a Director, Marvin Traub
Associates, Inc. received a grant of options to purchase 15,000 shares of Common
Stock pursuant to the 1994 Stock Incentive Plan. The exercise price of such
options is $19.00 per share, and such options are exercisable at any time prior
to the earlier of (a) March 22, 2004 or (b) the date ninety (90) days following
the termination of Mr. Traub's service as a Director of the Company.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and their positions and
offices are set forth in the following table:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- --------------------------------------------------
<S> <C> <C>
Michael W. Reschke 40 Chairman of the Board, Director
Abraham Rosenthal 46 Chief Executive Officer, Director
William H. Carpenter, Jr. 45 President, Chief Operating Officer, Director
Glenn D. Reschke 45 Executive Vice President -- Development
David G. Phillips 34 Executive Vice President -- Leasing
Robert P. Mulreaney 37 Executive Vice President -- Chief Financial
Officer and Treasurer
R. Bruce Armiger 50 Senior Vice President -- Development and
Construction Management Services
C. Alan Schroeder 39 Senior Vice President -- General Counsel and
Secretary
Steven S. Gothelf 36 Senior Vice President -- Finance
Steven M. McGhee 41 Senior Vice President -- Operations
</TABLE>
BIOGRAPHIES OF EXECUTIVE OFFICERS
MICHAEL W. RESCHKE. Michael W. Reschke has been the Chairman of the Board
of Directors of the Company since the Company's inception. Mr. Reschke founded
PGI in 1981 and, since that time, has acted as PGI's Chairman, Chief Executive
Officer, and President. For the last fourteen years, Mr. Reschke has directed
and managed the development, finance, construction, leasing, marketing,
acquisition, renovation, and property management activities of PGI. Mr. Reschke
also is a member of the Board of Directors of Prime Residential, Inc., a real
estate investment trust engaged in the ownership, operation, acquisition and
renovation of multi-family residential projects and the successor in interest to
the former multi-family division of PGI. Mr. Reschke received a Juris Doctorate
degree (summa cum laude) from the University of
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Illinois after having received a B.A. degree (summa cum laude) in Accounting
from Northern Illinois University. Mr. Reschke is licensed to practice law in
the State of Illinois and is a certified public accountant. Mr. Reschke is a
member of the Chairman's Roundtable and the Executive Committee of the National
Realty Committee, as well as a full member of the Urban Land Institute. Mr.
Reschke is the brother of Glenn D. Reschke, an executive officer of the Company.
ABRAHAM ROSENTHAL. Abraham Rosenthal has been the Chief Executive Officer
and a Director of the Company since the Company's inception. Mr. Rosenthal
joined PGI in 1988, serving as Vice President, Senior Vice President and,
immediately prior to joining the Company, as Executive Vice President. Mr.
Rosenthal's responsibilities with the Company include financing, site selection,
design and construction management for the Company's retail projects. Mr.
Rosenthal has been involved in retail design and development for the past 19
years. Prior to joining PGI, Mr. Rosenthal was Vice President -- Design and
Construction of Cordish/Embry and Associates. Mr. Rosenthal received a Bachelor
of Architecture degree from the University of Maryland School of Architecture,
is a registered architect in the State of Maryland and is certified by the
National Council of Architectural Registration Board. Mr. Rosenthal is a full
member of the Urban Land Institute, the International Council of Shopping
Centers and the VALUE RETAIL NEWS Advisory Board. Mr. Rosenthal also serves as a
member of the board of directors of the Baltimore Museum of Art and as a member
of the museum's executive and finance committees.
WILLIAM H. CARPENTER, JR. William H. Carpenter, Jr. has been President,
Chief Operating Officer and a Director of the Company since the Company's
inception. Immediately prior to the Initial Public Offering, Mr. Carpenter was
associated with PGI. Mr. Carpenter joined PGI in 1989, serving as Senior Vice
President and, immediately prior to joining the Company, as Executive Vice
President. Mr. Carpenter's responsibilities with the Company include leasing,
management and marketing, and public relations concerning the Company's retail
projects. Prior to joining PGI, Mr. Carpenter was President of D.I. Realty, Inc.
(a division of Design International) from 1988 to 1989 and in such capacity
managed all aspects of retail leasing and development for D.I. Realty, Inc.,
including property management, construction, and merchant coordination. Mr.
Carpenter previously was senior regional leasing director with The Rouse Company
and a partner with Cordish/Embry and Associates in Baltimore, Maryland. In these
positions, Mr. Carpenter directed the development and leasing of a number of
major urban projects in cooperation with city governments. Over the last 18
years, Mr. Carpenter has been involved in over 30 major urban, suburban and
specialty projects throughout the United States. Mr. Carpenter attended the
University of Baltimore, is a member of the International Council of Shopping
Centers, a board member of Developers of Outlet Centers, a full member of the
Urban Land Institute and sits on VALUE RETAIL NEWS Advisory Board. Mr. Carpenter
also serves as a member of the board of directors of the Baltimore Symphony
Orchestra.
GLENN D. RESCHKE. Glenn D. Reschke is Executive Vice President --
Development of the Company. Mr. Reschke joined PGI in 1983 and, since that time,
served as Vice President, Senior Vice President and Executive Vice President of
PGI, responsible for PGI's multi-family, senior housing, single family and land
development divisions. Mr. Reschke also served as President of Prime Property
Management, Inc., an affiliate of PGI. Mr. Reschke received a Masters in
Business Administration from Eastern Michigan University with a specialization
in finance after receiving a Bachelor of Science degree with honors in Chemical
Engineering from Rose Hulman Institute of Technology in Terre Haute, Indiana.
Mr. Reschke is the brother of Michael W. Reschke, the Company's Chairman of the
Board.
DAVID G. PHILLIPS. David G. Phillips is Executive Vice President -- Leasing
of the Company. Mr. Phillips joined PGI in 1989 and served as Vice President --
Leasing and as Senior Vice President -- Director of Leasing. Mr. Phillips'
responsibilities with the Company include the management and supervision of the
Company's leasing operation as well as project merchandising and lead merchant
leasing for all of the Company's outlet centers. Prior to joining PGI, Mr.
Phillips was a leasing representative at D.I. Realty, Inc., leasing a variety of
retail projects including outlet centers and traditional and specialty malls.
Prior to joining D.I. Realty, Inc., Mr. Phillips owned and operated Bowdoin
Street Contracting in Boston, Massachusetts, specializing in historical
renovation. Mr. Phillips received a Masters of Science in Real Estate
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Development at Johns Hopkins University and received a Bachelor of Science
degree in Business Administration from the University of Vermont. Mr. Phillips
is a member of the International Council of Shopping Centers, the Urban Land
Institute and holds a real estate sales license in the State of Maryland.
ROBERT P. MULREANEY. Robert P. Mulreaney is Executive Vice President --
Chief Financial Officer and Treasurer of the Company. Mr. Mulreaney joined the
Company in 1994. Mr. Mulreaney's responsibilities with the Company include
financial reporting, investor relations, accounting, taxation, treasury, and
management information systems. Prior to joining the Company, Mr. Mulreaney was
associated for 14 years with Ernst & Young LLP, where he specialized in
accounting and consulting issues related to real estate and financial
institutions. Mr. Mulreaney received a Bachelor of Business Administration in
Accounting in 1980 from Marshall University in Huntington, West Virginia. Mr.
Mulreaney is a member of the American Institute of Certified Public Accountants,
the Maryland Association of Certified Public Accountants and the West Virginia
Society of Certified Public Accountants.
R. BRUCE ARMIGER. R. Bruce Armiger is Senior Vice President -- Development
and Construction Management Services for the Company. Mr. Armiger's
responsibilities with the Company include supervision of project development and
construction for all of the Company's outlet centers. Mr. Armiger joined PGI in
1992, and since that time, acted as Vice President of the Retail Division of
PGI. Prior to joining PGI, Mr. Armiger was Vice President and Director of
Construction and Engineering of The Rouse Company for a period of 15 years. At
The Rouse Company, Mr. Armiger was responsible for all of the construction
activities of the company consisting of over 5 million square feet of GLA during
his tenure. Mr. Armiger has a Bachelor of Arts degree and Masters of Business
Administration from Loyola College, Baltimore, Maryland.
C. ALAN SCHROEDER. C. Alan Schroeder is Senior Vice President -- General
Counsel and Secretary of the Company. Mr. Schroeder's responsibilities with the
Company include legal, human resources and risk management. From 1990 to 1994,
Mr. Schroeder was an Assistant General Counsel of PGI, responsible for legal
matters relating to the retail division of PGI and involved in the division's
development, financing, corporate, partnership, construction and management
matters. Prior to joining PGI, Mr. Schroeder was associated for four years with
Hopkins & Sutter, a Chicago, Illinois based law firm, where he worked primarily
on real estate and financing matters. Mr. Schroeder received a Juris Doctorate
degree from The University of Chicago Law School. Mr. Schroeder received an A.B.
degree in Economics and Sociology from Bowdoin College in Brunswick, Maine. Mr.
Schroeder is licensed to practice law in Illinois.
STEVEN S. GOTHELF. Steven Gothelf is Senior Vice President -- Finance of
the Company. Mr. Gothelf joined PGI in 1990 and, since that time, served as Vice
President of Asset and Development Management. Mr. Gothelf's responsibilities
include financing and capital market activities and acquisition of existing
outlet centers. For two years prior to joining PGI, Mr. Gothelf was Vice
President of Finance and Administration of Clarion Development Inc. Prior to
joining Clarion Development Inc., Mr. Gothelf was a Market Maker for financial
futures at the Chicago Board of Trade and prior to that was a Manager of Real
Estate Tax and Consulting for Peat Marwick Main. Mr. Gothelf received his B.S.
degree in Accounting from the University of Illinois and is a certified public
accountant.
STEVEN M. MCGHEE. Steven McGhee is Senior Vice President -- Operations of
the Company. Mr. McGhee has been affiliated with PGI since October, 1989, most
recently as Vice President and Director of Operations. Mr. McGhee's
responsibilities include directing the marketing and management of the Company's
properties. Prior to joining PGI, Mr. McGhee was General Manager for CBL and
Associates for two years where he marketed and managed a portfolio of 1,500,000
square feet of retail properties. Prior to that Mr. McGhee spent fifteen years
with the Melville Corporation, a specialty retail chain where he was eventually
responsible for the operations of approximately 140 stores nationwide. Mr.
McGhee attended the University of Tennessee majoring in Business Administration.
Mr. McGhee is a member of the International Council of Shopping Centers (ICSC),
Value Retail News and Building Owners and Managers Association (BOMA). Mr.
McGhee received designation as a certified shopping center manager from the ICSC
in October 1995.
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COMPENSATION OF EXECUTIVES
Prior to the completion of the Initial Public Offering, the Company did not
pay any compensation to its officers. The following table sets forth the
compensation earned for the period from March 22, 1994 to December 31, 1994 and
for the year ended December 31, 1995 with respect to the Chairman of the Board,
the Chief Executive Officer and the four other persons who are the most highly
compensated executive officers of the Company, including the President and Chief
Operating Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------ ------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS
- ----------------------------------------------------- --------- ---------- ------------- ------------------------------
<S> <C> <C> <C> <C>
Michael W. Reschke, ................................. 1995 $ 150,000 $ 0(1) 50,000(2)
Chairman of the Board 1994 116,610 0(1) 150,000(3)
Abraham Rosenthal, .................................. 1995 257,385 125,000 50,000(2)
Chief Executive Officer 1994 190,341 75,000 150,000(3)
William H. Carpenter, Jr., .......................... 1995 257,385 125,000 50,000(2)
President and Chief Operating Officer 1994 190,341 75,000 150,000(3)
Glenn D. Reschke, ................................... 1995 150,000 88,200 20,000(2)
Executive Vice President -- Development 1994 114,205 69,450 50,000(3)
David G. Phillips, .................................. 1995 150,000 125,000 20,000(2)
Executive Vice President -- Leasing 1994 114,205 89,500 50,000(3)
R. Bruce Armiger, ................................... 1995 125,000 85,290 7,000(2)
Senior Vice President -- Development and 1994 92,473 130,278 0(3)
Construction Management Services
</TABLE>
- ------------------------
NOTES:
(1) At his request, Mr. M. Reschke was not considered for a discretionary bonus
for the period from March 22, 1994 to December 31, 1995.
(2) Granted pursuant to the 1995 Stock Incentive Plan effective February 16,
1996. See "-- Stock Incentive Plans."
(3) Granted pursuant to the 1994 Stock Incentive Plan. See "-- Stock Incentive
Plans."
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL AGREEMENTS
The Company has entered into agreements (the "Employment Agreements") with
each of the executive officers named in the summary compensation table above
other than Messrs. Armiger and G. Reschke. The agreements with Messrs. M.
Reschke, Rosenthal, Carpenter and Phillips generally provide that such executive
officers shall devote substantially all of their business time to the operation
of the Company, except Mr. M. Reschke who shall only be required to devote such
time as he deems necessary to fulfill his duties and obligations to the Company
as Chairman of the Board. The Employment Agreement for Mr. M. Reschke provides
for an initial term expiring on March 22, 1999 and the Employment Agreement for
Mr. Phillips provides for an initial term expiring on March 22, 1997, which
agreements are automatically extended for an additional year after expiration of
the initial term and any extension period unless either the Company or the
executive officer provides the other with prior written notice that such term
shall not be extended. The Employment Agreements for Messrs. Rosenthal and
Carpenter provide for a term expiring on December 31, 1998 and do not provide an
extension period.
The Employment Agreement with Messrs. M. Reschke and Phillips provide that
the employees covered thereby are eligible to receive discretionary bonuses
based on the achievement of performance goals established by the Company. The
Employment Agreements with Messrs. Rosenthal and Carpenter provide for annual
performance based bonuses of not more than the executive's base salary
determined by a formula based on the following financial factors: annual growth
in funds from operations on a fully diluted per share
94
<PAGE>
basis, first year return on total development cost for all new centers and
expansions which open during the year, average sales per square foot, percentage
of space leased, and a discretionary component of not more than 10% of the total
bonus paid on the executive's participation in the development of new concepts.
If the Employment Agreements are terminated by the Company "without cause"
or are terminated by the executive after a "change in control" or for "good
reason" (as such terms are defined in the Employment Agreements), the executive
will be entitled to a lump sum payment. With regard to Messrs. M. Reschke and
Phillips, such payment will be an amount equal to the greater of such
executive's annual base salary or 50 percent of the remaining aggregate base
salary due the executive under his Employment Agreement. With regards to Messrs.
Rosenthal and Carpenter, such amount for termination by the Company "without
cause" or for termination by the executive for "good reason" will be equal to
the executive's annual base salary plus (1) the average annual performance bonus
paid to the executive for the two years preceding the termination or (2) 50% of
the executive's base salary if the termination occurs before January 1, 1998.
The Employment Agreements with Messrs. Rosenthal and Carpenter allow these
executives the option to terminate their respective employment agreement at any
time within six months following a "change of control" of the Company (as such
term is defined therein). If either of these executives elects to exercise such
option in the event of a "change of control," such executive will be entitled to
receive any bonuses accrued but undistributed, other vested benefits through the
effective date of the termination and health and life insurance benefits for a
period of one year, plus a termination distribution in the amount of $1.5
million. Additionally, if the Employment Agreements are so terminated, certain
restrictions on the transfer of stock held by Messrs. Rosenthal and Carpenter
(or obtained by such persons upon exercise of Common Units) may terminate. With
regard to Messrs. Rosenthal and Carpenter, the Employment Agreements contain
certain non-compete provisions restricting the executives from developing,
acquiring or operating retail properties similar to those properties developed
or operated by the Company for a period of up to two years following termination
of employment, which period may be limited to four quarters by either party at
any time prior to 30 days before the end of the fourth quarter.
Current terms of the Employment Agreement provide for a base salary of
$150,000 for Mr. M. Reschke, $250,000 for Messrs. Rosenthal and Carpenter and
$175,000 for Mr. Phillips. The current terms of Mr. G. Reschke's compensation
include a base salary of $175,000. The current terms of Mr. Armiger's
compensation include an annual base salary of $130,000, a project development
bonus equal to $.10 for each square foot of GLA contained in any new factory
outlet center or project expansion completed by the Company and a discretionary
bonus of up to 30% of Mr. Armiger's base salary based on the achievement of
performance goals.
OPTION GRANTS IN 1995
No options to purchase Common Stock were granted to the named executives by
the Company during the fiscal year ended December 31, 1995; however, on February
16, 1996 the Company granted the options discussed below to each of the named
executive officers of the Company for services rendered in 1995. The table also
shows the potential value of such grants if the Common Stock appreciates at
compounded annual rates of 5% and 10% compounded annually over the remaining
term of the option from the grant date price of $11.88 per share on February 16,
1996. The 5% and 10% rates of appreciation based on the grant date price are
required to be disclosed by the rules of the Commission and are not intended to
forecast potential future appreciation, if any, in the Company's stock prices.
The Company did not use an alternative present
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<PAGE>
value formula permitted by the rules of the Commission because, in the Company's
view, potential future unknown or volatile factors result in there being no such
formula that can determine with reasonable accuracy the present value of such
option grants.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION FOR
OPTIONS/SARS OPTION TERM BASED ON
GRANTED TO EXERCISE OR GRANT DATE STOCK PRICE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR (2) ($/SH) (3) DATE 5% ($) 10% ($)
- ----------------------------------------- --------------- ----------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Reschke....................... 50,000 18.3% $ 11.88 2/16/06 $ 373,000 $ 946,000
Abraham Rosenthal........................ 50,000 18.3 11.88 2/16/06 373,000 946,000
William H. Carpenter, Jr................. 50,000 18.3 11.88 2/16/06 373,000 946,000
Glenn D. Reschke......................... 20,000 7.3 11.88 2/16/06 149,000 379,000
David G. Phillips........................ 20,000 7.3 11.88 2/16/06 149,000 379,000
R. Bruce Armiger......................... 7,000 2.6 11.88 2/16/06 52,000 132,000
</TABLE>
- ------------------------
NOTES:
(1) Options are fully vested. The exercise price for the options is generally
payable in cash or, in certain circumstances, by the surrender, at the fair
market value on the date on which the option is exercised, of shares of
Common Stock.
(2) A total of 272,500 options were granted to employees on February 16, 1996
for services rendered during 1995.
(3) Based on average closing price for the five business days preceding the
grant date.
The following table sets forth information with respect to options to
purchase shares of Common Stock exercised by the named executive officers during
1995 and the number of shares of Common Stock underlying options held by each of
the named executive officers and the value of such officers' exercisable and
unexercisable options on December 31, 1995.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT 1995 1995 YEAR-END
SHARES YEAR-END (#) ($)(1)
ACQUIRED ------------------- -----------------
ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------- --------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Michael W. Reschke............................... -- -- 52,500/97,500 --
Abraham Rosenthal................................ -- -- 52,500/97,500 --
William H. Carpenter, Jr......................... -- -- 52,500/97,500 --
Glenn D. Reschke................................. -- -- 17,500/32,500 --
David G. Phillips................................ -- -- 17,500/32,500 --
R. Bruce Armiger................................. -- -- -- --
</TABLE>
- ------------------------
NOTE:
(1) None of the options held by the named executive officers were in-the-money
at December 31, 1995.
STOCK INCENTIVE PLANS
The Company established the 1994 Stock Incentive Plan and the 1995 Stock
Incentive Plan for the purpose of attracting and retaining Directors, executive
officers and other key employees. Each option granted pursuant to the 1994 Stock
Incentive Plan and the 1995 Stock Incentive Plan shall be designated at the time
of grant as either an "incentive stock option" or as a "non-qualified stock
option." The 1994 Stock Incentive Plan provides for the grant of options ("1994
Options") to purchase up to 585,000 shares of Common Stock.
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<PAGE>
In connection with the Initial Public Offering, the Company granted 1994
Options to purchase an aggregate of 550,000 shares of Common Stock (the "Initial
Grants") to the following key executive officers of the Company (with the number
of shares of Common Stock to be issued upon exercise thereof indicated
parenthetically): Michael W. Reschke (150,000); Abraham Rosenthal (150,000);
William H. Carpenter, Jr. (150,000); Glenn D. Reschke (50,000); and David G.
Phillips (50,000). The Initial Grants vest monthly at an annual rate of 20% per
year and have a term of ten years (or less if the optionee owns more than 10% of
the total combined voting power of all classes of the Company's Stock, becomes
disabled within the meaning of the Internal Revenue Code of 1986, as amended
(the "Code") or dies. The exercise price of these options issued is $19.00 per
share, which represents the initial public offering price of the Common Stock.
The Company has also granted 1994 Options to purchase an aggregate of 35,000
shares of Common Stock to non-employee Directors or their affiliates as follows
(with the number of shares of Common Stock to be issued upon exercise thereof
indicated parenthetically): Terence C. Golden (5,000), Kenneth A. Randall
(5,000), Governor James R. Thompson (5,000), Marvin S. Traub (5,000) and Marvin
Traub Associates, Inc. (15,000). These options were fully vested upon grant,
have an exercise price of $19.00 per share, and are exercisable at any time
prior to the earlier of (a) March 22, 2004 or (b) one year from the termination
of such non-employee Director's service as a Director, or, with respect to the
grant of options to Marvin Traub Associates, Inc., ninety (90) days from the
termination of Mr. Traub's service as a Director of the Company.
The 1994 Stock Incentive Plan terminates ten years from the date the plan
was adopted by the Board of Directors (March 18, 2004). As of December 31, 1995,
no additional options were available for grant under the 1994 Stock Incentive
Plan.
The 1995 Stock Incentive Plan provides for the grant of options ("1995
Options") to purchase a specified number of shares of Common Stock. Under the
1995 Stock Incentive Plan, 600,000 shares of Common Stock were made available
for grants. With respect to any optionee during any calendar year, the maximum
number of shares of Common Stock that may be subject to 1995 Options under the
1995 Stock Incentive Plan is 150,000. Participants in the 1995 Stock Incentive
Plan, who may be Directors, officers or employees of the Company, the Operating
Partnership, their subsidiaries or designated affiliates, are selected by the
Executive Compensation and Stock Incentive Plan Committee. An employee of the
Operating Partnership (or any other affiliated partnership) or an outside
Director of the Company shall only be eligible to be granted non-qualified
options. In the case of Directors who are members of the Executive Compensation
and Stock Incentive Plan Committee, such grants are made only as automatic
grants under a specified formula set forth in the 1995 Stock Incentive Plan.
On May 18, 1995, the Company granted 1995 Options to purchase an aggregate
of 20,000 shares of Common Stock to non-employee Directors as follows (with the
number of shares of Common Stock to be issued upon exercise thereof indicated
parenthetically): Terence C. Golden (5,000), Kenneth A. Randall (5,000),
Governor James R. Thompson (5,000) and Marvin S. Traub (5,000). These 1995
Options were fully vested upon grant and have an exercise price of 12.45 per
share. Such options are exercisable at any time prior to the earlier of (a) May
18, 2005 or (b) one year from the termination of such non-employee Director's
service as a Director.
On February 16, 1996, the Company also granted 1995 Options to purchase an
aggregate of 190,000 shares of Common Stock to the following key executive
officers of the Company (with the number of shares of Common Stock to be issued
upon exercise thereof indicated parenthetically); Michael W. Reschke (50,000);
Abraham Rosenthal (50,000); William H. Carpenter, Jr. (50,000); Glenn D. Reschke
(20,000); and David G. Phillips (20,000). In addition, on February 16, 1996, the
Company granted 1995 Options to various other employees of the Company to
purchase an aggregate of 89,500 shares of Common Stock of the Company. These
1995 Options are fully vested and have a term of ten years (or less if the
optionee owns more than 10% of the total combined voting power of all classes of
the Company's Stock, becomes disabled within the meaning of the Code, leaves the
Company or dies). The exercise price of such 1995 Options is
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<PAGE>
$11.88 per share. The exercise price for the 1995 Options is generally payable
in cash or, in certain circumstances, by the surrender, at the fair market value
on the date on which the 1995 Option is exercised, of shares of Common Stock.
The 1995 Stock Incentive Plan authorizes the Executive Compensation and
Stock Incentive Plan Committee to grant 1995 Options at an exercise price to be
determined by it, provided that such price cannot be less than 100% of the fair
market value of the Common Stock on the date on which the 1995 Option is
granted. If an incentive stock option is to be granted to an employee who owns
over 10% of the total combined voting power of all classes of the Company's
stock, then the exercise price may not be less than 110% of the fair market
value of the Common Stock covered by such option on the day it is granted. The
exercise price for any 1995 Option is generally payable in cash or, in certain
circumstances, by the surrender, at the fair market value on the date on which
the 1995 Option is exercised, of shares of Common Stock.
The 1995 Stock Incentive Plan terminates ten years from the date the plan
was adopted by the Board of Directors (April 14, 2005).
All unvested options held by an optionee under the Stock Incentive Plans
will automatically be forfeited if the optionee leaves employment for any reason
other than a termination "without cause" by the Company, "for good reason" by
the optionee or a "change in control" (as defined in the applicable Stock
Incentive Plan). The rights of any participants to exercise an option pursuant
to the Stock Incentive Plans may not be transferred in any way other than by
will or laws of descent and distribution or pursuant to a qualified domestic
relations order.
Subject to the express provisions of the Stock Incentive Plans, the
Executive Compensation and Stock Incentive Plan Committee may take certain
actions with respect to the Stock Incentive Plan. In the event of certain
extraordinary events, the Executive Compensation and Stock Incentive Plan
Committee may make adjustments in the aggregate number and kind of shares
reserved for issuance, the number and kind of shares covered by outstanding
awards and the exercise prices specified therein as may be determined to be
appropriate.
The Executive Compensation and Stock Incentive Plan Committee also may amend
any award previously granted pursuant to the Stock Incentive Plans,
prospectively or retroactively. No such amendment may impair the rights of any
participant under any award without the consent of such participant (except for
any amendment made to cause the plan to qualify for an exemption provided by
Rule 16b-3.
If any option granted under the Stock Incentive Plan expires or is canceled
without having been fully exercised, additional options for the number of shares
of Common Stock that would have been issued upon exercise of such options may be
re-granted under the applicable Stock Incentive Plan, subject to the limitation
of the number of shares of Common Stock made available for grants. The Executive
Compensation and Stock Incentive Plan Committee may, in its discretion and in
such terms as it deems appropriate, require as a condition to the grant of an
option that the individual surrender for cancellation some or all of the
unexercised options which have been previously granted to such individual. An
option the grant of which is conditioned upon such surrender may have an option
price lower (or higher) than the option price of the surrendered option, may
cover the same (or a lesser or greater) number of shares as the surrendered
option, may contain other terms such as the Executive Compensation and Stock
Incentive Plan Committee deems appropriate and shall be exercisable in
accordance with its terms, without regard to a number of shares, price, option
period or any other term or condition of the surrendered option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation and Stock Incentive Plan Committee of the Board
of Directors, which is required to have a majority of outside Directors who are
neither employees or officers of the Company, is charged with determining
compensation for the Company's Executive Officers. Mr. Terence C. Golden and
Kenneth A. Randall currently serve on the Executive Compensation and Stock
Incentive Plan Committee. See "Compensation of Directors."
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<PAGE>
No executive officer of the Company served as a director or member of (i)
the compensation committee of another entity, an executive officer of which
entity is a Director of the Company or member of the Company's Executive
Compensation and Stock Incentive Plan Committee, (ii) the Board of Directors of
another entity in which one of the executive officers of such entity served on
the Company's Executive Compensation and Stock Incentive Plan Committee, or
(iii) the compensation committee of any other entity in which one of the
executive officers of such entity served as a member of the Company's Board of
Directors, during the year ended December 31, 1995. See "Other Matters --
Certain Relationships and Related Transactions."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
OPERATING PARTNERSHIP AGREEMENT. The Company, PGI, Messrs. Rosenthal and
Carpenter and certain other parties have entered into the Operating Partnership
Agreement which sets forth the terms of such partnership and establishes the
Company as the sole general partner of the Operating Partnership with full
responsibility and discretion in the management and control of the Operating
Partnership. The Operating Partnership Agreement also sets forth the terms under
which the Limited Partners conveyed their respective interests in the Properties
and the Management and Development Operations to the Company. For a summary
description of the terms of the Operating Partnership Agreement, see "Operating
Partnership Agreement."
BENEFITS TO CERTAIN AFFILIATES RESULTING FROM THE EXCHANGE OFFER. Assuming
the completion of the Exchange Offer, the required dividends payable by the
Company in respect of the Convertible Preferred Stock will be reduced and the
Limited Partners will benefit from the increase in the amount of Funds from
Operations available for distribution with respect to the Common Units. For
example, if the Exchange Offer had been completed on January 1, 1995 and without
giving effect to the Offering, the distributions per Common Unit payable to the
Limited Partners would have increased from $0.66 to $0.82. See "Prospectus
Summary -- Structure of the Company and the Operating Partnership."
FORMATION TRANSACTIONS. In connection with the Initial Public Offering, the
following affiliates of the Company received the following benefits:
- PGI's receipt of approximately $10.2 million in cash and 7,794,495 Common
Units and the repayment by the Operating Partnership of approximately
$155.8 million of indebtedness that was guaranteed or otherwise recourse,
in part, to PGI;
- Receipt by each of Abraham Rosenthal, Chief Executive Officer and a
Director of the Company, and William H. Carpenter, Jr., President, Chief
Operating Officer and a Director of the Company, of 266,090 Common Units
and $0.84 million in cash; and
- Receipt by each of Messrs. Rosenthal and Carpenter of a $2.375 million
recourse loan from the Operating Partnership, the proceeds of which were
used to acquire an additional 125,000 Common Units at the initial public
offering price of the Common Stock.
In connection with the Initial Public Offering, the affiliates contributed
total assets and liabilities with a net carrying value of $225.2 million and
$225.3 million, respectively.
The values attributed to the Common Units acquired by the Limited Partners
assume that each such Common Unit had a value of $19.00, the initial public
offering price per share of Common Stock. Based on such value, the 7,794,495
Common Units received by PGI were valued at $148,095,405, and the 266,090
received by each of Abraham Rosenthal and William H. Carpenter, Jr. were valued
at $5,055,710 for each of them. Because the Common Units held by the Limited
Partners are subject to a preferential distribution in favor of the Common Units
held by the Company, which currently results in greater dividends in respect of
each share of Common Stock than each Common Unit held by a Limited Partner, and
the right of the Limited Partners to exchange such Common Units into Common
Stock is limited in certain circumstances, the value of a Common Unit held by a
Limited Partner is likely to be less than the value of a share of Common Stock.
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<PAGE>
LOANS TO MESSRS. ROSENTHAL AND CARPENTER. In connection with the Initial
Public Offering, the Operating Partnership made recourse loans of $2.375 million
to each of Messrs. Rosenthal and Carpenter. Messrs. Rosenthal and Carpenter used
such loan proceeds to acquire an additional 125,000 Common Units at the initial
public offering price of the Common Stock. Each of Messrs. Rosenthal and
Carpenter incurred such loans and made such purchases through a partnership that
he controls which is the borrower under each such loan. Each of the loans is
secured by a pledge of the Common Units being acquired with the proceeds thereof
(the "Pledged Common Units") and guaranteed by the respective individual.
Interest on the loans accrues at a rate equal to 6.55% and is payable prior to
maturity only to the extent of any distributions paid by the Operating
Partnership in respect of the Pledged Common Units. Accrued and unpaid interest
of $187,500 was added to the principal balance of each such loan as of January
1, 1996. Each loan matures on the earlier to occur of (i) March 22, 2004 and
(ii) the first anniversary of the termination of the individual's employment
with the Company for any reason. The partnerships holding the Common Units are
subject to the same limitations on transfer and exchange applicable to Messrs.
Rosenthal and Carpenter personally.
INDEMNIFICATION OF MESSRS. ROSENTHAL AND CARPENTER. PGI has entered into
Indemnification and Option Agreements with Messrs. Rosenthal and Carpenter.
Pursuant to these agreements, subject to Messrs. Rosenthal and Carpenter's
continued employment by the Company and certain other conditions, PGI has agreed
to indemnify Messrs. Rosenthal and Carpenter against 50% of any "loss" (as
defined therein) which either may suffer as a result of his purchase of Common
Units in connection with the Company's Initial Public Offering.
PGI has also agreed, subject to Messrs. Rosenthal and Carpenter's continued
employment by the Company, to grant to each of Messrs. Rosenthal and Carpenter
options to purchase (i) up to 50,000 Common Units at $13.00 per Common Unit upon
the first date on which the regular cash distribution for a calendar quarter of
the Operating Partnership distributable with respect to Common Units is equal to
or greater than the regular quarterly (calendar) dividend on a per share basis
for the outstanding Common Stock for the same calendar quarter for four
successive calendar quarters, and (ii) up to 50,000 Common Units at $13.00 per
Common Unit upon the first date on which the Convertible Preferred Stock begins
to participate in non-preferred dividends as otherwise provided in the Charter,
such options to expire on December 31, 2000.
SPECIAL DISTRIBUTION TO THE ROSENTHAL FAMILY LLC AND THE CARPENTER FAMILY
ASSOCIATION LLC. The Company and the Operating Partnership have entered into
Special Distribution and Allocation Agreements with limited liability companies
controlled by Messrs. Rosenthal and Carpenter (the "LLC's"). Pursuant to these
agreements, subject to the continued employment of Messrs. Rosenthal and
Carpenter by the Company, the Operating Partnership has agreed to distribute to
the LLC's on or before March 31, 1999, a special distribution for 1996, 1997 and
1998 equal to the product of (a)(i) the average annual funds from operations per
share growth percentage minus ten percent (ii) divided by five percent, and (b)
one-half of the outstanding Note Balance (as hereinafter defined), provided that
in no event may the special distribution be less than zero or more than half of
the outstanding Note Balance. "Note Balance" means the original principal amount
of $2.375 million of the notes executed by Messrs. Rosenthal and Carpenter plus
any interest or other charges which have accrued or been capitalized but not
been paid as of December 31, 1998.
TRANSACTIONS WITH THE SELLING STOCKHOLDER.
Affiliates of the Selling Stockholder furnished a substantial portion of the
financing or credit required for the development and construction of the
properties in which the Selling Stockholder or its affiliates had an interest
prior to the Initial Public Offering and formation of the Company.
Ownership of Common Units. Immediately prior to the Initial Public
Offering, the Selling Stockholder and its affiliates held certain ownership
interests and options for ownership interests in certain of the Properties. In
exchange for 644,125 Common Units, the Selling Stockholder and certain of its
affiliates contributed their ownership interests and options with respect to the
Properties to the Operating Partnership. In December 1995, PGI acquired 553,797
Common Units from affiliates of the Selling Stockholder in a transaction in
which the Selling Stockholder and one of its affiliates were released from
pledge obligations to
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<PAGE>
a third party lender, and PGI re-pledged such Additional Common Units to such
lender. In connection with the Offering, the Selling Stockholder is exchanging
its remaining 90,328 Common Units for a like number of shares of Common Stock,
all of which are being sold in the Offering.
In order to facilitate the Initial Public Offering and related transactions,
PGI pledged 5,162,002 of its Common Units to affiliates of the Selling
Stockholder as additional collateral for certain indebtedness and guarantees of
PGI. Currently, 915,762 Common Units remain pledged by PGI to an affiliate of
the Selling Stockholder. The balance of the Common Units that were orginally
pledged by PGI were released in December 1995 in transactions in which the loans
or other obligations secured by such pledges were transferred or released by
affiliates of the Selling Stockholder.
Credit Enhancement. Certain affiliates of the Selling Stockholder provide
credit enhancement with respect to approximately $28.3 million of tax-exempt
bonds secured by certain of the Properties. See "Business and Properties --
Mortgage and Other Debt Financing of the Company -- Note 1." The Operating
Partnership is required to purchase such bonds on March 22, 1999 if at any time
prior to such date certain affiliates of the Selling Stockholder have purchased
any of such bonds, and the Company is required to indemnify such affiliates of
the Selling Stockholder for any losses or expenses incurred in connection with
the bonds and the credit enhancement. The standby credit enhancement agreements
also contain certain financial and performance covenants. An affiliate of the
Selling Stockholder received a fee of $140,000 from the proceeds of the Initial
Public Offering for the extension of credit enhancement for bonds relating to
The Shops at Western Plaza.
Other Financings. An affiliate of the Selling Stockholder provides a first
mortgage loan in the principal amount of $16.0 million secured by Northgate
Plaza and guaranteed by the Operating Partnership. This mortgage loan bears
interest at 8.0% per annum and matures on July 31, 1996. In connection with the
Initial Public Offering, the Company paid this lender $160,000 in fees to modify
the terms of this loan. An affiliate of the Selling Stockholder also held a
first mortgage on the Huntley Factory Shops in the principal amount of up to $20
million, which was a direct obligation of the Operating Partnership that matured
and was repaid in March 1995. In connection with the Initial Public Offering,
the Company repaid a $5.0 million predevelopment loan to an affiliate of the
Selling Stockholder and entered into a term loan agreement for $50.0 million
with one or more affiliates of the Selling Stockholder. Such term loan was
repaid in June 1994. In connection with such term loan, the Company paid a
$700,000 fee to an affiliate of the Selling Stockholder.
Other Initial Public Offering Transactions. In connection with the
restructuring of the partnerships that own Warehouse Row Factory Shops Phase I,
the Operating Partnership paid or caused to be distributed $1.14 million to an
affiliate of the Selling Stockholder, which owns 98% of the partnership
interests in one of the two partnerships that own such project. In connection
with the Initial Public Offering, the Company repaid approximately $128.0
million to affiliates of the Selling Stockholder in satisfaction of mortgage
indebtedness ($97.7 million) and other indebtedness ($30.3 million).
Other Transactions. Prior to the Initial Public Offering, PGI had provided
property management, leasing, acquisition, renovation, development and
construction management services for the partnerships which own certain of the
Company's properties. Since the Initial Public Offering, all such management
services have been performed by the Company. In connection with the development
of one of the Company's factory outlet centers completed in 1994, PGI reimbursed
the Company for $878,813 in connection with costs related to certain land
improvements. Further, the Company has indemnified PGI for certain matters
relating to its prior activities. See "Business and Properties -- Legal
Proceedings."
Governor James R. Thompson, a Director of the Company, is Chairman of the
law firm of Winston & Strawn, which has provided, and continues to provide,
legal services to the Company.
Marvin Traub Associates, Inc., an affiliate of Marvin S. Traub, a Director
of the Company, provides consulting services to the Company. See "Compensation
of Directors."
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OPERATING PARTNERSHIP AGREEMENT
The following summary of the Agreement of Limited Partnership of Prime
Retail, L.P., as amended (the "Operating Partnership Agreement"), including the
description of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Operating Partnership Agreement
which is incorporated by reference to the Registration Statement of which this
Prospectus is a part. The amendment of the Operating Partnership Agreement
pursuant to the Operating Partnership Amendment was a condition to the Exchange
Offer. See "Prospectus Summary -- The Exchange Offer -- Limited Partner Consent
Condition."
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Operating Partnership Agreement. The Operating
Partnership Agreement generally provides that the Company, as the sole general
partner of the Operating Partnership has full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership. The Limited Partners of the Operating Partnership have no authority
to transact business for, or participate in the management activities or
decisions of, the Operating Partnership. However, any decision for the Operating
Partnership to make certain amendments to the Operating Partnership Agreement,
to take title to any property other than in the name of the Operating
Partnership, or to dissolve prior to December 31, 2050 (which is the expiration
of the Partnership's term) or prior to the occurrence of certain liquidating
events would require the consent of a majority in interest of the Common Units.
The Limited Partners have no right to remove the Company as general partner of
the Operating Partnership.
TRANSFERABILITY OF INTERESTS
The Operating Partnership Agreement provides that the Company may not
voluntarily withdraw from the Operating Partnership, or transfer or assign its
interest in the Operating Partnership, without the unanimous consent of the
Limited Partners. The Limited Partners may transfer their interests in the
Operating Partnership to a transferee subject to certain conditions, including
that such transferee assumes all obligations of the transferor Limited Partner
and provided further that such transfer does not cause a termination of the
Operating Partnership for federal income tax purposes and does not cause the
Company to cease to comply with requirements under the Code for qualification as
a REIT. Pursuant to the Operating Partnership Agreement, the Prime Common Units,
as well as any shares of Common Stock obtainable upon exchange of such Common
Units, may not be transferred, assigned, sold, encumbered or otherwise disposed
of until March 22, 1997 without the consent of the Company (exercisable by its
independent directors) and Friedman, Billings, Ramsey & Co., Inc., other than to
their Affiliates (as defined in the Operating Partnership Agreement), other
Limited Partners, Affiliates of other Limited Partners and, with respect to PGI,
its owners which, in each case, agree to assume the obligations of the
transferor under the Operating Partnership Agreement. The Additional Common
Units are not subject to such restrictions on transferability. Since the Initial
Public Offering, the Company and Friedman, Billings, Ramsey & Co., Inc. have
consented to the pledge of all of the Common Units owned by PGI to various
financial institutions that have agreed to be bound by the various restrictions
and obligations relating to such Common Units under the Operating Partnership
Agreement. See "Principal Security Holders and Selling Security Holder of the
Company."
ADDITIONAL FUNDS
The Operating Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Operating Partnership from operations or prior capital
contributions, the Company may borrow such funds and lend the funds to the
Operating Partnership on the same terms and conditions as are applicable to the
Company's borrowing of such funds. The Operating Partnership Agreement further
provides that in the event the Company issues additional shares of Capital
Stock, the Company shall be required to contribute to the Operating Partnership
as an additional capital contribution any net proceeds from such issuance in
exchange for additional partnership interests with preferences and rights
corresponding to the Capital Stock so issued.
REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners and certain of their affiliates, see "Shares Available For Future Sale
- -- Registration Rights."
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TAX MATTERS
Pursuant to the Operating Partnership Agreement, the Company is the "tax
matters partner" of the Operating Partnership and, as such, does have authority
to make tax elections under the Code on behalf of the Operating Partnership. The
net income or net loss of the Operating Partnership generally has and will
continue to be allocated to the Company and the Limited Partners in accordance
with the distribution priority among the holders of Preferred Units and Common
Units in the Operating Partnership and in compliance with the provisions of
Sections 704(b) and 704(c) of the Code and the regulations promulgated
thereunder.
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income tax liability.
Pursuant to the Operating Partnership Agreement, the Operating Partnership also
will assume and pay when due, or reimburse the Company for payment of, all
administrative and operating expenses of the Property Partnerships, will
distribute cash to the Company to enable the Company to pay all of the costs and
expenses relating to the operations of the Company to the extent the Company
does not otherwise have sufficient funds to satisfy such costs and expenses. The
Operating Partnership will indemnify the Company, as its general partner, for
liabilities incurred in connection with debt financing for the Operating
Partnership or as general partner of the Operating Partnership.
DISTRIBUTIONS
The Operating Partnership Agreement sets forth the manner in which the net
cash flow of the Operating Partnership (which includes operating revenues and
proceeds from sales or refinancings less certain expenditures) will be
distributed with respect to the Preferred Units and the Common Units. Pursuant
to the Operating Partnership Agreement, each Senior Preferred Unit held by the
Company entitles it to receive a cash distribution in an amount equal to the
dividend declared or paid in respect of a share of Senior Preferred Stock prior
to the payment by the Operating Partnership of any distributions in respect of
the Convertible Preferred Units and the Common Units. Each Convertible Preferred
Unit entitles the Company to receive, prior to the payment by the Operating
Partnership of distributions with respect to the Common Units, a cash
distribution in an amount equal to the distribution or dividend declared or paid
in respect of a share of Convertible Preferred Stock. The Operating Partnership
Agreement further provides that net cash revenues available after the
declaration or payment of distributions with respect to the Preferred Units will
be distributed to the holders of Common Units from time to time (but not less
frequently than quarterly) in an aggregate amount determined by the Company in
accordance with certain provisions establishing a Preferential Distribution for
Common Units held by the Company. The purpose of these provisions is to enhance
the likelihood that holders of Common Stock will receive a quarterly
distribution of at least $0.295 per share, subject to availability of cash
available for distribution, after payment of dividends on the Senior Preferred
Stock and Convertible Preferred Stock. There can be no assurance, however, that
holders of Common Stock will continue to receive such distributions.
Subject to payment in full of all current and any accumulated dividends on
all Preferred Units, the Operating Partnership must pay the Preferential
Distribution of $0.295 in each quarter (plus any preferential distribution that
is unpaid in any previous quarter) for each Common Unit held by the Company (the
total of such units is equal to the number of outstanding shares of Common
Stock) before any distributions may be paid in respect of the Common Units held
by the Limited Partners of the Operating Partnership. The Operating Partnership
Agreement provides that any quarterly distributions made by the Operating
Partnership in excess of the Preferential Distribution must first be allocated
pro rata among the Common Units held by the Limited Partners up to $0.295 for
each such Common Unit and then be allocated pro rata among all of the Common
Units. The Operating Partnership Agreement further provides that the
Preferential Distribution will terminate only after the Operating Partnership
has paid quarterly distributions of at least $0.295 with respect to all of the
Common Units during four successive quarters without distributing more than 90%
of its Funds from Operations with respect to the Convertible Preferred Units and
Common Units after payment in full of distributions for the Senior Preferred
Units in any such quarter. Once the Preferential Distribution is terminated,
distributions with respect to the Common Units will be allocated pro rata among
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all of the holders thereof. Until the Company generates Funds from Operations on
a quarterly basis in excess of the FFO Threshold Amount, the Company does not
intend to pay distributions per share of Common Stock in excess of $0.295 per
quarter (other than the Special Distribution), and any increase in the Operating
Partnership's Funds from Operations up to the FFO Threshold Amount will continue
to inure solely to the benefit of the Limited Partners. For purposes of
determining whether the Company's Funds from Operations is sufficient to
terminate the Preferential Distribution, Funds from Operations will be
calculated based on the old definition of Funds from Operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Funds from Operations."
LIMITED PARTNER EXCHANGE RIGHTS
Subject to certain conditions, each Common Unit held by a Limited Partner
may be exchanged for one share of Common Stock (subject to adjustment) or, at
the option of the Company, cash equal to the fair market value of a share of
Common Stock at the time of exchange. The Prime Common Units may not be
exchanged until the later of (i) March 22, 1997 or (ii) the termination of the
Preferential Distribution without the consent of the Company (exercisable by its
independent directors) and Friedman, Billings, Ramsey & Co., Inc. The Limited
Partners have agreed not to exchange their Common Units for Common Stock unless
the Operating Partnership receives an opinion of counsel reasonably satisfactory
to the Company that, upon such exchange, the Operating Partnership would not
cease to qualify as a partnership for federal income taxes. In connection with
the Offering, the Selling Stockholder is exchanging 90,328 Common Units for a
like number of shares of Common Stock; however, since the Selling Stockholder is
exchanging all of its Common Units for Common Stock, which Common Stock is being
sold in the Offering, the foregoing opinion of counsel is not applicable to the
Selling Stockholder.
INDEMNIFICATION
The Operating Partnership Agreement provides for indemnification solely out
of the assets of the Operating Partnership of the partners and their affiliates
for losses incurred because of the operations of the Operating Partnership
unless (i) the partner or other person acted or failed to act due to bad faith
or through active and deliberate dishonesty, (ii) actually received an improper
personal benefit, or (iii) in the case of any criminal proceeding, the partner
or other person had reasonable cause to believe that the action or ommission was
unlawful.
The Company, as general partner of the Operating Partnership, is indemnified
by the Operating Partnership from any loss incurred by the Company as general
partner by reason of (i) the incurrence of indebtedness in compliance with the
Operating Partnership Agreement or indebtedness of the Operating Partnership
that is guaranteed by the Company as general partner or (ii) vicarious liability
by reason of its status as general partner.
DUTIES AND CONFLICTS
The Operating Partnership Agreement provides that all business activities of
the Company, including all activities pertaining to the acquisition and
operation of the Company's outlet centers, must be conducted through the
Operating Partnership. The Operating Partnership Agreement prohibits the Company
from borrowing for the purpose of making a distribution to stockholders except
if it arranges such borrowing through the Operating Partnership.
REPRESENTATIONS AND WARRANTIES
At the time of the Initial Public Offering, PGI made customary
representations and warranties in the Operating Partnership Agreement regarding
the Properties in which it or its affiliates contributed an interest to the
Operating Partnership, including representations and warranties relating to
compliance with laws, environmental matters, title and the absence of liens and
encumbrances, tenant leases, litigation, contractual obligations, absence of
undisclosed liabilities, compliance with laws and the existence of insurance.
The Operating Partnership Agreement provides that the representations and
warranties thereunder survive, provided that no claim for breach may be
maintained by the Operating Partnership or the Company unless notice shall have
been delivered to the Limited Partners on or before the earlier to occur of (i)
one year after the independent directors of the Company know of such breach, or
(ii) March 22, 1997. The Operating Partnership's sole remedy and recourse
against the Limited Partners for any unpaid claims will be
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the dilution of the interests of the Limited Partners in the Operating
Partnership. Notwithstanding the sale by the Selling Stockholder of all of its
shares of Common Stock, the Selling Stockholder will not be relieved of its
obligations with respect to the representations and warranties made by it in the
Operating Partnership Agreement. The Selling Stockholder will pledge marketable
securities approximately equal to the value of such shares to the Operating
Partnership to secure its obligations with respect to representations and
warranties made by it under the Operating Partnership Agreement. Such
obligations of the Selling Stockholder are limited to the value of such pledged
securities.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2050, unless sooner dissolved and terminated upon the dissolution,
bankruptcy, insolvency or termination of the Company (unless the Limited
Partners elect to continue the Operating Partnership), the election of the
Company with the consent of a majority in interest of the Common Units, the sale
or other disposition of all or substantially all the assets of the Operating
Partnership or by operation of law.
PRINCIPAL SECURITY HOLDERS AND SELLING SECURITY HOLDER OF THE COMPANY
The following tables set forth certain information regarding the beneficial
ownership of shares of Common Stock and of Common Units in the Operating
Partnership, for (a) each person who is a stockholder of the Company holding
more than 5% of the voting securities of the Company, (b) each named executive
officer listed in the Summary Compensation Table presented in "Management --
Compensation of Executives", (c) each director of the Company and (d) the
directors and officers of the Company as a group. The number of shares
represents the number of shares of Common Stock the person holds or the number
of shares into which Common Units held by the person are exchangeable (if, as
discussed below, the Company elects to issue shares of Common Stock rather than
pay cash upon such exchange). The extent to which a person holds Common Stock as
opposed to Common Units is set forth in the notes. The Operating Partnership
Agreement provides that Common Units may be exchanged, subject to certain
limitations, into shares of Common Stock or, at the option of the Company, cash
equal to the fair market value of a share of Common Stock at the time of
exchange. See "Operating Partnership Agreement."
The following sets forth information as to the persons known to the Company
to be the beneficial owner of more than five percent of the Company's Common
Stock as of April 10, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES/
COMMON UNITS PERCENT OF
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF ALL SHARES/
BENEFICIAL OWNER OWNED (1) ALL SHARES(2) COMMON UNITS (3)
- --------------------------------------------------------- -------------------- ------------- -----------------
<S> <C> <C> <C>
The Prime Group, Inc. (4) ............................... 8,598,292 76.61% 67.91%
77 West Wacker Drive
Chicago, Illinois 60601
The Crabbe Huson Special Fund, Inc. (5) ................. 286,000 9.95 2.26
121 S.W. Morrison, Suite 1400
Portland, OR 97204
T. Rowe Price Associates, Inc. (6) ...................... 230,000 8.00 1.82
100 East Pratt Street
Baltimore, MD 21202
Boston Group Holdings (7) ............................... 188,000 6.54 1.48
The Boston Company
c/o Mellon Bank
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Brown Capital Management, Inc. (8) ...................... 148,400 5.16 1.17
809 Cathedral Street
Baltimore, MD 21201
</TABLE>
- ------------------------
NOTES:
(1) The ownership of shares of Common Stock reported herein is based upon
filings with the Commission and is subject to confirmation by the Company
that such ownership did not violate the ownership
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restrictions in the Company's Charter. Information presented does not
include shares of Common Stock that may be acquired upon conversion of
Convertible Preferred Stock. On or after March 31, 1997, holders of
Convertible Preferred Stock will have the right, subject to ownership and
transfer restrictions in the Charter intended to allow the Company to
maintain its status as a REIT, to convert all or any of their shares of
Convertible Preferred Stock into shares of Common Stock at the conversion
price of $20.90 per share of Common Stock, subject to certain adjustments.
The ownership of Common Units reported herein is derived from the transfer
records maintained by the Operating Partnership based on information
provided by the Limited Partners.
(2) Information presented assumes exchange only of Common Units owned by such
beneficial owner for shares of Common Stock.
(3) Information presented assumes exchange of all outstanding Common Units for
shares of Common Stock and also includes shares of the Company's Common
Stock issuable upon exercise of options granted pursuant to the Company's
Stock Incentive Plans which are fully vested or which may vest within 60
days of April 10, 1996. The Limited Partners have agreed not to exchange
their Common Units for certain periods without the consent of the Company
and Friedman, Billings, Ramsey & Co., Inc., the underwriter for the
Company's March 1994 initial public offering.
(4) Information presented includes 8,348,292 Common Units and 250,000 shares of
Common Stock owned by PGI and certain limited partnerships affiliated with
PGI. The address of PGI is 77 West Wacker Drive, Suite 3900, Chicago,
Illinois 60601. All of the Common Units and shares of Common Stock held by
PGI have been pledged to certain unaffiliated third parties to secure
certain indebtedness of PGI and its affiliates (collectively, the
"Pledgees"). Unless and until the Pledgees foreclose on the pledged Common
Units or have given notice of an event of default under the operative pledge
or loan agreement, such entities will not have the direct or indirect power
to vote or dispose of the Common Units so pledged. The Pledgees disclaim
beneficial ownership of these pledged Common Units.
(5) Information presented is based on a Schedule 13G filed with the Commission
on February 15, 1996 by The Crabbe Huson Special Fund, Inc., The Crabbe
Huson Real Estate Investment Fund, Inc. and The Crabbe Huson Group, Inc. The
Schedule 13G indicates that The Crabbe Huson Special Fund, Inc. directly
owns 202,000 shares of Common Stock, representing 7.03% of the outstanding
shares, and shares voting and dispositive power with its investment advisor,
The Crabbe Huson Group, Inc. The Schedule 13G also indicates that The Crabbe
Huson Real Estate Investment Fund, Inc. directly owns 63,000 shares of
Common Stock, representing 2.19% of the outstanding shares, and shares
voting and dispositive power with its investment advisor, The Crabbe Huson
Group, Inc. The Schedule 13G further indicates that The Crabbe Huson Group,
Inc. does not directly own any shares of the Company, but shares voting and
dispositive power with the two investment companies for whom it serves as
investment advisor. In addition, according to the Schedule 13G, The Crabbe
Huson Group, Inc. also shares voting and dispositive power with
approximately four investors for whom it serves as investment advisor. Such
investors directly own, in the aggregate, 21,000 shares of Common Stock.
Each of the foregoing reporting persons disclaims beneficial ownership of
all shares owned by each other reporting person and disclaims that a "group"
within the meaning of Rule 13d-5(b)(1) has been formed with respect to
ownership of the Common Stock.
(6) Information presented is based on a Schedule 13G filed by T. Rowe Price
Associates, Inc. with the Commission on February 14, 1996. The Schedule 13G
indicates that T. Rowe Price Associates, Inc. has sole dispositive power
over 230,000 shares; however, sole voting power is divided between T. Rowe
Price Associates, Inc. (30,000) and T. Rowe Price Over the Counter Fund,
Inc. (200,000).
(7) Information presented is based on a Schedule 13G filed by Mellon Bank
Corporation, Boston Group Holdings, Inc. and The Boston Company, Inc. with
the Commission as amended through January 18, 1996. The Schedule 13G
indicates that Boston Group Holdings, Inc. and The Boston Company, Inc. each
has sole voting power with respect to 168,000 shares of Common Stock and
sole dispositive power with respect to 188,000 shares of Common Stock.
(8) Information presented is based on a Schedule 13D filed by Brown Capital
Management, Inc. with the Commission on February 21, 1995.
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<PAGE>
The following table sets forth the beneficial ownership of shares of Common
Stock as of April 10, 1996 by the Company's current Directors and Officers.
<TABLE>
<CAPTION>
NUMBER OF
SHARES/COMMON UNITS PERCENT PERCENT OF ALL
NAME AND ADDRESS OF BENEFICIALLY OF SHARES/COMMON
BENEFICIAL OWNER (1) OWNED (2) ALL SHARES (3) UNITS (4)
- ----------------------------------------------------------- -------------------- --------------- -----------------
<S> <C> <C> <C>
Michael W. Reschke (5)..................................... 8,713,292 76.85% 68.82%
Abraham Rosenthal (6)...................................... 508,090 15.03 4.01
William H. Carpenter, Jr. (7).............................. 509,690 15.07 4.03
Terence C. Golden.......................................... 12,500 (8) (8)
Kenneth A. Randall......................................... 10,000 (8) (8)
James R. Thompson.......................................... 10,000 (8) (8)
Marvin S. Traub (9)........................................ 26,000 (8) (8)
Glenn D. Reschke........................................... 41,667 1.43 (8)
R. Bruce Armiger........................................... 7,000 (8) (8)
David G. Phillips (10)..................................... 41,767 1.43 (8)
Directors and officers of the Company as a group (14
persons).................................................. 9,913,081 82.31 78.29
</TABLE>
- ------------------------
NOTES:
(1) All of the Directors and executive officers of the Company may be contacted
c/o Prime Retail, Inc., 100 East Pratt Street, Baltimore, Maryland 21202.
(2) The ownership of shares of Common Stock reported herein is based upon
filings with the Commission and is subject to confirmation by the Company
that such ownership did not violate the ownership restrictions in the
Charter. Shares beneficially owned include shares subject to options granted
under the Company's Stock Incentive Plans which are fully vested or which
may vest within 60 days of April 10, 1996 as follows: Mr. M. Reschke
115,000; Mr. Rosenthal 115,000; Mr. Carpenter 115,000; Mr. Golden 10,000;
Mr. Randall 10,000; Governor Thompson 10,000; Mr. Traub 10,000 (Marvin Traub
Associates, Inc. 15,000); Mr. G. Reschke 41,667; and Mr. Phillips 41,667.
Information presented does not include shares of Common Stock that may be
acquired upon conversion of the Convertible Preferred Stock. On or after
March 31, 1997, holders of Convertible Preferred Stock will have the right,
subject to ownership and transfer restrictions in the Charter intended to
allow the Company to maintain its status as a REIT, to convert all or any of
their shares of Convertible Preferred Stock into shares of Common Stock at
the conversion price of $20.90 per share of Common Stock, subject to certain
adjustments. The ownership of Common Units reported herein is derived from
transfer records maintained by the Operating Partnership based on
information provided by the Limited Partners.
(3) Information presented assumes exchange only of Common Units owned by such
beneficial owner for shares of Common Stock. Information presented also
includes shares of Common Stock issuable upon exercise of those options of
such beneficial owner which have vested or will vest within 60 days of April
10, 1996.
(4) Information presented assumes exchange of all outstanding Common Units for
shares of Common Stock. Information presented also includes shares of the
Company's Common Stock issuable upon exercise of options granted to the
Company's executive officers and Directors which have vested or which will
vest within 60 days of April 10, 1996. The Limited Partners have agreed not
to exchange their Common Units for certain periods without the consent of
the Company and Friedman, Billings, Ramsey & Co., Inc. Pursuant to the
Operating Partnership Agreement, without the consent of Friedman, Billings,
Ramsey & Co., Inc., the Prime Common Units (as defined therein) may not be
exchanged for Common Stock (or cash) until the later of (i) March 22, 1997
or (ii) the termination of the
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Preferential Distribution (as defined in the Operating Partnership
Agreement). The remaining Common Units may be exchanged for Common Stock (or
cash) at any time. All of the Common Units owned by Messrs. Rosenthal and
Carpenter, and all but 553,787 of the Common Units owned by Prime Group,
Inc. ("PGI"), constitute Prime Common Units.
(5) Information presented includes 8,348,292 Common Units and 250,000 shares of
Common Stock held by PGI (Mr. M. Reschke is the Chairman and Chief Executive
Officer of PGI) and certain affiliated limited partnerships, and 112,500
shares of Common Stock which Mr. M. Reschke has the right to acquire upon
exercise of certain stock options. Mr. M. Reschke's address is 77 West
Wacker Drive, Suite 3900, Chicago, Illinois 60601.
(6) Information presented includes 391,090 Common Units, 125,000 of which are
held by a limited liability company controlled by Mr. Rosenthal and 44,050
of which are held by Mr. Rosenthal's spouse and children, 2,000 shares of
Common Stock owned by Mr. Rosenthal and 112,500 shares of Common Stock which
Mr. Rosenthal has the right to acquire upon exercise of certain stock
options. See Note (4).
(7) Information presented includes 391,090 Common Units, 125,000 of which are
held by a limited liability company controlled by Mr. Carpenter, 3,600
shares of Common Stock owned by Mr. Carpenter's children and 112,500 shares
of Common Stock which Mr. Carpenter has the right to acquire upon exercise
of certain stock options. See Note (4).
(8) Amount represents less than 1%.
(9) Includes 15,000 options held by Marvin Traub Associates, Inc. See
"Compensation of Directors."
(10) Represents 100 shares of Common Stock owned by Mr. Phillips and 40,833
shares of Common Stock which Mr. Phillips has the right to acquire upon
exercise of certain stock options.
As of April 10, 1996, Messrs. M. Reschke and Phillips owned 55,000 and 100
shares, respectively, of the Company's Convertible Preferred Stock, representing
1.35% and less than 1% of the outstanding shares of such class. As a group, the
Directors and officers of the Company collectively own 55,780 shares of
Convertible Preferred Stock, representing less than 1% of the outstanding shares
of such class. On and after March 31, 1997, each share of Convertible Preferred
Stock may be converted into Common Stock at a conversion price of $20.90 per
share, subject to certain adjustments.
Except as described above, no Director or officer of the Company owns any
shares of any other class of the Company's equity securities.
KILICO Realty Corporation, as the Selling Stockholder, is offering all of
its 90,328 shares of Common Stock for sale in the Offering at a price per share
equal to the price to the public set forth on the cover page of this Prospectus.
The costs of the offering of these shares (other than Underwriters' discounts)
are being borne by the Company pursuant to the terms of a registration rights
agreement dated as of March 22, 1994 among the Company, the Operating
Partnership, the Selling Stockholder and certain other Limited Partners. See
"Shares Available for Future Sale -- Registration Rights." The Selling
Stockholder and certain of its affiliates have provided and continue to provide
financing and credit enhancements to the Company for certain of its Properties.
Prior to the Initial Public Offering, the Selling Stockholder and its affiliates
had ownership interests in certain of the Properties. Such interests were
contributed to the Operating Partnership for an aggregate of 644,125 Common
Units. See "Certain Relationships and Transactions -- Transactions with the
Selling Stockholder."
DESCRIPTION OF CAPITAL STOCK
The Company is incorporated in the State of Maryland. Rights of stockholders
are governed by the MGCL and by the Company's Charter and Bylaws.
AUTHORIZED SHARES
The Company has authorized 75,000,000 shares of Common Stock, par value $.01
per share, 24,315,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"), and 51,000,000 shares of Excess Stock, par value $.01 per
share ("Excess Stock"). The Charter designates 2,300,000 shares of Preferred
Stock
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as 10.5% Series A Senior Cumulative Preferred Stock and 7,015,000 shares of
Preferred Stock as 8.5% Series B Cumulative Participating Convertible Preferred
Stock. The Board of Directors has the authority to issue 15,000,000 additional
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series without further vote or action by
the stockholders, subject to the rights of the holders of the Senior Preferred
Stock and the Convertible Preferred Stock. The Board of Directors could
authorize the issuance of Preferred Stock with terms and conditions which could
have the effect of discouraging a takeover or other transaction which holders of
some, or a majority, of the Common Stock might believe to be in their interests
or in which holders of some, or a majority, of the Common Stock might receive a
premium for their shares over the then market price of such shares. As of the
date hereof, the Company has no plans to issue any Preferred Stock other than
the Senior Preferred Stock and the Convertible Preferred Stock.
As of March 31, 1996, 2,300,000 shares of Senior Preferred Stock were issued
and outstanding, 7,015,000 shares of Convertible Preferred Stock were issued and
outstanding, 2,875,000 shares of Common Stock were issued and outstanding
(9,220,800 shares of Common Stock are reserved for issuance upon exchange of
issued and outstanding Common Units and 1,185,000 shares of Common Stock are
reserved for issuance upon exercise of Options granted or available to be
granted under Stock Incentive Plans) and no shares of Excess Stock were issued
and outstanding.
The following summary of the terms of the Senior Preferred Stock, the
Convertible Preferred Stock and the Common Stock does not purport to be complete
and is qualified in its entirety by reference to the pertinent sections of the
Charter, a form of which has been incorporated by reference into the
Registration Statement of which this Prospectus is a part. The terms of the
Excess Stock related to the Senior Preferred Stock, the Convertible Preferred
Stock and the Common Stock are set forth under "-- Restrictions on Ownership and
Transfer."
SENIOR PREFERRED STOCK
DIVIDENDS
Subject to the preferential rights of any series of Preferred Stock ranking
senior as to dividends to the Senior Preferred Stock and to the provisions of
the Charter regarding Excess Stock, holders of shares of the Senior Preferred
Stock are entitled to receive, when and as declared by the Board of Directors,
out of funds legally available for the payment of dividends, cumulative
preferential cash dividends in an amount per share of Senior Preferred Stock
equal to $2.625 per annum.
Dividends with respect to the Senior Preferred Stock are cumulative from the
date of original issuance and are payable quarterly in arrears on the fifteenth
day of each May, August, November, and February, or, if such day is not a
business day, on the next succeeding business day (each, a "Senior Preferred
Dividend Payment Date"). Such dividend and any dividend payable on the Senior
Preferred Stock for any partial dividend period are computed on the basis of a
360-day year consisting of twelve 30-day months. Dividends payable on the Senior
Preferred Stock for each full dividend period are computed by dividing the
annual dividend rate by four. Dividends are payable to holders of record as they
appear in the stock records of the Company at the close of business on the
applicable record date, which is the first day of the calendar month in which
the applicable Senior Preferred Dividend Payment Date falls or such other date
designated by the Board of Directors of the Company for the payment of dividends
that is no more than thirty (30) nor less than ten (10) days prior to such
Senior Preferred Dividend Payment Date (each, a "Senior Preferred Dividend
Record Date").
No dividends on shares of Senior Preferred Stock will be declared by the
Board of Directors of the Company or paid or set apart for payment by the
Company at such time as, and to the extent that, the terms and provisions of any
agreement of the Company, including any agreement relating to its indebtedness,
or any provisions of the Charter relating to any series of Preferred Stock
ranking senior to the Senior Preferred Stock as to dividends, prohibit such
declaration, payment or setting apart for payment or provide that such
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declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment would be
restricted or prohibited by law. Notwithstanding the foregoing, dividends on the
Senior Preferred Stock accrue whether or not the Company has earnings, whether
or not there are funds legally available for the payment of such dividends and
whether or not such dividends are declared. Holders of the Senior Preferred
Stock are not entitled to any dividends in excess of full cumulative dividends
as described above.
If any shares of Senior Preferred Stock are outstanding, no full dividends
will be declared or paid or set apart for payment on the capital stock of the
Company of any other series ranking, as to dividends, on a parity with or junior
to the Senior Preferred Stock for any period unless full cumulative dividends
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on the Senior
Preferred Stock for all past dividend periods and the then current dividend
period. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the shares of the Senior Preferred Stock and
the shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Senior Preferred Stock, all dividends declared upon shares of
Senior Preferred Stock and any other series of Preferred Stock ranking on a
parity as to dividends with the Senior Preferred Stock will be declared pro rata
so that the amount of dividends declared per share on the Senior Preferred Stock
and such other series of Preferred Stock will in all cases bear to each other
the same ratio that accrued and unpaid dividends per share on the shares of the
Senior Preferred Stock and such other series of Preferred Stock bear to each
other. No interest, or sum of money in lieu of interest, is payable in respect
of any dividend payment or payments on Senior Preferred Stock which may be in
arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Senior Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past dividend periods and the then
current dividend period, no dividends (other than dividends payable in Common
Stock or other capital stock ranking junior to the Senior Preferred Stock as to
dividends and upon liquidation, dissolution or winding up) will be declared or
paid or set aside for payment, and no other distribution or dividend will be
declared or made, upon the Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the Senior Preferred Stock as to
dividends, nor will any Common Stock or any other capital stock of the Company
ranking junior to or on a parity with the Senior Preferred Stock as to dividends
or upon liquidation, dissolution or winding up be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Company (except by conversion into or exchange for other capital stock of
the Company ranking junior to the Senior Preferred Stock as to dividends and
upon liquidation, dissolution or winding up).
Any dividend payment made on shares of Senior Preferred Stock is first
credited against the earliest accrued but unpaid dividend due with respect to
shares of such Senior Preferred Stock which remains payable.
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of stock (the "Total
Dividends"), then the portion of the Capital Gains Amount that will be allocable
to the holders of Senior Preferred Stock will be the Capital Gains Amount
multiplied by a fraction, the numerator of which shall be the total dividends
(within the meaning of the Code) paid or made available to the holders of the
Senior Preferred Stock for the year and the denominator of which shall be the
Total Dividends.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
subject to the prior rights of any series of capital stock ranking senior to the
Senior Preferred Stock, the holders of shares of Senior Preferred Stock will be
entitled to be paid out of the assets of the Company legally available for
distribution to its stockholders a liquidation preference equal to the sum of
$25.00 per share plus an amount equal to any accrued and unpaid dividends
thereon (whether or not earned or declared) to the date of payment (the
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"Senior Preferred Liquidation Preference Amount"), before any distribution of
assets is made to holders of the Convertible Preferred Stock, the Common Stock
or any other capital stock that ranks junior to the Senior Preferred Stock as to
liquidation rights. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Senior Preferred Stock
will have no right or claim to any of the remaining assets of the Company.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of the Company are
insufficient to pay the Senior Preferred Liquidation Preference Amount on all
outstanding shares of Senior Preferred Stock and the corresponding amounts
payable on all shares of other classes or series of capital stock of the Company
ranking on a parity with the Senior Preferred Stock in the distribution of
assets upon liquidation, dissolution or winding up, then the holders of the
Senior Preferred Stock and all other such classes or series of capital stock
will share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions have been made in full to all holders of shares
of Senior Preferred Stock, the remaining assets of the Company will be
distributed among the holders of any other classes or series of capital stock
ranking junior to the Senior Preferred Stock upon liquidation, dissolution or
winding up, according to their respective rights and preferences and in each
case according to their respective number of shares.
The consolidation or merger of the Company with or into any other
corporation, or the sale, lease, transfer or conveyance of all or substantially
all of the property or business of the Company, will not be deemed to constitute
a liquidation, dissolution or winding up of the Company for these purposes.
REDEMPTION
The Senior Preferred Stock will not be redeemable at the option of the
Company prior to March 31, 1999. On and after March 31, 1999, the Senior
Preferred Stock may be redeemed for cash at the option of the Company, in whole
or in part, initially at a redemption price of $26.75 per share and thereafter
at prices declining ratably to $25.00 per share on and after March 31, 2004,
plus in each case accrued and unpaid dividends, if any, to the redemption date.
The Senior Preferred Stock has no stated maturity and will not be entitled to
the benefit of any sinking fund.
VOTING RIGHTS
Holders of the Senior Preferred Stock do not have any voting rights, except
as set forth below or as otherwise from time to time required by law. Subject to
the provisions in the Charter regarding Excess Stock, in any matter in which the
Senior Preferred Stock may vote, including any action by written consent, each
share of Senior Preferred Stock is entitled to one vote. The holders of each
share of the Senior Preferred Stock may separately designate a proxy for the
vote to which that share of Senior Preferred Stock is entitled.
Whenever dividends on any shares of the Senior Preferred Stock have been in
arrears for six or more consecutive quarterly periods, the holders of such
shares of Senior Preferred Stock (voting separately as a class with all other
series of Preferred Stock (including the Convertible Preferred Stock) upon which
rights to vote on such matter with the Senior Preferred Stock have been
conferred and are then exercisable) will be entitled to vote for the election of
two additional directors of the Company at a special meeting called by the
holders of record of at least 10% of the Senior Preferred Stock and such other
Preferred Stock, if any (unless such request is received less than 90 days
before the date fixed for the next annual or special meeting of the
stockholders) or at the next annual meeting of stockholders, and at each
subsequent annual meeting until all dividends accumulated on such shares of the
Senior Preferred Stock for the past dividend periods and the then current
dividend period have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment. In such event, the entire Board of
Directors of the Company will be increased by two directors. Each of such two
directors will be elected to serve until the earlier of (i) the election and
qualification of such director's successor or (ii) payment of the dividend
arrearage for the Senior Preferred Stock.
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So long as any shares of the Senior Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least a majority of the shares of the Senior Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class), (i) authorize or create or increase the
authorized or issued amount of, any class or series of capital stock ranking
senior to or on a parity with the Senior Preferred Stock with respect to payment
of dividends or the distribution of assets upon liquidation, dissolution or
winding up or Excess Senior Preferred Stock with respect to distributions upon
liquidation, dissolution or winding up, or reclassify any authorized capital
stock of the Company into any such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of the Senior Preferred
Stock or the holders thereof; PROVIDED, HOWEVER, that any increase in the amount
of the authorized Preferred Stock or the creation or issuance of any other
series of Preferred Stock, or any increase in the amount of authorized shares of
the Convertible Preferred Stock or any other series of Preferred Stock, in each
case ranking junior to the Senior Preferred Stock with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up, will not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers. In addition, so long as any shares of
the Senior Preferred Stock remain outstanding, the Company will not terminate
the Company's status as a REIT without the affirmative vote or consent of the
holders of at least a majority of the shares of Senior Preferred Stock,
Convertible Preferred Stock and Common Stock outstanding at the time, voting
together as a single class, given in person or by proxy, either in writing or at
a meeting.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required is
effected, all outstanding shares of the Senior Preferred Stock have been
redeemed or called for redemption upon proper notice and sufficient funds have
been deposited in trust to effect such redemption.
RANK
The Senior Preferred Stock, with respect to dividend rights and
distributions upon liquidation, dissolution, and winding up, ranks (i) senior to
the Common Stock, all other shares of Common Stock of the Company of all classes
and series, all classes of Excess Stock (other than the Excess Senior Preferred
Stock, as to which the Senior Preferred Stock is senior only as to dividends),
the Convertible Preferred Stock, and shares of all other series of capital stock
issued by the Company other than any series of capital stock the terms of which
specifically provide that the capital stock of such series rank senior to or on
a parity with such Senior Preferred Stock with respect to dividend rights or
distributions upon liquidation, dissolution, or winding up of the Company; (ii)
on a parity with the Excess Senior Preferred Stock (upon liquidation,
dissolution and winding up) and the shares of all other capital stock issued by
the Company the terms of which specifically provide that the shares rank on a
parity with the Senior Preferred Stock with respect to dividends and
distributions upon liquidation, dissolution, or winding up of the Company (the
issuance of which must have been approved by a vote of at least a majority of
the outstanding shares of Senior Preferred Stock); and (iii) junior to all other
capital stock issued by the Company the terms of which specifically provide that
the shares rank senior to the Senior Preferred Stock with respect to dividends
and distributions upon liquidation, dissolution, or winding up of the Company
(the issuance of which must have been approved by a vote of at least a majority
of the outstanding shares of Senior Preferred Stock).
CONVERTIBLE PREFERRED STOCK
DIVIDENDS
Subject to the preferential rights of the Senior Preferred Stock and any
other series of Preferred Stock ranking senior as to dividends to the
Convertible Preferred Stock and to the provisions of the Charter regarding
Excess Stock, holders of shares of the Convertible Preferred Stock are entitled
to receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of distributions and dividends, cumulative
preferential cash dividends in an amount per share of Convertible Preferred
Stock equal to the greater of (i) $2.125 per annum or (ii) the distributions and
dividends (determined on each of
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the quarterly Convertible Preferred Dividend Payment Dates referred to below) on
number of shares of Common Stock (or fraction thereof) into which a share of
Convertible Preferred Stock will be convertible on or after March 31, 1997. The
amount referred to in clause (ii) above will equal the number of shares of
Common Stock, or fraction thereof, into which a share of Convertible Preferred
Stock will be convertible on or after March 31, 1997, multiplied by the
quarterly distribution declared or paid with respect to a share of Common Stock
on or most recently prior to the applicable Convertible Preferred Dividend
Payment Date.
Dividends with respect to the Convertible Preferred Stock are cumulative
from the date of original issuance and are payable quarterly in arrears on the
fifteenth day of each May, August, November, and February, or, if such day is
not a business day, on the next succeeding business day (each, a "Convertible
Preferred Dividend Payment Date"). Such distribution or dividend and any
distribution or dividend payable on the Convertible Preferred Stock for any
partial dividend period are computed on the basis of a 360-day year consisting
of twelve 30-day months. Distributions and dividends payable on the Convertible
Preferred Stock for each full dividend period are computed by dividing the
annual dividend rate by four. Distributions and dividends are payable to holders
of record as they appear in the stock records of the Company at the close of
business on the applicable record date, which is the first day of the calendar
month in which the applicable Convertible Preferred Dividend Payment Date falls
or such other date designated by the Board of Directors of the Company for the
payment of distributions and dividends that is no more than thirty (30) nor less
than ten (10) days prior to such Convertible Preferred Dividend Payment Date
(each, a "Convertible Preferred Dividend Record Date").
No distributions or dividends on shares of Convertible Preferred Stock will
be declared by the Board of Directors of the Company or paid or set apart for
payment by the Company at such time as, and to the extent that, the terms and
provisions of any agreement of the Company, including any agreement relating to
its indebtedness, or any provisions of the Charter relating to any series of
Preferred Stock ranking senior to the Convertible Preferred Stock as to
dividends (including the Senior Preferred Stock), prohibit such declaration,
payment or setting apart for payment or provide that such declaration, payment
or setting apart for payment would constitute a breach thereof or a default
thereunder, or if such declaration or payment would be restricted or prohibited
by law. Notwithstanding the foregoing, dividends on the Convertible Preferred
Stock accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Holders of the Convertible Preferred Stock will not
be entitled to any distributions or dividends in excess of full cumulative
dividends as described above.
If any shares of Convertible Preferred Stock are outstanding, no full
distributions or dividends will be declared or paid or set apart for payment on
the capital stock of the Company of any other series ranking, as to dividends,
on a parity with or junior to the Convertible Preferred Stock for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for such
payment on the Convertible Preferred Stock for all past dividend periods and the
then current dividend period. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the shares of the
Convertible Preferred Stock and the shares of any other series of Preferred
Stock ranking on a parity as to dividends with the Convertible Preferred Stock,
all dividends declared upon shares of Convertible Preferred Stock and any other
series of Preferred Stock ranking on a parity as to dividends with the
Convertible Preferred Stock will be declared pro rata so that the amount of
distributions and dividends declared per share on the Convertible Preferred
Stock and such other series of Preferred Stock will in all cases bear to each
other the same ratio that accrued and unpaid distributions and dividends per
share on the shares of the Convertible Preferred Stock and such other series of
Preferred Stock bear to each other. No interest, or sum of money in lieu of
interest, is payable in respect of any dividend payment or payments on
Convertible Preferred Stock which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Convertible Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past dividend periods and the then
current dividend period, no distributions or dividends (other than dividends
payable in Common Stock or other capital stock ranking junior to the Convertible
Preferred Stock as to dividends and upon liquidation,
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dissolution or winding up) will be declared or paid or set aside for payment,
and no other distribution or dividend will be declared or made, upon the Common
Stock or any other capital stock of the Company ranking junior to or on a parity
with the Convertible Preferred Stock as to dividends, nor will any Common Stock
or any other capital stock of the Company ranking junior to or on a parity with
the Convertible Preferred Stock as to dividends or upon liquidation, dissolution
or winding up be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Convertible Preferred Stock as to dividends and upon liquidation, dissolution
and winding up).
Any distribution or dividend payment made on shares of Convertible Preferred
Stock is first credited against the earliest accrued but unpaid dividend due
with respect to shares of such Convertible Preferred Stock which remains
payable.
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of stock (the "Total
Dividends"), then the portion of the Capital Gains Amount that will be allocable
to the holders of Convertible Preferred Stock will be the Capital Gains Amount
multiplied by a fraction, the numerator of which shall be the total dividends
(within the meaning of the Code) paid or made available to the holders of the
Convertible Preferred Stock for the year and the denominator of which shall be
the Total Dividends.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
subject to the prior rights of any series of capital stock ranking senior to the
Convertible Preferred Stock, the holders of shares of Convertible Preferred
Stock will be entitled to be paid out of the assets of the Company legally
available for distribution to its stockholders a liquidation preference equal to
the sum of $25.00 per share plus an amount equal to any accrued and unpaid
dividends thereon (whether or not earned or declared) to the date of payment
(the "Convertible Preferred Liquidation Preference Amount"), before any
distribution of assets is made to holders of Common Stock or any other capital
stock that ranks junior to the Convertible Preferred Stock as to liquidation
rights. After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Convertible Preferred Stock will have no
right or claim to any of the remaining assets of the Company.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of the Company are
insufficient to pay the Convertible Preferred Liquidation Preference Amount on
all outstanding shares of Convertible Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of capital stock of the
Company ranking on a parity with the Convertible Preferred Stock in the
distribution of assets upon liquidation, dissolution or winding up, then the
holders of the Convertible Preferred Stock and all other such classes or series
of capital stock will share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
If liquidating distributions have been made in full to all holders of shares
of Convertible Preferred Stock, the remaining assets of the Company will be
distributed among the holders of any other classes or series of capital stock
ranking junior to the Convertible Preferred Stock upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in each
case according to their respective number of shares.
The consolidation or merger of the Company with or into any other
corporation, or the sale, lease, transfer or conveyance of all or substantially
all of the property or business of the Company, will not be deemed to constitute
a liquidation, dissolution or winding up of the Company for these purposes.
REDEMPTION
The Convertible Preferred Stock will not be redeemable at the option of the
Company prior to March 31, 1999. On and after March 31, 1999, the Convertible
Preferred Stock may be redeemed for cash at
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the option of the Company, in whole or in part, initially at a redemption price
of $27.125 per share and thereafter at prices declining ratably to $25.00 per
share on and after March 31, 2004, plus in each case accrued and unpaid
dividends, if any, to the redemption date. The Convertible Preferred Stock has
no stated maturity and will not be entitled to the benefit of any sinking fund.
VOTING RIGHTS
Holders of the Convertible Preferred Stock do not have any voting rights,
except as set forth below or as otherwise from time to time required by law.
Subject to the provisions in the Charter regarding Excess Stock, in any matter
in which the Convertible Preferred Stock may vote, including any action by
written consent, each share of Convertible Preferred Stock is entitled to one
vote. The holders of each share of the Convertible Preferred Stock may
separately designate a proxy for the vote to which that share of Convertible
Preferred Stock is entitled.
Whenever dividends on any shares of the Convertible Preferred Stock have
been in arrears for six or more consecutive quarterly periods, the holders of
such shares of Convertible Preferred Stock (voting separately as a class with
all other series of Preferred Stock (including the Senior Preferred Stock) upon
which rights to vote on such matter with the Convertible Preferred Stock have
been conferred and are then exercisable) will be entitled to vote for the
election of two additional directors of the Company at a special meeting called
by the holders of record of at least 10% of the Convertible Preferred Stock and
such other Preferred Stock, if any (unless such request is received less than 90
days before the date fixed for the next annual or special meeting of the
stockholders) or at the next annual meeting of stockholders, and at each
subsequent annual meeting until all dividends accumulated on such shares of the
Convertible Preferred Stock for the past dividend periods and the then current
dividend period have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment. In such event, the entire Board of
Directors of the Company will be increased by two directors. Each of such two
directors will be elected to serve until the earlier of (i) the election and
qualification of such director's successor or (ii) payment of the dividend
arrearage for the Convertible Preferred Stock.
So long as any shares of the Convertible Preferred Stock remain outstanding,
the Company will not, without the affirmative vote or consent of the holders of
at least a majority of the shares of the Convertible Preferred Stock outstanding
at the time, given in person or by proxy, either in writing or at a meeting
(such series voting separately as a class), (i) authorize or create, or increase
the authorized or issued amount of, any class or series of capital stock ranking
senior to the Convertible Preferred Stock with respect to payment of dividends
or the distribution of assets upon liquidation, dissolution or winding up, or
Excess Convertible Preferred Stock with respect to distributions upon
liquidation, dissolution or winding up or reclassify any authorized capital
stock of the Company into any such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of the Convertible
Preferred Stock or the holders thereof; PROVIDED, HOWEVER, that any increase in
the amount of the authorized Preferred Stock or the creation or issuance of any
other series of Preferred Stock, or any increase in the amount of authorized
shares of the Convertible Preferred Stock or any other series of Preferred
Stock, in each case ranking on a parity with or junior to the Convertible
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up, will not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers. In addition, so long as any shares of the Convertible Preferred Stock
remain outstanding, the Company will not terminate the Company's status as a
REIT without the affirmative vote or consent of the holders of at least a
majority of the shares of Senior Preferred Stock, Convertible Preferred Stock
and Common Stock outstanding at the time, voting together as a single class,
given in person or by proxy, either in writing or at a meeting.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required is
effected, all outstanding shares of the Convertible Preferred Stock have been
redeemed or called for redemption upon proper notice and sufficient funds have
been deposited in trust to effect such redemption.
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CONVERSION
Subject to the exceptions described under "Description of Capital Stock --
Restrictions on Ownership and Transfer," holders of the Convertible Preferred
Stock have the right, as provided in the Charter, exercisable on or after March
31, 1997, except in the case of Convertible Preferred Stock called for
redemption, to convert all or any of the Convertible Preferred Stock (based upon
the Convertible Preferred Liquidation Preference Amount determined immediately
following the most recent Convertible Preferred Dividend Payment Date) into
shares of Common Stock at the conversion price of $20.90 per share of Common
Stock, subject to adjustment upon the occurrence of certain events, as described
below. In the case of Convertible Preferred Stock called for redemption,
conversion rights will expire at the close of business on the third business day
immediately preceding the date fixed for redemption.
Shares of Convertible Preferred Stock will be deemed to have been converted
immediately prior to the close of business on the date such shares are
surrendered for conversion and notice of election to convert the same is
received by the Company. Upon conversion, no adjustment or prepayment will be
made for distributions or dividends, but if any holder surrenders Convertible
Preferred Stock for conversion after the close of business on a Convertible
Preferred Dividend Record Date and prior to the opening of business on the
related Convertible Preferred Dividend Payment Date, then, notwithstanding such
conversion, the distribution or dividend payable on such Convertible Preferred
Dividend Payment Date will be paid on such Convertible Preferred Dividend
Payment Date to the registered holder of such shares on such Convertible
Preferred Dividend Record Date. Shares of Convertible Preferred Stock
surrendered for conversion during the period from the close of business on a
Convertible Preferred Dividend Record Date to the Convertible Preferred Dividend
Payment Date must also pay the amount of the distribution or dividend which is
payable. No fractional shares of Common Stock will be issued upon conversion
and, if the conversion results in a fractional interest, an amount will be paid
in cash equal to the value of such fractional interest based on the market price
of the Common Stock on the last trading day prior to the date of conversion.
The number of shares of Common Stock or other assets issuable upon
conversion and the conversion price are subject to adjustment upon the
occurrence of the following events:
(i) the issuance of Common Stock as a dividend or distribution on shares of
Common Stock;
(ii) the subdivision, combination or reclassification of the outstanding
shares of Common Stock,
(iii) the issuance to all holders of Common Stock of rights or warrants to
subscribe for or purchase Common Stock (or securities convertible into
Common Stock) at a price per share less than the then current market
price per share, as determined in accordance with the provisions of the
Charter;
(iv) the distribution to all holders of Common Stock of evidences of
indebtedness or assets (including securities, but excluding Ordinary
Cash Dividends, as defined below, and those dividends, distributions,
rights or warrants referred to above); and
(v) the distribution to all holders of Common Stock of rights or warrants to
subscribe for securities (other than those referred to in clause (iii)
above).
The adjustments to be made in each such event are set forth in the Charter.
In the event of a distribution of evidence of indebtedness or other assets (as
described in clause (iv)) or a distribution to all holders of Common Stock of
rights to subscribe for additional shares of the Company's capital stock (other
than those referred to in clause (iii) above), the Company may, instead of
making an adjustment of the Conversion Price, make proper provision so that each
holder who converts such shares will be entitled to receive upon such
conversion, in addition to shares of Common Stock, an appropriate number of such
rights, warrants, evidences of indebtedness or other assets. No adjustment will
be made for Ordinary Cash Dividends (defined as distributions to holders of
Common Stock in an amount not exceeding the Operating Partnership's accumulated
FFO since the Initial Public Offering, after deducting dividends or other
distributions (i) paid in respect of all classes of capital stock of the Company
and Common Units held by persons other than the Company or (ii) accrued in
respect of Convertible Preferred Stock, the Senior Preferred Stock and any other
shares of Preferred Stock of the Company ranking on a parity with or senior to
the Convertible Preferred Stock as to dividends). In addition, no adjustment
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of the conversion price will be made until cumulative adjustments amount to one
percent or more of the conversion price as last adjusted. Any adjustments not so
required to be made will be carried forward and taken into account in subsequent
adjustments.
Whenever the number of shares of Common Stock or other assets issuable upon
conversion and the conversion price are adjusted as herein provided, the Company
(i) will promptly make available at the office of the transfer agent a statement
describing in reasonable detail such adjustment, and (ii) will cause to be
mailed by first class mail, postage prepaid, as soon as practicable, to each
holder of record of shares of Convertible Preferred Stock, a notice stating that
certain adjustments have been made and stating the adjusted conversion price.
In the event of any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale, transfer or lease of all or substantially all
of its assets to another corporation, is effected in such a way that holders of
Common Stock will be entitled to receive stock, securities or other assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger, sale, transfer or
lease, the holder of each share of Convertible Preferred Stock shall have the
right immediately to convert such share into the kind and amount of stock,
securities or other assets which the holders of such shares would have owned or
been entitled to receive immediately after the transaction if such holders had
converted such shares immediately before the effective date of the transaction,
subject to further adjustment upon the occurrence of the events described above.
RANK
The Convertible Preferred Stock, with respect to dividend rights and
distributions upon liquidation, dissolution, and winding up, ranks (i) senior to
the Common Stock, all other shares of Common Stock of the Company of all classes
and series, all classes of Excess Stock (other than the Excess Senior Preferred
Stock and Excess Convertible Preferred Stock, as to which the Convertible
Preferred Stock is senior only as to dividends), and shares of all other series
of capital stock issued by the Company other than any series of capital stock
the terms of which specifically provide that the capital stock of such series
rank senior to or on a parity with such Convertible Preferred Stock with respect
to dividend rights or distributions upon liquidation, dissolution, or winding up
of the Company; (ii) on a parity with the Excess Convertible Preferred Stock
(upon liquidation, dissolution and winding up) and the shares of all other
capital stock issued by the Company the terms of which specifically provide that
the shares rank on a parity with the Convertible Preferred Stock with respect to
dividends and distributions upon liquidation, dissolution, or winding up of the
Company or make no specific provision as to their ranking; and (iii) junior to
the Senior Preferred Stock, the Excess Senior Preferred Stock (only upon
liquidation, dissolution or winding up) and all other capital stock issued by
the Company the terms of which specifically provide that the shares rank senior
to the Convertible Preferred Stock with respect to dividends and distributions
upon liquidation, dissolution, or winding up of the Company (the issuance of
which must have been approved by a vote of at least a majority of the
outstanding shares of Convertible Preferred Stock).
COMMON STOCK
All of the Common Stock offered hereby is duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares and to the provisions of the Charter regarding Preferred Stock,
including the Senior Preferred Stock and the Convertible Preferred Stock, and
Excess Stock, holders of shares of Common Stock are entitled to receive
distributions on such shares if, as and when authorized and declared by the
Board of Directors out of assets legally available therefor and to share ratably
in the assets of the Company legally available for distribution to the
stockholders in the event of the liquidation, dissolution or winding-up of the
Company after payment of, or adequate provision for, all known debts and
liabilities of the Company. The Company intends to continue to pay quarterly
distributions. Subject to the payment in full of all current and any accumulated
dividends in respect of Senior Preferred Units and Convertible Preferred Units,
the Preferential Distribution of $0.295 per share of Common Stock (plus any
Preferential Distribution not paid in a previous quarter) will be payable by the
Company for each quarter before any distribution by the Operating Partnership in
respect of the Common Units held by the Limited Partners. After payment of the
Preferential Distribution, up to $0.295 will be distributed by the
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Operating Partnership in respect of the Common Units held by the Limited
Partners. Any further amounts distributed in such quarter will be distributed
ratably among all holders of Common Units. If the Operating Partnership has not
distributed to the Company the amount specified above in any quarter, then the
deficit will cumulate and be distributable on a preferential basis in subsequent
quarters. Distributions not paid on the Common Units held by Limited Partners
for any quarter will not cumulate. The Preferential Distribution will terminate
when distributions of at least $0.295 have been paid with respect to each Common
Unit (held by the Company and others) during four quarters without distributing
to the Convertible Preferred Units and the Common Units more than 90% of FFO
after payment of the dividends on the Senior Preferred Units for any such
quarter. Once the Preferential Distribution has terminated, distributions in
respect of the Common Units will be made pro rata to the holders thereof. For
purposes of determining whether the Company's Funds from Operations is
sufficient to terminate the Preferential Distribution, Funds from Operations
will be calculated based on the old definition of Funds from Operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources and Funds from Operations." See
"Policies With Respect to Certain Activities -- Distribution and Dividend
Policy."
The Convertible Preferred Stock is entitled to payment of distributions and
dividends at the rate declared on the Common Stock if such rate is greater than
the stated dividend rate on the Convertible Preferred Stock. Accordingly, at
such time as the distribution or dividend rate on the Common Stock is greater
than the stated rate on the Convertible Preferred Stock, holders of Convertible
Preferred Stock will be entitled to participate in any further growth of FFO
together with the holders of Common Stock.
The Company will not, without the affirmative vote or consent of holders of
at least two-thirds of the shares of the Common Stock outstanding at the time,
amend, alter or repeal the provisions of the Operating Partnership Agreement or
the Charter so as to reduce the Preferential Distribution. In addition, the
Company will not terminate the Company's status as a REIT without the
affirmative vote or consent of the holders of at least a majority of the shares
of Senior Preferred Stock, Convertible Preferred Stock and Common Stock
outstanding at the time, voting together as a single class, given in person or
by proxy, either in writing or at a meeting.
Subject to the provisions of the Charter regarding Excess Stock, the Senior
Preferred Stock and Convertible Preferred Stock, each outstanding share of
Common Stock entitles the holder to one vote on all matters submitted to a vote
of stockholders, including the election of directors and, except as otherwise
required by law or except as provided with respect to any other class or series
of shares, the holders of such shares will possess exclusive voting power. There
is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the directors then standing for election and the holders of the remaining shares
will not be able to elect any directors.
Holders of Common Stock have no conversion, sinking fund, redemption rights
or preemptive rights to subscribe for any securities of the Company.
Subject to the provisions of the Charter regarding Excess Stock, shares of a
particular class of issued Common Stock have equal dividend, distribution,
liquidation and other rights, and have no preference, appraisal or exchange
rights.
The transfer agent and registrar for the Common Stock is Wilmington Trust
Company.
The Common Stock is quoted in the Nasdaq National Market under the trading
symbol "PRME."
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Charter contains certain restrictions on the number of shares of Capital
Stock, defined to include all classes of capital stock that the Company shall
have authority to issue, including Senior Preferred Stock, Convertible Preferred
Stock, Preferred Stock and Common Stock, that stockholders may own. For the
Company to continue to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer individuals
(as defined in the Code to include certain tax-exempt entities other than, in
general,
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qualified domestic pension funds) at any time during the last half of a taxable
year (other than the first taxable year for which the election to be taxed as a
REIT has been made). The capital stock also must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. Because the Company intends to
continue to qualify as a REIT, the Charter contains restrictions on the
ownership and transfer of capital stock.
Subject to certain exceptions specified in the Charter, no holder may own,
either directly or constructively under the applicable attribution rules of the
Code, more than 9.9% of the outstanding shares of Common Stock (the "Common
Ownership Limit"). The Common Ownership Limit will not apply, however, to
holders of shares of Common Stock who acquire shares of Common Stock in excess
of the Common Ownership Limit solely by reason of the conversion of shares of
Convertible Preferred Stock owned by such holder into shares of Common Stock;
PROVIDED, HOWEVER, that no such holder may own an interest in any tenant under
any lease of real property owned, in whole or in part, directly or indirectly by
the Company, which exceeds, in the case of a tenant that is a corporation, 9.9%
of the total voting stock of such tenant or 9.9% of the total number of shares
of all classes of stock of such tenant, or, in the case of a tenant that is not
a corporation, a 9.9% interest in the assets or net profits of such tenant.
Subject to certain exceptions specified in the Charter, no holder may
acquire, either directly or constructively under the applicable attribution
rules of the Code, or beneficially own shares of Convertible Preferred Stock if,
as a result of such acquisition or beneficial ownership, such holder
beneficially owns shares of capital stock (including all classes) of the Company
in excess of 9.9% of the value of the Company's outstanding capital stock (the
"Convertible Preferred Ownership Limit"). There are no restrictions on the
ability of a holder of shares of Convertible Preferred Stock to convert such
shares into shares of Common Stock even if, as a result of such conversion, the
holder will own shares of Common Stock in excess of the Common Ownership Limit.
However, no person may acquire or own shares of Convertible Preferred Stock or
shares of Common Stock to the extent that the aggregate of the shares of Common
Stock owned by such holder and the shares of Common Stock that would be issued
to such holder upon conversion of all the shares of Convertible Preferred Stock
then owned by such holder, assuming that all of the outstanding shares of
Convertible Preferred Stock were converted into Common Stock at such time,
exceeds 9.9% of the total shares of Common Stock on a fully diluted basis
(taking into account the shares of Common Stock actually outstanding and the
shares of Common Stock that would be issued if all of the outstanding shares of
Convertible Preferred Stock were converted into shares of Common Stock, but
without regard to the shares of Common Stock issuable in exchange for Common
Units).
Subject to certain exceptions specified in the Charter, no holder may own,
either directly or constructively under the applicable attribution rules of the
Code, more than 10.0% of the outstanding shares of Senior Preferred Stock, and
no holder that owns an interest in any tenant under any lease of real property
owned, in whole or in part, directly or indirectly by the Company, which
exceeds, in the case of a tenant that is a corporation, 9.9% of the total voting
stock of such tenant or 9.9% of the total number of shares of all classes of
stock of such tenant, or in the case of a tenant that is not a corporation, a
9.9% interest in the assets or net profits of such tenant, may own, directly or
constructively under the applicable attribution rules of the Code, more than
9.9% of the outstanding shares of Senior Preferred Stock (the "Senior Preferred
Ownership Limit"). The Senior Preferred Ownership Limit does not apply, however,
to holders who acquired shares of Senior Preferred Stock in excess of the Senior
Preferred Ownership Limit directly from Friedman, Billings, Ramsey & Co., Inc.
in connection with the Initial Public Offering ("Initial Senior Preferred
Holders"); PROVIDED, HOWEVER, that (i) such holder may not own an interest in
any tenant under any lease of real property owned, in whole or in part, directly
or indirectly by the Company, which exceeds, in the case of a tenant that is a
corporation, 9.9% of the total voting stock of such tenant or 9.9% of the total
number of shares of all classes of stock of such tenant, or, in the case of a
tenant that is not a corporation, a 9.9% interest in the assets or net profits
of such tenant and (ii) such holder's ownership of Senior Preferred Stock does
not cause any "individual" (within the meaning of the Code) to beneficially or
constructively own shares of Senior Preferred Stock in excess of the Senior
Preferred Ownership Limit. Initial Senior Preferred Holders will not be able to
acquire additional shares of Senior Preferred Stock in excess of the Senior
Preferred Ownership Limit.
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Notwithstanding any of the foregoing ownership limits, no holder may own or
acquire, either directly or constructively under the applicable attribution
rules of the Code, any shares of any class of the Company's Stock if such
ownership or acquisition (i) would cause more than 50% in value of the Company's
outstanding stock to be owned, either directly or constructively under the
applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds), (ii) would result in the Company's
Stock being beneficially owned by less than 100 persons (determined without
reference to any rules of attribution), or (iii) would otherwise result in the
Company failing to qualify as a REIT.
The Board of Directors may, subject to the receipt of certain
representations as required by the Charter and a ruling from the IRS or an
opinion of counsel satisfactory to it, waive the ownership restrictions with
respect to a holder if such waiver will not jeopardize the Company's status as a
REIT. In addition, under the Charter, certain parties will not be subject to the
Common Stock Ownership Limit in the event such parties (i) deliver to the
Company either a ruling from the IRS or an opinion from nationally recognized
tax counsel that such ownership will result in no individual (as defined in the
Code) beneficially or constructively owning in excess of 9.9% of the outstanding
Common Stock and (ii) represent to the Company that it does not and will not own
more than a 9.9% interest in any tenant of the Company.
If any stockholder purports to transfer capital stock to a person and either
the transfer would result in the Company failing to qualify as a REIT, or such
transfer would cause the transferee to hold capital stock in excess of an
applicable ownership restriction, the purported transfer shall be null and void,
the intended transferee will acquire no rights or economic interest in the
capital stock, and the stockholder will be deemed to have transferred the
capital stock to the Company in exchange for Excess Stock of the same class or
classes as were purportedly transferred, which Excess Stock will be deemed to be
held by the Company as trustee of a trust for the exclusive benefit of the
person or persons to whom the shares can be transferred without violating the
ownership restrictions. In addition, if any person owns, either directly or
under the applicable attribution rules of the Code, shares of capital stock in
excess of an applicable ownership restriction, such person will be deemed to
have exchanged the shares of capital stock that cause the applicable ownership
restriction to be exceeded for an equal number of shares of Excess Stock of the
appropriate class, which will be deemed to be held by the Company as trustee of
a trust for the exclusive benefit of the person or persons to whom the shares
can be transferred without violating the ownership restrictions. A person who
holds or transfers shares such that shares of capital stock shall have been
deemed to be exchanged for Excess Stock will not be entitled to vote the Excess
Stock and will not be entitled to receive any dividends or distributions (any
dividend or distribution paid on shares of capital stock prior to the discovery
by the Company that such shares have been exchanged for Excess Stock shall be
repaid to the Company upon demand, and any dividend or distribution declared but
unpaid shall be rescinded). Such person shall have the right to designate a
transferee of such Excess Stock so long as consideration received for
designating such transferee does not exceed a price (the "Limitation Price")
that is equal to the lesser of (i) in the case of a deemed exchange for Excess
Stock resulting from a transfer, the price paid for the shares in such transfer
or, in the case of a deemed exchange for Excess Stock resulting from some other
event, the fair market value, on the date of the deemed exchange, of the shares
deemed exchanged, or (ii) the fair market value of the shares for which such
Excess Stock will be deemed to be exchanged on the date of the designation of
the transferee (or, in the case of a purchase by the Company, on the date the
Company accepts the offer to sell). For these purposes, fair market value on a
given date is determined by reference to the average closing price for the five
preceding days. The shares of Excess Stock so transferred will automatically be
deemed reexchanged for the appropriate shares of capital stock. In addition, the
Company will have the right to purchase the Excess Stock for a period of 90 days
at a price equal to the Limitation Price.
An automatic redemption will occur to prevent any violation of the
Convertible Preferred Ownership Limit that would not have occurred but for a
conversion of Convertible Preferred Stock, or a redemption or open market
purchase of Convertible Preferred Stock by the Company (each a "Corporation
Induced Event"). In the event of any such automatic redemption, the redemption
price of each share of Convertible Preferred Stock redeemed will be (x) if a
purported acquisition of Convertible Preferred Stock in which full value was
paid for such Convertible Preferred Stock caused the redemption, the price per
share paid for the
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Convertible Preferred Stock, or (y) if the transaction that resulted in the
redemption was not an acquisition in which the full value was paid for such
Convertible Preferred Stock (e.g. a gift or Corporation Induced Event relating
to stock held by others), a price per share equal to the market price on the
date of the purported transfer that resulted in the redemption. Any dividend or
other distribution paid to a holder of redeemed shares of Convertible Preferred
Stock (prior to the discovery by the Company that such shares have been
automatically redeemed by the Company as described above) will be required to be
repaid to the Company upon demand. An automatic redemption also will occur with
respect to Senior Preferred Stock under similar circumstances as those described
above. The Board of Directors shall have authority at any time to waive the
requirements that Excess Stock be issued or be deemed outstanding in accordance
with the provisions of the Charter or that the Corporation redeem shares of
Convertible Preferred Stock or Senior Preferred Stock as a result of a
Corporation Induced Event if the issuance of such Excess Stock or the fact that
such Excess Stock is deemed to be outstanding, or any such redemption would in
the opinion of nationally recognized tax counsel jeopardize the status of the
Corporation as a REIT for federal income tax purposes.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decisions, statute, rule or regulation, then the intended
transferee of any Excess Stock may be deemed, at the option of the Company, to
have acted as an agent on behalf of the Company in acquiring such Excess Stock
and to hold such Excess Stock on behalf of the Company.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or regulations thereunder) of the issued and outstanding Senior Preferred
Stock, Convertible Preferred Stock or Common Stock must file a written notice
with the Company containing the information specified in the Charter no later
than January 30 of each year. Furthermore, each stockholder shall upon demand be
required to disclose to the Company in writing such information as the Company
may request in order to determine the effect of such stockholder's direct,
indirect and constructive ownership of such capital stock on the Company's
status as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Directors, and, consequently, stockholders may be unable to realize a premium
for their shares over the then prevailing market price which is customarily
associated with such acquisitions.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of the MGCL and the
Charter and the Bylaws. The summary does not purport to be complete and is
subject to and qualified in its entirety by reference to the MGCL and the
Charter and Bylaws for complete information.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Bylaws provide that the number of directors of the Company may
be established by the Board of Directors but in no case shall be less than three
directors. Subject to the right of the holders of Senior Preferred Stock and
Convertible Preferred Stock to elect directors under certain circumstances, any
vacancy will be filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors will be filled by
a majority of the entire Board of Directors. Pursuant to the terms of the
Charter, the directors are divided into three classes. One class will hold
office for a term expiring at the annual meeting of stockholders to be held in
1996, another class will hold office for a term expiring at the annual meeting
of stockholders to be held in 1997 and another class will hold office for a term
expiring at the annual meeting of stockholders to be held in 1998. As the term
of each class expires, directors in that class will be elected for a term of
three
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years and until their successors are duly elected and qualified. The Company
believes that classification of the Board of Directors will help to assure the
continuity and stability of the Company's business strategies and policies as
determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of shares of Common Stock will have no right to cumulative voting for
the election of directors. Consequently, at each annual meeting of stockholders,
the holders of a majority of the shares of Common Stock will be able to elect
all of the successors of the class of directors whose term expires at that
meeting.
REMOVAL OF DIRECTORS
Subject to the right of the holders of Senior Preferred Stock and
Convertible Preferred Stock to elect directors under certain circumstances, the
Charter provides that a director may be removed only for cause and only by the
affirmative vote of at least two-thirds of the aggregate number of votes then
entitled to be cast generally in the election of directors. This provision, when
coupled with the provision in the Bylaws authorizing the Board of Directors to
fill directorships, precludes stockholders from removing incumbent directors
except upon an affirmative vote and filling the vacancies created by such
removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares after the date on which the corporation had 100 or
more beneficial owners of its stock or an affiliate of the corporation which was
the beneficial owner, directly or indirectly, of 10% or more of the voting power
of the then outstanding stock of the corporation, at any time within the
two-year period immediately prior to the date in question, and after the date on
which the corporation had 100 or more beneficial owners of its stock (an
"Interested Stockholder") or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the Board of Directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding voting shares of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of outstanding voting shares of the corporation
other than shares held by the Interested Stockholder with whom the business
combination is to be effected, unless, among other things, the corporation's
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its shares. These provisions of Maryland law
do not apply, however, to business combinations that are approved or exempted by
the Board of Directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Board of Directors has
exempted from these provisions of the MGCL any business combination involving
the issuance of shares of Common Stock to PGI and certain other entities, or any
of their respective affiliates, upon the exchange of Common Units acquired by
such entities in connection with the Initial Public Offering.
CONTROL SHARES ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control shares acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror, or in respect of which the acquiror is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing
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directors within one of the following ranges of voting power: (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority,
or (iii) a majority of all voting power. Control Shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control shares acquisition" means the
acquisition of Control Shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the Control Shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the Control Shares, as of the date of the last control shares
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares were considered and not approved. If voting rights
for Control Shares are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control shares acquisition.
The control shares acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the Charter or Bylaws of
the Company.
The Charter contains a provision exempting from the control shares
acquisition statute any and all acquisitions by any person of the Company's
shares of capital stock. There can be no assurance that such provision will not
be amended or eliminated at any point in the future.
The business combination statute and, if the foregoing exemption in the
Charter is rescinded, the control shares acquisition statute could have the
effect of discouraging offers to acquire the Company and of increasing the
difficulty of consummating any such offer.
AMENDMENT TO THE CHARTER
The Charter, with certain limited exceptions, may be amended by the
affirmative vote of the holders of not less than a majority of the aggregate
number of votes then entitled to be cast generally in the election of directors.
The provisions relating to classification of the Board of Directors, removal of
directors or any consent by the Company to an amendment to the Operating
Partnership Agreement resulting in any reduction of the Preferential
Distribution may be amended only by the affirmative vote of the holders of not
less than two-thirds of the aggregate number of votes then entitled to be cast
generally in the election of directors.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (i)
pursuant to the Company's notice of the meeting, (ii) by the Board of Directors,
or (iii) by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the Charter, with
respect to the election of directors by the holders of Senior Preferred Stock
and Convertible Preferred Stock in certain circumstances, or the Bylaws, and (b)
with respect to special meetings of stockholders, only the business specified in
the Company's notice of meeting may be brought before the meeting of
stockholders, and nominations of persons for election to the Board of Directors
may be made only (i) pursuant to the Company's notice of the meeting, (ii) by
the Board of Directors, or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder who
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is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Charter, with respect to the election of directors
by the holders of Senior Preferred Stock and Convertible Preferred Stock in
certain circumstances, or the Bylaws.
The provisions in the Charter on classification of the Board of Directors
and removal of directors, the business combination statute and, if the
applicable provision in the Company's Charter is revoked, control shares
acquisition provisions of the MGCL, and the advance notice provisions of the
Bylaws could have the effect of discouraging a takeover or other transaction in
which holders of some, or a majority, of the shares of Common Stock might
receive a premium for their shares over the then prevailing market price or
which such holders might believe to be otherwise in their best interests.
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
2,300,000 shares of Senior Preferred Stock, 2,938,502 shares of Convertible
Preferred Stock and 13,192,722 shares of Common Stock. In addition, the Company
has reserved 12,020,426 shares of Common Stock for issuance upon exchange of
Common Units or conversion of Convertible Preferred Stock and 1,185,000 shares
of Common Stock for issuance upon exercise of options granted or available to be
granted under the Stock Incentive Plans. All of the Common Stock to be issued or
sold by the Company or the Selling Stockholder in the Offering will be tradeable
without restriction under the Securities Act. In addition, all of the 3,514,954
shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock other than to affiliates will be tradeable without restriction under the
Securities Act.
In connection with the Initial Public Offering, PGI, Messrs. Rosenthal and
Carpenter and certain other Limited Partners entered into certain lockup
agreements (the "Lock-up Agreements"). The Lock-up Agreements entered into by
PGI and Messrs. Rosenthal and Carpenter contractually restrict PGI, its
affiliates, and Messrs. Rosenthal and Carpenter from transferring the Prime
Common Units and any shares of Common Stock obtainable upon exchange of such
Common Units, without the consent of Friedman, Billings, Ramsey & Co., Inc. and
the Company until March 22, 1997, provided that PGI may transfer Common Units to
certain Affiliates who are subject to the Lock-up Agreements. In addition, the
Prime Common Units may not be exchanged for Common Stock (or cash) so long as
the Preferential Distribution is in effect. After expiration of the relevant
lock-up period and, to the extent applicable, the Preferential Distribution, the
Limited Partners, including PGI and Messrs. Rosenthal and Carpenter, will be
able to sell shares of Common Stock issuable in exchange for Common Units
pursuant to registration rights that have been granted by the Company or
available exemptions from registration. The Lock-up Agreement entered into with
respect to the Additional Common Units expired on March 22, 1996. In connection
with the Offering, 90,328 shares of Common Stock will be sold to the public by
the Underwriter on behalf of the Selling Stockholder that is exchanging its
Additional Common Units for Common Stock. The balance of the Additional Common
Units are owned by PGI and are not being exchanged in connection with the
Offering.
In general, under Rule 144 under the Securities Act ("Rule 144") as
currently in effect, if two years have elapsed since the later of the date of
acquisition of restricted securities from the Company or any "affiliate" of the
Company, as that term is defined under the Securities Act, the acquiror or
subsequent holder thereof is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then outstanding
Common Stock or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of restricted securities from the Company or from any "affiliate" of
the Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements. Any Stock
registered under the Securities Act that is acquired by an
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"affiliate" of the Company are not "restricted securities" and may be sold
without regard to the period of beneficial ownership. However, such shares will
be subject to the volume limitation described above and to other conditions of
Rule 144.
No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of Common Stock for future sale, will have on
the market prices prevailing from time to time. Sales of substantial amounts of
Common Stock (including Common Stock issued upon the exchange of Common Units,
conversion of Convertible Preferred Stock or exercise of Options), or the
perception that such sales could occur, could adversely affect the prevailing
market prices of the Common Stock.
REGISTRATION RIGHTS
The Company has granted the Limited Partners certain "demand" and
"piggyback" registration rights with respect to their respective shares of
Common Stock acquired by them upon exchange of Common Units for shares. These
registration rights became effective on March 22, 1996 with respect to shares
obtained upon exchange of the Additional Common Units and on the later of (i)
March 22, 1997 or (ii) the termination of the Preferential Distribution with
respect to shares obtained upon the exchange of the Prime Common Units. The
registration rights further provide that the Limited Partners will have the
right to demand registration of all or any portion of their respective
restricted shares of Common Stock up to two times in each calendar year and that
such parties will have the right to have such shares registered incidentally to
any registration being conducted by the Company of Common Stock or of any
securities of the Company substantially similar to Common Stock. The Company
will bear expenses arising from the exercise of registration rights, except that
the Company shall not pay any underwriting discounts or commissions, Securities
and Exchange Commission and Blue Sky registration fees and transfer taxes
relating to such shares. With regard to the Additional Common Units, the Selling
Stockholder has elected to convert 90,328 Common Units into a like number of
shares of Common Stock and exercise its registration rights relating thereto.
Such shares of Common Stock are being sold to the public by the Selling
Stockholder in connection with the Offering.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of shares of Common Stock. Winston
& Strawn has acted as Tax Counsel to the Company in connection with the Offering
and has reviewed this summary and is of the opinion that it fairly summarizes
the federal income tax considerations that are likely to be material to a holder
of shares of Common Stock. The discussion contained herein does not address all
aspects of federal income taxation that may be relevant to particular
stockholders in light of their personal investment or tax circumstances, or to
certain types of stockholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers) subject to special treatment
under the federal income tax laws.
The statements in this discussion and the opinion of Tax Counsel are based
on current provisions of the Code, existing, temporary, and currently proposed
Treasury Regulations promulgated under the Code, the legislative history of the
Code, existing administrative rulings and practices of the Internal Revenue
Service ("IRS"), and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to transactions entered into or contemplated prior to
the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF SHARES OF COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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GENERAL
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Code and the applicable Treasury Regulations promulgated thereunder, which
together set forth the requirements for qualifying as a REIT (the "REIT
Requirements"), commencing with its taxable year ending December 31, 1994. The
Company believes that it is organized and has operated in such a manner to
qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner in the future. No assurance can be given,
however, that the Company has operated in a manner to so qualify as a REIT or
will continue to operate in a manner so as to remain qualified as a REIT.
The REIT Requirements (i.e., the Code sections and Treasury Regulations
relating to the federal income tax treatment of REITs and their stockholders)
are highly technical and complex. The following discussion sets forth only the
material aspects of those provisions. This summary is qualified in its entirety
by the applicable Code sections, Treasury Regulations promulgated thereunder,
and administrative and judicial interpretations thereof.
Subject to the qualifications stated herein and in its opinion, Tax Counsel
has given the Company an opinion that the Company is organized in conformity
with the requirements for qualification as a REIT, and the Company's method of
operation has enabled it to meet the requirements for qualification and taxation
as a REIT under the Code and its method of operation enables it to continue to
meet the requirements for qualification as a REIT. An opinion of counsel is not
binding on the IRS and no assurance can be given that the IRS will not challenge
the status of the Company as a REIT. It must be emphasized that Tax Counsel's
opinion is based on various assumptions and is conditioned upon numerous
representations made by the Company as to factual matters, including those
related to its business and properties as set forth in this Prospectus. Tax
Counsel has not independently verified the Company's representations. Moreover,
the Company's qualification and taxation as a REIT depends upon the Company's
ability to meet on a continuing basis, through actual operating results,
distribution levels and diversity of stock ownership, the various qualification
tests imposed by the Code discussed below. Tax Counsel will not review the
Company's compliance with these tests on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any given taxable year will satisfy the requirements for qualification and
taxation as a REIT. See "Certain Federal Income Tax Considerations -- Failure to
Qualify".
TAXATION OF THE COMPANY
If the Company continues to qualify for taxation as a REIT, it generally
will not be subject to federal corporate income tax on that portion of its
ordinary income or capital gain that is currently distributed to its
stockholders. The REIT provisions of the Code generally allow a REIT to deduct
dividends paid to its stockholders. This deduction for dividends paid to
stockholders substantially eliminates the federal "double taxation" on earnings
(once at the corporate level and once again at the stockholder level) that
generally results from an investment in a corporation.
Even if the Company continues to qualify for taxation as a REIT, it may be
subject to federal income tax in certain circumstances. First, the Company will
be taxed at regular corporate rates on any undistributed "REIT taxable income"
and undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the corporate "alternative minimum tax" on its items
of tax preference, if any. Third, if the Company has (i) net income from the
sale or other disposition of "foreclosure property" which is held primarily for
sale to customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, the Company will be subject to tax on such
income at the highest regular corporate rate. Fourth, 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. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but
nonetheless maintains its qualification as a REIT because certain other
requirements are met, the Company will be subject to a 100% tax on the greater
of the amount by which the Company fails the 75% or the 95% test, multiplied by
a fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute for each calendar year at least the sum of (i)
85% of its REIT ordinary income for such year,
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(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. Finally, 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 basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation, and the Company subsequently recognizes gain on the
disposition of such asset during the 10-year period (the "Recognition Period")
beginning on the date on which the asset was acquired by the Company, then,
pursuant to guidelines issued by the IRS, the excess of (i) the fair market
value of the asset as of the beginning of the applicable Recognition Period,
over (ii) the Company's adjusted basis in such asset as of the beginning of such
Recognition Period (i.e., "built-in gain"), will be subject to tax at the
highest regular corporate rate. The Clinton Administration has proposed
legislation, which if enacted, would alter this rule for assets transferred to a
REIT by certain C corporations after December 31, 1996. Under the proposed
legislation, C corporations having stock with a value greater than $5 million
would have to recognize the built-in gain on any assets transferred to the REIT
at the time of the transfer, and the REIT would have a fair market value basis
in the assets. A REIT that receives such assets may have transferee liability
for the tax liability on this gain to the extent it inherits this tax liability
from the transferor.
If the Company invests in retail properties or other real estate in foreign
countries, the Company's profits from such investments will generally be subject
to tax in the countries where such properties are located. The precise nature
and amount of any such taxation will depend on the laws of the countries where
the properties are located. If the Company satisfies the annual distribution
requirements for qualification as a REIT and is therefore not subject to federal
corporate income tax on that portion of its ordinary income and capital gain
that is currently distributed to its stockholders, the Company will generally
not be able to recover the cost of any foreign tax imposed on profits from its
foreign investments by claiming foreign tax credits against its U.S. tax
liability on such profits. Moreover, a REIT is not able to pass foreign tax
credits through to its stockholders.
The Company uses the calendar year for both federal income tax purposes and
for financial reporting purposes.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must have met and continue to meet the
requirements, discussed below, relating to the Company's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its stockholders.
ORGANIZATIONAL REQUIREMENTS
The Code requires that a REIT be a corporation, trust, or association:
(i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation but for compliance
with the REIT Requirements;
(iv) which is neither a financial institution nor an insurance company
subject to certain special provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons;
(vi) at any time during the last half of each taxable year not more than
50% in value of the outstanding stock of which is owned, directly or
indirectly through the application of certain attribution rules, by or for
five or fewer individuals (as defined in the Code to include certain
tax-exempt entities other than, in general, qualified domestic pension
funds); and
(vii) which meets certain other tests, described below, regarding the
nature of its income and assets.
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The Code provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months.
The Company has issued sufficient shares of Stock in sufficient proportions
to allow the Company to satisfy the requirement set forth in (v) above (the "100
stockholder" requirement).
As set forth in (vi) above, to qualify as a REIT, the Company must satisfy
the requirement set forth in Section 856(a)(6) of the Code that it not be
closely held. The Company will not be closely held so long as at all times
during the last half of any taxable year of the Company other than the first
taxable year for which the election to be taxed as a REIT has been made, not
more than 50% in value of its outstanding Stock is owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds) (the "five
or fewer" requirement). Although the Charter of the Company contains certain
restrictions on the ownership and transfer of the Stock, the restrictions do not
ensure that the Company will be able to satisfy the "five or fewer" requirement.
This risk results primarily, though not exclusively, from potential fluctuations
in values among the different classes of the Stock. If the Company fails to
satisfy the "five or fewer" requirement, the Company's status as a REIT will
terminate, and the Company will not be able to prevent such termination. See
"Certain Federal Income Tax Considerations -- Failure to Qualify."
OWNERSHIP OF A PARTNERSHIP INTEREST
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership and is deemed to be entitled to the income of the
partnership attributable to such proportionate share. In addition, the character
of the assets and gross income of the partnership retain the same character in
the hands of the REIT for purposes of the REIT Requirements, including
satisfying the gross income tests and the asset tests. Accordingly, the
Company's proportionate share of the assets, liabilities and items of income of
the Operating Partnership, including the Operating Partnership's proportionate
share of the assets, liabilities and items of income of each Property
Partnership, are treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT Requirements, provided that the
Operating Partnership and each of the Property Partnerships are treated as
partnerships for federal income tax purposes. See "Certain Federal Income Tax
Considerations -- Partnership Classification."
INCOME TESTS
To maintain its qualification as a REIT, the Company must satisfy three
gross income requirements annually. First, at least 75% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property investments and from dividends, interest, and gain from the
sale or disposition of stock or securities or from any combination of the
foregoing. Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions, and gain from the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent received or accrued with
respect to any property must not be based in whole or in part on the income or
profits derived by any person from such property, although an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Rents received from a tenant that are based on the tenant's income
from the property will not be treated as rents based on income or profits and
thus excluded from the term "rents
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from real property" if the tenant derives substantially all of its income with
respect to such property from the leasing or subleasing of substantially all of
such property, provided that the tenant receives from subtenants only amounts
that would be treated as rents from real property if received directly by a
REIT. Second, rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if the Company, or an owner of
10% or more of the Company, directly or constructively owns 10% or more of such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, if the Company provides services to its tenants, rents
received by the Company from such tenants will qualify as "rents from real
property" only if the services are of a type that a tax-exempt organization can
provide to its tenants without causing its rental income to be unrelated
business taxable income under the Code. A tax-exempt organization may provide
services which are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered "rendered to
the occupant," without incurring unrelated business taxable income. Services
which would give rise to unrelated business taxable income if provided by a
tax-exempt organization must be provided by an "independent contractor" who is
adequately compensated and from whom the Company does not derive or receive any
income. Receipts for services furnished to a tenant (whether or not rendered by
an independent contractor) which are not customarily provided to tenants in
properties of a similar class in the geographic market in which the property is
located will in no event qualify as "rents from real property."
Substantially all of the gross income of the Company is attributable
generally to investments in real property and specifically to rents attributable
to and gains from the disposition of real property. The Company does not receive
rents in excess of a de minimis amount based on the net income or profits of a
tenant. Moreover, the Company believes that it does not receive any rents from a
Related Party Tenant, and does not receive rent attributable to personal
property leased in connection with a lease of real property that exceeds 15% of
the total rents received under any such lease.
The Operating Partnership provides certain services with respect to the
Properties, but does not satisfy the "independent contractor" requirements
described above. To the extent necessary to preserve the Company's status as a
REIT, the Operating Partnership will arrange to have services provided by
independent contractors from whom the Company does not derive or receive any
income.
The Operating Partnership also receives fees in exchange for the performance
of certain usual and customary services relating to property not owned entirely
by the Operating Partnership. The ratable portion of these fees attributable to
the part of the property not owned by the Operating Partnership does not
constitute qualifying income under the 75% or 95% gross income tests. The
remainder of these fees is ignored under the 75% and 95% gross income test. The
Company believes that the aggregate amount of such nonqualifying fees (and any
other nonqualifying income) in any taxable year will not exceed the limits on
nonqualifying income under the three gross income tests described above.
Should the potential amount of nonqualifying income in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid nonqualification as a REIT. The Company may for instance,
as it has done with the Services Corporation, transfer certain nonqualifying
activities to a taxable corporation from which it would receive dividends. If
this should occur, the Operating Partnership would be entitled to receive
dividends as a stockholder of the corporation, which dividends generally should
constitute qualifying income for purposes of the 95% gross income test. The
amount of dividends available for distribution to the Company would be reduced
below the comparable amount of fee income that would otherwise be received by
the Operating Partnership because such a corporation would be subject to a
corporate level tax on its taxable income, thereby reducing the amount of cash
available for distribution. Furthermore, the Company would structure the stock
interest owned by the Operating Partnership in such a corporation to ensure that
the various asset tests described below were not violated (i.e., the Operating
Partnership would not own more than 10% of the voting securities of such
corporation and the value of the stock interest would not exceed 5% of the value
of the Company's total assets).
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If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if (i) the Company's failure
to meet such test(s) was due to reasonable cause and not due to willful neglect,
(ii) the Company reported the nature and amount of each item of its income
included in the test(s) for such taxable year on a schedule attached to its
return, and (iii) any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether, in all
circumstances, the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally earns exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. As discussed above in "--
Taxation of the Company," even if these relief provisions apply, the Company
will still be subject to a 100% tax on the greater of the amount by which the
Company failed the 75% or the 95% test, multiplied by a fraction intended to
reflect the Company's profitability. No similar mitigation provision applies to
provide relief if the Company fails to satisfy the 30% income test, and in such
case, the Company will cease to qualify as a REIT. See "Certain Federal Income
Tax Considerations -- Failure to Qualify."
ASSET TESTS
At the close of each quarter of its taxable year, the Company also must
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets, including its allocable share of assets
held by the Operating Partnership and each Property Partnership in which the
Operating Partnership is a partner, must be represented by real estate assets
(which for this purpose includes stock or debt instruments held for not more
than one year purchased with proceeds of a stock offering or a long-term (at
least five years) debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets, and the Company may not own more than 10% of any one issuer's
outstanding voting securities. By virtue of its partnership interest in the
Operating Partnership, the Company will be deemed to own for purposes of the
three asset tests its pro rata share of the assets of the Operating Partnership,
and the assets of each Property Partnership in which the Operating Partnership
is a partner. The Operating Partnership owns 100 percent of the nonvoting
preferred stock of the Services Corporation, but none of its voting stock. The
Company does not believe that its pro rata share of the stock the Operating
Partnership owns in the Services Corporation exceeds 5% of the total value of
the Company's assets. The Finance Corporations each constitute a "qualified REIT
subsidiary," which is not treated as a separate corporation for federal income
tax purposes. Instead, the assets, liabilities, and items of income, deduction
and credit of the Finance Subsidiaries are treated as assets, liabilities and
items of the Company.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy any of the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such other
action within 30 days after the close of any quarter as may be required to cure
any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS
To continue to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders each year in
an amount at least equal to (i) the sum of (A) 95% of the Company's "REIT
taxable income" (computed without regard to the dividends paid deduction and the
Company's net capital gain) plus (B) 95% of the net income (after tax), if any,
from foreclosure property, minus (ii) the sum of certain items of non-cash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration.
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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 on the undistributed amount at
regular capital gains or ordinary corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute for 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, plus (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.
The Company has and intends to continue to make timely distributions
sufficient to satisfy all of the annual distribution requirements. The Company
anticipates that it will generally have sufficient cash or liquid assets to
enable it to satisfy these distribution requirements. It is possible that, from
time to time, the Company may not have sufficient cash or other liquid assets to
meet the 95% distribution requirement due to the insufficiency of cash flow from
the Operating Partnership in a particular year or to timing differences between
the actual receipt of income and actual payment of deductible expenses, on the
one hand, and the inclusion of such income and deduction of such expenses in
computing the Company's "REIT taxable income," on the other hand. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement, the Company may find it necessary to cause the
Operating Partnership to arrange for borrowings, or to pay dividends in the form
of taxable stock dividends.
If the Company fails to meet the 95% distribution requirement as a result of
an adjustment to the Company's tax return by the IRS upon audit, the Company may
retroactively cure the failure by paying "deficiency dividends" to its
stockholders in a later year, which may then be included in the Company's
deduction for dividends paid for the earlier year. The Company may thus be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest to the IRS based upon the amount of
any deduction taken for deficiency dividends.
PENALTY TAX ON PROHIBITED TRANSACTIONS
The Company's share of any gain realized on the sale of any property held as
inventory or otherwise primarily for sale to customers in the ordinary course of
its trade or business generally will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income will also have an adverse effect upon the Company's ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership, through the Property Partnerships, intends to hold the
Properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning and operating the Properties and
other retail properties and to make such occasional sales of the Properties as
are consistent with the Company's investment objectives. Based upon such
investment objectives, the Company believes that in general the Properties
should not be considered inventory or other property held primarily for sale to
customers in the ordinary course of a trade or business and that the amount of
income from prohibited transactions, if any, will not be material. Nevertheless,
the IRS could contend otherwise. In particular, the Property Partnerships own
parcels of vacant land which are located adjacent to, or near, particular
Properties that are not necessarily required for use in connection with the
outlet center located at a particular Property (referred to as "outparcels").
The Company believes that the outparcels, four of which have been sold since the
Initial Public Offering, should not be considered inventory or as held primarily
for sale to customers in the ordinary course of the Company's trade or business,
but there is a risk that the IRS could contend otherwise, in which event the
profit from such sales allocable to the Company would be subject to a 100% tax.
In the event that the Company determines that the level of such activity is
sufficient to cause such sales to be subject to 100% tax, the Company intends to
hold and sell such outparcels through a separate corporation in which the
Operating Partnership would hold a stock interest. The Company would structure
the stock interest owned by the Operating Partnership in any such corporation to
ensure that the various asset tests described above were not violated (I.E., the
Operating Partnership would not own more than 10% of the voting securities of
such corporation and the value of the
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stock interest would not exceed 5% of the value of the Company's total assets).
See "Certain Federal Income Tax Considerations -- Requirements for
Qualification." Such corporation would be subject to a corporate level tax on
its taxable income, thereby reducing the amount of cash available for
distribution.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify as a REIT will not be required and, if made, will not
be deductible by the Company. As a result, the Company's failure to qualify as a
REIT will reduce the cash available for distribution by the Company to its
stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to the Company's stockholders will be taxable as ordinary dividend
income to the extent of the Company's then current and accumulated earnings and
profits, and, subject to certain limitations in the Code, corporate distributees
may be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, the Company also will be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. It is not possible to determine whether the
Company would be entitled to such statutory relief in all circumstances.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, or (iii) is an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
As long as the Company continues to qualify as a REIT, distributions made by
the Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Stockholders
that are corporations. For purposes of determining whether distributions on the
Common Stock are out of current or accumulated earnings and profits, the
earnings and profits of the Company will be allocated first to the Senior
Preferred Stock, second to the Convertible Preferred Stock and finally to the
Common Stock. There can be no assurance that the Company will have sufficient
earnings and profits to cover distributions on the Senior Preferred Stock, the
Convertible Preferred Stock and the Common Stock.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to taxable U.S. Stockholders
as long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his shares of Common Stock. U.S. Stockholders
that are corporations may, however, be required to treat up to 20% of certain
capital gain dividends as ordinary income. Any capital gain dividends designated
by the Company will be allocated among the classes of Stock based on the ratio
of the total dividends (distributions out of earnings and profits) paid to a
class over total dividends paid to all classes of Stock.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions, to the extent of each U.S. Stockholder's adjusted
basis in his shares of Common Stock, will be treated for tax purposes first as a
tax-free return of capital to such stockholder (and thereby reducing the
adjusted basis which such U.S. Stockholder has in his shares of Common Stock for
tax purposes by the amount of such distribution (but not below zero)).
Distributions in excess of a U.S. Stockholder's adjusted basis in his shares
taxable as capital gains (provided that the shares have been held as a capital
asset). Dividends declared by the Company in October, November, or December of
any year and payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
stockholder on December 31 of
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such year, provided that the dividend is actually paid by the Company on or
before January 31 of the following calendar year. Stockholders may not include
in their own income tax returns any net operating losses or capital losses of
the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
the Company (to the extent they do not constitute a return of capital) generally
will be treated as investment income for purposes of computing the investment
income limitation. Gain arising from the sale or other disposition of shares of
Common Stock, however, will not be treated as investment income unless the U.S.
Stockholder elects to reduce the amount of such U.S. Stockholder's total net
capital gain eligible for the maximum capital gains rate by the amount of such
gain with respect to the shares.
Upon any sale or other disposition of shares of Common Stock, a U.S.
Stockholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition, and
(ii) the holder's adjusted basis in the shares of Common Stock for tax purposes.
Such gain or loss will be capital gain or loss if the shares of Common Stock
have been held by the U.S. Stockholder as a capital asset, and will be long-term
gain or loss if such shares have been held for more than one year. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition of
shares of Common Stock that have been held for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss, to the extent of distributions received by such U.S. Stockholder from the
Company which were required to be treated as long-term capital gains.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
"unrelated business taxable income" even if the REIT has incurred indebtedness
in connection with the acquisition of an investment. Although revenue rulings
are interpretive in nature and are subject to revocation or modification by the
IRS, based upon the revenue ruling and the analysis therein, distributions made
by the Company to a U.S. Stockholder that is a tax-exempt entity (such as an
individual retirement account (IRA) or a 401(k) plan) should not constitute
unrelated business taxable income unless such tax-exempt U.S. Stockholder has
financed the acquisition of its shares of Common Stock with "acquisition
indebtedness" within the meaning of the Code, or the shares of Common Stock are
otherwise used in an unrelated trade or business conducted by such U.S.
Stockholder.
Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of a "pension held REIT" at any time during a taxable year
beginning after December 31, 1993. Such a pension fund must treat a certain
percentage of all dividends received from the REIT during the year as unrelated
business taxable income. The percentage is equal to the ratio of the REIT's
gross income (less direct expenses related thereto) derived from the conduct of
unrelated trades or businesses determined as if the REIT were a tax-exempt
pension fund, to the REIT's gross income (less direct expenses related thereto)
from all sources. The special rules will not apply to require a pension fund to
recharacterize a portion of its dividends as unrelated business taxable income
unless the percentage computed is at least 5%.
A REIT will be treated as a "pension held REIT" if the REIT is predominantly
held by tax-exempt pension funds and if the REIT would otherwise fail to satisfy
the "five or fewer" ownership requirements discussed above, see "Certain Federal
Income Tax Considerations -- Requirements for Qualification -- Organizational
Requirements," if the stock of the REIT held by such tax-exempt pension funds
were not treated as held directly by their respective beneficiaries. A REIT is
predominantly held by tax-exempt pension funds if at least one tax-exempt
pension fund holds more than 25% (measured by value) of the REIT's stock, or if
one or more tax-exempt pension funds (each of which owns more than 10% (measured
by value) of the REIT's stock) own in the aggregate more than 50% (measured by
value) of the REIT's stock.
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The Company believes that it will not be treated as a pension-held REIT.
However, because the shares of the Company are publicly traded, no assurance can
be given that this Company is not and will not become a pension-held REIT.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign trusts
and estates and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are highly complex, and the following discussion is intended only
as a summary of such rules. Prospective Non-U.S. Stockholders should consult
with their own tax advisors to determine the impact of United States federal,
state, and local income tax laws on an investment in shares of Common Stock,
including any reporting requirements.
In general, Non-U.S. Stockholders are subject to regular United States
income tax with respect to their investment in shares of Common Stock in the
same manner as a U.S. Stockholder if such investment is "effectively connected"
with the Non-U.S. Stockholder's conduct of a trade or business in the United
States. A corporate Non-U.S. Stockholder that receives income with respect to
its investment in shares of Common Stock that is (or is treated as) effectively
connected with the conduct of a trade or business in the United States also may
be subject to the 30% branch profits tax imposed by the Code, which is payable
in addition to regular United States corporate income tax. The following
discussion addresses only the United States taxation of Non-U.S. Stockholders
whose investment in shares of Common Stock is not effectively connected with the
conduct of a trade or business in the United States.
Distributions made by the Company that are not attributable to gain from the
sale or exchange by the Company of United States real property interests and
that are not designated by the Company as capital gain dividends will be treated
as ordinary income dividends to the extent made out of current or accumulated
earnings and profits of the Company. Generally, such ordinary income dividends
will be subject to United States withholding tax at the rate of 30% on the gross
amount of the dividend paid unless reduced or eliminated by an applicable United
States income tax treaty. The Company expects to withhold United States income
tax at the rate of 30% on the gross amount of any such dividends paid to a
Non-U.S. Stockholder unless a lower treaty rate applies and the Non-U.S.
Stockholder has filed an IRS Form 1001 with the Company, certifying the Non-U.S.
Stockholder's entitlement to treaty benefits.
Distributions made by the Company in excess of its current and accumulated
earnings and profits will be treated first as a tax-free return of capital to
each Non-U.S. Stockholder, reducing the adjusted basis which such Non-U.S.
Stockholder has in his shares of Common Stock for U.S. tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a Non-U.S. Stockholder's adjusted basis in his shares being treated as gain
from the sale or exchange of such shares, the tax treatment of which is
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of the Company's current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to a dividend distribution. However, the
Non-U.S. Stockholder may seek a refund from the IRS of any amount withheld if it
is subsequently determined that such distribution was, in fact, in excess of the
Company's then current and accumulated earnings and profits.
As long as the Company continues to qualify as a REIT, distributions made by
the Company that are attributable to gain from the sale or exchange by the
Company of United States real property interests will be taxed to a Non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Stockholder
as if such distributions were gains "effectively connected" with the conduct of
a trade or business in the United States. Accordingly, a Non-U.S. Stockholder
will be taxed on such distributions at the same capital gain rates applicable to
U.S. Stockholders (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of non-resident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the case of a corporate Non-U.S. Stockholder that is not entitled to
treaty relief or exemption. The Company will be required to withhold tax from
any distribution to a Non-U.S. Stockholder that could be designated by the
Company as a capital gain dividend in an amount equal to 35% of the gross
distribution. The amount of tax withheld is fully creditable against the
Non-U.S. Stockholder's FIRPTA tax
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liability, and if such amount exceeds the Non-U.S. Stockholder's federal income
tax liability for the applicable taxable year, the Non-U.S. Stockholder may seek
a refund of the excess from the IRS. In addition, if the Company designates
prior distributions as capital gain dividends, subsequent distributions, up to
the amount of such prior distributions, will be treated as capital gain
dividends for purposes of withholding.
Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of
shares of Common Stock generally will not be subject to United States taxation
unless the Common Stock constitutes a "United States real property interest"
within the meaning of FIRPTA. The Common Stock will not constitute a "United
States real property interest" so long as the Company is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by Non-U.S. Stockholders. The Company believes that
it is and will continue to be a "domestically controlled REIT," and therefore
that the sale of shares of Common Stock will not be subject to taxation under
FIRPTA. However, because the shares of Stock will be publicly traded, no
assurance can be given that the Company is or will continue to be a
"domestically-controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of shares of Common Stock not otherwise subject to FIRPTA will
be taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If the Company did not constitute a "domestically-controlled REIT," gain
arising from the sale or exchange by a Non-U.S. Stockholder of shares of Common
Stock would be subject to United States taxation under FIRPTA as a sale of a
"United States real property interest" only if the selling Non-U.S.
Stockholder's interest in the Company exceeded 5% at any time during the 5 years
preceding the sale or exchange. If gain on the sale or exchange of shares of
Common Stock were subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to regular United States income tax with respect to such gain
in the same manner as a U.S. Stockholder (subject to any applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals and the possible application of the 30% branch profits tax in the
case of foreign corporations), and the purchaser of the Common Stock would be
required to withhold and remit to the IRS 10% of the purchase price.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company reports to its U.S. Stockholders and to the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if any,
with respect thereto. Under the backup withholding rules, a U.S. Stockholder may
be subject to backup withholding at the rate of 31% on dividends paid unless
such U.S. Stockholder (i) is a corporation or falls within certain other exempt
categories and, when required, can demonstrate this fact, or (ii) 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 U.S. Stockholder who does not provide the Company with his
correct taxpayer identification number also may be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
U.S. Stockholder's federal income tax liability. In addition, the Company may be
required to withhold a portion of any capital gain distributions made to U.S.
Stockholders who fail to certify their nonforeign status to the Company. See
"Certain Federal Income Tax Considerations -- Taxation of Non-U.S.
Stockholders."
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders, and Non-U.S. Stockholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
The Company holds direct or indirect interests in the Operating Partnership
and each of the Property Partnerships (each individually a "Partnership" and,
collectively, the "Partnerships"). The following discussion summarizes certain
federal income tax considerations applicable solely to the Company's investments
in the Partnerships. The discussion does not address state or local tax laws or
any federal tax laws other than income tax laws.
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PARTNERSHIP CLASSIFICATION
The Company is entitled to include in its income its distributive share of
the income, and to deduct its distributive share of the losses, of each of the
Partnerships only if each such Partnership is classified for federal income tax
purposes as a partnership rather than as an association taxable as a
corporation.
The Company has not requested a ruling from the IRS that each of the
Partnerships is or will be treated as a partnership for federal income tax
purposes. Instead, Tax Counsel has delivered an opinion that, based on the
provisions of the partnership agreements for each of the Partnerships, certain
factual assumptions, and certain representations described in the opinion, each
of the Partnerships constitutes a partnership for federal income tax purposes
(and not as an association taxable as a corporation and not as a "publicly
traded partnership"). Unlike a tax ruling, however, an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
challenge the status of the Partnerships as partnerships for federal income tax
purposes. In addition, the opinions of Tax Counsel are based on existing law,
which to a great extent is the result of administrative and judicial
interpretation. No assurance can be given that administrative or judicial
changes would not modify the conclusions expressed in these opinions.
If for any reason any of the Partnerships were taxable as a corporation
rather than as a partnership for federal income tax purposes, the character of
the Company's assets and items of gross income would change, and, as a result,
the Company would most likely be unable to satisfy the income and asset tests,
which would thus prevent the Company from qualifying as a REIT. In addition, any
change in the status for tax purposes of any of the Partnerships might be
treated as a taxable event, in which case the Company could incur a tax
liability without any related cash distribution. Further, if any of the
Partnerships were to be treated as an association taxable as a corporation,
items of income, gain, loss, deduction and credit of such Partnership would not
pass through to its partners; instead, the Partnership would be taxable as a
corporation, subject to entity-level taxation on its net income at regular
corporate tax rates. The partners of any such Partnership would be treated for
federal income tax purposes as stockholders, with distributions to such partners
being treated as dividends. See "Certain Federal Income Tax Considerations --
Requirements for Qualification -- Income Tests, Asset Tests."
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
PARTNERS, NOT PARTNERSHIPS, SUBJECT TO TAX
A partnership is not a separate taxable entity for federal income tax
purposes. Rather, partners are allocated their proportionate share of the items
of income, gain, loss, deduction and credit of the partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive any distributions from the partnership. The Company will be required to
take into account its allocable share of the foregoing items of the Partnerships
for purposes of the various REIT income tests and in the computation of its
"REIT taxable income." See "Certain Federal Income Tax Considerations --
Requirements for Qualification -- Income Tests."
PARTNERSHIP ALLOCATIONS
Although a partnership agreement will generally determine the allocation of
a partnership's income and losses among the partners, such allocations will be
disregarded for tax purposes under Section 704(b) of the Code if they do not
comply with the provisions of Section 704(b) and the Treasury Regulations
promulgated thereunder.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
contained in the partnership agreements for each of the existing Partnerships
generally are intended to comply with the requirements of Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES
Pursuant to Section 704(c) of the Code, income, gain, loss, and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership (such as interests in the Property Partnerships that
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own the Properties) in exchange for an interest in the partnership must be
allocated for federal income tax purposes in a manner such that the contributing
partner is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (a "Book-Tax Difference"). Such allocations are solely for federal
income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The Operating Partnership was
formed by way of contributions of appreciated property (including interests in
the Property Partnerships that own the Properties). Consequently the Partnership
agreements require allocations of income, gain, loss, and deduction attributable
to such contributed property to be made in a manner that is consistent with
Section 704(c) of the Code.
In general, the Limited Partners of the Operating Partnership are allocated,
solely for tax purposes, lower amounts of depreciation deductions and increased
taxable income and gain on the sale by the Property Partnerships of the
Properties than would ordinarily be the case for economic or book purposes. This
will tend to eliminate the Book-Tax Differences over the life of the
Partnerships. However, the special allocation rules of Section 704(c) do not
always entirely rectify a Book-Tax Difference on an annual basis or with respect
to a specific taxable transaction such as a sale. Moreover, the application of
Section 704(c) principles in tiered partnership arrangements is not entirely
clear. Accordingly, variations from normal Section 704(c) principles could
arise.
The Operating Partnership and the Company have elected to use the
traditional method with curative allocations under Treasury Regulation
1.704-3(c) as the method of accounting for the Book -- Tax Differences with
respect to properties contributed to the Partnerships.
With respect to any property purchased by any of the Property Partnerships
subsequent to the formation of the Company, such property will initially have a
tax basis equal to its fair market value and Section 704(c) of the Code will not
apply.
BASIS IN PARTNERSHIP INTEREST
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership is generally (i) equal to the amount of cash and the basis
of any other property contributed to the Operating Partnership by the Company,
(ii) increased by (A) the Company's allocable share of the Operating
Partnership's income and (B) the Company's allocable share of indebtedness of
the Operating Partnership, and (iii) reduced, but not below zero, by (A) the
Company's allocable share of the Operating Partnership's losses and (B) the
amount of cash and the basis of any other property distributed by the Operating
Partnership to the Company, including any constructive cash distributions
resulting from a reduction in the Company's allocable share of indebtedness of
the Operating Partnership.
If the allocation to the Company of its distributive share of any loss of
the Operating Partnership would reduce the adjusted tax basis in its partnership
interest in the Operating Partnership below zero, the recognition of such excess
loss will be deferred until such time and to the extent that the Company has
sufficient tax basis in its partnership interest so that the recognition of such
loss would not reduce the amount of such tax basis below zero. To the extent
that the Operating Partnership's distributions, or any decrease in the Company's
share of the indebtedness of the Operating Partnership (each such decrease being
considered a constructive cash distribution to the Company), would reduce the
Company's adjusted tax basis in its partnership interest below zero, such excess
distributions (including such constructive distributions) would constitute
taxable income to the Company. Such distributions and constructive distributions
will normally be characterized as a capital gain, and if the Company has held
its partnership interest in the Operating Partnership for longer than the
long-term capital gain holding period (currently one year), the distributions
and constructive distributions will constitute long-term capital gains.
The rules described above with respect to basis apply equally to the
Operating Partnership in its capacity as a partner in any Property Partnership,
as well as to the Company in its capacity as a partner in any Property
Partnership.
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OTHER TAX CONSIDERATIONS
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective stockholders should recognize that the present federal income
tax treatment of the Company may be modified by future legislative, judicial or
administrative actions or decisions at any time, which may be retroactive in
effect, and, as a result, any such action or decision 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 statutory changes as well as
promulgation of new, or revisions to existing, regulations and revised
interpretations of established concepts. No prediction can be made as to the
likelihood of passage of any new tax legislation, such as the C corporation
asset transfer proposal, or other provisions either directly or indirectly
affecting the Company or its stockholders. Revisions in federal income tax laws
and interpretations thereof could adversely affect the tax consequences of an
investment in shares of Common Stock.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in shares of Common Stock.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Winston &
Strawn, Chicago, Illinois, for the Selling Stockholder by D'Ancona & Pflaum,
Chicago, Illinois and for the Underwriters by Hogan & Hartson L.L.P.,
Washington, D.C. The Honorable James R. Thompson, a partner in Winston & Strawn,
is a director of the Company.
EXPERTS
The consolidated balance sheets of the Company at December 31, 1995 and 1994
and the consolidated financial statements for the year ended December 31, 1995
and for the period from March 22, 1994 to December 31, 1994, the combined
financial statements of the Predecessor for the period from January 1, 1994 to
March 21, 1994 and for the year ended December 31, 1993, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act with respect to the Common Stock offered by this
Prospectus. For the purposes hereof, the term "Registration Statement" means the
original Registration Statement and any and all amendments thereto. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the schedules and exhibits thereto, to which reference hereby is
made. Each statement made in this Prospectus concerning a document filed as an
exhibit to the Registration Statement is qualified in its entirety by reference
to such exhibit for a complete statement of its provisions.
The Company is subject to the financial reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy statements and other information with the Commission. Reports,
proxy statements and other information filed by the Company may be inspected and
copied at prescribed rates at the public reference facilities of the Commission
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices at Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661, and at Seven World Trade
Center, 13th Floor, New York, New York 10048. Any interested party may obtain
copies of all or any portion of the Registration Statement and its exhibits at
prescribed rates from the Public Reference Section of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.
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PRIME RETAIL, INC.
INDEX TO FINANCIAL STATEMENTS
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PAGE
REFERENCE
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<S> <C>
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company as of March 31, 1996 and December 31, 1995.................. F-2
Consolidated Statements of Operations of the Company for the three months ended March 31, 1996 and
1995.................................................................................................. F-3
Consolidated Statements of Cash Flows of the Company for the three months ended March 31, 1996 and
1995.................................................................................................. F-4
Notes to Interim Consolidated Financial Statements of the Company...................................... F-5
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors......................................................................... F-8
Consolidated Balance Sheets of the Company as of December 31, 1995 and December 31, 1994............... F-9
Consolidated Statements of Operations of the Company for the year ended December 31, 1995 and for the
period from March 22, 1994 to December 31, 1994 and Combined Statements of Operations of the
Predecessor for the period from January 1, 1994 to March 21, 1994 and the year ended December 31,
1993.................................................................................................. F-10
Consolidated Statements of Cash Flows of the Company for the year ended December 31, 1995 and for the
period from March 22, 1994 to December 31, 1994 and Combined Statements of Cash Flows of the
Predecessor for the period from January 1, 1994 to March 21, 1994 and the year ended December 31,
1993.................................................................................................. F-11
Consolidated Statements of Shareholders' Equity of the Company and Combined Statements of Predecessor
Owners' Deficit....................................................................................... F-13
Notes to Consolidated Financial Statements of the Company and Combined Financial Statements of the
Predecessor........................................................................................... F-14
</TABLE>
F-1
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
ASSETS:
Investment in rental property:
Land........................................................................ $ 35,370 $ 35,370
Buildings and improvements.................................................. 405,252 403,542
Property under development.................................................. 19,384 12,165
Furniture and equipment..................................................... 3,452 3,403
-------------- --------
463,458 454,480
Accumulated depreciation.................................................... (44,139) (40,190)
-------------- --------
419,319 414,290
Cash and cash equivalents..................................................... 2,589 14,927
Restricted cash............................................................... 2,358 2,230
Accounts receivable, net...................................................... 8,772 10,070
Deferred charges, net......................................................... 18,302 18,136
Due from affiliates, net...................................................... 1,150 1,194
Investment in partnerships.................................................... 2,572 2,258
Other assets.................................................................. 644 619
-------------- --------
Total assets............................................................ $ 455,706 $ 463,724
-------------- --------
-------------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Bonds payable................................................................. $ 32,900 $ 32,900
Notes payable................................................................. 273,120 273,054
Accrued interest.............................................................. 3,121 3,034
Real estate taxes payable..................................................... 3,191 3,142
Construction costs payable.................................................... 3,153 5,796
Accounts payable and other liabilities........................................ 9,420 9,858
-------------- --------
Total liabilities....................................................... 324,905 327,784
-------------- --------
Minority interests............................................................ 10,867 14,456
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
2,300,000 shares of 10.5% Series A Senior Cumulative Preferred Stock,
$0.01 par value (liquidation preference of $57,500), issued and
outstanding.............................................................. 23 23
7,015,000 shares of 8.5% Series B Cumulative Participating Convertible
Preferred Stock, $0.01 par value (liquidation preference of $175,375),
issued and outstanding................................................... 70 70
Shares of common stock, 75,000,000 shares authorized:
2,875,000 shares of common stock, $0.01 par value, issued and
outstanding.............................................................. 29 29
Additional paid-in capital.................................................. 128,275 128,275
Distributions in excess of net income....................................... (8,463) (6,913)
-------------- --------
Total shareholders' equity.............................................. 119,934 121,484
-------------- --------
Total liabilities and shareholders' equity.............................. $ 455,706 $ 463,724
-------------- --------
-------------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
REVENUES:
Base rents......................................................................... $ 12,744 $ 10,672
Percentage rents................................................................... 443 401
Tenant reimbursements.............................................................. 6,139 4,873
Income from investment partnerships................................................ 441 130
Interest and other................................................................. 1,364 1,198
--------- ---------
Total revenues................................................................. 21,131 17,274
EXPENSES:
Property operating................................................................. 4,619 3,770
Real estate taxes.................................................................. 1,473 1,234
Depreciation and amortization...................................................... 4,387 3,605
Corporate general and administrative............................................... 893 844
Interest........................................................................... 6,056 4,456
Other charges...................................................................... 646 223
--------- ---------
Total expenses................................................................. 18,074 14,132
--------- ---------
Income before minority interests................................................... 3,057 3,142
Loss allocated to minority interests............................................... 1,477 1,466
--------- ---------
Net income......................................................................... 4,534 4,608
Income allocated to preferred shareholders......................................... 5,236 5,236
--------- ---------
Net loss applicable to common shares............................................... $ (702) $ (628)
--------- ---------
--------- ---------
Net loss per common share outstanding.............................................. $ (0.24) $ (0.22)
--------- ---------
Weighted average shares outstanding................................................ 2,875 2,875
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 4,534 $ 4,608
Adjustments to reconcile net income to net cash provided by operating activities:
Loss allocated to minority interests........................................... (1,477) (1,466)
Depreciation and amortization.................................................. 4,387 3,605
Amortization of deferred financing costs and interest rate protection
contracts..................................................................... 1,112 1,068
Equity earnings in excess of cash distributions from joint ventures............ (282) (26)
Provision for uncollectible accounts receivable................................ 224 57
Changes in operating assets and liabilities:
Decrease in accounts receivable................................................ 1,074 206
(Increase) decrease in other assets............................................ (224) 20
Increase (decrease) in accounts payable and other liabilities.................. (260) 267
Increase in accrued interest................................................... 87 203
Increase (decrease) in due to affiliates, net.................................. 44 (809)
---------- ----------
Net cash provided by operating activities.................................... 9,219 7,733
---------- ----------
INVESTING ACTIVITIES:
Purchase of buildings and improvements........................................... (1,779) (1,263)
Increase in property under development........................................... (9,952) (18,956)
Deferred leasing commissions..................................................... (17) (15)
---------- ----------
Cash used in investing activities............................................ (11,748) (20,234)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from notes payable...................................................... 500 41,850
Principal repayments on notes payable............................................ (434) (22,396)
Deferred financing fees.......................................................... (1,679) (843)
Distributions and dividends paid................................................. (6,084) (6,084)
Distributions to minority interests.............................................. (2,112) (1,026)
---------- ----------
Net cash (used in) provided by financing activities.......................... (9,809) 11,501
---------- ----------
Decrease in cash and cash equivalents............................................ (12,338) (1,000)
Cash and cash equivalents at beginning of period................................. 14,927 2,959
---------- ----------
Cash and cash equivalents at end of period....................................... $ 2,589 $ 1,959
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
PRIME RETAIL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
consisting only of recurring accruals considered necessary for a fair
presentation have been included. Operating results for such interim periods are
not necessarily indicative of the results which may be expected for a full
fiscal year. For further information, refer to the consolidated financial
statements for the year ended December 31, 1995 and notes thereto included
elsewhere in this Prospectus.
Unless the context requires otherwise, all references to the Company herein
mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail,
Inc., including Prime Retail, L.P. (the "Operating Partnership"). The
consolidated financial statements include the accounts of the Company, the
Operating Partnership and the partnerships in which the Company has majority
interest or control. Profits and losses are allocated in accordance with the
terms of the agreement of limited partnership of the Operating Partnership.
Investments in partnerships in which the Company does not have operational
control or a majority interest are accounted for under the equity method of
accounting. Income (loss) applicable to minority interests and common shares as
presented in the consolidated statements of operations is allocated based on
income (loss) before minority interests after income allocated to preferred
shareholders.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant intercompany accounts and transactions have been
eliminated in consolidation. Certain financial statement amounts and related
footnote information have been reclassified to conform with the current
presentation. These reclassifications have not changed previously reported
results or shareholders' equity.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF", which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS No. 121 in
the first quarter of 1996 and the adoption had no effect on the consolidated
financial statements of the Company.
NOTE 3 -- BONDS AND NOTES PAYABLE
On January 30, 1996, the Company obtained from a commercial mortgage company
a commitment for a mortgage loan in an amount not to exceed $7,000 for an
eight-year term (the "Refinancing Loan"). The Refinancing Loan will bear a fixed
interest rate based on eight-year Treasury notes plus 2.60%, requires monthly
principal and interest payments based on a 16-year amortization schedule and
will be collateralized by property in Lombard, IL. The commitment for the
Refinancing Loan expires on August 1, 1996.
The Company has accepted a loan commitment (the "1996 Nomura Loan
Commitment") with Nomura Asset Capital Corporation ("Nomura") which provides
for, among other things, (i) a variable-rate seven-year cross-collateralized
first mortgage loan (the "First Mortgage Loan") in the principal amount of
$226.5 million and (ii) a variable-rate seven-year cross-collateralized second
mortgage loan (the "Mezzanine Mortgage Loan") in the principal amount of $33.5
million. The Company expects to close the First Mortgage
F-5
<PAGE>
PRIME RETAIL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BONDS AND NOTES PAYABLE (CONTINUED)
Loan and the Mezzanine Mortgage Loan in July 1996. The 1996 Nomura Loan
Commitment is subject to Nomura's customary real estate due diligence review of
the thirteen factory outlet centers comprising the collateral and the completion
of appropriate documentation. In connection with the 1996 Nomura Loan
Commitment, the Company will pay Nomura a commitment fee at closing in the
amount of $3.5 million. There can be no assurance that the Company will be
successful in consummating such refinancing.
The First Mortgage Loan will bear a variable rate of interest equal to the
London Interbank offered rate for thirty (30) day deposits in U.S. dollars
("30-day LIBOR") plus 1.24% (plus trustee and servicing fees, which are expected
to be 0.07% in the aggregate). The Mezzanine Mortgage Loan will bear a variable
rate of interest equal to 30-day LIBOR plus 3.25%. The First Mortgage Loan and
the Mezzanine Mortgage Loan are expected to be securitized by Nomura on or
before September 30, 1996 (the "Securitization Closing Date"). In the event the
Securitization Closing Date does not occur by September 30, 1996 or in the event
the Company elects to terminate the securitization and repay the loans because
the terms of the securitization are unacceptable to the Company, the interest
rate on the Mezzanine Mortgage Loan will increase to a variable rate per annum
equal to 30-day LIBOR plus 5.20%. Until the Securitization Closing Date, no
payments of principal will be required under the First Mortgage Loan and the
Mezzanine Mortgage Loan. After the Securitization Closing Date, the First
Mortgage Loan will require monthly payments of principal and interest based on a
thirty-year amortization of principal and the Mezzanine Mortgage Loan will
require monthly payments of principal and interest based on the full
amortization of principal within seven years. The First Mortgage Loan and the
Mezzanine Mortgage Loan will be cross-collateralized by senior and junior
mortgages, respectively, encumbering thirteen of the Company's existing factory
outlet centers. The proceeds from the closing of the First Mortgage Loan and the
Mezzanine Mortgage Loan will be used to repay outstanding borrowings under the
Agreement dated March 2, 1995 relating to a loan in the aggregate principal
amount of $160.0 million (the "Revolving Loan"), the Open-End Mortgage Agreement
Assignment of Rents and Fixture Filing dated June 30, 1994 relating to a loan in
the principal amount of $100.0 million (which may not be prepaid prior to July
1, 1996) (the "1994 Mortgage Loan"), the Interim Loan entered into on December
18, 1995 in the principal amount of $35.0 million (the "Interim Loan") and a
portion of the Company's $16.0 million fixed rate mortage loan. The remaining
proceeds will be used for the purchase of interest rate protection contracts,
the costs and expenses of the refinancing and for working capital purposes.
In connection with the commitment to provide the First Mortgage Loan and the
Mezzanine Mortgage Loan, the Company and Nomura have agreed that, subject to
certain conditions, the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the securitization of the First Mortgage Loan.
If the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the
Senior Certificates (as defined below), the appropriate party will make a
payment to the other based on the present value of such deviation applied
against the principal balance of the Senior Certificates. If the Securitization
Closing Date does not occur within six months of the closing of the First
Mortgage Loan and the Mezzanine Mortgage Loan, Nomura may demand payment of such
loans in full six months after delivery of such demand notice. It is anticipated
that the First Mortgage Loan will be securitized at investment grade levels
through the issuance of Real Estate Mortgage Investment Company ("REMIC")
certificates (the "Senior Certificates") and the Mezzanine Mortgage Loan will be
securitized through the issuance of REMIC certificates or another acceptable
securitization vehicle (the "Junior Certificates"). In addition, the 1996 Nomura
Loan Commitment requires that, prior to the securitization, the Company purchase
interest rate protection contracts with regard to the First Mortgage Loan and
the Mezzanine Mortgage Loan when and if 30-day LIBOR exceeds 6.50%. After
securitization, the Company will be required to purchase interest rate
protection contracts for the seven-year term of such loans and for the principal
amount of the Senior Certificates. It is estimated that the proceeds from the
sale of the Senior Certificates and the Junior Certificates and the proceeds
from the cash flow loan (described below) will approximate $260.0 million. In
the event that loan proceeds available from the Senior Certificates and the
Junior Certificates are less than $260.0 million, Nomura has agreed to provide,
subject to certain conditions (including the consent of the
F-6
<PAGE>
PRIME RETAIL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BONDS AND NOTES PAYABLE (CONTINUED)
applicable rating agencies), a loan based on the cash flow of the Property
Partnerships which own the thirteen factory outlet centers in the principal
amount of the difference between $260.0 million and such loan proceeds. In the
event that the net cash flow from the thirteen outlet centers is less than a
mutually agreed upon amount and the securitization results in less than $260.0
million in proceeds, the Company will be required to pay to Nomura such
difference at the closing of the securitization. The Company intends to purchase
the Junior Certificates with the proceeds of financing provided through a Nomura
repurchase agreement (the "Repo Financing"). The Repo Financing will require
monthly payments of interest only and will be for a term of two years and will
be recourse to the Operating Partnership. The Repo Financing will be subject to
daily mark-to-market and margin calls. Interest will be payable for 75% of the
market value of the Junior Certificates (which at date of inception shall be par
value) at the rate of 30-day LIBOR plus 1.95% and for the balance of the market
value of the Junior Certificates (which at date of inception shall be par value)
at the rate of 30-day LIBOR plus 7.0%. The weighted average annual interest rate
(including the estimated annual amortization of interest rate protection
contracts) on the $260.0 million of securitized loans is initially expected to
be approximately 7.66%.
The existing Revolving Loan with Nomura will not be terminated as a result
of the transactions contemplated by the 1996 Nomura Loan Commitment; however,
the collateral currently pledged thereunder will be released and pledged to
Nomura under the First Mortgage Loan and the Mezzanine Mortgage Loan. The
Revolving Loan will be available, subject to sufficient collateral being pledged
to Nomura, for acquisitions, expansions and new outlet centers.
Upon terms acceptable to the Company and the rating agencies involved in the
securitization, an amount between $25.0 million to $50.0 million in addition to
the $260.0 million of securitized loans may be raised by the securitization and,
if so, will be held in escrow by Nomura. These funds may be drawn upon by the
Company, subject to the satisfaction of certain objective standards acceptable
to the Company and such rating agencies, for the cost of construction of
expansions at the thirteen mortgaged outlet centers.
In connection with the execution of the 1996 Nomura Loan Commitment, the
Company expects to incur a non-recurring loss of approximately $10.1 million
that will be recorded during the three months ending June 30, 1996. This loss
results from the expected prepayment of the Revolving Loan, the 1994 Mortgage
Loan, the anticipated termination of previously obtained financing commitments
from Nomura for which the Company paid $3.3 million in nonrefundable financing
fees and the repayment in full of the Interim Loan. The loss includes the
estimated unamortized cost of certain interest rate protection contracts of $3.7
million as of July 31, 1996 that will be terminated upon repayment of the debt
underlying the contracts, debt prepayment penalties of $0.8 million and other
deferred financing costs of $4.5 million, less the estimated fair market value
of the interest rate protection contracts of approximately $2.2 million based on
their fair market value at May 30, 1996. Upon termination and sale of the
interest rate protection contracts, the Company will receive proceeds based on
the then fair market value of such contracts. The future fair market value of
interest rate protection contracts is susceptible to valuation fluctuations
based on market changes in interest rates and the maturity date of the
underlying contracts.
NOTE 4 -- LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes that losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Company.
The Company is a defendant in a lawsuit filed on June 14, 1995 in the U.S.
District Court for the Northern District of West Virginia whereby the plaintiffs
allege that the Company breached a confidentiality agreement entered into by the
Predecessor and the plaintiffs in connection with the proposed purchase of a
factory outlet center in Martinsburg, West Virginia. The outcome and the
ultimate liability of the Company, if any, of this lawsuit cannot currently be
predicted. Management believes, however, that it has acted properly and intends
to defend this lawsuit vigorously.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Prime Retail, Inc.
We have audited the accompanying consolidated balance sheets of Prime
Retail, Inc. (the "Company") as of December 31, 1995 and 1994 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 1995 and for the period from March 22, 1994 to
December 31, 1994. We have also audited the accompanying combined statements of
operations, predecessor owners' deficit and cash flows of Prime Retail
Properties (the "Predecessor") for the period from January 1, 1994 to March 21,
1994 and for the year ended December 31, 1993. These financial statements are
the responsibility of the Company's and Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prime Retail,
Inc. at December 31, 1995 and 1994, the consolidated results of the Company's
operations and its cash flows for the year ended December 31, 1995 and for the
period from March 22, 1994 to December 31, 1994 and the combined results of the
Predecessor's operations and its cash flows for the period from January 1, 1994
to March 21, 1994 and the year ended December 31, 1993 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Baltimore, Maryland
January 30, 1996
F-8
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED BALANCE SHEETS OF THE COMPANY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS:
Investment in rental property:
Land................................................................................... $ 35,370 $ 31,183
Buildings and improvements............................................................. 403,542 334,099
Property under development............................................................. 12,165 8,589
Furniture and equipment................................................................ 3,403 2,310
---------- ----------
454,480 376,181
Accumulated depreciation............................................................... (40,190) (26,668)
---------- ----------
414,290 349,513
Cash and cash equivalents................................................................ 14,927 2,959
Restricted cash.......................................................................... 2,230 2,445
Accounts receivable, net................................................................. 10,070 7,408
Deferred charges, net.................................................................... 18,136 19,550
Due from affiliates, net................................................................. 1,194 1,654
Investment in partnerships............................................................... 2,258 1,872
Other assets............................................................................. 619 529
---------- ----------
Total assets....................................................................... $ 463,724 $ 385,930
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Bonds payable............................................................................ $ 32,900 $ 32,900
Notes payable............................................................................ 273,054 181,125
Accrued interest......................................................................... 3,034 1,975
Real estate taxes payable................................................................ 3,142 1,417
Construction costs payable............................................................... 5,796 8,099
Accounts payable and other liabilities................................................... 9,858 7,720
---------- ----------
Total liabilities.................................................................. 327,784 233,236
---------- ----------
Minority interests....................................................................... 14,456 25,043
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
2,300,000 shares of 10.5% Series A Senior Cumulative Preferred Stock,
$.01 par value (liquidation preference of $57,500), issued and outstanding.......... 23 23
7,015,000 shares of 8.5% Series B Cumulative Participating Convertible Preferred
Stock, $.01 par value (liquidation preference of $175,375), issued and
outstanding......................................................................... 70 70
Shares of common stock, 75,000,000 shares authorized:
2,875,000 shares of common stock, $.01 par value, issued and outstanding.............. 29 29
Additional paid-in capital............................................................. 128,275 128,275
Distributions in excess of net income.................................................. (6,913) (746)
---------- ----------
Total shareholders' equity......................................................... 121,484 127,651
---------- ----------
Total liabilities and shareholders' equity......................................... $ 463,724 $ 385,930
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-9
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
AND COMBINED STATEMENTS OF OPERATIONS OF THE PREDECESSOR
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRIME RETAIL, INC. PRIME RETAIL PROPERTIES
-------------------------------- --------------------------------
PERIOD FROM
MARCH 22, 1994 PERIOD FROM
YEAR ENDED TO JANUARY 1, 1994 YEAR ENDED
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1995 1994 MARCH 21, 1994 1993
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Base rents................... $ 46,368 $ 28,657 $ 3,670 $ 14,298
Percentage rents............. 1,520 1,404 187 709
Tenant reimbursements........ 22,283 11,858 2,113 5,370
Income from investment
partnerships................ 1,729 453 336 821
Interest and other........... 5,498 2,997 24 602
------- ------- ------- -------
Total revenues........... 77,398 45,369 6,330 21,800
EXPENSES
Property operating........... 17,389 9,952 1,927 5,046
Real estate taxes............ 4,977 2,462 497 1,558
Depreciation and
amortization................ 15,438 9,803 2,173 7,632
Corporate general and
administrative.............. 3,878 2,710 -- --
Interest..................... 20,821 9,485 3,280 8,928
Property management fees..... -- -- 299 777
Other charges................ 2,089 1,503 562 1,732
------- ------- ------- -------
Total expenses........... 64,592 35,915 8,738 25,673
------- ------- ------- -------
Income (loss) before minority
interests................... 12,806 9,454 (2,408) (3,873)
Loss allocated to minority
interests................... 5,364 5,204 -- --
------- ------- ------- -------
Net income (loss)............ 18,170 14,658 $ (2,408) $ (3,873)
------- -------
------- -------
Income allocated to preferred
shareholders................ 20,944 16,290
------- -------
Net loss applicable to common
shares...................... $ (2,774) $ (1,632)
------- -------
------- -------
Net loss per common share
outstanding................. $ (0.96) $ (0.57)
------- -------
------- -------
Weighted average shares
outstanding................. 2,875 2,850
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-10
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND
COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRIME RETAIL, INC. PRIME RETAIL PROPERTIES
------------------------------------ --------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED MARCH 22, 1994 TO JANUARY 1, 1994 TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 MARCH 21, 1994 DECEMBER 31, 1993
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $ 18,170 $ 14,658 $ (2,408) $ (3,873)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Loss allocated to minority
interests........................... (5,364) (5,204) -- --
Depreciation and amortization........ 15,438 9,803 2,173 7,632
Amortization of deferred financing
costs and interest rate protection
contracts........................... 4,524 2,945 695 362
Equity earnings in excess of cash
distributions from joint ventures... (1,281) -- (336) (821)
Provision for uncollectible accounts
receivable.......................... 346 527 87 292
Gain on sale of land................. (106) -- -- --
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable.......................... (2,941) (3,669) 1,285 (2,473)
(Increase) decrease in other
assets.............................. 47 (60) (81) 7,374
Increase (decrease) in other
liabilities......................... 6,047 173 (2,310) 7,057
Increase (decrease) in accrued
interest............................ 1,059 (1,047) 718 1,329
(Increase) decrease in due to/from
affiliates, net..................... 460 (668) (1,696) (2,429)
-------- ----------------- ------- --------
Net cash provided by (used in)
operating activities................ 36,399 17,458 (1,873) 14,450
-------- ----------------- ------- --------
INVESTING ACTIVITIES
Purchase of land....................... (4,765) (13,614) -- (5,384)
Purchase of buildings and
improvements.......................... (70,716) (140,969) (278) (55,763)
(Increase) decrease in property under
development........................... (7,056) 658 (859) 8,709
Proceeds from sale of land............. 624 -- -- --
Cash from contributed net assets....... -- 4,177 -- --
Cash distributions in excess of equity
in earnings of joint ventures......... -- 2,761 -- --
Deferred leasing commissions........... (65) (2,448) (102) (1,772)
-------- ----------------- ------- --------
Net cash used in investing
activities.......................... (81,978) (149,435) (1,239) (54,210)
-------- ----------------- ------- --------
FINANCING ACTIVITIES
Net proceeds from offerings............ -- 253,823 -- --
Distributions to predecessor owners.... -- (12,245) -- --
Distributions in satisfaction of
mortgage indebtedness................. -- (77,782) -- --
Proceeds from notes payable............ 185,078 217,932 4,676 62,596
Principal repayments on notes
payable............................... (93,149) (211,130) (334) (20,564)
Deferred financing fees................ (4,822) (14,084) -- (955)
Distribution and dividends paid........ (24,337) (15,404) -- --
Distributions to minority interests.... (5,223) (7,078) -- --
Partners' capital contributions........ -- -- 461 162
Contributions from minority
interests............................. -- 904 -- --
Distributions to partners.............. -- -- (716) (1,332)
-------- ----------------- ------- --------
Net cash provided by financing
activities............................ 57,547 134,936 4,087 39,907
-------- ----------------- ------- --------
Increase in cash and cash
equivalents........................... 11,968 2,959 975 147
Cash and cash equivalents at beginning
of period............................. 2,959 -- 2,869 2,722
-------- ----------------- ------- --------
Cash and cash equivalents at end of
period................................ $ 14,927 $ 2,959 $ 3,844 $ 2,869
-------- ----------------- ------- --------
-------- ----------------- ------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-11
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE COMPANY AND
COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR (CONTINUED)
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The following assets and liabilities were contributed by certain minority
interest partners to the Company on March 22, 1994:
<TABLE>
<S> <C>
Rental property, net.............................................................. $ 205,983
Cash and cash equivalents......................................................... 4,177
Accounts receivable, net.......................................................... 4,266
Deferred charges, net............................................................. 7,348
Due from affiliates, net.......................................................... 986
Other assets...................................................................... 2,397
---------
Total assets.................................................................. 225,157
Bonds payable..................................................................... 32,900
Notes payable..................................................................... 174,323
Accrued interest.................................................................. 3,021
Real estate taxes payable......................................................... 734
Accounts payable and other liabilities............................................ 14,305
---------
Total liabilities............................................................. 225,283
Minority interests................................................................ 11,091
---------
Predecessor owners' deficit contributed....................................... $ (11,217)
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-12
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY OF THE COMPANY
AND COMBINED STATEMENTS OF PREDECESSOR OWNERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SERIES A SERIES B ADDITIONAL DISTRIBUTIONS PREDECESSOR
PREFERRED PREFERRED COMMON PAID-IN IN EXCESS OF OWNERS'
STOCK STOCK STOCK CAPITAL NET INCOME DEFICIT
------------- ------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $ (3,422)
Net loss.............................. (3,873)
Contributions......................... 1,912
Distributions......................... (1,332)
-----------
BALANCE, DECEMBER 31, 1993............ (6,715)
Net loss for the period from January
1, 1994 through March 21, 1994....... (2,408)
Contributions......................... 461
Distributions......................... (2,555)
-----------
Predecessor owners' deficit
contributed at March 22, 1994........ (11,217)
Reclassification adjustment........... $ (11,217) 11,217
Issuance of 2,300,000 shares of Series
A preferred stock, net of issuance
costs................................ $ 23 50,742 --
Issuance of 7,015,000 shares of Series
B preferred stock, net of issuance
costs................................ -- $ 70 154,762 --
Issuance of 2,875,000 shares of common
stock, net of issuance costs......... -- -- $ 29 48,197 --
Additional paid-in capital allocated
to minority interests................ -- -- -- (24,182) --
Distributions to predecessor owners... -- -- -- (90,027) --
Net income............................ -- -- -- -- $ 14,658 --
Common distributions declared ($0.623
per share)........................... -- -- -- -- (1,790) --
Preferred distributions and dividends
declared:
Series A ($1.706 per share)......... -- -- -- -- (3,924) --
Series B ($1.381 per share)......... -- -- -- -- (9,690) --
--- --- --- ----------- ------------- -----------
BALANCE, DECEMBER 31, 1994............ 23 70 29 128,275 (746) --
Net income............................ -- -- -- -- 18,170 --
Common distributions declared ($1.18
per share)........................... -- -- -- -- (3,393) --
Preferred distributions and dividends
declared:
Series A ($2.625 per share)......... -- -- -- -- (6,037) --
Series B ($2.125 per share)......... -- -- -- -- (14,907) --
--- --- --- ----------- ------------- -----------
BALANCE, DECEMBER 31, 1995............ $ 23 $ 70 $ 29 $ 128,275 $ (6,913) $ --
--- --- --- ----------- ------------- -----------
--- --- --- ----------- ------------- -----------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
---------------
<S> <C>
BALANCE, JANUARY 1, 1993 $ (3,422)
Net loss.............................. (3,873)
Contributions......................... 1,912
Distributions......................... (1,332)
---------------
BALANCE, DECEMBER 31, 1993............ (6,715)
Net loss for the period from January
1, 1994 through March 21, 1994....... (2,408)
Contributions......................... 461
Distributions......................... (2,555)
---------------
Predecessor owners' deficit
contributed at March 22, 1994........ (11,217)
Reclassification adjustment........... --
Issuance of 2,300,000 shares of Series
A preferred stock, net of issuance
costs................................ 50,765
Issuance of 7,015,000 shares of Series
B preferred stock, net of issuance
costs................................ 154,832
Issuance of 2,875,000 shares of common
stock, net of issuance costs......... 48,226
Additional paid-in capital allocated
to minority interests................ (24,182)
Distributions to predecessor owners... (90,027)
Net income............................ 14,658
Common distributions declared ($0.623
per share)........................... (1,790)
Preferred distributions and dividends
declared:
Series A ($1.706 per share)......... (3,924)
Series B ($1.381 per share)......... (9,690)
---------------
BALANCE, DECEMBER 31, 1994............ 127,651
Net income............................ 18,170
Common distributions declared ($1.18
per share)........................... (3,393)
Preferred distributions and dividends
declared:
Series A ($2.625 per share)......... (6,037)
Series B ($2.125 per share)......... (14,907)
---------------
BALANCE, DECEMBER 31, 1995............ $ 121,484
---------------
---------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND PUBLIC STOCK OFFERING
Prime Retail, Inc. (the "Company") was organized as a Maryland corporation
on July 16, 1993. The Company is a self-administered, self-managed real estate
investment trust engaged in ownership, development, construction, acquisition,
leasing, marketing and management of factory outlet centers. The Company's
factory outlet center portfolio, including four factory outlet centers owned
through joint venture partnerships, consists of 17 factory outlet centers in 14
states, which total approximately 4,331,000 square feet of gross leasable area
at December 31, 1995.
The Company commenced operations on March 22, 1994, upon completion of its
initial public offerings (the "Offerings") of 2,300,000 shares of Series A
Senior Cumulative Preferred Stock ("Senior Preferred Stock") at $25 per share,
7,015,000 shares of Series B Cumulative Participating Convertible Preferred
Stock ("Convertible Preferred Stock") at $25 per share, and 2,500,000 shares of
Common Stock at $19 per share. On April 11, 1994, the underwriter of the
Offerings exercised its overallotment option to purchase 375,000 shares of the
Company's Common Stock at $19 per share. Net of underwriting discounts and
expenses, the Company received approximately $253,823 in proceeds from the
Offerings, including proceeds from the overallotment option. As described below,
such proceeds were contributed by the Company to Prime Retail, L.P. (the
"Operating Partnership") in exchange for certain partnership interests therein.
Upon consummation of the Offerings and in exchange for the proceeds thereon,
the Company acquired 2,300,000 Senior Preferred Units of the Operating
Partnership (the "Senior Preferred Units"), 7,015,000 Convertible Preferred
Units of the Operating Partnership (the "Convertible Preferred Units" and,
together with the Senior Preferred Units, the "Preferred Units") and 2,875,000
Common Units of partnership interest in the Operating Partnership (the "Common
Units"). Each Preferred Unit entitles the Company to receive distributions from
the Operating Partnership in an amount equal to the dividend declared or paid
with respect to a share of Senior Preferred Stock and Convertible Preferred
Stock, respectively, prior to the payment by the Operating Partnership of
distributions with respect to the Common Units. Convertible Preferred Units will
be automatically converted into Common Units to the extent of any conversion of
Convertible Preferred Stock into Common Stock. The Preferred Units will be
redeemed by the Operating Partnership as and to the extent of any redemption of
Senior Preferred Stock or Convertible Preferred Stock.
Upon consummation of the Offerings, The Prime Group, Inc. and certain of its
affiliates (collectively "PGI") contributed to the Operating Partnership certain
assets and interests in properties and joint ventures in exchange for 7,794,495
Common Units and cash of approximately $10,212. The Operating Partnership paid
approximately $157,384 in satisfaction of certain mortgage indebtedness and
other indebtedness of PGI that was collateralized in part by certain properties
of Prime Retail Properties and PGI's interests therein.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Certain other parties contributed their interests in Prime Retail Properties to
the Operating Partnership in exchange for 1,426,305 Common Units and cash of
$1,686. A summary of the holders of the Senior Preferred Units, Convertible
Preferred Units and Common Units at December 31, 1995 follows:
<TABLE>
<CAPTION>
NUMBER OF UNITS
------------------------------------
HOLDER SERIES A SERIES B COMMON
- ------------------------------------------------------ ---------- ---------- ------------
<S> <C> <C> <C>
Prime Retail, Inc..................................... 2,300,000 7,015,000 2,875,000
PGI and management (1)................................ -- -- 9,130,472
Other party........................................... -- -- 90,328
---------- ---------- ------------
2,300,000 7,015,000 12,095,800
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
- ------------------------
NOTE:
(1) Includes 782,180 units beneficially owned by management and 4,399,550 units
owned by certain executive officers based on their ownership interests in
PGI.
As of December 31, 1995, the Company has a 23.8% general partnership
interest in the Operating Partnership with full and complete control over the
management of the Operating Partnership as the sole general partner which cannot
be removed by the limited partners.
On November 1, 1994, the Operating Partnership became the 1% sole general
partner of Prime Retail Services Limited Partnership (the "Services
Partnership"). The Operating Partnership owns 100% of the non-voting preferred
stock of Prime Retail Services, Inc. (the "Services Corporation") which, in
turn, is the 99% limited partner of the Services Partnership. Certain members of
management own 100% of the voting common stock of the Services Corporation and
no cash distributions were made during the years ended December 31, 1995 and
1994. The Services Partnership was formed primarily to operate business lines of
the Company that are not directly associated with the collection of rents. The
Services Corporation is subject to federal, state and local taxes.
Unless the context otherwise requires, all references to the Company herein
mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail,
Inc., including the Operating Partnership and the Services Partnership. The
combined financial statements of Prime Retail Properties (the "Predecessor")
include the accounts of eleven property partnerships, which were considered to
be entities under common ownership and management, and the ownership interest in
two previously non-controlled property partnerships, which were accounted for on
the equity method of accounting.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
The Predecessor, the New Partnerships (formed simultaneously with, or
subsequent to, the acquisition of properties and partnership interests in
connection with the Offerings) and Joint Venture Partnerships (collectively
referred to as the "Property Partnerships") represent the interests of the
Company. The Property Partnerships at December 31, 1995 were as follows:
THE PREDECESSOR
- - Gainesville Factory Shops Limited Partnership
- - Gulf Coast Factory Shops Limited Partnership
- - Market Street, Ltd.
- - Melrose Place, Ltd.
- - Prime Northgate Plaza Limited Partnership
- - Prime Warehouse Row Limited Partnership
- - San Marcos Factory Stores, Ltd.
- - Triangle Factory Stores Limited Partnership
- - Warehouse Row, Ltd.
- - Warehouse Row II Limited Partnership
- - Weisgarber Partners, Ltd.
NEW PARTNERSHIPS
- - Arizona Factory Shops Limited Partnership
- - Buckeye Factory Shops Limited Partnership
- - Carolina Factory Shops Limited Partnership
- - Castle Rock Factory Shops Partnership
- - Coral Isle Factory Shops Limited Partnership
- - Florida Keys Factory Shops Limited Partnership
- - Gulfport Factory Shops Limited Partnership
- - Huntley Factory Shops Limited Partnership
- - Indianapolis Factory Shops Limited Partnership
- - Magnolia Bluff Factory Shops Limited Partnership
- - Nebraska Crossing Factory Shops Limited Partnership
- - Nebraska Crossing Factory Shops Limited Partnership II
- - Ohio Factory Shops Partnership
- - Ohio Factory Shops Limited Partnership II
- - Puerto Rico Factory Shops Limited Partnership
- - Sun Coast Factory Shops Limited Partnership
JOINT VENTURE PARTNERSHIPS
- - Arizona Factory Shops Partnership
(50% ownership interest)
- - Grove City Factory Shops Partnership
(50% ownership interest)
- - Oxnard Factory Outlet Partners
(30% ownership interest)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company,
the Operating Partnership and the partnerships in which the Company has majority
interest or control. Profits and losses are allocated in accordance with the
terms of the agreement of limited partnership of the Operating Partnership. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in partnerships in which the Company does not have operational
control or a majority interest are accounted for on the equity method of
accounting. Income (loss) applicable to minority interests and common shares as
presented in the consolidated statements of operations is allocated based on
income (loss) before minority interests after income allocated to preferred
shareholders.
Significant intercompany accounts and transactions have been eliminated in
consolidation and combination.
RISKS AND UNCERTAINTIES
The Company's results of operations are significantly dependent on the
overall health of the retail industry. The Company's tenant base is comprised
almost exclusively of merchants in the retail industry. The retail industry is
subject to external factors such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences. A decline in the retail industry
could reduce merchant sales, which could adversely affect the operating results
of the Company. A number of the merchants have occupied space in more than one
of the Company's factory outlet centers; however, no single merchant accounts
for more than 10% of the Company's revenues.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RENTAL PROPERTY
Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets which are as follows:
<TABLE>
<S> <C>
Land improvements 20 years
Buildings and Principally 40
improvements years
Tenant improvements Term of related
lease
Furniture and equipment 5 years
</TABLE>
Rental property is carried at the lower of depreciated cost or net
realizable value. Development costs, which include fees and costs incurred in
developing new properties, are capitalized as incurred. Upon completion of
construction, development costs are amortized over the useful lives of the
respective properties on a straight-line basis.
Expenditures for ordinary maintenance and repairs are expensed to operations
as incurred. Significant renovations and improvements which improve and/or
extend the useful life of assets are capitalized and depreciated over their
estimated useful lives.
The Company evaluates its rental properties periodically to assess whether
any impairment indications are present, including recurring operating losses and
significant adverse changes in the business climate that affect the recovery of
recorded asset value. If any rental property is considered impaired, a loss is
provided to reduce the carrying value of the asset to its estimated net
realizable value. No impairment losses have been recorded in any of the periods
presented.
Effective April 1, 1994, the Company changed the estimated useful lives used
to compute depreciation for certain buildings and improvements from 5 to 10
years to useful lives ranging from 10 to 40 years. This change was made to
better reflect the estimated periods during which such assets will remain in
service. The change had the effect of reducing depreciation expense and
increasing net income by $657 for the year ended
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1995 by $2,040 for the period from March 22, 1994 to December 31,
1994. The change had the effect of reducing the net loss per common share by
$0.05 and $0.17 for the year ended December 31, 1995 and for the period from
March 22, 1994 to December 31, 1994, respectively.
CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Management regularly reviews accounts receivable and determines an
appropriate range for the allowance for doubtful accounts based upon the impact
of economic conditions on the merchants' ability to pay, past collection
experience and such other factors which, in management's judgment, deserve
current recognition. In turn, a provision is charged against earnings in order
to maintain the allowance level within this range. The allowance for doubtful
accounts at December 31, 1995 and 1994 was $819 and $1,071, respectively.
Accounts receivable due after one year primarily representing straight-line
rents were $4,274 and $3,121 at December 31, 1995 and 1994, respectively.
DEFERRED CHARGES
Deferred charges consist of leasing commissions and financing costs.
Deferred leasing commissions incurred to originate and renew operating leases
are amortized on a straight-line basis over the term of the related lease. Fees
and costs incurred to obtain financing are deferred and are being amortized as a
component of interest expense over the terms of the respective loans on a basis
that approximates the interest method.
REVENUE RECOGNITION
Leases with tenants are accounted for as operating leases. Minimum rental
income is recognized on a straight-line basis over the term of the lease and
unpaid rents are included in accounts receivable in the accompanying balance
sheet. Certain lease agreements contain provisions which provide for rents based
on a percentage of sales or based on a percentage of sales volume above a
specified threshold. In addition, the lease agreements generally provide for the
reimbursement of real estate taxes, insurance, advertising and certain common
area maintenance costs. These additional rents and tenant reimbursements are
accounted for on the accrual basis.
INTEREST RATE PROTECTION CONTRACTS
The Company uses interest rate protection contracts, including interest rate
caps and corridors, to manage interest rate risk associated with floating rate
debt. These contracts generally involve limiting the Company's interest costs
with an upper limit or specified range on the underlying interest rate index.
The costs of such contracts are included in deferred charges and are being
amortized on a straight-line basis as a component of interest expense over the
life of the contracts. Amounts earned from interest rate protection contracts
are recorded as a reduction of interest expense. The Company is exposed to
credit losses in the event of counterparty nonperformance, but does not
anticipate any such losses based on the creditworthiness of the counterparties.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to directors,
executive officers and other key employees with an option price equal to the
fair value of the shares at the date of grant. The Company accounts for stock
option grants in accordance with Accounting Principles Board Opinion ("APB") No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and, accordingly, recognizes no
compensation expense for the stock option grants.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", which provides an alternative to APB No. 25,
"Accounting for Stock Issued to Employees", in accounting for stock-based
compensation issued to employees. The Company will continue to account for stock
option grants in accordance with APB No. 25.
INCOME TAXES
The Company has elected to be taxed as a real estate investment trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. As a REIT, the Company generally will not be subject to federal income
tax at the corporate level on income it distributes to its shareholders so long
as it distributes at least 95% of its taxable income (excluding any net capital
gain) each year. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. Even
if the Company qualifies as a REIT, the Company may be subject to certain state
and local taxes on its income and property. The Company accrued $90 and $128 for
state and local taxes for the year ended December 31, 1995 and for the period
from March 22, 1994 to December 31, 1994, respectively. The Company paid $80 of
state and local income taxes during the year ended December 31, 1995. The
Company did not pay any state and local income taxes during the period from
March 22, 1994 to December 31, 1994.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
in the first quarter of 1996 and, based on current circumstances, management
does not believe the effect of adoption will be material to the consolidated
financial statements of the Company.
NOTE 3 -- RESTRICTED CASH
At December 31, 1995 and 1994, the Company had placed in escrow
approximately $2,230 and $2,445, respectively, to be used to complete certain
development projects, to fund real estate taxes and debt service and certain
operating costs under a mortgage loan agreement.
NOTE 4 -- DEFERRED CHARGES
Deferred charges were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Leasing commissions..................................................... $ 9,971 $ 10,225
Financing costs......................................................... 19,472 15,027
--------- ---------
29,443 25,252
Accumulated amortization................................................ (11,307) (5,702)
--------- ---------
$ 18,136 $ 19,550
--------- ---------
--------- ---------
</TABLE>
During the periods from March 22, 1994 to December 31, 1994 and January 1,
1994 to March 21, 1994, deferred financing costs of $618 and $695, respectively,
were written off as a result of debt refinancings. These amounts are included in
interest expense in the Consolidated Statements of Operations.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 5 -- INVESTMENT IN PARTNERSHIPS
The Company holds interests in certain real estate ventures that are
accounted for using the equity method of accounting. The Company manages these
ventures and earns a property management fee based on the ventures' revenues.
The condensed combined balance sheets of these ventures and their condensed
statements of operations are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Total assets, primarily rental property................................. $ 90,252 $ 53,224
--------- ---------
--------- ---------
Liabilities, primarily long-term debt................................... $ 91,126 $ 53,920
Partners' deficit....................................................... (874) (696)
--------- ---------
Total liabilities and partners' deficit................................. $ 90,252 $ 53,224
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 1, 1994
YEAR ENDED MARCH 22, 1994 TO TO YEAR ENDED
DECEMBER 31,1995 DECEMBER 31,1994 MARCH 21, 1994 DECEMBER 31, 1993
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues............................. $ 12,671 $ 3,456 $ 3,591 $ 7,724
Operating expense.................... 4,504 1,308 1,233 2,343
Interest expense..................... 3,923 850 584 1,413
Depreciation and amortization........ 2,298 637 934 1,916
------- ------ ------ ------
Net income........................... $ 1,946 $ 661 $ 840 $ 2,052
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
As of December 31, 1995, the Company guaranteed long-term debt of joint
venture partnerships of $38,596.
During the year ended December 31, 1995 and the period from March 22, 1994
through December 31, 1994, the Company collected preferential distributions from
a joint venture partnership in the amount of $162 and $2,863, respectively.
These distributions exceeded the Company's initial capital contribution and its
allocation of net earnings of the partnership. Under the terms of the
partnership agreement, the Company is required to restore its capital account
upon liquidation of the partnership or sale of its partnership interest to an
amount equal to the lesser of the amount of the deficit or the aggregate amount
of the preferential distributions. At December 31, 1995 and 1994, $856 and
$2,025, respectively, is included in accounts payable and other liabilities
representing the balance of preferential distributions collected in excess of
the initial capital contribution and allocation of net earnings.
NOTE 6 -- RELATED PARTY TRANSACTIONS
At December 31, 1995, the net amount due from affiliates consisted of $890
due primarily from joint venture partnerships relating to reimbursement of costs
paid by the Company on behalf of the joint venture partnerships and $304 of fees
due from joint venture partnerships in connection with the development of one
new factory outlet center and the expansion of an existing factory outlet
center. At December 31, 1994, the net amount due from affiliates consisted of
$806 due from PGI for costs to be reimbursed relating to certain land
improvements at one of the Company's factory outlet centers and $848 due from
joint venture partnerships relating to costs to be reimbursed for the
development of future phases of certain factory outlet centers.
Prior to the formation of the Company, the Predecessor paid PGI fees for
certain development, construction management, administrative, leasing and
management services.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 6 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Summary information regarding fees paid to PGI by the Predecessor were as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1994 TO YEAR ENDED
MARCH 21, 1994 DECEMBER 31, 1993
------------------- -----------------
<S> <C> <C>
Development fees (A).................................... $ 26 $ 579
Construction management fees(A)......................... 12 416
Administrative/support fees............................. 17 51
Leasing commissions(B).................................. 76 1,058
Other leasing costs(A).................................. 27 142
Property management fees................................ 299 777
Other................................................... -- 45
----- ------
$ 457 $ 3,068
----- ------
----- ------
</TABLE>
- ------------------------
(A) Amounts paid were capitalized to rental property
(B) Amounts paid were capitalized to deferred charges
During 1993 and through March 21, 1994, the Predecessor reimbursed PGI for
legal, accounting and other miscellaneous costs. For the period from January 1,
1994 to March 21, 1994 and for the year ended December 31, 1993, such amounts
were $95 and $319, respectively.
NOTE 7 -- BONDS AND NOTES PAYABLE
Bonds payable consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Variable rate tax-exempt revenue bonds (the "Bonds"), rate determined by remarketing agents,
3.80% to 5.30% at December 31, 1995, interest-only payments, due 2012 to 2014,
collateralized by properties in Chattanooga, TN and Knoxville, TN.......................... $ 28,250 $ 28,250
Urban Development Action Grant Loans, 3% through August 31, 1997 and 6% thereafter,
interest-only payments, due 2016 to 2019, collateralized by property in Chattanooga, TN.... 4,650 4,650
--------- ---------
$ 32,900 $ 32,900
--------- ---------
--------- ---------
</TABLE>
Under the terms of the loan agreements relating to the Bonds, the issuing
partnerships are required to make interest-only payments calculated using a
variable rate determined by the remarketing agents of the Bonds. The interest
rates ranged from 2.65% to 5.30% in 1995, 1.65% to 5.9% in 1994 and 1.5% to 3.4%
in 1993. Under certain conditions, the interest rate on the Bonds may be
converted to a fixed rate at the request of the partnership. A bondholder may
tender bonds during the variable interest rate period and receive principal,
plus accrued interest through the tender date. Upon tender, the remarketing
agents are required to immediately remarket the Bonds. In the event the
remarketing agents fail to remarket any bonds, the remarketing agents may draw
on certain liquidity facilities as described below. The remarketing agents
receive fees varying from 0.1% to 0.125% per annum on the outstanding bond
balance, payable quarterly in arrears.
At December 31, 1995, the Bonds are collateralized by letters of credit (the
"Letters of Credit") issued by a group of financial institutions pursuant to a
master letter of credit agreement. A letter of credit fee of 0.925% per annum of
the stated amount of the Letters of Credit is payable quarterly in advance to
such financial institutions. The Letters of Credit are collateralized by a
reimbursement agreement under the
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 7 -- BONDS AND NOTES PAYABLE (CONTINUED)
master letter of credit agreement (the "Reimbursement Agreement") which
obligates an insurance company to reimburse the financial institutions for any
funds drawn on the Letters of Credit. In addition, in March 1994, the issuing
partnerships, the Operating Partnership and an insurance company entered into
standby bond purchase and indemnity agreements (the "Standby Agreements") in
order to address the scheduled expirations of various credit enhancements,
including the Letters of Credit, through March 21, 1999.
Pursuant to the Standby Agreements, the insurance company agreed that in the
event that any of the issuing partnerships are unable to arrange replacement
credit enhancement facilities as necessary, the insurance company will purchase
the applicable Bonds and hold the same until March 21, 1999, at which time the
issuing partnership and the Operating Partnership will purchase the Bonds
pursuant to the terms of the related Standby Agreement.
The Letters of Credit are scheduled to expire on December 31, 1996. The
total commitments outstanding under the Letters of Credit, the Reimbursement
Agreement and the Standby Agreements as of December 31, 1995, were $28,909. The
due date of the Bonds accelerates upon the expiration of the Letters of Credit
unless the Letters of Credit are extended or replaced.
Notes payable consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Revolving line of credit, LIBOR plus 2.25%, 8.19% at December 31, 1995, monthly
interest-only payments, due December 31, 1996, collateralized by seven properties located
throughout the United States............................................................. $ 145,478
Mortgage, LIBOR plus 2.235%, 8.21% at December 31, 1995 and 8.235% at December 31, 1994,
monthly installments of $694 including interest, due July 1, 2000, collateralized by six
properties located throughout the United States.......................................... 97,732 $ 99,355
Mortgage, 8.00% at December 31, 1995 and 5.25% at December 31, 1994, interest-only
payments, due July 31, 1996, collateralized by property in Lombard, IL................... 16,000 16,000
Second mortgage, LIBOR plus 2.25%, 8.19% at December 31, 1995, interest-only payments, due
July 31, 1996, collateralized by properties in Castle Rock, CO and Huntley, IL........... 10,000 --
Mortgage, 7.50%, monthly installments of $29 including interest, due June 22, 2000,
collateralized by property in Knoxville, TN.............................................. 3,844 3,870
Mortgage, LIBOR plus 2.25%, 8.38% at December 31, 1994, interest only payments, due April
1, 1995, collateralized by property in Gainesville, TX................................... -- 15,000
Revolving line of credit, LIBOR plus 2.25%, weighted average rate of 8.29% at December 31,
1994, interest-only payments, due September 22, 1995, collateralized by property in
Castle Rock, CO.......................................................................... -- 26,900
Construction line of credit, LIBOR plus 2.50%, 8.63% at December 31, 1994, interest-only
payments, due September 30, 1995, collateralized by property in Huntley, IL.............. -- 20,000
Unsecured line of credit, $10,000 available at December 31, 1995, LIBOR plus 2.50%,
interest-only payments, due July 11, 1996................................................ -- --
---------- ----------
$ 273,054 $ 181,125
---------- ----------
---------- ----------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 7 -- BONDS AND NOTES PAYABLE (CONTINUED)
At December 31, 1995, unused commitments were $10,000. Interest costs are
summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED MARCH 22, 1994 TO JANUARY 1, 1994 YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 TO MARCH 21, 1994 DECEMBER 31, 1993
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest incurred.................... $ 19,354 $ 7,728 $ 2,585 $ 9,277
Interest capitalized................. (2,336) (964) -- (711)
Interest earned on interest rate
protection contracts................ (721) (224) -- --
Amortization of deferred financing
costs and interest rate protection
contracts........................... 4,524 2,945 695 362
------- ------ ------ ------
Interest expense..................... $ 20,821 $ 9,485 $ 3,280 $ 8,928
------- ------ ------ ------
------- ------ ------ ------
Interest paid........................ $ 18,295 $ 8,803 $ 1,868 $ 5,131
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
The scheduled maturities of bonds and notes payable at December 31, 1995
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1996.............................................................................. $ 173,271
1997.............................................................................. 1,961
1998.............................................................................. 2,187
1999.............................................................................. 2,340
2000.............................................................................. 90,244
Thereafter........................................................................ 35,951
----------
$ 305,954
----------
----------
</TABLE>
The aggregate carrying amount of bonds and notes payable at December 31,
1995 approximated their fair value. At December 31, 1995, the aggregate carrying
amount of rental property collateralizing bonds and notes payable was $396,473.
At December 31, 1995, the Company held interest rate protection contracts on
$28,250 of floating rate tax-exempt indebtedness and $97,732 of other floating
rate indebtedness. These contracts expire in 1999 and 2000, respectively. In
addition, the Company purchased additional interest rate protection contracts on
$43,900 of the $97,732 floating rate indebtedness to further reduce the
Company's exposure to increases in interest rates. These contracts have a
weighted average maturity of approximately 3.9 years.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 7 -- BONDS AND NOTES PAYABLE (CONTINUED)
The following table summarizes the material terms of the interest rate
protection contracts held for purposes other than trading and related borrowings
at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
BORROWINGS INTEREST RATE PROTECTION CONTRACTS
OUTSTANDING ----------------------------------------------------------------------------
AT DECEMBER NOTIONAL
31, 1995 AMOUNT DATE
(IN MILLIONS) (IN MILLIONS) PURCHASED TERM INDEX MAXIMUM INDEX RATE
- ------------- ------------- ----------- --------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 97.7 $ 97.7 6/30/94 6 years LIBOR Years 1-5 7.0%
Year 6 8.0%
28.3 28.3 3/21/94 5 years Kenny Year 1 3.0%
Index Year 2 3.5%
Year 3 4.0%
Year 4 4.5%
Year 5 5.0%
------ ------
$ 126.0 $ 126.0
------ ------
------ ------
<CAPTION>
ADDITIONAL INTEREST RATE PROTECTION ON $97.7 MILLION FLOATING RATE INDEBTEDNESS
-------------------------------------------------------------------------------------------------
MAXIMUM SPREAD
NOTIONAL BETWEEN
AMOUNT DATE MAXIMUM INDEX
(IN MILLIONS) PURCHASED TERM INDEX MAXIMUM INDEX RATE RATE AND INDEX
------------- ----------- --------- --------- --------------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 22.0 7/1/94 4 years LIBOR Year 1 5.0% 2.0%
Year 2 5.5% 1.5%
Year 3 6.0% 1.0%
Year 4 6.5% 0.5%
21.9 3/31/94, 5 years LIBOR Year 1 3.75% 3.25%
Amended Year 2 4.25% 2.75%
7/1/94 Year 3 4.75% 2.25%
Year 4 5.25% 1.75%
Year 5 5.75% 1.25%
------
$ 43.9
------
------
</TABLE>
The net carrying amount of interest rate protection contracts at December
31, 1995 was $5,064. The estimated fair value of interest rate protection
contracts based on quoted market rates at December 31, 1995 was $1,612.
On March 2, 1995, the Company closed on a $160,000 Revolving Loan (the
"Revolving Loan") with a financial institution. At December 31, 1995, the
Revolving Loan had an outstanding principal balance of $145,478. The Revolving
Loan is guaranteed by the Operating Partnership and seven property partnerships,
and is cross-collateralized by first mortgages on seven factory outlet centers
and certain related assets. The Revolving Loan prohibits additional
collateralized indebtedness on the properties and requires compliance with
certain financial loan covenants related to earnings, debt service coverage
ratios, payment of dividends, market capitalization and certain non-monetary
covenants such as changes in control and the taxation of the Company. The amount
available to be drawn by the Company under the Revolving Loan at any time during
the term of the facility is calculated based upon the net cash flow of the
collateral, as defined. The collateral pool of the Revolving Loan can be
expanded by adding properties including properties under development, subject to
certain limitations such as the level of executed leases and the amount of
projected net cash flow.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 7 -- BONDS AND NOTES PAYABLE (CONTINUED)
On December 18, 1995, the Company obtained from a financial institution a
commitment for a ten-year $233,000 first mortgage loan (the "First Mortgage
Loan"). The First Mortgage Loan will bear a fixed rate of interest at a spread
over 10-year Treasury notes, depending on the level of proceeds drawn on the
facility, and will require monthly principal and interest payments pursuant to a
25-year amortization schedule. Management can elect to fix the interest rate on
the loan facility at any time prior to the expected loan closing in July, 1996.
The First Mortgage Loan will be cross-collateralized by mortgages encumbering
nine existing factory outlet centers. Approximately $91,000 of the net proceeds
from the First Mortgage Loan will be used to pay down the Revolving Loan. In
addition, approximately $97,000 will be used to repay the six-year variable-rate
loan facility closed in June, 1994 that had an outstanding principal balance of
$97,732 at December 31, 1995.
On December 18, 1995, the Company also obtained from a financial institution
a $35,000 interim loan (the "Interim Loan") collateralized by second mortgages
on two existing factory outlet centers. The principal balance outstanding at
December 31, 1995 was $10,000. The Interim Loan will be repaid from proceeds of
the First Mortgage Loan. In addition, on December 18, 1995, the Company obtained
a commitment for a five-year $22,500 term loan (the "Term Loan") which is
expected to close simultaneously with the First Mortgage Loan. The Term Loan
will bear interest at LIBOR plus 5.00% and requires interest-only payments
during the first twelve months and then will be fully amortizing over the
balance of the term. The Term Loan will be collateralized by a pledge of the
excess cash flow from the nine existing factory outlet centers collateralizing
the First Mortgage Loan.
Upon closing of the First Mortgage Loan and the Term Loan, the Company will
incur a loss of approximately $6,550, including $5,728 relating to unamortized
financing and interest rate protection costs. Management intends to redesignate
a portion of the interest rate protection contracts in July 1996 to hedge other
long-term variable-rate indebtedness. The estimated loss of approximately $6,550
includes the estimated unamortized cost of the interest rate protection
contracts as of July 31, 1996, including debt prepayment penalties and other
deferred financing costs, less the fair value of the interest rate protection
contracts based on their fair value at December 31, 1995. The future fair value
of interest rate protection contracts is susceptible to valuation fluctuations
based on market changes in interest rates and the maturity date of the
underlying contracts. In the event the First Mortgage Loan and Term Loan do not
close prior to July 31, 1996, the Company will incur a charge to earnings
relating to non-refundable financing fees. As of December 31, 1995,
non-refundable financing fees paid to the financial institution were $1,973. In
addition, the Company is required to pay $1,277 of additional non-refundable
financing fees prior to the First Mortgage Loan closing date.
On January 30, 1996, the Company obtained from a commercial mortgage company
a commitment for a mortgage loan in an amount not to exceed $7,000 for an
eight-year term (the "Refinancing Loan"). The Refinancing Loan will bear a fixed
interest rate based on eight-year Treasury notes plus 2.60%, require monthly
principal and interest payments based on a 16-year amortization schedule and
will be collateralized by property in Lombard, IL. The commitment for the
Refinancing Loan expires on August 1, 1996.
NOTE 8 -- MINORITY INTERESTS
In conjunction with the formation of the Company and the Operating
Partnership, the predecessor owners contributed interests in certain properties
to the Operating Partnership and, in exchange, received limited partnership
interests in the Operating Partnership. In accordance with its partnership
agreement, the Operating Partnership will pay a preferential distribution of
$0.295 in each quarter for each Common Unit held by the Company (the total of
such units is equal to the number of outstanding common shares of the Company)
before any distribution is paid for the Common Units held by the limited
partners. After payment of the preferential distribution to the Company, up to
$0.295 will be distributed for each Common Unit held by the limited partners.
Any further amounts distributed in such quarter will be distributed ratably
among all
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 8 -- MINORITY INTERESTS (CONTINUED)
Common Units. The preferential distribution for Common Units held by the Company
will terminate after the Operating Partnership has paid quarterly distributions
of at least $0.295 on all Common Units (12,095,800 as of December 31, 1995)
during four successive quarters without distributing to Convertible Preferred
Units and Common Units more than 90% of Funds from Operations ("FFO") after
payment of distributions on the Senior Preferred Units in any such quarter. Once
the preferential distribution is terminated, distributions with respect to the
Common Units held by the Company and the limited partners will be pro rata to
the holders thereof. Accordingly, FFO must equal at least $9,615 (or $0.362 per
common share equivalent-primary) for four successive quarters to terminate the
preferential distribution to the Company. For purposes of terminating the
preferential distribution, FFO means net income (loss) (computed in accordance
with generally accepted accounting principles "GAAP"), excluding gains or losses
from debt restructuring and sales of real property, plus depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. In addition, PGI, certain members of executive management and other
parties have agreed not to exchange their Common Units for common shares of the
Company (subject to certain conditions as defined in the Operating Partnership's
partnership agreement) for a period of two to three years after the completion
of the Offerings.
At December 31, 1995 and 1994, loans to certain limited partners, who also
are executive officers of the Company, aggregating $4,750 were reported as a
reduction in minority interests in the consolidated balance sheets.
Minority interests also includes limited partners owning interests in three
Property Partnerships that are not wholly owned by the Company. During the year
ended December 31, 1995, expenses totaling $1,049 related solely to the
operation of the Company were allocated only to the common shareholders. Such
allocation is consistent with the federal and state tax treatment of these
expenses.
NOTE 9 -- PREFERRED STOCK
The Company is authorized to issue up to 24,315,000 of non-voting preferred
stock in one or more series. At December 31, 1995, 2,300,000 shares of 10.5%
Series A Senior Cumulative Preferred Stock ($0.01 par value) ("Senior Preferred
Stock") and 7,015,000 shares of Series B Cumulative Participating Convertible
Preferred Stock ($0.01 par value) ("Convertible Preferred Stock") were
outstanding. The Senior Preferred Stock and Cumulative Preferred Stock have a
liquidation preference equivalent to $25 per share plus the amount equal to any
accrued and unpaid dividends thereon.
Dividends on the Senior Preferred Stock are payable quarterly in the amount
of $2.625 per share per annum. Dividends on the Convertible Preferred Stock are
payable quarterly at the greater of (1) $2.125 per share per annum or (2) the
dividends on the number of shares of Common Stock into which a share of
Convertible Preferred Stock will be convertible on or after March 31, 1997. The
Convertible Preferred Stock is convertible into shares of Common Stock on or
after March 31, 1997, at the conversion price of $20.90 per share of Common
Stock.
The Company has the right to redeem the Senior Preferred Stock and the
Convertible Preferred Stock beginning on and after March 31, 1999 at $26.75 and
$27.125 per share, respectively. The redemption price decreases incrementally
each year thereafter through March 31, 2004, at which date the redemption price
is fixed at $25.00 per share.
The holders of the Senior Preferred Stock and Cumulative Preferred Stock,
each series voting separately as a class, have the right to elect two additional
members to the Company's Board of Directors if the equivalent of six quarterly
dividends on these series of preferred stock of the Company are in arrears. Each
of such two directors will be elected to serve until the earlier of (1) the
election and qualification of such directors' successor, or (2) payment of the
dividend arrearage.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 10 -- STOCK OPTION PLANS
On March 22, 1994, the Company established a stock option plan (the "1994
Plan") for the purpose of attracting and retaining directors, executive officers
and other key employees. Under the 1994 Plan, the Company issued options to
purchase 585,000 shares of common stock at $19.00 per share which was equal to
the initial public offering price of such shares. The grant date of these
options was March 22, 1994. Options aggregating 550,000 common shares were
granted to key executive officers and vest at a rate of 20% per year over five
years (20% on the first anniversary of the Offerings and one-twelfth of 20%
monthly thereafter) and will have a term of ten years. Options granted to
outside directors and consultants of 35,000 common shares were fully vested at
the grant date and have a term of ten years.
On May 18, 1995, the Company adopted the 1995 Stock Incentive Plan (the
"1995 Plan"). The 1995 Plan provides for awards of stock options not to exceed
600,000 shares in the aggregate to directors, executive officers and other key
employees. On May 18, 1995, options aggregating 20,000 common shares were
granted to outside directors and consultants. Such stock options have an option
price of $12.45, were fully vested at the grant date and have a term of ten
years. No additional options were granted during 1995.
There were no stock options exercised or canceled during the year ended
December 31, 1995 and for the period from March 22, 1994 to December 31, 1994.
NOTE 11 -- LEASE AGREEMENTS
The Company is the lessor of retail and office space under operating leases
with initial lease terms that expire from 1996 to 2013. Most leases are
renewable for five years at the lessee's option. Future minimum base rent to be
received under noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1996.............................................................................. $ 48,349
1997.............................................................................. 44,776
1998.............................................................................. 39,827
1999.............................................................................. 31,948
2000.............................................................................. 22,660
Thereafter........................................................................ 41,627
----------
$ 229,187
----------
----------
</TABLE>
The Company leases certain land, buildings and equipment under various
noncancelable operating lease agreements. Rental expense for operating leases
was $961, $720, $47 and $131 for the year ended December 31, 1995 and for the
periods from March 22, 1994 to December 31, 1994, January 1, 1994 to March 21,
1994 and for the year ended December 31, 1993, respectively. Future minimum
rental payments, by year and in the aggregate, payable under these noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1996............................................................................... $ 949
1997............................................................................... 903
1998............................................................................... 836
1999............................................................................... 804
2000............................................................................... 790
Thereafter......................................................................... 9,070
---------
$ 13,352
---------
---------
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
AND COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR (CONTINUED)
NOTE 12 -- LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes that losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Company.
The Company is a defendant in a lawsuit filed on June 14, 1995 in the U.S.
District Court for the Northern District of West Virginia whereby the plaintiffs
allege that the Company breached a confidentiality agreement entered into by the
Predecessor and the plaintiffs in connection with the proposed purchase of a
factory outlet center in Martinsburg, West Virginia. The outcome and the
ultimate liability of the Company, if any, of this lawsuit cannot currently be
predicted. Management believes, however, that it has acted properly and intends
to defend this lawsuit vigorously.
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Prime Retail, Inc.
We have audited the consolidated financial statements of Prime Retail, Inc.
as of December 31, 1995 and 1994, and for the year ended December 31, 1995 and
for the period from March 22, 1994 to December 31, 1994. We have also audited
the combined financial statements of Prime Retail Properties for the period from
January 1, 1994 to March 21, 1994 and for the year ended December 31, 1993. We
have issued our report thereon dated January 30, 1996 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 35(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Baltimore, Maryland
January 30, 1996
S-1
<PAGE>
PRIME RETAIL, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
COSTS CAPITALIZED
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST TO COMPANY
ACQUISITION PERIOD
------------------------ ------------------------ ------------------------
BUILDINGS & BUILDINGS & BUILDINGS &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------------- ------------- --------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Warehouse Row..................... $ 23,900 $ -- $ -- $ 537 $ 31,996 $ 537 $ 31,996
Warehouse Row II.................. -- -- -- 350 2,566 350 2,566
San Marcos Factory Shops.......... 29,808 -- -- 1,626 38,224 1,626 38,224
Triangle Factory Shops............ 7,330 -- -- 2,502 19,753 2,502 19,753
Gulf Coast Factory Shops.......... 22,283 -- -- 3,873 25,375 3,873 25,375
Gainsville Factory Shops.......... 22,639 -- -- 737 29,542 737 29,542
Castle Rock Factory Shops......... 40,167 4,424 47,200 -- 310 4,424 47,510
Ohio Factory Shops................ 20,622 843 31,084 -- 1,340 843 32,424
Coral Isle Factory Shops.......... 7,916 2,753 15,602 -- 200 2,753 15,802
Nebraska Crossing Factory Shops... 9,773 2,904 16,614 -- 197 2,904 16,811
Huntley Factory Shops............. 23,900 -- -- 1,827 33,380 1,827 33,380
Florida Keys Factory Shops........ 17,682 -- -- 2,875 21,183 2,875 21,183
Indiana Factory Shops............. 15,007 -- -- 516 20,697 516 20,697
Magnolia Bluff Factory Shops...... 18,007 -- -- 3,073 26,267 3,073 26,267
Gulfport Factory Shops............ 18,076 -- -- 405 23,457 405 23,457
Northgate Plaza................... 16,000 3,626 11,630 -- 119 3,626 11,749
Melrose Place..................... 2,000 -- -- 499 1,928 499 1,928
Western Plaza..................... 10,844 -- -- 2,000 6,990 2,000 6,990
Property Under Development........ -- -- -- -- 12,165 -- 12,165
Other Property.................... -- -- 1,291 -- -- -- 1,291
------------- --------- ------------- --------- ------------- --------- -------------
$ 305,954 $ 14,550 $ 123,421 $ 20,820 $ 295,689 $ 35,370 $ 419,110
------------- --------- ------------- --------- ------------- --------- -------------
------------- --------- ------------- --------- ------------- --------- -------------
<CAPTION>
ACCUMULATED CONSTRUCTED (C)
DESCRIPTION TOTAL DEPRECIATION ACQUIRED (A)
- ---------------------------------- --------- ------------- ------------------
<S> <C> <C> <C>
Warehouse Row..................... $ 32,533 $ 8,091 Nov 1989(C)
Warehouse Row II.................. 2,916 162 Dec 1993(A)
San Marcos Factory Shops.......... 39,850 7,237 Aug 1990(C)
Triangle Factory Shops............ 22,255 3,592 Oct 1991(C)
Gulf Coast Factory Shops.......... 29,248 4,161 Oct 1991(C)
Gainsville Factory Shops.......... 30,279 2,570 Aug 1993(C)
Castle Rock Factory Shops......... 51,934 4,240 Mar 1994(A)
Ohio Factory Shops................ 33,267 2,767 Mar 1994(A)
Coral Isle Factory Shops.......... 18,555 708 Mar 1994(A)
Nebraska Crossing Factory Shops... 19,715 732 Mar 1994(A)
Huntley Factory Shops............. 35,207 1,252 Sep 1994(C)
Florida Keys Factory Shops........ 24,058 1,159 Sep 1994(C)
Indiana Factory Shops............. 21,213 873 Nov 1994(C)
Magnolia Bluff Factory Shops...... 29,340 482 July 1995(C)
Gulfport Factory Shops............ 23,862 114 Oct 1995(C)
Northgate Plaza................... 15,375 592 Mar 1994(A)
Melrose Place..................... 2,427 619 Aug 1987(C)
Western Plaza..................... 8,990 532 Jun 1993(A)
Property Under Development........ 12,165 -- Under
Construction
Other Property.................... 1,291 307 Mar 1994 -
Dec 1995(A)
--------- -------------
$ 454,480 $ 40,190
--------- -------------
--------- -------------
</TABLE>
S-2
<PAGE>
PRIME RETAIL, INC.
NOTES TO SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
Depreciation on building and improvements is calculated on a straight-line
basis over the estimated useful lives of the asset as follows:
<TABLE>
<S> <C>
Land improvements................................. 20 years
Buildings and improvements........................ Principally 40 years
Tenant improvements............................... Term of related lease
Furniture and equipment........................... 5 years
</TABLE>
The aggregate cost for federal income tax purposes was approximately
$531,145 at December 31, 1995.
<TABLE>
<CAPTION>
INVESTMENT IN RENTAL PROPERTY
----------------------------------
YEAR ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of period............................. $ 376,181 $ 185,394 $ 131,413
Retirements.............................................. (258) (238) (206)
Improvements............................................. 79,075 191,025 54,187
Cost of real estate sold................................. (518) -- --
---------- ---------- ----------
Balance, end of period................................... $ 454,480 $ 376,181 $ 185,394
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
-------------------------------
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of period................................. $ 26,668 $ 15,720 $ 9,261
Retirements.................................................. (258) (238) (206)
Depreciation for the period.................................. 13,780 11,186 6,665
--------- --------- ---------
Balance, end of period....................................... $ 40,190 $ 26,668 $ 15,720
--------- --------- ---------
--------- --------- ---------
</TABLE>
S-3
<PAGE>
(This page has been left blank intentionally.)
S-4
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among the Company, the Operating Partnership and the Underwriters (the
"Underwriting Agreement"), the Company and the Selling Stockholder have agreed
to sell to each of the Underwriters named below, and each of the Underwriters
for whom Friedman, Billings, Ramsey & Co., Inc., is acting as representative
(the "Representative") has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth below opposite their
respective names. Under the Underwriting Agreement, the Underwriters are
obligated to purchase all of the 3,795,328 shares of Common Stock offered hereby
if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
- --------------------------------------------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc........
Morgan Keegan & Company, Inc.................
Stifel, Nicolaus & Company, Incorporated.....
----------------
Total.................................... 3,795,328
</TABLE>
The Underwriters have advised the Company and the Selling Stockholder that
they propose to initially offer the Common Stock to the public at the Offering
price set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to 555,750 additional
shares of Common Stock solely to cover over-allotments, if any, at the public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus.
The Representative has reserved up to 5,000 shares of Common Stock offered
hereby for sale at the public offering price to directors, officers and
employees of the Company who have expressed an interest in purchasing such
shares. Such purchases will be made on the same terms and conditions as will be
initially offered by the Underwriters to others in the Offering, and such
purchasers will, prior to acquiring any shares, be required to represent to the
Representative and the Company that they are purchasing such shares for
investment purposes only with no present intention to resell the shares.
The Company and the executive officers and directors of the Company have
agreed that for a period of 90 days from the date of this Prospectus they will
not, without the prior written consent of the Representative, offer, sell or
otherwise dispose of any shares of Common Stock or any security convertible into
or exercisable for shares of Common Stock, except for any Common Stock issued by
the Company upon exchange of Common Units or upon conversion of Convertible
Preferred Stock or pursuant to the Stock Incentive Plans.
In the Underwriting Agreement, the Company, the Selling Stockholder and the
Operating Partnership have agreed, jointly and severally, to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act. Each of the Underwriters may be deemed to be an "underwriter"
for purposes of the Securities Act in connection with the Offering. The Company
will reimburse the Underwriters for up to $200,000 of their reasonable
out-of-pocket expenses (including legal fees and expenses) incurred in
connection with the Offering.
The Common Stock is listed on the Nasdaq National Market. There can be no
assurance, however, that the Company will be able to maintain the inclusion of
the Common Stock in the Nasdaq National Market or that an active trading market
will be maintained in such stock.
U-1
<PAGE>
(This page has been left blank intentionally.)
U-2
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONTSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION WHERE, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE THEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 18
The Company.................................... 29
Price Range of Common Stock and Distribution
History....................................... 35
Use of Proceeds................................ 36
Capitalization................................. 37
Dilution....................................... 40
Selected Financial Data........................ 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 45
Business and Properties........................ 62
Policies With Respect to Certain Activities.... 87
Management..................................... 91
Certain Relationships and Transactions......... 101
Operating Partnership Agreement................ 104
Principal Security Holders and Selling Security
Holder of the Company......................... 107
Description of Capital Stock................... 110
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws.................. 123
Shares Available for Future Sale............... 126
Certain Federal Income Tax Considerations...... 127
Legal Matters.................................. 140
Experts........................................ 140
Available Information.......................... 140
Index of Financial Statements.................. F-1
Underwriting................................... U-1
</TABLE>
3,795,328 SHARES
[PRIME RETAIL, INC. LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
MORGAN KEEGAN &
COMPANY, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below are the expenses payable by the Company in connection with
the issuance and distribution of the shares of Common Stock. All amounts are
estimated other than the Securities and Exchange Commission Registration Fee and
the NASD Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Fee........................................ $ 17,776.24
NASD Fee...................................................................... 5,655.11
Printing and Engraving Expenses............................................... 125,000.00
Legal Fees and Expenses....................................................... 750,000.00
Accounting Fees and Expenses.................................................. 175,000.00
Blue Sky Fees and Expenses.................................................... 21,000.00
Transfer Agent's and Registrar's Fees and Expenses............................ 1,500.00
Miscellaneous Expenses........................................................ 4,068.65
------------
Total..................................................................... $1,100,000.00
------------
------------
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
Not applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information as to all securities sold by
the Company within the last three years that were not registered under the
Securities Act. As to such transactions, an exemption is claimed under Section
4(2) and/or Section 3(a)(9) of the Securities Act.
On July 16, 1993, the Company issued 100 shares of Common Stock to Michael
W. Reschke for $10 per share, or an aggregate consideration of $1,000. This
Common Stock was purchased solely for investment purposes to facilitate the
organization of the Company. Upon completion of the Initial Public Offering, all
of the shares so acquired by Mr. Reschke were redeemed by the Company for an
aggregate redemption price of $1,000.
In addition, at the time of the Initial Public Offering, the Company caused
the Operating Partnership to issue 9,200,800 Common Units to the Limited
Partners in exchange for their respective interests in the Properties and the
Management and Development Operations. Also at the time of the Initial Public
Offering, the Operating Partnership loaned, on a recourse basis, $2.5 million to
each of Messrs. Rosenthal and Carpenter who used the proceeds of such loan to
each purchase 125,000 additional Common Units. The Company has issued options to
purchase a total of 585,000 shares of Common Stock pursuant to the 1994 Stock
Incentive Plan and options to purchase a total of 600,000 shares of Common Stock
pursuant to the 1995 Stock Incentive Plan to certain executives and the
Company's independent directors.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Charter and Bylaws authorize the Company to indemnify its present and
former directors and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding to the maximum
extent permitted from time to time under Maryland law. The MGCL provides that
indemnification of a person who is a party, or threatened to be made a party, to
legal proceedings by reason of the fact that such a person is or was a director,
officer, employee or agent of a corporation, or is or was serving as a director,
officer, employee or agent of a corporation or other firm at the request of a
corporation, against expenses, judgments, fines and amounts paid in settlement,
is mandatory in certain circumstances and permissive in others, subject to
authorization by the board of directors, so long as a person seeking
indemnification acted in good faith and in a manner reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to
criminal proceedings, had no reason to believe that his or her conduct was
unlawful.
II-1
<PAGE>
The Company's officers and directors are also indemnified pursuant to the
Operation Partnership Agreement and their respective employment agreements,
which agreements were filed in connection with the Company's Registration
Statement on Form S-11 pursuant to the Initial Public Offering.
The Company has purchased an insurance policy which purports to insure the
officers and directors of the Company against certain liabilities incurred by
them in the discharge of their functions as such officers and directors except
for liabilities resulting from their own malfeasance.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. EXHIBITS.
(a) Financial Statements
Unaudited Consolidated Balance Sheets of the Company as of March 31,
1996 and December 31, 1995
Unaudited Consolidated Statements of Operations of the Company for the
three months ended March 31, 1996 and 1995
Unaudited Consolidated Statements of Cash Flows of the Company for the
three months ended March 31, 1996 and 1995
Notes to Interim Consolidated Financial Statements of the Company
Report of Independent Auditors
Consolidated Balance Sheets of the Company as of December 31, 1995 and
December 31, 1994
Consolidated Statements of Operations of the Company for the year ended
December 31, 1995 and for the period from March 22, 1994 to December 31,
1994 and Combined Statements of Operations of the Predecessor for the
period from January 1, 1994 to March 21, 1994 and the year ended December
31, 1993
Consolidated Statements of Cash Flows of the Company for the year ended
December 31, 1995 and for the period from March 22, 1994 to December 31,
1994 and Combined Statements of Cash Flows of the Predecessor for the
period from January 1, 1994 to March 21, 1994 and the year ended December
31, 1993
Consolidated Statements of Shareholders' Equity of the Company and
Combined Statements of Predecessor Owners' Deficit
Notes to Consolidated Financial Statements of the Company and Combined
Financial Statements of the Predecessor
(b) Financial Statement Schedules
Report of Independent Auditors
Schedule III -- Real Estate and Accumulated Depreciation
All other schedules have been omitted either because they are not applicable
or because the required information has been disclosed in the Financial
Statements and related notes included in the Prospectus.
II-2
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement among the Company, the Operating
Partnership, the Selling Stockholder and the Underwriters
3.1 Amended and Restated Articles of Incorporation of Prime Retail, Inc., as
amended [Restated to incorporate amendment dated May 29, 1996 for
purposes of Regulation ST Section 232.102(c) only]
3.2 Amended and Restated By-Laws of Prime Retail, Inc. [Incorporated by
reference to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 (File No.
0-23616).]
4 Form of Stock Certificate [Incorporated by reference to the same titled
exhibit in the Company's registration statement on Form S-11
(Registration No. 33-68536).]
5.1 Opinion of Winston & Strawn regarding the validity of the securities
registered
8.1 Opinion of Winston & Strawn regarding tax matters
10.1 Agreement of Limited Partnership of Prime Retail, L.P. [Incorporated by
reference to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.1A First Amendment to Agreement of Limited Partnership of Prime Retail, L.P.
10.1B Common Unit Contribution Agreement
10.2 1994 Stock Incentive Plan [Incorporated by reference to the same titled
exhibit in the Company's registration statement on Form S-11
(Registration No. 33-68536).]
10.3* 1995 Stock Incentive Plan
10.4 Executive Employment Agreement (Michael W. Reschke) [Incorporated by
reference to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.5 Combined Service and Special Distribution and Allocation Agreement
(Abraham Rosenthal) [Incorporated by reference to the same titled exhibit
in the Company's registration statement on Form S-4 (Registration No.
333-1784).]
10.5A Special Distribution and Allocation Agreement by and between the Company,
the Operating Partnership and the Rosenthal Family LLC [Incorporated by
reference to the same titled exhibit in the Company's registration
statement on Form S-4 (Registration No. 333-1784).]
10.5B Indemnification and Option Agreement by and between the Prime Group, Inc.,
the Rosenthal Family LLC and Abraham Rosenthal [Incorporated by reference
to the same titled exhibit in the Company's registration statement on
Form S-4 (Registration No. 333-1784).]
10.6 Combined Service and Special Distribution and Allocation Agreement
(William H. Carpenter, Jr.) [Incorporated by reference to the same titled
exhibit in the Company's registration statement on Form S-4 (Registration
No. 333-1784).]
10.6A Special Distribution and Allocation Agreement by and between the Company,
the Operating Partnership and the Carpenter Family Associates LLC
[Incorporated by reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No. 333-1784).]
10.6B Indemnification and Option Agreement by and between the Prime Group, Inc.,
William H. Carpenter, Jr. and the Carpenter Family Associates LLC
[Incorporated by reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No. 333-1784).]
10.7 Form of Executive Employment Agreement (David G. Phillips) [Incorporated
by reference to the same titled exhibit in the Company's registration
statement on Form S-11 (Registration No. 33-68536).]
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------
<S> <C>
10.8 Letter Agreement with R. Bruce Armiger [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.9 Right of First Refusal Agreement (Northgate Plaza-Improved Parcel)
[Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
10.10 Right of First Refusal Agreement (Northgate Plaza - Vacant Parcel)
[Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
10.11 Right of First Refusal Agreement (Huntley Factory Shops) [Incorporated by
reference to the same titled exhibit in the Company's registration
statement on Form S-11 (Registration No. 33-68536).]
10.12 Right of First Refusal Agreement (San Marcos Factory Shops) [Incorporated
by reference to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.13 Purchase Option Agreement (Northgate Plaza - Excluded Parcel)
[Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
10.14A Purchase and Option Agreement (Huntley Factory Shops) [Incorporated by
reference to the same titled exhibit in the Company's registration
statement on Form S-11 (Registration No. 33-68536).]
10.14B* First Amendment to Purchase and Option Agreement (Huntley Factory Shops)
10.15 Purchase Agreement (Northgate Plaza) [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.16 Registration Rights Agreement [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended (File No. 0-23616).]
10.17 Agreement of Partnership of Grove City Factory Shops Partnership by and
between Pittsburgh Factory Shops Limited Partnership and Fru-Con
Development of Pennsylvania, Inc. as amended by Amendments One through
Four [Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration No.
33-68536).]
10.18 Assignment, Assumption and Indemnification Agreement (Northgate Plaza)
[Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
10.19 Form of Property Level General Partnership Agreement [Incorporated by
reference to the same titled exhibit in the Company's registration
statement on Form S-11 (Registration No. 33-68536).]
10.20 Form of Property Level Limited Partnership Agreement [Incorporated by
reference to the same titled exhibit in the Company's registration
statement on Form S-11 (Registration No. 33-68536).]
10.21 Noncompetition Agreement with PGI [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended (File No. 0-23616).]
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------
<S> <C>
10.22 Form of Standby Bond Purchase and Indemnity Agreement [Incorporated by
reference to the same titled exhibit in the Company's registration
statement on Form S-11 (Registration No. 33-68536).]
10.23 Second Amended and Restated Subscription Agreement of Abraham Rosenthal
regarding Common Units of Prime Retail, L.P. [Incorporated by reference
to the same titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as amended (File No.
0-23616).]
10.24 Second Amended and Restated Subscription Agreement of William H.
Carpenter, Jr. regarding Common Units of Prime Retail, L.P. [Incorporated
by reference to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.25 Amended and Restated Promissory Note (Northgate Plaza) with respect to
Northgate Plaza [Incorporated by reference to the same titled exhibit in
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, as amended (File No. 0-23616).]
10.26 Loan Modification and Assumption Agreement and Partial Release of Mortgage
(Northgate Plaza) [Incorporated by reference to the same titled exhibit
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, as amended (File No. 0-23616).]
10.27 Environmental Remediation and Indemnity Agreement (Northgate Plaza)
[Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
10.28 Guaranty (Northgate Plaza) [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.29 ADA Indemnity Agreement (Northgate Plaza) [Incorporated by reference to
the same titled exhibit in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.30 Consulting Agreement between the Company and Marvin Traub Associates, Inc.
[Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
10.31 Secured Promissory Note of Rosenthal Family LLC with respect to the
purchase of the Restricted Common Units [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.31A Allonge related to the Secured Promissory Note of Rosenthal Family LLC
[Incorporated by reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No. 333-1784).]
10.32 Secured Promissory Note of Carpenter Family Associates LLC with respect to
the purchase of the Restricted Common Units [Incorporated by reference to
the same titled exhibit in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.32A Allonge related to the Secured Promissory Note of Carpenter Family
Associates LLC [Incorporated by reference to the same titled exhibit in
the Company's registration statement on Form S-4 (Registration No.
333-1784).]
10.33 Pledge and Security Agreement of Rosenthal Family LLC with respect to the
purchase of the Restricted Common Units [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------
<S> <C>
10.34 Pledge and Security Agreement of Carpenter Family Associates LLC with
respect to the purchase of the Restricted Common Units [Incorporated by
reference to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.35 Guaranty of Abraham Rosenthal with respect to the purchase of the
Restricted Common Units [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.35A Reaffirmation of Pledge and Guaranty with respect to the Restricted Common
Units of Rosenthal Family LLC and Abraham Rosenthal [Incorporated by
reference to the same titled exhibit in the Company's registration
statement on Form S-4 (Registration No. 333-1784).]
10.36 Guaranty of William H. Carpenter, Jr. with respect to the purchase of the
Restricted Common Units [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.36A Reaffirmation of Pledge and Guaranty with respect to the Restricted Common
Units of Carpenter Family Associates LLC and William H. Carpenter, Jr.
[Incorporated by reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No. 333-1784).]
10.37 Waiver, Recontribution and Indemnity Agreement by the Limited Partners
[Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
10.38 Lock-Up Agreement (PGI) [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.39 Lock-Up Agreement (Kemper Companies) [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.40 Lock-Up Agreement (Abraham Rosenthal) [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.41 Lock-Up Agreement (William H. Carpenter, Jr.) [Incorporated by reference
to the same titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as amended (File No.
0-23616).]
10.42 Promissory Note dated June 30, 1994 by and among Prime Retail, L.P. and
Nomura Asset Capital Corporation [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended (File No. 0-23616).]
10.43 Open-End Mortgage Agreement, Assignment of Rents and Fixture Filing dated
June 30, 1994, by and among Ohio Factory Shops Partnership and Nomura
Asset Capital Corporation [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.44 Revolving Loan Agreement dated March 2, 1995 between Gainesville Factory
Shops Limited Partnership, Florida Keys Factory Shops Limited
Partnership, Indianapolis Factory Shops Limited Partnership and Nomura
Asset Capital Corporation [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------
<S> <C>
10.45 Commitment Letter dated December 18, 1995 between the Company and Nomura
Asset Capital Corporation [Incorporated by reference to the same titled
exhibit in the Company's Current Report on Form 8-K dated December 18,
1995 (File No. 0-23616).]
10.46* Indemnity Agreement made by the Company in favor of Prime Group, Inc. and
Prime Group Limited Partnership
10.47* Partnership Interest Purchase Agreement Grove City Factory Shops
Partnership by and between Prime Retail, L.P. and The Fru-Con Projects,
Inc. dated as of May 6, 1996.
10.48* Commitment Letter dated June 5, 1996 between the Company and Nomura Asset
Capital Corporation [Confidential treatment requested for certain omitted
portions; complete copy on file with the Securities and Exchange
Commission]
12.1 Statement re Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
12.2 Statement re Computation of Ratio of Funds from Operations to Combined
Fixed Charges and Preferred Stock Dividends
22 Subsidiaries of Prime Retail, Inc. [Incorporated by reference to the same
titled exhibit in the Company's registration statement on Form S-4
(Registration No. 333-1784).]
24.1 Consent of Winston & Strawn (included in their opinions filed as Exhibits
5.1 and 8.1)
24.2 Consent of Ernst & Young LLP
25* Power of Attorney
27* Financial Data Schedule
</TABLE>
- ------------------------
+ To be filed by amendment.
* Previously filed.
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and officers of the Registrant pursuant to the
provisions referred to in Item 33 above or otherwise, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceedings), is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Baltimore, State of Maryland, on June 25, 1996.
PRIME RETAIL, INC.
By: /s/ C. ALAN SCHROEDER
-----------------------------------
C. Alan Schroeder
Senior Vice President and
General Counsel
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
*
- ----------------------------------- Chairman of the Board and June 25, 1996
Michael W. Reschke Director
* Chief Executive Officer
- ----------------------------------- (Principal Executive June 25, 1996
Abraham Rosenthal Officer) and Director
* President, Chief
- ----------------------------------- Operating Officer and June 25, 1996
William H. Carpenter, Jr. Director
Executive Vice President
-- Chief Financial
/s/ ROBERT P. MULREANEY Officer and Treasurer
- ----------------------------------- (Principal Financial June 25, 1996
Robert P. Mulreaney Officer and Principal
Accounting Officer)
*
- ----------------------------------- Director June 25, 1996
Terence C. Golden
*
- ----------------------------------- Director June 25, 1996
Kenneth A. Randall
II-9
<PAGE>
<TABLE>
<C> <S> <C>
*
- ----------------------------------- Director June 25, 1996
James R. Thompson
*
- ----------------------------------- Director June 25, 1996
Marvin S. Traub
*By: /s/ C. ALAN SCHROEDER
- ----------------------------------- as Attorney-in-Fact
C. Alan Schroeder
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------------ -------------------------------------------------------------- ---------------
<S> <C> <C>
1.1 Form of Underwriting Agreement among the Company, the
Operating Partnership, the Selling Stockholder and the
Underwriters
3.1 Amended and Restated Articles of Incorporation of Prime
Retail, Inc., as amended [Restated to incorporate amendment
dated May 29, 1996 for purposes of Regulation ST Section
232.102(c) only]
3.2 Amended and Restated By-Laws of Prime Retail, Inc.
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 0-23616).]
4 Form of Stock Certificate [Incorporated by reference to the
same titled exhibit in the Company's registration statement
on Form S-11 (Registration No. 33-68536).]
5.1 Opinion of Winston & Strawn regarding the validity of the
securities registered
8.1 Opinion of Winston & Strawn regarding tax matters
10.1 Agreement of Limited Partnership of Prime Retail, L.P.
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.1A First Amendment to Agreement of Limited Partnership of Prime
Retail, L.P.
10.1B Common Unit Contribution Agreement
10.2 1994 Stock Incentive Plan [Incorporated by reference to the
same titled exhibit in the Company's registration statement
on Form S-11 (Registration No. 33-68536).]
10.3* 1995 Stock Incentive Plan
10.4 Executive Employment Agreement (Michael W. Reschke)
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.5 Combined Service and Special Distribution and Allocation
Agreement (Abraham Rosenthal) [Incorporated by reference to
the same titled exhibit in the Company's registration
statement on Form S-4 (Registration No. 333-1784).]
10.5A Special Distribution and Allocation Agreement by and between
the Company, the Operating Partnership and the Rosenthal
Family LLC [Incorporated by reference to the same titled
exhibit in the Company's registration statement on Form S-4
(Registration No. 333-1784).]
10.5B Indemnification and Option Agreement by and between the Prime
Group, Inc., the Rosenthal Family LLC and Abraham Rosenthal
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-4 (Registration
No. 333-1784).]
10.6 Combined Service and Special Distribution and Allocation
Agreement (William H. Carpenter, Jr.) [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No.
333-1784).]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------------ -------------------------------------------------------------- ---------------
<S> <C> <C>
10.6A Special Distribution and Allocation Agreement by and between
the Company, the Operating Partnership and the Carpenter
Family Associates LLC [Incorporated by reference to the same
titled exhibit in the Company's registration statement on
Form S-4 (Registration No. 333-1784).]
10.6B Indemnification and Option Agreement by and between the Prime
Group, Inc., William H. Carpenter, Jr. and the Carpenter
Family Associates LLC [Incorporated by reference to the same
titled exhibit in the Company's registration statement on
Form S-4 (Registration No. 333-1784).]
10.7 Form of Executive Employment Agreement (David G. Phillips)
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.8 Letter Agreement with R. Bruce Armiger [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
10.9 Right of First Refusal Agreement (Northgate Plaza-Improved
Parcel) [Incorporated by reference to the same titled exhibit
in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended (File No. 0-23616).]
10.10 Right of First Refusal Agreement (Northgate Plaza - Vacant
Parcel) [Incorporated by reference to the same titled exhibit
in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended (File No. 0-23616).]
10.11 Right of First Refusal Agreement (Huntley Factory Shops)
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.12 Right of First Refusal Agreement (San Marcos Factory Shops)
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.13 Purchase Option Agreement (Northgate Plaza - Excluded Parcel)
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.14A Purchase and Option Agreement (Huntley Factory Shops)
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.14B* First Amendment to Purchase and Option Agreement (Huntley
Factory Shops)
10.15 Purchase Agreement (Northgate Plaza) [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------------ -------------------------------------------------------------- ---------------
<S> <C> <C>
10.16 Registration Rights Agreement [Incorporated by reference to
the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as
amended (File No. 0-23616).]
10.17 Agreement of Partnership of Grove City Factory Shops
Partnership by and between Pittsburgh Factory Shops Limited
Partnership and Fru-Con Development of Pennsylvania, Inc. as
amended by Amendments One through Four [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-11 (Registration No.
33-68536).]
10.18 Assignment, Assumption and Indemnification Agreement
(Northgate Plaza) [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.19 Form of Property Level General Partnership Agreement
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.20 Form of Property Level Limited Partnership Agreement
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.21 Noncompetition Agreement with PGI [Incorporated by reference
to the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as
amended (File No. 0-23616).]
10.22 Form of Standby Bond Purchase and Indemnity Agreement
[Incorporated by reference to the same titled exhibit in the
Company's registration statement on Form S-11 (Registration
No. 33-68536).]
10.23 Second Amended and Restated Subscription Agreement of Abraham
Rosenthal regarding Common Units of Prime Retail, L.P.
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.24 Second Amended and Restated Subscription Agreement of William
H. Carpenter, Jr. regarding Common Units of Prime Retail,
L.P. [Incorporated by reference to the same titled exhibit in
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.25 Amended and Restated Promissory Note (Northgate Plaza) with
respect to Northgate Plaza [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994, as amended
(File No. 0-23616).]
10.26 Loan Modification and Assumption Agreement and Partial Release
of Mortgage (Northgate Plaza) [Incorporated by reference to
the same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, as
amended (File No. 0-23616).]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------------ -------------------------------------------------------------- ---------------
<S> <C> <C>
10.27 Environmental Remediation and Indemnity Agreement (Northgate
Plaza) [Incorporated by reference to the same titled exhibit
in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended (File No. 0-23616).]
10.28 Guaranty (Northgate Plaza) [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994, as amended
(File No. 0-23616).]
10.29 ADA Indemnity Agreement (Northgate Plaza) [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
10.30 Consulting Agreement between the Company and Marvin Traub
Associates, Inc. [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.31 Secured Promissory Note of Rosenthal Family LLC with respect
to the purchase of the Restricted Common Units [Incorporated
by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1994, as amended (File No. 0-23616).]
10.31A Allonge related to the Secured Promissory Note of Rosenthal
Family LLC [Incorporated by reference to the same titled
exhibit in the Company's registration statement on Form S-4
(Registration No. 333-1784).]
10.32 Secured Promissory Note of Carpenter Family Associates LLC
with respect to the purchase of the Restricted Common Units
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.32A Allonge related to the Secured Promissory Note of Carpenter
Family Associates LLC [Incorporated by reference to the same
titled exhibit in the Company's registration statement on
Form S-4 (Registration No. 333-1784).]
10.33 Pledge and Security Agreement of Rosenthal Family LLC with
respect to the purchase of the Restricted Common Units
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.34 Pledge and Security Agreement of Carpenter Family Associates
LLC with respect to the purchase of the Restricted Common
Units [Incorporated by reference to the same titled exhibit
in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, as amended (File No. 0-23616).]
10.35 Guaranty of Abraham Rosenthal with respect to the purchase of
the Restricted Common Units [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994, as amended
(File No. 0-23616).]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------------ -------------------------------------------------------------- ---------------
<S> <C> <C>
10.35A Reaffirmation of Pledge and Guaranty with respect to the
Restricted Common Units of Rosenthal Family LLC and Abraham
Rosenthal [Incorporated by reference to the same titled
exhibit in the Company's registration statement on Form S-4
(Registration No. 333-1784).]
10.36 Guaranty of William H. Carpenter, Jr. with respect to the
purchase of the Restricted Common Units [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
10.36A Reaffirmation of Pledge and Guaranty with respect to the
Restricted Common Units of Carpenter Family Associates LLC
and William H. Carpenter, Jr. [Incorporated by reference to
the same titled exhibit in the Company's registration
statement on Form S-4 (Registration No. 333-1784).]
10.37 Waiver, Recontribution and Indemnity Agreement by the Limited
Partners [Incorporated by reference to the same titled
exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No.
0-23616).]
10.38 Lock-Up Agreement (PGI) [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as amended (File
No. 0-23616).]
10.39 Lock-Up Agreement (Kemper Companies) [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
10.40 Lock-Up Agreement (Abraham Rosenthal) [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
10.41 Lock-Up Agreement (William H. Carpenter, Jr.) [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
10.42 Promissory Note dated June 30, 1994 by and among Prime Retail,
L.P. and Nomura Asset Capital Corporation [Incorporated by
reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, as amended (File No. 0-23616).]
10.43 Open-End Mortgage Agreement, Assignment of Rents and Fixture
Filing dated June 30, 1994, by and among Ohio Factory Shops
Partnership and Nomura Asset Capital Corporation
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------------ -------------------------------------------------------------- ---------------
<S> <C> <C>
10.44 Revolving Loan Agreement dated March 2, 1995 between
Gainesville Factory Shops Limited Partnership, Florida Keys
Factory Shops Limited Partnership, Indianapolis Factory Shops
Limited Partnership and Nomura Asset Capital Corporation
[Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, as amended (File No. 0-23616).]
10.45 Commitment Letter dated December 18, 1995 between the Company
and Nomura Asset Capital Corporation [Incorporated by
reference to the same titled exhibit in the Company's Current
Report on Form 8-K dated December 18, 1995 (File No.
0-23616).]
10.46* Indemnity Agreement made by the Company in favor of Prime
Group, Inc. and Prime Group Limited Partnership
10.47* Partnership Interest Purchase Agreement Grove City Factory
Shops Partnership by and between Prime Retail, L.P. and the
Fru-Con Projects, Inc. dated as of May 6, 1996.
10.48* Commitment Letter dated June 5, 1996 between the Company and
Nomura Asset Capital Corporation [Confidential treatment
requested for certain omitted portions; complete copy on file
with the Securities and Exchange Commission]
12.1 Statement re Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
12.2 Statement re Computation of Ratio of Funds from Operations to
Combined Fixed Charges and Preferred Stock Dividends
22 Subsidiaries of Prime Retail, Inc. [Incorporated by reference
to the same titled exhibit in the Company's registration
statement on Form S-4 (Registration No. 333-1784).]
24.1 Consent of Winston & Strawn (included in their opinions filed
as Exhibits 5.1 and 8.1)
24.2 Consent of Ernst & Young LLP
25* Power of Attorney
27* Financial Data Schedule
</TABLE>
- ------------------------
+ To be filed by amendment.
* Previously filed.
<PAGE>
PRIME RETAIL, INC.
(a Maryland corporation)
3,795,328 Shares
Common Stock
(Par Value $0.01 Per Share)
UNDERWRITING AGREEMENT
June __, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
STIFEL, NICOLAUS & COMPANY INCORPORATED
Fr[caad 234]eresc/o Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Prime Retail, Inc., a Maryland corporation (the "Company"), Prime
Retail, L.P., a Delaware limited partnership (the "Operating Partnership"), and
KILICO Realty Corporation, a Delaware corporation (the "Selling Stockholder"),
each confirms its agreement with Friedman, Billings, Ramsey & Co., Inc. ("FBR"),
Morgan Keegan & Company, Inc. and Stifel Nicolaus & Company Incorporated
(collectively, the "Underwriters," which term shall also include any underwriter
substituted as provided in Section 9 hereof), for whom FBR is acting as
representative and is hereinafter referred to as the "Representative", subject
to the terms and conditions stated herein, with respect to the sale by the
Company to the Underwriters, acting severally and not jointly, of 3,705,000
shares (the "Company Firm Shares") of the Company's Common Stock, par value
$0.01 per share (the "Common Stock"), and the sale by the Selling Stockholder to
the Underwriters, acting severally and not jointly, of 90,328 shares of the
Company's Common Stock (the "Selling Stockholder Firm Shares" and, together with
the Company Firm Shares, the "Firm Shares"), as set forth in SCHEDULE A hereto,
and with respect to the grant by the Company to the Underwriters of the option
described in Section 2(b) hereof to purchase all or any part of an additional
555,750 shares of Common Stock (the "Option Shares") to cover over-allotments.
The Firm Shares and the Option Shares are collectively hereinafter called the
"Shares".
Prior to the purchase and public offering of the Shares by the
Underwriters, the Company, the Selling Stockholder and the Representative,
acting on behalf of the Underwriters, shall enter into an agreement
substantially in the form of EXHIBIT A hereto (the "Pricing Agreement"). The
Pricing Agreement may take the form of an exchange of any standard form of
written telecommunication between the Company, the Selling Stockholder and the
Representative and shall specify such applicable information as is
<PAGE>
indicated in EXHIBIT A hereto. The offering of the Shares will be governed by
this Agreement, as supplemented by the Pricing Agreement. From and after the
date of the execution and delivery of the Pricing Agreement, this Agreement
shall be deemed to incorporate the Pricing Agreement.
The Company has commenced an offer to exchange (the "Exchange Offer")
up to 6,734,400 shares of its Common Stock for up to 4,209,000 of the
outstanding shares of the Company's 8.5% Series B Cumulative Participating
Convertible Preferred Stock. In connection with the Exchange Offer, the Company
intends to declare a special cash distribution on its Common Stock (the "Special
Distribution") and certain limited partners of the Operating Partnership have
agreed, subject to the satisfaction of certain conditions, to contribute to the
Operating Partnership for cancellation (the "Common Unit Contribution") certain
of their units of common partnership interest ("Common Units").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-11 (No. 333-1666) and a related
preliminary prospectus for the registration of the Shares under the Securities
Act of 1933, as amended (the "1933 Act"), and has filed such amendments thereto
and such amended preliminary prospectuses as may have been required to the date
hereof, and will file such additional amendments thereto and such amended
prospectuses as may hereafter be required. Such registration statement when it
becomes effective (as amended, if applicable) and the prospectus constituting a
part thereof (including in each case the information, if any, deemed to be a
part thereof pursuant to Rule 430A(b) of the rules and regulations under the
1933 Act (the "1933 Act Regulations")), as from time to time amended or
supplemented pursuant to the 1933 Act or otherwise, are hereinafter referred to
as the "Registration Statement" and the "Prospectus," respectively, except that
if any revised prospectus shall be provided to the Underwriters by the Company
for use in connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the
term "Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use.
The Company, the Operating Partnership and the Selling Stockholder
understand that the Underwriters propose to make a public offering of the Shares
as soon as the Representative deems advisable after the Registration Statement
becomes effective and the Pricing Agreement has been executed and delivered.
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE
OPERATING PARTNERSHIP AND THE SELLING STOCKHOLDER.
1(a) The Company and the Operating Partnership, jointly and
severally, represent and warrant to, and agree with, each Underwriter as of the
date hereof and as of the date of the Pricing Agreement (such later date being
hereinafter referred to as the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective and
at the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations and
- 2 -
<PAGE>
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, at the
Representation Date (unless the term "Prospectus" refers to a prospectus
that has been provided to the Underwriters by the Company for use in
connection with the offering of the Shares which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective, in which case at the time it is first provided to the
Underwriters for such use) and at the Closing Time referred to in
Section 2(c) hereof, will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and will not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
contained in the second paragraph of the section of the Prospectus
captioned "Underwriting."
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceeding for that purpose has been instituted or, to the knowledge of the
Company or the Operating Partnership, threatened by the Commission or by
the state securities authority of any jurisdiction. No order preventing or
suspending the use of the Prospectus has been issued and no proceeding for
that purpose has been instituted or, to the knowledge of the Company or the
Operating Partnership, threatened by the Commission or by the state
securities authority of any jurisdiction.
(iii) Ernst & Young LLP, who have certified the financial
statements and financial statement schedules included in the Registration
Statement, are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iv) The financial statements (including the notes thereto)
included in the Registration Statement and the Prospectus present fairly
the financial position of the respective entity or entities presented
therein at the respective dates indicated and the results of their
operations for the respective periods specified, and except as otherwise
stated in the Registration Statement, such financial statements have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis. The financial statement schedules included
in the Registration Statement present fairly the information required to be
stated therein. The financial information and data included in the
Registration Statement and the Prospectus present fairly the information
included therein and have been prepared on a basis consistent with that of
the financial statements included in the Registration Statement and the
Prospectus and the books and records of the respective entities presented
therein. Other than the historical financial statements (and schedules)
included therein, no other historical or pro forma financial statements (or
schedules) are required by the 1933 Act or the 1933 Act Regulations to be
included in the Registration Statement. Except as reflected or
- 3 -
<PAGE>
disclosed in the financial statements included in the Registration
Statement or otherwise set forth in the Prospectus, none of the Company,
the Operating Partnership or the Subsidiaries (as hereinafter defined) are
subject to any material indebtedness, obligation, or liability, contingent
or otherwise, known to the Company.
(v) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, assets, or business
affairs of the Company, the Operating Partnership and the Subsidiaries
considered as a single enterprise, whether or not arising in the ordinary
course of business, (B) no material casualty loss or material condemnation
or other material adverse event has occurred with respect to any of the
Properties (as the same are defined in the Prospectus), (C) there have been
no acquisitions or other transactions entered into by the Company, the
Operating Partnership or any Subsidiary that are material with respect to
such entities, considered as a single enterprise, or would result in any
inaccuracy in the representations contained in Section 1(a)(iv) above,
(D) there has been no dividend or distribution of any kind declared, paid,
or made by the Company on any class of its capital stock (other than the
Special Distribution) or by the Operating Partnership with respect to its
partnership interests (other than in connection with the Special
Distribution), (E) there has been no change in the capital stock of the
Company or the partnership interests of the Operating Partnership (other
than the exchange by the Selling Stockholder of Common Units for shares of
Common Stock or changes resulting from the Common Unit Contribution or the
Exchange Offer) or any Subsidiary, and (F) there has been no increase in
the indebtedness of the Company, the Operating Partnership or any
Subsidiary that is material to such entities, considered as a single
enterprise (other than indebtedness contemplated by the 1996 Nomura Loan
Commitment).
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Maryland, with corporate power and authority to own its properties, conduct
its business as described in the Prospectus and to enter into and perform
its obligations under this Agreement. The Company has been duly qualified
as a foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which such
qualification is required, whether by reason of the ownership, leasing, or
management of any properties or the conduct of any other business, except
where the failure to so qualify would not have a material adverse effect on
the condition, financial or otherwise, or the earnings, assets or business
affairs of the Company, the Operating Partnership and the Subsidiaries,
considered as a single enterprise.
(vii) The Operating Partnership and each other partnership which
directly owns the Company's interests in the Properties (each such
partnership individually, other than the Operating Partnership, a "Property
Partnership" and collectively, the "Property Partnerships") has been duly
organized and is validly existing as a partnership in good standing (to the
extent applicable) under the laws of its
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jurisdiction of organization, with partnership power and authority to own
its properties, conduct its business as described in the Prospectus and,
with respect to the Operating Partnership, enter into and perform its
obligations under this Agreement. The Operating Partnership and each
Property Partnership has been duly qualified for the transaction of
business and is in good standing (to the extent applicable) under the laws
of each other jurisdiction in which such qualification is required, whether
by reason of the ownership, leasing, or management of any properties
(including the Properties) or the conduct of any other business, except
where the failure to so qualify would not have a material adverse effect on
the condition, financial or otherwise, or the earnings, assets or business
affairs of the Company, the Operating Partnership and the Subsidiaries,
considered as a single enterprise. All of the partnership interests in
each Property Partnership have been duly and validly authorized and issued,
are fully paid, and (except as described in the Prospectus) are owned
directly or indirectly by the Company or the Operating Partnership, free
and clear of all liens, encumbrances, equities or claims. The Company is
the sole general partner of the Operating Partnership and on the date
hereof is the holder of _______________ Common Units, 2,300,000 units of
senior preferred partnership interest (the "Senior Preferred Units") and
__________ units of convertible preferred partnership interest (the "Junior
Preferred Units"). The Operating Partnership, Prime Retail Services
Limited Partnership ("PRSLP"), Prime Retail Services, Inc. ("PRSI"), Prime
Retail Finance, Inc. ("Prime Finance") and Prime Retail Finance II, Inc.
("Prime Finance II") (PRSLP, PRSI, Prime Finance and Prime Finance II being
hereafter referred to each as a "Subsidiary" and collectively as the
"Subsidiaries") and the property partnerships listed on Exhibit 22.1 to the
Registration Statement are the only subsidiaries of the Company and the
Operating Partnership required to be identified as such in the Registration
Statement.
(viii) PRSI has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland, with
corporate power and authority to own its properties, conduct its business
as described in the Prospectus and to enter into and perform its
obligations under this Agreement. PRSI has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which such qualification is
required, whether by reason of the ownership, leasing, or management of any
properties or the conduct of any other business, except where the failure
to so qualify would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, assets or business affairs of the
Company, the Operating Partnership and the Subsidiaries, considered as a
single enterprise. All of the issued and outstanding shares of capital
stock of PRSI have been duly authorized and validly issued and are fully
paid and non-assessable. The ownership of the shares of capital stock of
PRSI is as described in the Prospectus.
(ix) Each of Prime Finance and Prime Finance II has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Maryland, with corporate power and authority
to own its properties, conduct its business as described in the Prospectus
and to enter into and
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perform its obligations under this Agreement. Each of Prime Finance and
Prime Finance II has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which such qualification is required, whether by
reason of the ownership, leasing, or management of any properties or the
conduct of any other business, except where the failure to so qualify would
not have a material adverse effect on the condition, financial or
otherwise, or the earnings, assets or business affairs of the Company, the
Operating Partnership and the Subsidiaries, considered as a single
enterprise. All of the issued and outstanding shares of capital stock of
Prime Finance and Prime Finance II have been duly authorized and validly
issued and are fully paid and non-assessable.
(x) PRSLP has been duly organized and is validly existing as a
partnership in good standing (to the extent applicable) under the laws of
the State of Delaware, with partnership power and authority to own its
properties and conduct its business as described in the Prospectus, and has
been duly qualified for the transaction of business and is in good standing
(to the extent applicable) under the laws of each other jurisdiction in
which such qualification is required, whether by reason of the ownership,
leasing, or management of any properties (including the Properties) or the
conduct of any other business, except where the failure to so qualify would
not have a material adverse effect on the condition, financial or
otherwise, or the earnings, assets or business affairs of the Company, the
Operating Partnership and the Subsidiaries, considered as a single
enterprise. The partnership agreement of PRSLP is in full force and
effect, and the percentage interest of the partners in PRSLP are as set
forth in the Prospectus.
(xi) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company conform in all material respects to all statements relating thereto
contained in the Prospectus. On the date hereof, _________ shares of
Common Stock, 2,300,000 shares of the Company's Series A Senior Cumulative
Preferred Stock, par value $0.01 per share (the "Senior Preferred Stock"),
________ shares of the Company's Series B Cumulative Participating
Convertible Preferred Stock, par value $0.01 per share (the "Convertible
Preferred Stock"), and no shares of Excess Stock (as defined in the Amended
and Restated Articles of Incorporation of the Company, as amended on May
29, 1996 (the "Charter")) are outstanding, assuming no automatic conversion
of which the Company is not aware, of shares of Common Stock, Senior
Preferred Stock, or Convertible Preferred Stock into shares of Excess
Stock. All such shares of Common Stock, Senior Preferred Stock and
Convertible Preferred Stock have been duly and validly authorized and
issued, are fully paid and non-assessable, are not subject to preemptive or
other similar rights, and have been offered and sold in compliance with all
applicable laws (including federal and state securities laws). No shares
of capital stock of the Company are reserved for any purpose except in
connection with (i) the 1994 and 1995 stock option plans of the Company as
described in the Prospectus, (ii) the possible issuance of Common Stock
upon the exchange of Common Units pursuant to the Operating Partnership
Agreement, and (iii) the possible issuance of Common Stock upon the
conversion of shares of Convertible Preferred Stock. Except as described
in the Prospectus, there are no
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outstanding securities convertible into or exchangeable for any capital
stock of the Company and no outstanding options, rights (preemptive or
otherwise) or warrants to purchase or to subscribe for such shares or any
other securities of the Company.
(xii) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized for issuance
and sale to the Underwriters, and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth
in the Pricing Agreement, will be duly and validly issued and fully paid
and non-assessable. The terms of the Shares conform to all statements and
descriptions related thereto contained in the Prospectus and comply with
all applicable legal requirements. The Shares conform to the provisions of
the Charter. The form of share certificate to be used to evidence the
Shares is in due and proper form and complies with all applicable legal
requirements. The provisions of the Charter relating to Excess Stock (as
defined in the Charter) comply with all applicable legal requirements and
are enforceable in accordance with their terms against holders of shares of
capital stock of the Company, subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
(xiii) A total of ____________ Common Units, 2,300,000 Senior
Preferred Units and ________ Junior Preferred Units (collectively, "Units")
are validly issued and outstanding and fully paid on the date hereof.
(xiv) None of the Company, the Operating Partnership, or any
Subsidiary is in violation of its charter, by-laws, certificate of limited
partnership, partnership agreement, or other organizational document, as
applicable. None of the Company, the Operating Partnership or any
Subsidiary is in default in the performance or observance of any
obligation, agreement, covenant, or condition contained in any material
contract, indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument to which the Company, the Operating
Partnership, or any Subsidiary is, or at the Closing Time will be, a party
or by which the Company, the Operating Partnership, or any Subsidiary is,
or at the Closing Time will be, bound or to which any of the property or
assets of the Company, the Operating Partnership, or any Subsidiary is, or
at the Closing Time will be, subject, except where a default thereunder
would not have a material adverse effect on the condition, financial or
otherwise, or the earnings, assets, or business affairs of the Company, the
Operating Partnership, and the Subsidiaries, considered as a single
enterprise. For puposes of this paragraph the phrase "material contract,
indenture, mortgage, deed of trust, loan agreement or other material
agreement or instrument" shall mean any contract, indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument that is required
to be filed as an exhibit to a registration statement on Form S-11 pursuant
to Section 601(b) of Regulation S-K.
(xv) (A) This Agreement has been duly authorized, executed, and
delivered by the Company and the Operating Partnership, and, assuming due
authorization, execution, and delivery by the Underwriters, is a valid and
binding agreement of the Company and the Operating Partnership, enforceable
against the Company and the Operating Partnership, in accordance with its
terms; and (B) at the Representation
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Date, the Pricing Agreement will have been duly authorized, executed, and
delivered by the Company and, assuming due authorization, execution, and
delivery by the Representative, will be a valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms;
PROVIDED that the enforceability of the foregoing agreements described in
(A) and (B) may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general principles of
equity; PROVIDED FURTHER that the indemnification provisions of this
Agreement may be unenforceable under general principles of equity or public
policy.
(xvi) The issuance and sale of the Company Firm Shares and the
Option Shares by the Company, the performance by the Company, the Operating
Partnership, and the Subsidiaries of their respective obligations under
this Agreement, the Pricing Agreement, and the consummation of the
transactions herein and therein contemplated, including the application of
the net proceeds from the sale of the Company Firm Shares and the Option
Shares as described in the Prospectus will not (A) conflict with or result
in a breach or violation of any of the terms or provisions of, constitute a
default under, or result in the acceleration of the maturity of any
indebtedness under, any material contact, indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to which
the Company or the Operating Partnership or any Subsidiary is a party or by
which the Company, the Operating Partnership or any Subsidiary is bound or
to which any of the property or assets of the Company, the Operating
Partnership or any Subsidiary is subject, (B) result in any violation of
the provisions of the certificate of incorporation or by-laws, certificate
of limited partnership, partnership agreement or other organizational
documents, as the case may be, of the Company, the Operating Partnership,
or any Subsidiary, or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company,
the Operating Partnership, or any Subsidiary or any of their respective
properties, or (C) result in the loss of tax-exempt status of any tax-
exempt bonds described in the Prospectus under the caption "Business and
Properties--Mortgage and Other Debt Financing of the Company." For puposes
of this paragraph the phrase "material contract, indenture, mortgage, deed
of trust, loan agreement or other material agreement or instrument" shall
mean any contract, indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument that is required to be filed as an exhibit to
a registration statement on Form S-11 pursuant to Section 601(b) of
Regulation S-K.
(xvii) Except to the extent obtained prior to the Closing Time, no
consent, approval, authorization, order, registration or qualification of
or with any court or governmental agency or body or any other person is
required for the issue and sale of the Shares or the consummation by the
Company, the Operating Partnership, and the Subsidiaries of the
transactions contemplated by this Agreement and the Pricing Agreement
except the registration under the 1933 Act of the Shares and such consents,
approvals, authorizations, registrations or qualifications as may be
required under state or foreign securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters.
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<PAGE>
(xviii) Other than as set forth or contemplated in the Prospectus,
there are no legal or governmental proceedings pending to which the
Company, the Operating Partnership or any Subsidiary is a party or of which
any property of, or that will be conveyed at or prior the Closing Time to,
the Company, the Operating Partnership, or any Subsidiary is the subject
which, if determined adversely to the Company, the Operating Partnership or
any Subsidiary, would individually or in the aggregate be reasonably
expected to have a material adverse effect on the consolidated financial
position, stockholders' equity (including, with respect to the Operating
Partnership and the Subsidiaries, partnership capital) or results of
operations of the Company, the Operating Partnership, and the Subsidiaries,
and, to the best knowledge of the Company and the Operating Partnership, no
such proceedings are threatened or contemplated by governmental authorities
or threatened by others.
(xix) The Company, the Operating Partnership, and the Subsidiaries
have good and marketable title in fee simple to all real property and good
and marketable title to all personal property owned by them, as described
in the Prospectus, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do
not materially adversely affect the value of such property and do not
materially adversely interfere with the use made and proposed to be made of
such property by the Company, the Operating Partnership, and the
Subsidiaries; and any real property and buildings described in the
Prospectus as being held under lease by the Company, the Operating
Partnership, or any Subsidiary are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially adversely interfere with the use made and proposed to be made of
such property and buildings by the Company, the Operating Partnership, and
the Subsidiaries.
(xx) The Company is organized in conformity with the requirements
for qualification as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (the "Code"), the Company's method of
operation has enabled it to meet the requirements for qualification and
taxation as a real estate investment trust under the Code, and its method
of operation enables it to continue to meet the requirements for taxation
as a real estate investment trust under the Code.
(xxi) Neither the Company, the Operating Partnership nor any of
the Subsidiaries is, or after giving effect to the issuance and sale of the
Shares by the Company (i) an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), or (ii) a "holding
company" or a "subsidiary company" of a "registered holding company," as
defined in the Public Utility Holding Company Act of 1938, as amended.
(xxii) Except as set forth in the Prospectus, no holder of any
securities of the Company or the Operating Partnership has any rights to
require the Company or the Operating Partnership to register any securities
of the Company or the Operating Partnership under the 1933 Act.
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<PAGE>
(xxiii) Other than this Agreement and the Pricing Agreement, the
Company is not a party to any contract, agreement or understanding with any
person that would give rise to a valid claim against the Company for a
brokerage commission, finder's fee or like payment in connection with the
sale of the Shares.
(xxiv) The Shares have been authorized for inclusion in the Nasdaq
National Market.
(xxv) No statement, representation, warranty or covenant made by
the Company or the Operating Partnership in any certificate or document
required by this Agreement to be delivered to the Underwriters was or will
be, when made, inaccurate, untrue or incorrect in any material respect.
(xxvi) Neither of the Company nor the Operating Partnership, nor
any of their directors, officers or controlling persons, has taken and will
take, directly or indirectly, any action resulting in a violation of
Rule 10b-6 under the 1934 Act, or designed to cause or result in or that
has constituted or reasonably might be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares.
1(b) The Selling Stockholder represents and warrants to, and
agrees with, each of the Underwriters as of the date hereof and as of the
Representation Date as follows:
(i) The Selling Stockholder has good and valid title to 90,328
Common Units, and at the Closing Time, following the exercise of the
exchange rights under the partnership agreement of the Operating
Partnership with respect to such Common Units, will have good and valid
title to the Shares of Common Stock to be sold by the Selling Stockholder
hereunder, in each case free and clear of all liens, encumbrances,
equities, claims, security interests or other restrictions whatsoever
(including any restrictions on transfer); and upon delivery of such Shares
and payment therefor pursuant hereto, good and valid title to such Shares,
free and clear of all liens, encumbrances, equities or claims, will pass to
the several Underwriters who have purchased such shares in good faith and
without notice of any such lien, encumbrance, equity or claim or any other
adverse claim within the meaning of the Uniform Commercial Code. There are
no outstanding options, warrants, rights, or other agreements or
arrangements requiring the Selling Stockholder at any time to transfer any
of such Common Units or the Shares issuable in exchange therefor, which are
to be sold hereunder by the Selling Stockholder.
(ii) The Selling Stockholder has granted to Wilmington Trust
Company, as custodian (the "Custodian"), under a custody agreement (the
"Custody Agreement"), an irrevocable power of attorney authorizing the
Custodian to exercise the exchange rights with respect to 90,328 Common
Units owned by the Selling Stockholder, subject to the conditions set forth
in the Custody Agreement, and to deliver under this Agreement certificates
in negotiable form representing the Shares issuable in exchange for such
Common Units, which are to be sold hereunder by the Selling Stockholder.
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<PAGE>
(iii) The Selling Stockholder has full legal right and power and
all authorizations and approvals required by law to execute, deliver and
perform this Agreement, the Pricing Agreement and the Custody Agreement.
This Agreement, the Pricing Agreement and the Custody Agreement have been
duly and validly authorized, executed and delivered by or on behalf of such
Selling Stockholder and are the legal, valid and binding agreements of such
Selling Stockholder, enforceable against such Selling Stockholder in
accordance with their terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency, reorganization or
other laws affecting creditors' rights generally.
(iv) The execution and delivery of this Agreement, the Pricing
Agreement and the Custody Agreement by the Selling Stockholder, the
performance of the obligations set forth herein or therein, and the
consummation by the Selling Stockholder of the transactions contemplated
hereby and thereby will not conflict with or constitute a breach or
violation of or a default under (A) any contract, indenture, mortgage, loan
agreement, note, lease, joint venture or partnership agreement or other
agreement or instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is bound or to which any of the property or
assets of the Selling Stockholder is subject, (B) the organizational
documents of the Selling Stockholder, or (C) any applicable law, rule,
order, administrative regulation or administrative or court decree; and all
authorizations, approvals or consents of any court or governmental
authority that are necessary in connection with the sale of the Shares by
the Selling Stockholder have been obtained, except such as may be required
under the 1933 Act or the 1933 Act Regulations or state securities or real
estate syndication laws.
(v) All information furnished by or on behalf of the Selling
Stockholder expressly for use in the Registration Statement is, and at the
Closing Time will be, true and correct and does not, and at the Closing
Time will not, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
such information not misleading.
(vi) The representations and warranties of the Selling
Stockholder in the Custody Agreement are true and correct.
(vii) There is not pending or, to the knowledge of the Selling
Stockholder, threatened against the Selling Stockholder any action, suit or
proceeding which (A) questions the validity of this Agreement or of any
action taken or to be taken by the Selling Stockholder pursuant to or in
connection with this Agreement or (B) is required to be disclosed in or
incorporated by reference in the Registration Statement which is not so
disclosed or incorporated.
(viii) Neither the Selling Stockholder nor any of its directors,
officers or controlling persons has taken and will take, directly or
indirectly, any action resulting in a violation of Rule 10b-6 under the
1934 Act, or designed to cause or result in or that has constituted or
reasonably might be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares.
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<PAGE>
1(c) Any certificate signed by any officer or attorney-in-fact of
the Company, the Operating Partnership or the Selling Stockholder and delivered
to the Representative or to counsel for the Underwriters shall be deemed a
representation and warranty by such entity to each Underwriter as to the matters
covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING; RESERVATION OF
SHARES.
2(a) On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell the 3,705,000 Company Firm Shares and the Selling Stockholder
agrees to sell the 90,328 Selling Stockholder Firm Shares to each Underwriter,
severally and not jointly, and each Underwriter, severally and not jointly,
agrees to purchase from the Company and the Selling Stockholder, at the price
per share set forth in the Pricing Agreement, the number of Firm Shares set
forth in SCHEDULE A hereto opposite the name of such Underwriter (except as
otherwise provided in the Pricing Agreement), plus any additional number of Firm
Shares which such Underwriter may become obligated to purchase pursuant to
Section 9 hereof.
If the Company has elected not to rely upon Rule 430A under the 1933
Act Regulations, the public offering price and the purchase price per share to
be paid by the Underwriters for the Shares have each been determined and set
forth in the Pricing Agreement, dated the date hereof, and an amendment to the
Registration Statement and the Prospectus reflecting such information will be
filed before the Registration Statement becomes effective.
If the Company has elected to rely upon Rule 430A under the 1933 Act
Regulations, the purchase price per share to be paid by the Underwriters for the
Shares shall be an amount equal to the public offering price, less an amount per
share to be determined by agreement between the Representative, the Company and
the Selling Stockholder. The public offering price per share of the Shares
shall be a fixed price to be determined by agreement between the Representative,
the Company and the Selling Stockholder. The public offering price and the
purchase price, when so determined, shall be set forth in the Pricing Agreement.
In the event that such prices have not been agreed upon and the Pricing
Agreement has not been executed and delivered by all parties thereto by the
close of business on the fourth business day following the date of this
Agreement, this Agreement shall terminate forthwith, without liability of any
party to any other party hereunder other than pursuant to Section 6 hereof,
unless otherwise agreed to by the Company, the Selling Stockholder and the
Representative.
2(b) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Underwriters to purchase up to
an additional 555,750 shares of Common Stock, as Option Shares, at the price per
share set forth in the Pricing Agreement. The option hereby granted will expire
30 days after the date hereof (or, if the Company has elected to rely upon
Rule 430A under the 1933 Act Regulations, 30 days after the Representation Date)
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Firm Shares upon notice by the Representative to the
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Company setting forth the number of Option Shares as to which the Underwriters
are then exercising the option and the time, date and place of payment and
delivery for such Option Shares. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Representative but shall not be later than
seven full business days after the exercise of said option, nor in any event
prior to Closing Time, as hereinafter defined, unless otherwise agreed upon by
the Representative and the Company. If the option is exercised as to all or any
portion of the Option Shares, the Option Shares shall be purchased by the
Underwriters, severally and not jointly, in proportion to their respective Firm
Share underwriting obligations as set forth in SCHEDULE A hereto (except as may
be otherwise provided in the Pricing Agreement).
2(c) Payment of the purchase price for and delivery of
certificates for the Firm Shares (including the Shares placed in custody
pursuant to the Custody Agreement, as described in Section 1(b)(ii)) shall be
made at the offices of Friedman, Billings, Ramsey & Co., Inc., 1001 Nineteenth
Street North, Arlington, Virginia, or at such other place as shall be agreed
upon by the Representative and the Company, at 10:00 a.m., Washington, D.C.
time, on the third business day following the date the Registration Statement
becomes effective (or, if the Company has elected to rely upon Rule 430A, the
third business day after the Representation Date), or such other time not later
than 10 business days after such date as shall be agreed upon by the
Representative and the Company (such time and date of payment and delivery being
herein called "Closing Time"). In addition, in the event that any or all of the
Option Shares are purchased by the Underwriters, payment of the purchase price
for and the delivery of such Option Shares shall be made at the above-mentioned
offices of Friedman, Billings, Ramsey & Co., Inc., or at such other place as
shall be mutually agreed upon by the Representative and the Company, on each
Date of Delivery as specified in the notice from the Representative to the
Company. Payment shall be made to the Company and the Selling Stockholder by
certified or official bank check or checks in New York Clearing House or similar
next day funds payable to the order of the Company or the Selling Stockholder,
as applicable, or, at the election of the Company or the Selling Stockholder
made at the time of execution of this Agreement, in same day funds, PROVIDED
that the Company or the Selling Stockholder, as the case may be, reimburses the
Underwriters for the additional cost of same day funds, in each case against
delivery to the Representative for the respective accounts of the Underwriters
of certificates for the Shares to be purchased by the Underwriters. The
certificates for the Firm Shares and the Option Shares shall be in such
authorized denominations and registered in such names as the Representative may
request in writing at least two business days before Closing Time or each Date
of Delivery, as the case may be. It is understood that each Underwriter has
authorized the Representative, for its account, to accept delivery of, receipt
for, and make payment of the purchase price for, the Shares which it has agreed
to purchase. FBR, individually and not as the Representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Shares to be purchased by any Underwriter whose check has not been
received by Closing Time, but such payment shall not relieve such Underwriter
from its obligations hereunder. The certificates for the Firm Shares and the
Option Shares will be made available for examination and packaging by the
Underwriters not later than 10:00 a.m., Washington, D.C. time, on the last
business day prior to Closing Time or each Date of Delivery, as the case may be.
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SECTION 3. COVENANTS OF THE COMPANY, THE OPERATING
PARTNERSHIP AND THE SELLING STOCKHOLDER.
3(a) Each of the Company and the Operating Partnership covenants
with each Underwriter as follows:
(i) The Company will (i) prepare the Prospectus in a form
approved by the Representative and file such Prospectus pursuant to
Rule 424(b) of the 1933 Act Regulations not later than the
Commission's close of business on the second business day following
the execution and delivery of this Agreement, or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) of the 1933 Act
Regulations; (ii) advise the Representative, promptly after it
receives notice thereof, of the time when the Registration Statement,
or any amendment thereto, has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed;
(iii) advise the Representative, promptly after it receives notice
thereof, of (A) the receipt of any comments from the Commission,
(B) the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any preliminary prospectus or the
Prospectus, (C) the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, (D) the initiation or
threatening of any proceeding for any such purpose, or (E) any request
by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information;
and, (iv) in the event of the issuance of any stop order or any order
preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, use promptly its best
efforts to obtain its withdrawal.
(ii) The Company will (i) give the Representative notice of
its intention to prepare or file any amendment to the Registration
Statement (including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus that
the Company proposes for use by the Underwriters in connection with
the offering of the Shares that differs from the prospectus on file at
the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be
filed pursuant to Rule 424(b) of the 1933 Act Regulations),
(ii) furnish the Underwriters with copies of any such amendments or
supplements a reasonable time prior to the proposed filing or use
thereof, and (iii) not file any such amendment or any supplement or
use any such prospectus to which the Representative shall reasonably
object promptly after reasonable notice thereof.
(iii) Promptly from time to time, the Company will take such
action as the Representative may reasonably request to qualify the
Shares for offering and sale under the securities laws of such
jurisdictions as the Representative may request and to comply with
such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a
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foreign corporation or to file a general consent to service of process
in any jurisdiction.
(iv) The Company will furnish each Underwriter with copies
of the Prospectus in such quantities as such Underwriter may from time
to time reasonably request. If the delivery of a prospectus is
required at any time prior to the expiration of nine months after the
time of issue of the Prospectus in connection with the offering or
sale of the Shares, and if at such time any event shall have occurred
as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the 1933 Act and the 1933 Act
Regulations, the Company will notify the Representative and upon the
Representative's request will prepare and furnish without charge to
the Underwriters and to any dealer in securities as many copies as the
Underwriters may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance. In case the
Underwriters are required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the
time of issue of the Prospectus, upon the Underwriter's request but at
the Underwriter's expense, the Company will prepare and deliver to the
Underwriters as many copies as the Underwriters may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of
the 1933 Act.
(v) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later
than eighteen months after the "effective date of the Registration
Statement" (as defined in Rule 158(c)), an earnings statement of the
Company and its subsidiaries (which need not be audited) complying
with Section 11(a) of the 1933 Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158).
(vi) The Company will furnish to its stockholders, as soon
as practicable after the end of each fiscal year, an annual report
(including a balance sheet and statements of income, stockholders'
equity and cash flow of the Company and its consolidated subsidiaries
certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), consolidated summary
financial information of the Company and its subsidiaries for such
quarter in reasonable detail.
(vii) During a period of five years from the effective date
of the Registration Statement, the Company will furnish to the
Representative copies of all reports or other communications
(financial or other) furnished to
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stockholders, and deliver to the Representative, as soon as they are
available, copies of any reports and financial statements furnished to
or filed with the Commission or any national securities exchange or
quotation system on which any class of securities of the Company is
listed.
(viii) The Company will use its best efforts to meet the
requirements to continue to qualify as a "real estate investment
trust" under the Code.
(ix) The Company and the Operating Partnership will not
invest, reinvest or otherwise use the proceeds received by the Company
or the Operating Partnership from the sale of the Company Firm Shares
or Option Shares in such a manner, or take any action or omit to take
any action, that would cause the Company or the Operating Partnership
to become an "investment company" as that term is defined in the
Investment Company Act.
(x) The Company will use the net proceeds of the sale of
the Company Firm Shares and Option Shares for the purposes described
in the Prospectus under "Use of Proceeds."
(xi) The Company will take all action to ensure that the
Common Stock continues to be listed on the Nasdaq National Market or
any national securities exchange.
(xii) Except for the authorization of actions permitted to be
taken by the Underwriters as contemplated herein or in the Prospectus,
neither the Company nor the Operating Partnership will (A) take,
directly or indirectly, any action designed to cause or to result in,
or that might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares, (B) sell, bid for or
purchase the Shares or pay any person any compensation for soliciting
purchases of the Shares, or (C) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities
of the Company.
(xiii) During the period from the date of the Pricing
Agreement until 180 days after Closing Time, the Company and the
Operating Partnership will not, without the prior written consent of
the Representative, directly or indirectly, sell, offer to sell, grant
any option for the sale of, or otherwise dispose of, any Common Stock
or shares of Common Stock to be issued upon conversion of any
Convertible Preferred Stock or Units or any other security convertible
into or exchangeable into or exercisable for Common Stock, otherwise
than (i) in accordance with this Agreement, (ii) in connection with
the Company's 1994 and 1995 stock option plans, (iii) upon the
conversion of shares of Convertible Preferred Stock, (iv) upon the
exchange of Common Units pursuant to the Operating Partnership
Agreement, or (v) as otherwise contemplated in the Prospectus.
3(b) The Selling Stockholder covenants with each Underwriter as
follows:
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(i) During the period from the Representation Date until
60 days after the date of the Prospectus, the Selling Stockholder will
not, without the prior written consent of the Representative, directly
or indirectly, sell, offer or contract to sell, grant any option for
the sale of, or otherwise dispose of or transfer (or enter into any
transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of)
any shares of Common Stock (or any securities of the same or similar
class as, or convertible into or exchangeable or exercisable for such
securities), other than in accordance with this Agreement;
(ii) That the Shares to be sold by the Selling Stockholder
hereunder, which are issuable in exchange for the Common Units with
respect to which the Selling Stockholder has granted a power of
attorney pursuant to the Custody Agreement, and such Common Units, are
subject to the interest of the Underwriters hereunder, that the
arrangements made by the Selling Stockholder for such custody are to
that extent irrevocable, and that the obligations of the Selling
Stockholder hereunder shall not be terminated by any act of the
Selling Stockholder, by operation of law, or the occurrence of any
other event; and
(iii) To deliver to the Representative prior to Closing Time
a properly completed and executed United States Treasury Department
Form W-9.
The Selling Stockholder consents to the use, in accordance with the
provisions of the 1933 Act and with the securities laws of the jurisdictions in
which the Shares are offered by the Underwriters and by all dealers to whom
Shares may be sold, of each preliminary prospectus furnished by the Company, the
Prospectus and any amendment or supplement thereto, both in connection with the
offering and sale of the Shares and for such period of time thereafter as the
Prospectus is required by the 1933 Act to be delivered in connection with sales
by any Underwriter.
SECTION 4. PAYMENTS OF FEES AND EXPENSES. The Company, the Operating
Partnership and the Selling Stockholder covenant and agree with one another and
the Underwriters that (a) the Company will pay or cause to be paid the
following: (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto (other than the filing fee
payable to the SEC with respect to the Shares to be sold by the Selling
Stockholder), (ii) the preparation, issuance and delivery of the certificates
for the Shares to the Underwriters, (iii) the fees and other charges of the
Company's counsel and accountants, (iv) the qualification of the Shares under
securities laws and real estate syndication laws in accordance with the
provisions of Section 3(a)(iii) hereof, including filing fees (other than the
filing fees payable with respect to the Shares to be sold by the Selling
Stockholder) and the reasonable fees and other charges of counsel for the
Underwriters in connection therewith and in connection with the preparation of
the Blue Sky Memorandum, (v) the printing and delivery to the Underwriters of
copies of the Registration Statement as originally filed and of each amendment
thereto, of the preliminary prospectuses, and of the Prospectus and any
amendments or supplements thereto, (vi) the printing and delivery to the
Underwriters of copies of the Blue Sky Memorandum; (vii) the fee of the NASD,
including the reasonable fees and other charges of counsel for the Underwriters
in connection with the NASD's review of the terms of the
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<PAGE>
proposed public offering of the Shares, (viii) the fees and expenses incurred in
connection with the listing of the Common Stock on the Nasdaq National Market,
including filing and listing fees, and (ix) all out-of-pocket expenses of the
Underwriters, including reasonable fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the offering, purchase,
sale and delivery of the Shares and in connection with their services rendered
pursuant to the Engagement Letter (as defined); PROVIDED, THAT, the aggregate
amount of fees and expenses of counsel for the Underwriters that may be
reimbursed in connection with such offering and services and the Exchange Offer
shall not exceed $200,000; and (b) the Selling Stockholder will pay (i) any fees
and expenses of counsel for the Selling Stockholder; (ii) any fees and expenses
of the Custodian; (iii) all filing fees attributable to the Selling Stockholder
Firm Shares payable to the SEC or in connection with the qualification of the
Selling Stockholder Firm Shares under securities laws and real estate
syndication laws in accordance with the provisions of Section 3(a)(iii) hereof;
and (iv) any transfer taxes incident to the sale and delivery of the Selling
Stockholder Firm Shares to the Underwriters hereunder.
If this Agreement is canceled or terminated by the Representative in
accordance with the provisions of Section 5 hereof, the Company also shall
reimburse the Underwriters for its out-of-pocket expenses, including the
reasonable fees and other charges of counsel for the Underwriters, to the extent
provided in and limited by Section 8 hereof.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations
of the Underwriters hereunder, as to the Shares to be delivered at each Date of
Delivery, shall be subject to the condition that all representations and
warranties and other statements of the Company, the Operating Partnership and
the Selling Stockholder herein are, at and as of such Date of Delivery, true and
correct, the condition that the Company, the Operating Partnership and the
Selling Stockholder shall have each performed all of their obligations hereunder
theretofore to be performed, and the following additional conditions:
5(a) The Registration Statement shall have become effective not later
than 5:30 p.m. Eastern time on the first business day following the date
hereof; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the Commission; and
all requests for additional information on the part of the Commission shall
have been complied with to the Representative's reasonable satisfaction.
If the Company has elected to rely upon Rule 430A of the 1933 Act
Regulations, the price of the Shares and any price-related information
previously omitted from the effective Registration Statement pursuant to
such Rule 430A shall have been transmitted to the Commission for filing
pursuant to Rule 424(b) of the 1933 Act Regulations within the applicable
time period prescribed for such filing by the 1933 Act Regulations and in
accordance with Section 3(a) hereof, or a post-effective amendment
providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A of the 1933 Act
Regulations.
5(b) Hogan & Hartson L.L.P., counsel for the Underwriters, shall have
furnished to the Representative such opinion or opinions, dated such Date
of Delivery, with respect to the incorporation of the Company, this
Agreement, the Pricing Agreement, the validity of the Shares being
delivered at such Date of
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<PAGE>
Delivery, the Registration Statement, the Prospectus, and other related
matters as the Representative may reasonably request, and such counsel
shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters.
5(c) Winston & Strawn, counsel for the Company, shall have furnished
to the Representative their written opinion, dated such Date of Delivery,
in form and substance satisfactory to the Representative, to the effect
that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Maryland, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus.
(ii) The Company has an authorized capitalization as set
forth in the Prospectus; all of the issued shares of capital stock of
the Company (including the Shares being delivered at such Date of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; the terms of the Shares conform in all
material respects to all statements and descriptions related thereto
contained in the Prospectus.
(iii) Each of the Operating Partnership and each Subsidiary
has been duly organized and is validly existing as a partnership or
corporation, as the case may be, in good standing (to the extent
applicable) under the laws of its jurisdiction of organization; the
partnership agreement of the Operating Partnership has been duly
authorized, executed and delivered by the Company and the Operating
Partnership and, assuming the due authorization, execution and
delivery where applicable by each of the parties thereto other than
the Company and the Operating Partnership, constitutes valid and
legally binding obligations of the Company and the Operating
Partnership, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws of general applicability relating to or
affecting creditors' rights and to the effect of general principles of
equity; and the partnership agreement of each Subsidiary that is a
partnership has been duly authorized, executed and delivered by the
parties thereto and, assuming the due authorization, execution and
delivery where applicable by each of the parties thereto other than
the Company, the Operating Partnership, and any Subsidiary constitutes
valid and legally binding obligations of the Company, the Operating
Partnership, and the Subsidiaries, as applicable, enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium, and similar laws of
general applicability relating to or affecting creditors' rights and
to the effect of general principles of equity (such counsel being
entitled to rely in respect of the opinion in this clause in respect
of matters of fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall
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<PAGE>
state that they believe that both the Underwriters and they are
justified in relying upon such certificates).
(iv) Each of the Company, the Operating Partnership, and the
Subsidiaries has been duly qualified as a foreign corporation, limited
partnership, or otherwise, as appropriate, for the transaction of
business and is in good standing (to the extent applicable) under the
laws of each other jurisdiction specified in such opinion (which shall
include each jurisdiction in which the Company, the Operating
Partnership, or any Subsidiary) owns, leases, or manages properties,
or conducts any other business, so as to require such qualification,
or is subject to no material liability or disability by reason of
failure to be so qualified in any such jurisdiction (such counsel
being entitled to rely in respect of the opinion in this clause in
respect of matters of fact upon certificates of officers of the
Company and governmental authorities, provided that such counsel shall
state that they believe that both the Underwriters and they are
justified in relying upon such certificates).
(v) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company, the Operating Partnership,
or any Subsidiary is a party or of which any property of the Company,
the Operating Partnership, or any Subsidiary is the subject which
would individually or in the aggregate, be reasonably expected to have
a material adverse effect on the consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others.
(vi) This Agreement has been duly authorized, executed, and
delivered by the Company and the Operating Partnership. The Pricing
Agreement has been duly authorized, executed, and delivered by the
Company.
(vii) The issuance and sale of the Shares being delivered at
such Date of Delivery by the Company, the performance by the Company,
the Operating Partnership, and the Subsidiaries of their respective
obligations under this Agreement, the Pricing Agreement, and the
consummation of the transactions herein and therein contemplated,
including the application of the net proceeds from the sale of the
Shares as described in the Prospectus will not (A) conflict with or
result in a breach or violation of any of the terms or provisions of,
constitute a default under, or result in the acceleration of the
maturity of any indebtedness under, any indenture, mortgage, deed of
trust, loan agreement, or other agreement or instrument filed or
incorporated by reference in the Registration Statement to which the
Company or the Operating Partnership or any Subsidiary is a party or
by which the Company, the Operating Partnership, or any Subsidiary is
bound or to which any of the property or assets of the Company, the
Operating Partnership, or any Subsidiary is subject or (B) result in
any violation of the provisions of the certificate of incorporation or
by-laws, certificate of limited
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partnership, partnership agreement or other organizational documents,
as the case may be, of the Company, the Operating Partnership, or any
Subsidiary, or any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over the Company, the Operating Partnership, or any
Subsidiary or any of their respective properties.
(viii) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized for
issuance and sale to the Underwriters, and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth in the Pricing Agreement, will be duly and
validly issued and fully paid and non-assessable. The terms of the
Shares conform to all statements and descriptions related thereto
contained in the Prospectus and comply with all applicable legal
requirements. The Shares conform to the provisions of the Charter.
The form of share certificate to be used to evidence the Shares is in
due and proper form and complies with all applicable legal
requirements.
(ix) The issuance and sale of the Shares being delivered at
such Date of Delivery by the Company, the performance by the Company,
the Operating Partnership, and the Subsidiaries of their respective
obligations under this Agreement, the Pricing Agreement, and the
consummation of the transactions herein and therein contemplated,
including the application of the proceeds from the sale of the Shares
as described in the Prospectus will not affect the treatment of the
bonds designated "Tax-Exempt Bonds" in the Prospectus under the
caption "Mortgage and Other Debt Financing" as small issue bonds as
defined by Section 103(b)(6) of the Internal Revenue Code of 1954.
(x) No consent, approval, authorization, order,
registration or qualification of or with any court or governmental
agency or body or other person is required for the issuance and sale
of the Shares by the Company or the performance by the Company, the
Operating Partnership, or any Subsidiary of their respective
obligations under this Agreement, the Pricing Agreement, and the
consummation of the transactions herein and therein contemplated,
other than such consents, approvals, authorizations, registrations or
qualifications as have been obtained prior to the Closing Time or may
be required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Underwriters.
(xi) The statements made under the captions "Business and
Properties--Mortgage and Other Debt Financing," "Management--
Employment Agreements", "Management--Stock Incentive Plans," "Certain
Relationships and Transactions," "Operating Partnership Agreement,"
"Description of Capital Stock," "Shares Available for Future Sale,"
"Management--Indemnification of Directors and Officers," "Description
of
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<PAGE>
Capital Stock," and "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws" in the Prospectus, to the extent they
constitute matters of law or legal conclusions or constitute summaries
of documents described therein, are true and accurate in all material
respects, and fairly present the information provided therein.
(xii) The Operating Partnership and each Subsidiary which was
organized as a partnership is properly treated (x) as a partnership
for federal income tax purposes and (y) not as a "publicly traded
partnership."
(xiii) The Company is not, and (assuming the application by
the Company of the net proceeds of the issue and sale of the Shares in
the manner described in the Prospectus under the caption "Use of
Proceeds") after giving effect to the issuance and sale of the Shares
by the Company will not be, an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act.
(xiv) The Registration Statement, as of the Effective Date,
and the Prospectus, as of its date, appeared on their face to be
appropriately responsive in all material respects to the requirements
of the 1933 Act and the 1933 Act Regulations, except that such counsel
need express no opinion as to the financial statements and related
notes thereto and the other financial, statistical, and accounting
data included in the Registration Statement or the Prospectus (except
to the extent set forth in paragraph (xiv) hereof), or as to the
accuracy, completeness or fairness of the statements contained in the
Registration Statement, except to the extent set forth in paragraphs
(xi) and (xvii) and the paragraph immediately following paragraph
(xvii).
(xv) To the knowledge of such counsel, there is no action,
suit, or proceeding before or by any court or governmental agency or
body, domestic or foreign, now pending or threatened against the
Company, the Operating Partnership, any Subsidiary, or any officer or
director of any of the foregoing that is required to be disclosed in
the Registration Statement (other than as disclosed therein). To the
knowledge of such counsel, there are no contracts or documents of a
character that are required to be described in the Prospectus or filed
as exhibits to or incorporated by reference into the Registration
Statement by the 1933 Act or the 1933 Act Regulations that have not
been so described or filed.
(xvi) The Company is organized in conformity with the
requirements for qualification as a real estate investment trust under
the Code, the Company's method of operation has enabled it to meet the
requirements for qualification and taxation as a real estate
investment trust under the Code, and its method of operation enables
it to continue to meet the requirements for taxation as a real estate
investment trust under the Code.
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<PAGE>
(xvii) The statements made in the Prospectus under the caption
"Certain Federal Income Tax Considerations," to the extent they
constitute matters of law or legal conclusions have been reviewed by
such counsel and fairly summarize the federal income tax
considerations that are likely to be material to a holder of Shares.
In giving its opinion required by this Section 5(c), such counsel
shall additionally state that, although it has not independently verified
and is not passing upon and assumes no responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration or
Prospectus (except to the extent specified in paragraph (xi) and (xvii)
above), no facts have come to the attention of such counsel that lead it to
believe that, as of its effective date, the Registration Statement or any
further amendment thereto made by the Company prior to such Date of
Delivery contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading (it being understood that such
counsel need express no opinion as to the financial statements and related
notes thereto and the other financial, statistical, and accounting data
included in the Registration Statement or the Prospectus) or that, as of
its date, the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Date of Delivery contained an untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading (it being understood that such counsel need
express no opinion as to the financial statements and related notes thereto
and the other financial, statistical, and accounting data included in the
Registration Statement or the Prospectus) or that, as of such Date of
Delivery, either the Registration Statement or the Prospectus or any
further amendment or supplement thereto made by the Company prior to such
Date of Delivery contains an untrue statement of a material fact or omits
to state a material fact necessary to make the statements therein, in light
of the circumstances in which they were made, not misleading (it being
understood that such counsel need express no opinion as to the financial
statements and related notes thereto and the other financial, statistical,
and accounting data included in the Registration Statement or the
Prospectus).
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the laws of the
United States, the general corporate law of Maryland and the general
corporate law of Delaware.
Such counsel shall furnish a copy of such opinion to the Selling
Stockholder, with a letter stating that the Selling Stockholder shall be
entitled to rely on such opinion as if it were addressed to the Selling
Stockholder.
5(d) D'Ancona & Pflaum, counsel for the Selling Stockholder, shall
have furnished to the Representative their written opinion, dated such Date
of Delivery, in form and substance satisfactory to the Representative, to
the effect that:
(i) The Custody Agreement has been duly executed and
delivered by the Selling Stockholder and constitutes a valid and
binding agreement of
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the Selling Stockholder enforceable in accordance with its terms,
except as enforceability may be limited by general equitable
principles and bankruptcy, insolvency, reorganization or other laws
affecting creditors' rights generally.
(ii) Each of this Agreement and the Pricing Agreement has
been duly and validly authorized, executed and delivered by or on
behalf of the Selling Stockholder.
(iii) The execution and delivery of this Agreement, the
Pricing Agreement and the Custody Agreement, the performance of the
obligations set forth therein, and the consummation of the
transactions contemplated thereby did not, do not and will not
conflict with or constitute a breach or violation of or a default
under: (1) to the knowledge of counsel, any contract, indenture,
mortgage, loan agreement, note, lease, joint venture or partnership
agreement or other instrument or agreement to which the Selling
Stockholder is a party or by which that Selling Stockholder may be
bound or subject; or (2) the organizational documents of the Selling
Stockholder.
(iv) To the knowledge of counsel, there is no action, suit
or proceeding before or by any court or governmental agency of body,
domestic or foreign, now pending or threatened against or affecting
the Selling Stockholder that, if determined adversely to the Selling
Stockholder, could reasonably be expected to materially and adversely
affect the consummation of the transactions contemplated by this
Agreement.
(v) All authorizations, approvals and consents of any court
or governmental authority or agency that are necessary in connection
with the offering, issuance or sale of the Shares by the Selling
Stockholders under this Agreement have been obtained, except such as
may be required under the 1933 Act or the 1933 Act Regulations or
state securities or real estate syndication laws.
(vi) The Selling Stockholder has full right, power and
authority to sell, assign, transfer and deliver the Shares to be sold
by the Selling Stockholder hereunder.
(vii) Assuming that the Underwriters are bona fide purchasers
purchasing in good faith without notice of any adverse claim within
the meaning of the Uniform Commercial Code, upon the delivery of and
payment for the Shares to be sold by such Selling Stockholder as
contemplated by this Agreement, each of the Underwriters will receive
valid title to the Shares purchased by it from such Selling
Stockholder, free and clear of any pledge, lien, security interest,
voting trust, encumbrance, claim or equitable interest.
In rendering such opinion such special counsel may rely, as
to matters of law in jurisdictions other than the State of
Illinois, on opinions of local counsel, and, as to matters of
fact, upon certificates of authorized
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representatives of the Selling Stockholder, in which case such opinion
will state that such counsel is so doing and that the Underwriters are
justified in relying on such opinions or certificates.
5(e) At the time of the execution of this Agreement and on the
effective date of the most recently filed post-effective amendment to the
Registration Statement and also at each Date of Delivery, Ernst & Young LLP
shall have furnished to the Representative a letter or letters, dated the
respective date of delivery thereof, in form and substance satisfactory to
the Representative, to the effect set forth in ANNEX I hereto and, if the
Company has elected to rely upon Rule 430A of the 1933 Act Regulations, to
the further effect that they have carried out procedures specified in
paragraph (v) of ANNEX I with respect to certain amounts, percentages, and
financial information specified by the Representative and deemed to be part
of the Registration Statement pursuant to Rule 430A(b) and have found such
amounts, percentages and financial information to be in agreement with the
records specified in such paragraph (v).
At the Closing Time, Ernst & Young LLP shall have furnished a copy of
such letters to the Selling Stockholder, with a letter stating that the
Selling Stockholder shall be entitled to rely thereon.
5(f) The Registration Statement and the Prospectus shall contain all
statements that are required to be stated therein in accordance with the
1933 Act and the 1933 Act Regulations and shall conform in all material
respects to the requirements of the 1933 Act and the 1933 Act Regulations.
Neither the Registration Statement nor the Prospectus shall contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading.
5(g) No action, suit, or proceeding at law or in equity shall be
pending or, to the knowledge of the Company or the Operating Partnership,
be threatened against the Company, the Operating Partnership or any
Subsidiary, that would be required to be described in the Prospectus other
than as described therein.
5(h) (A) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus,
and (B) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock,
partnership interests, or long-term debt of the Company, the Operating
Partnership or any Subsidiary or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company, the Operating Subsidiary, and the Subsidiaries, otherwise than as
set forth or contemplated in the Prospectus, the effect of which, in any
such case described in clause (A) or (B), is in the Representative's
judgment so material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the
- 25 -
<PAGE>
delivery of the Shares being delivered at such Date of Delivery on the
terms and in the manner contemplated in the Prospectus.
5(i) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the Nasdaq National Market or any national stock
exchange; (ii) a general moratorium on commercial banking activities
declared by either Federal or District of Columbia authorities; or (iii)
the outbreak or escalation of hostilities involving the United States or
the declaration by the United States of a national emergency or war, if the
effect of any such event specified in this clause (iii), in the
Representative's judgment, makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at
such Date of Delivery on the terms and in the manner contemplated by the
Prospectus.
5(j) The Shares to be sold by the Company at such Date of Delivery
shall have been duly authorized for inclusion on the Nasdaq National
Market.
5(k) The Company shall have furnished or caused to be furnished to the
Representative at such Date of Delivery certificates of officers of the
Company satisfactory to the Underwriters as to the accuracy of the
representations and warranties of the Company herein at and as of such Date
of Delivery, as to the performance by the Company of all of its obligations
hereunder to be performed at or prior to such Date of Delivery, as to the
matters set forth in subsections (a) and (f) through (h) of this Section
and as to such other matters as the Representative may reasonably request.
If any condition specified in this Section 5 shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be terminated
by the Underwriters by notice to the Company at any time at or prior to the
Closing Time, and such termination shall be without liability of any party to
any other party except as provided in Section 8 hereof.
SECTION 6. INDEMNIFICATION.
6(a) The Company and the Operating Partnership, jointly and severally,
will indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of section 15 of the 1933 Act,
against any losses, claims, damages, or liabilities to which any Underwriter or
such controlling person may become subject, under the 1933 Act or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Underwriters and
such controlling persons for any legal or other expenses reasonably incurred by
the Underwriters or such controlling persons in connection with investigating or
defending any such action or claim as such expenses are incurred; PROVIDED,
HOWEVER, that (i) none of the Company or the Operating Partnership shall be
liable in any such case to the extent that
- 26 -
<PAGE>
any such loss, claim, damage, or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the second paragraph under the caption "Underwriting" in the Prospectus
and (ii) such indemnity with respect to any Preliminary Prospectus shall not
inure to the benefit of the Underwriters (or any person controlling the
Underwriters) if the person asserting any such loss, claim, damage or liability
did not receive a copy of the Prospectus (or the Prospectus as supplemented) at
or prior to the confirmation of the sale of Shares to such person in any case
where such delivery is required by the 1933 Act and the untrue statement or
omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as supplemented).
6(b) The Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of section 15 of the 1933 Act, as
follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the
information deemed to be part of the Registration Statement pursuant
to Rule 430A(b) or Rule 434 of the 1933 Act Regulations, if
applicable, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation or of any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever for which indemnification is
provided under subsection (i) above, if such settlement is effected
with the written consent of the Selling Stockholder; and
(iii) against any and all expense whatsoever (including,
without limitation, the fees and other charges of counsel chosen by
the Representative) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceedings
by any governmental agency or body, commenced or threatened, or any
claim whatsoever for which indemnification is provided under
subsection (i) above, to the extent that any such expense is not paid
under subsection (i) or (ii) above;
PROVIDED, HOWEVER, that the Selling Stockholder shall be liable under this
Section 6(b) only to the extent that such untrue statement of a material fact or
omission or alleged omission of a material fact was made in any preliminary
prospectus or the Prospectus (or any
-27-
<PAGE>
amendment or supplement thereto) in reliance upon or in conformity with written
information furnished to the Company by the Selling Stockholder by an instrument
duly executed by the Selling Stockholder specifically stating that it is for use
in preparation thereof; and PROVIDED FURTHER, that the liability of the Selling
Stockholder for indemnification and contribution under this Agreement shall be
limited to an amount equal to the net proceeds received by the Selling
Stockholder from the Underwriters in the offering.
6(c) Each Underwriter severally agrees to indemnify and hold harmless
the Company, the Operating Partnership and the Selling Stockholder and each of
the Company's directors, each officer of the Company who signed the Registration
Statement, and each other person who controls the Company or the Selling
Stockholder within the meaning of the 1933 Act, against any losses, claims,
damages, or liabilities to which the Company, the Operating Partnership, the
Selling Stockholder, or each such other person may become subject, under the
1933 Act or otherwise, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement, or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the second
paragraph under the caption "Underwriting" in the Prospectus, and will reimburse
the Company, the Operating Partnership, the Selling Stockholder, or each such
other person for any legal or other expenses reasonably incurred by the Company,
the Operating Partnership, the Selling Stockholder, or each such other person in
connection with investigating or defending any such action or claim as such
expenses are incurred.
6(d) Promptly after receipt by an indemnified party under subsection
6(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation, unless such
indemnified party reasonably objects to such assumption on the ground that the
named parties to any such action (including any impleaded parties) include both
such indemnified party and an indemnifying party and such indemnified party
reasonably believes that there may be legal
-28-
<PAGE>
defenses available to it that are different from or in addition to those
available to such indemnifying party. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel (in addition to
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
6(e) If the indemnification provided for in this Section 6 is
unavailable to, or insufficient to hold harmless, an indemnified party under
subsection 6(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company, the Operating Partnership and the
Selling Stockholder on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection 6(d) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company, the Operating
Partnership and the Selling Stockholder on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company, the Operating Partnership and the Selling Stockholder on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares purchased
under this Agreement (before deducting expenses) received by the Company, the
Operating Partnership or the Selling Stockholder bear to the total underwriting
discounts and commissions received by the Underwriters with respect to the
Shares purchased under this Agreement, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Operating Partnership, or
the Selling Stockholder on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Operating
Partnership, the Selling Stockholder and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this subsection 6(e) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection 6(e). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection 6(e) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection 6(e), the Underwriters shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any
-29-
<PAGE>
damages which the Underwriters has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
6(f) The obligations of the Company, the Operating Partnership and the
Selling Stockholder under this Section 6 shall be in addition to any liability
which the Company, the Operating Partnership or the Selling Stockholder may
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls the Underwriters within the meaning of the 1933
Act; and the obligations of the Underwriters under this Section 6 shall be in
addition to any liability which the Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
Company (including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the Company) and to each
person, if any, who controls the Company, the Operating Partnership or the
Selling Stockholder within the meaning of the 1933 Act.
6(g) The provisions of this Section 6 shall supersede the
indemnification provisions included in the letter agreement dated January 16,
1996 among the Underwriters, on the one hand, and the Company, on the other
hand, as amended on February ___, 1996 (the "Engagement Letter"), insofar, but
only insofar, as such indemnification provisions relate to any such loss, claim,
damage or liability that arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment or
supplement thereto. In all other respects, the provisions of the Engagement
Letter shall remain in full force and effect.
SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Operating Partnership, the Selling
Stockholder, and the Underwriters, as set forth in this Agreement and the
Pricing Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of the Underwriters or any controlling person of the Underwriters, or the
Company, the Operating Partnership, the Selling Stockholder, or any officer or
director or controlling person of the Company, the Operating Partnership, the
Selling Stockholder, and shall survive delivery of and payment for the Shares.
- 30 -
<PAGE>
SECTION 8. TERMINATION OF AGREEMENT. The Underwriters may terminate
this Agreement, by notice to the Company and the Selling Stockholder, at any
time at or prior to the Closing Time, pursuant to Section 5, in which event the
Company and the Operating Partnership, jointly and severally, will reimburse the
Underwriters for all out-of-pocket expenses, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
offering, purchase, sale and delivery of the Shares and in connection with their
services rendered pursuant to the Engagement Letter; PROVIDED, THAT, the
aggregate amount of fees and expenses of counsel for the Underwriters that may
be reimbursed in connection with such offering and services and the Exchange
Offer shall not exceed $200,000; but the Company and the Operating Partnership
shall then be under no further liability to the Underwriters in respect of the
Shares not so delivered except with respect to the Company and the Operating
Partnership, as provided in Section 4 and Section 6 hereof.
SECTION 9. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or
more of the Underwriters shall fail at Closing Time to purchase the Shares which
it or they are obligated to purchase under this Agreement and the Pricing
Agreement (the "Defaulted Shares"), the Representative shall have the right,
within 24 hours thereafter, to make arrangements for one or more of the non-
defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Shares in such amounts as may be agreed upon and
upon the terms herein set forth; if, however, the Representative shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Shares does not exceed ten
percent (10%) of the Shares, the non-defaulting Underwriters shall be
obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters; or
(b) if the number of Defaulted Shares exceeds ten percent
(10%) of the Shares, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section 9 shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, the Representative and the Company each shall
have the right to postpone the Closing Time for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements.
SECTION 10. NOTICES. All statements, requests, notices and
agreements hereunder shall be in writing, and, if to the Underwriters, shall be
delivered or sent by mail, telex or facsimile transmission to Friedman,
Billings, Ramsey & Co., Inc., 1001 Nineteenth Street North, Arlington, Virginia
22209, Attention: Eric Billings; if to the Company or the Operating Partnership,
shall be delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration
-31-
<PAGE>
Statement, Attention: C. Alan Schroeder; and if to the Selling Stockholder,
shall be delivered or sent by mail, telex or facsimile transmission to KILICO
Realty Corporation, c/o Kemper Corporation, 120 South LaSalle Street, Chicago,
Illinois 60603, Attention:_______________. Any such statements, requests,
notices or agreements shall take effect at the time of receipt thereof.
SECTION 11. PARTIES. This Agreement and the Pricing Agreement shall
be binding upon, and inure solely to the benefit of, (i) the Underwriters, the
Company, the Operating Partnership and the Selling Stockholder, and (ii) to the
extent provided in Sections 6 and 7 hereof, the officers and directors of the
Company, the Operating Partnership, the Selling Stockholder, and each person who
controls the Company, the Operating Partnership, the Selling Stockholder, or the
Underwriters, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement or the Pricing Agreement. No purchaser of any of the
Shares from the Underwriters shall be deemed a successor or assign merely by
reason of such purchase.
SECTION 12.. TIME OF ESSENCE. Time shall be of the essence of this
Agreement and the Pricing Agreement. As used herein, the term "business day"
shall mean any day when the Commission's office in Washington, D.C. is open for
business.
SECTION 13. CHOICE OF LAW. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of Maryland.
SECTION 14. COUNTERPARTS. This Agreement may be executed by any
one or more of the parties hereto in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
-32-
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us four counterparts hereof, and, upon the acceptance hereof by
the Underwriters, this letter and such acceptance hereof shall constitute a
binding agreement between the Underwriters, the Company, the Operating
Partnership and the Selling Stockholder.
Very truly yours,
PRIME RETAIL, INC.
By:
--------------------------------
Name:
Title:
PRIME RETAIL, L.P.
By: PRIME RETAIL, INC.
By:
-------------------------------
Name:
Title:
KILICO REALTY CORPORATION
By:
---------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
By:
--------------------------------------
Name:
Title:
-33-
<PAGE>
SCHEDULE A
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------- -----------------
<PAGE>
ANNEX I
Pursuant to Section 5(f) of the Underwriting Agreement, the
accountants shall furnish letters to the Representative to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the 1933 Act and the
applicable rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplemental
financial information and schedules audited (and, if applicable, and/or pro
forma financial information examined) by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and
the related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements as indicated in their reports
thereon, copies of which have been furnished to the Underwriters;
(iii) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in the
audited consolidated financial statements for such five fiscal years for
such fiscal years;
(iv) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the related published rules and regulations thereunder, or are not
in conformity with generally accepted accounting principles applied on
a basis substantially consistent with the basis for the audited
consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus;
<PAGE>
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated long-
term debt of the Company and its subsidiaries, or any decreases in
consolidated net current assets or other items specified by the
Underwriters or any increases in any items specified by the
Underwriters, in each case as compared with amounts shown in the
latest balance sheet included in the Prospectus, except in each case
for changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter; and
(E) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (D) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Underwriters, or any
increases in any items specified by the Underwriters, in each case as
compared with the comparable period of the preceding year and with any
other period of corresponding length specified by the Underwriters,
except in each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in such
letter; and
(v) In addition to the audit referred to in their report(s) included
in the Prospectus and the limited procedures, inspection of minute books,
inquiries and other procedures referred to in paragraphs (iii) and (iv)
above, they have carried out certain specified procedures, not constituting
an audit in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified
by the Underwriters, which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the
-2-
<PAGE>
Prospectus, or in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Underwriters, and have compared
certain of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found them
to be in agreement.
-3-
<PAGE>
EXHIBIT A
PRIME RETAIL, INC.
(a Maryland corporation)
3,795,328 Shares
Common Stock
(Par Value $0.01 Per Share)
PRICING AGREEMENT
June __, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
STIFEL, NICOLAUS & COMPANY INCORPORATED
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Reference is made to the Underwriting Agreement, dated June ___,
1996 (the "Underwriting Agreement"), relating to the purchase by Friedman,
Billings, Ramsey & Co., Inc., Morgan Keegan & Company, Inc. and Stifel Nicolaus
& Company Incorporated (collectively, the "Underwriters,") of the above shares
of Common Stock and Option Shares, as each such term is defined in the
Underwriting Agreement (collectively, the "Shares"), of Prime Retail, Inc. (the
"Company").
Pursuant to Section 2 of the Underwriting Agreement, the Company and
the Selling Stockholder agree with each Underwriter as follows:
1. The public offering price per share for the Shares,
determined as provided in such Section 2, shall be $_____.
2. The purchase price per share for the Shares to be paid by
the several Underwriters shall be $_____, being an amount equal to the
public offering price set forth above less $_____ per share.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters, the Company and the Selling Stockholder in accordance
with its terms.
Very truly yours,
PRIME RETAIL, INC.
By:
-----------------------
Name:
Title:
KILICO REALTY CORPORATION
By:
-------------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
By:
-----------------------------
Name:
Title:
-2-
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRIME RETAIL, INC.
RESTATED AMENDED AND RESTATED
ARTICLES OF INCORPORATION
(RESTATED FOR PURPOSES OF REGULATION ST SECTION 232.102(c) ONLY;
INCORPORATES AMENDMENT FILED ON MAY 29, 1996)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
RESTATEMENT
OF
ARTICLES OF INCORPORATION
OF
PRIME RETAIL, INC.
ARTICLE I
NAME
The name of the Corporation (the "Corporation") is Prime Retail, Inc.
ARTICLE II
PRINCIPAL OFFICE, REGISTERED OFFICE, AND AGENT
The address of the Corporation's principal office is 100 East Pratt
Street, 19th Floor, Baltimore, Maryland 21202. The address of the
Corporation's resident agent in the State is 32 South Street, Baltimore,
Maryland 21202. The name of its registered agent at that office is The
Corporation Trust, Incorporated.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Maryland General
Corporation Law as now or hereafter in force (the "MGCL").
ARTICLE IV
CAPITALIZATION
4.1 CAPITAL STOCK
Section 4.1.1 AUTHORITY TO ISSUE STOCK. The Board of Directors is
hereby empowered to authorize the issuance from time to time of shares of
capital stock, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable, subject to such limitations as may
be set forth in these Amended and Restated Articles of Incorporation, in the
By-laws of the Corporation as such By-laws may be amended from time to time
(the "By-laws") or in the MGCL.
Section 4.1.2 SHARES AND PAR VALUE. The total number of shares of all
classes of stock that the Corporation shall have authority to issue is
150,315,500 consisting of (i) 75,000,000 shares of common stock having a par
value of one cent ($.01) per share (the "Common Stock"), amounting in the
aggregate to par value of $750,000, (ii) 24,315,000 shares of preferred stock
having a par value of one cent ($.01)
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per share (the "Preferred Stock"), amounting to an aggregate par value of
$243,150 of which 2,300,000 shares shall be designated as 10.5% Series A
Senior Cumulative Preferred Stock (the "Series A Preferred Stock") and
7,015,000 shares shall be designated as 8.5% Series B Cumulative
Participating Convertible Preferred Stock (the "Series B Preferred Stock")
and (iii) 51,000,000 shares of excess stock having a par value of one cent
($.01) per share (the "Excess Stock"), amounting in the aggregate to par
value of $510,000, of which 38,842,500 shares shall be designated Excess
Common Stock (the "Excess Common Stock"), 1,150,000 shares shall be
designated Excess Series A Preferred Stock (the "Excess Series A Preferred
Stock"), 3,507,500 shares shall be designated Excess Series B Preferred Stock
(the "Excess Series B Preferred Stock") and 7,500,000 shares shall be
designated Excess Preferred Stock (the "Excess Preferred Stock").
Notwithstanding the first sentence of this SECTION 4.1.2, 300,000 shares of
Series A Preferred Stock and 915,000 shares of Series B Preferred Stock may
only be issued by the Corporation to cover over-allotments pursuant to the
terms of the underwriting agreement dated March 15, 1994, between the
Corporation and the Underwriter. If such shares are not so issued, the
number of shares of Series A Preferred Stock or Series B Preferred Stock
which have not been so issued shall automatically and without further action
by the Corporation be cancelled and retired and shall no longer constitute
authorized but unissued shares of any class or series of Capital Stock of the
Corporation. The aggregate par value of all the shares of all classes of
stock that the Corporation shall have authority to issue is $1,503,150.
Section 4.1.3 DECLARATION OF DIVIDENDS.
(a) The Board of Directors of the Corporation may declare
dividends only to the extent permitted under the MGCL and, to the extent not
inconsistent therewith, these Amended and Restated Articles of Incorporation.
(b) All dividends shall be declared at the sole discretion of the
Board of Directors.
(c) To the extent declared by the Board of Directors out of funds
legally available therefor, dividends payable in respect of the Series A
Preferred Stock, the Series B Preferred Stock and the Common Stock will have
identical record and payment dates.
Section 4.1.4 DETERMINATION OF FUNDS LEGALLY AVAILABLE FOR
DISTRIBUTION. In determining whether a distribution (other than upon
voluntary or involuntary liquidation) by dividend, redemption or other
acquisition of shares of Capital Stock is permitted under the MGCL, no effect
shall be given to amounts that would be needed, if the Corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of holders of shares of Capital Stock whose preferential
rights upon dissolution are superior to those receiving the distribution.
Section 4.1.5 PREEMPTIVE RIGHTS. No holder of shares of capital stock
of the Corporation shall, as such holder, have any preemptive or other right
to purchase or subscribe for any shares of Series A Preferred Stock, Series B
Preferred Stock, Common Stock or any other class of Capital Stock of the
Corporation which the Corporation may issue or sell.
Section 4.1.6 CONTROL SHARES. Pursuant to Section 3-702(b) of the
MGCL, the terms of Subtitle 7 of Title 3 of such law (the "Control Share
Statute") shall be inapplicable to any acquisition of a Control Share (as
determined in Section 3-701(d) of the MGCL) that is not prohibited by the
terms of Articles IV or V of these Amended and Restated Articles of
Incorporation.
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4.2 CERTAIN DEFINITIONS
Unless the context otherwise requires, the terms defined in this SECTION
4.2 shall have, for all purposes of these Amended and Restated Articles of
Incorporation, the meanings herein specified (with terms defined in the
singular having comparable meanings when used in the plural).
ACQUIRE. The term "Acquire" shall mean the acquisition of Beneficial
Ownership of shares of Capital Stock by any means including, without
limitation, the exercise of any rights under any option, warrant, convertible
security, pledge or other security interest or similar right to acquire
shares, but shall not include the acquisition of any such rights unless, as a
result, the acquiror would be considered a Beneficial Owner, as defined
below. The term "Acquisition" shall have the correlative meaning.
BUSINESS DAY. The term "Business Day" shall mean any day, other than a
Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in New York City are authorized or required by law,
regulation or executive order to close.
BENEFICIAL OWNERSHIP. The term "Beneficial Ownership" shall mean
ownership of Capital Stock by a Person who would be treated as an owner of
such shares of Capital Stock either directly or constructively through the
application of Section 544 of the Code, as modified by Section 856(h)(1)(B)
of the Code, or the application of Section 318(a) of the Code, as modified by
Section 856(d)(5) of the Code (except where expressly provided otherwise).
The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned"
shall have the correlative meanings.
BENEFICIARY. The term "Beneficiary" shall mean a beneficiary of the
Trust as determined pursuant to Sections 4.4.5, 4.6.5 and 4.10.5.
CAPITAL STOCK. The term "Capital Stock" shall mean all classes or
series of capital stock, including without limitation, Common Stock,
Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and
Excess Stock.
CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
COMMON STOCK. The term "Common Stock" shall mean the common shares, par
value $.01 per share, of the Corporation.
COMMON STOCK OWNERSHIP LIMIT. The term "Common Stock Ownership Limit"
shall mean 9.9% of the aggregate of the outstanding shares of Common Stock of
the Corporation and the outstanding Excess Common Stock of the Corporation.
CONSTRUCTIVE OWNERSHIP. The term "Constructive Ownership" shall
mean ownership by a Person who would be treated as an owner either directly
or constructively through the application of Section 318(a) of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have the correlative
meanings.
CONVERSION. The term "Conversion" shall mean a conversion of shares of
Series B Preferred Stock into Common Stock, as provided in SECTION 4.5.6
hereof.
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CONVERSION COMMENCEMENT DATE. The term "Conversion Commencement Date"
shall mean March 31, 1997.
CONVERSION HOLDER. The term "Conversion Holder" shall mean any Person
who is the Beneficial Owner of Common Stock in excess of the Common Stock
Ownership Limit by reason of the Conversion of shares of Series B Preferred
Stock; PROVIDED, HOWEVER, that such Person shall not be a Conversion Holder
at any time that such Person Constructively Owns an interest in any tenant
under any lease of real property owned, in whole or in part, directly or
indirectly by the Corporation and such ownership interest exceeds, in the
case of a tenant that is a corporation, 9.9% of the total voting stock of
such tenant or 9.9% of the total number of shares of all classes of stock of
such tenant, or, in the case of a tenant that is not a corporation, a 9.9%
interest in the assets or net profits of such tenant.
CONVERSION PRICE. The term "Conversion Price" shall have the meaning set
forth in SECTION 4.5.6(a) hereof.
CORPORATION INDUCED EVENT. The term "Corporation Induced Event" shall
mean either (i) the election by one or more holders of Series B Preferred
Stock to convert all or a portion of such Series B Preferred Stock into
Common Stock, or (ii) the redemption or purchase by the Corporation of all or
a portion of the outstanding Series A Preferred Stock or the outstanding
Series B Preferred Stock.
DIVIDEND PERIOD. The term "Dividend Period" shall mean the period from,
and including, the Initial Issue Date to, but not including, the first Series
A Dividend Payment Date or Series B Dividend Payment Date, as the case may
be, and thereafter each quarterly period from, and including, the Series A
Dividend Payment Date or Series B Dividend Payment Date to, but not
including, the next Series A Dividend Payment Date or Series B Dividend
Payment Date (or earlier date on which dividends are paid), as the case may
be.
EXCESS STOCK. The term "Excess Stock" shall mean the Excess Common
Stock, the Excess Preferred Stock, the Excess Series A Preferred Stock and
the Excess Series B Preferred Stock.
EXISTING HOLDER. The term "Existing Holder" shall mean any Person who,
at the close of business on the date of the closing of the Initial Public
Offering, was the Beneficial Owner of Series A Preferred Stock Acquired
directly from Friedman, Billings, Ramsey & Co., Inc. (the "Underwriter") in
the closing of the Initial Public Offering in excess of the Series A
Preferred Stock Ownership Limit so long as, but only so long as, such Person
continues to Beneficially Own Series A Preferred Stock in excess of the
Series A Preferred Stock Ownership Limit; PROVIDED, HOWEVER, that such Person
shall not be an Existing Holder if at any time (i) such Person Constructively
Owns an interest in any tenant under any lease of real property owned, in
whole or in part, directly or indirectly by the Corporation and such
ownership interest exceeds, in the case of a tenant that is a corporation,
9.9% of the total voting stock of such tenant or 9.9% of the total number of
shares of all classes of stock of such tenant, or, in the case of a tenant
that is not a corporation, a 9.9% interest in the assets or net profits of
such tenant or (ii) such Person's Beneficial Ownership causes any
"individual" (within the meaning of Section 542(a)(2) of the Code) to
Beneficially Own shares of Series A Preferred Stock in excess of the Series A
Preferred Stock Ownership Limit.
EXISTING HOLDER LIMIT. The term "Existing Holder Limit" for an Existing
Holder initially shall mean the percentage of outstanding Series A Preferred
Stock that is Beneficially Owned by such Existing Holder at the close of
business on the date of the closing of the Initial Public Offering provided
such Series
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A Preferred Stock has been Acquired by such Existing Holder directly from
Friedman, Billings, Ramsey & Co., Inc. in the closing of the Initial Public
Offering. From the date of the closing of the Initial Public Offering and
prior to the Restriction Termination Date, each Existing Holder Limit shall
be subject to modification pursuant to Section 4.3.13. The secretary of the
Corporation shall maintain and, upon request, make available to each Existing
Holder, a schedule which sets forth the then current Existing Holder Limits
for each Existing Holder.
INITIAL ISSUE DATE. The term "Initial Issue Date" shall mean the date
that shares of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, are first issued by the Corporation.
INITIAL PUBLIC OFFERING, The term "Initial Public Offering" means the
closing of the sale of shares of Series A Preferred Stock, Series B Preferred
Stock and Common Stock pursuant to the Corporation's first effective
registration statement for such Capital Stock filed under the Securities Act
of 1933, as amended.
LIQUIDATION PREFERENCE. The term "Liquidation Preference" for a share
of Series A Preferred Stock or Series B Preferred Stock shall mean $25.00 per
share plus an amount equal to any accrued and unpaid dividends on such share
to the date of liquidation.
MARKET PRICE. The term "Market Price" on any date shall mean, with
respect to any class or series of outstanding Capital Stock, the average of
the Closing Price for such Capital Stock for the five consecutive Trading
Days ending on such date. The "Closing Price" on any date shall mean the
last sale price for such Capital Stock, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, for such Capital Stock in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or,
if such Capital Stock is not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such Capital Stock is listed or admitted to
trading or, if such Capital Stock is not listed or admitted to trading on any
national securities exchange, the last quoted price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System or, if such system is no longer in use, the
principal other automated quotations system that may then be in use or, if
such Capital Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in such Capital Stock selected by the Board of Directors of
the Corporation. "Trading Day" shall mean a day on which the principal
national securities exchange on which the applicable Capital Stock is listed
or admitted to trading is open for the transaction of business or, if such
Capital Stock is not listed or admitted to trading on any national securities
exchange, shall mean any day other than a Saturday, a Sunday or a day on
which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
OPERATING PARTNERSHIP. The term "Operating Partnership" shall mean
Prime Retail, L.P., a Delaware limited partnership.
PARTNERSHIP AGREEMENT. The term "Partnership Agreement" shall mean the
Agreement of Limited Partnership of Prime Retail, L.P., of which the
Corporation is the sole general partner, dated as of March 22, 1994, as such
agreement may be amended from time to time.
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PERSON. The term "Person" shall mean an individual, corporation,
partnership, estate, trust (including a trust qualified under Sections 401(a)
or 501(c)(17) of the Code), a portion of a trust permanently set aside for or
to be used exclusively for the purposes described in Section 642(c) of the
Code, association, private foundation within the meaning of Section 509(a) of
the Code, joint stock company or other entity and also includes a group as
that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include an underwriter which
participates in a public offering of Capital Stock for a period of 90 days
following the purchase by such underwriter of such Capital Stock.
PURPORTED BENEFICIAL HOLDER. The term "Purported Beneficial Holder"
shall mean, with respect to any event other than a purported Transfer which
results in Excess Stock, the person for whom the applicable Purported Record
Holder held the shares of Capital Stock that were, pursuant to Sections
4.3.8, 4.5.9 and 4.9.7, automatically exchanged for Excess Stock upon the
occurrence of such event. The Purported Beneficial Holder and the Purported
Record Holder may be the same Person.
PURPORTED BENEFICIAL TRANSFEREE. The term "Purported Beneficial
Transferee" shall mean, with respect to any purported Transfer which results
in Excess Stock, the purported beneficial transferee for whom the Purported
Record Transferee would have acquired shares of Capital Stock if such
Transfer had not violated the provisions of SECTIONS 4.3.6, 4.5.7 and 4.9.5.
The Purported Beneficial Transferee and the Purported Record Transferee may
be the same Person.
PURPORTED RECORD HOLDER. The term "Purported Record Holder" shall mean,
with respect to any event other than a purported Transfer which results in
Excess Stock, the record holder of the shares of Capital Stock that were,
pursuant to SECTIONS 4.3.8, 4.5.9 and 4.9.7 of this Article, automatically
exchanged for Excess Stock upon the occurrence of such event. The Purported
Record Holder and the Purported Beneficial Holder may be the same Person.
PURPORTED RECORD TRANSFEREE. The term "Purported Record Transferee"
shall mean, with respect to any purported Transfer which results in Excess
Stock, the Person who would have been the record holder of the Capital Stock
if such Transfer had not violated the provisions of SECTIONS 4.3.6, 4.5.7 and
4.9.5. The Purported Beneficial Transferee and the Purported Record
Transferee may be the same Person.
RECORD DATE. The term "Record Date" shall mean, for any class or series
of Capital Stock, the date designated by the Board of Directors of the
Corporation at the time a dividend is declared as the date for determining
holders of record entitled to such dividend; PROVIDED, HOWEVER, that such
Record Date shall be the first day of the calendar month in which the
applicable Dividend Payment Date falls or such other date designated by the
Board of Directors for the payment of dividends that is not more than thirty
(30) days nor less than ten (10) days prior to such Dividend Payment Date.
REIT. The term "REIT" shall mean a real estate investment trust within
the meaning of Section 856 of the Code.
RESTRICTION TERMINATION DATE. The term "Restriction Termination Date"
shall mean the first day after the date of the Initial Public Offering on
which the Corporation determines pursuant to Section 5.3 of these Amended and
Restated Articles of Incorporation that it is no longer in the best interests
of the Corporation to attempt to, or continue to, qualify as a REIT or that
compliance with the restrictions and
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limitations on Beneficial Ownership and Transfer of shares of Capital Stock
set forth herein is no longer required in order for the Corporation to
qualify as a REIT.
SERIES A DIVIDEND PAYMENT DATE: The term "Series A Dividend Payment
Date" shall have the meaning set forth in SECTION 4.3.1(b) hereof.
SERIES A PREFERRED STOCK OWNERSHIP LIMIT. The term "Series A Preferred
Stock Ownership Limit" shall mean 10.0 % of the aggregate of the outstanding
Series A Preferred Stock of the Corporation and the outstanding Excess Series
A Preferred Stock of the Corporation; PROVIDED, HOWEVER, that if at any time
any Person Constructively Owns an interest in a tenant under a lease of real
property owned, in whole or in part , directly or indirectly by the
Corporation and such ownership interest exceeds, in the case of a tenant that
is a corporation, 9.9% of the total voting stock of such tenant or 9.9% of
the total number of shares of all classes of stock of such tenant, or, in the
case of a tenant that is not a corporation, a 9.9% interest in the assets or
net profits of such tenant, then the term "Series A Preferred Stock Ownership
Limit" shall mean, with respect to any such Person, 9.9% of the aggregate of
the outstanding Series A Preferred Stock of the Corporation and the
outstanding Excess Series A Preferred Stock of the Corporation.
SERIES A REDEMPTION DATE. The term "Series A Redemption Date" shall
have the meaning set forth in SECTION 4.3.3(b) hereof.
SERIES A REDEMPTION PRICE. The term "Series A Redemption Price" shall
have the meaning set forth in SECTION 4.3.3(a) hereof.
SERIES B DIVIDEND PAYMENT DATE: The term "Series B Dividend Payment
Date" shall have the meaning set forth in SECTION 4.4.1(b) hereof.
SERIES B PREFERRED STOCK OWNERSHIP LIMIT. The term "Series B Preferred
Stock Ownership Limit" shall mean 9.9% of value of the outstanding Capital
Stock of the Corporation.
SERIES B REDEMPTION DATE. The term "Series B Redemption Date" shall
have the meaning set forth in SECTION 4.5.3(b) hereof.
SERIES B REDEMPTION PRICE. The term "Series B Redemption Price" shall
have the meaning set forth in SECTION 4.5.3(a) hereof.
TRANSFER. The term "Transfer" shall mean any sale, transfer, gift,
assignment, devise or other disposition of Capital Stock or the right to vote
or receive dividends on Capital Stock (including (i) the granting of any
option or entering into any agreement for the sale, transfer or other
disposition of Capital Stock or the right to vote or receive dividends on
Capital Stock or (ii) the sale, transfer, assignment or other disposition of
any securities (or rights convertible into or exchangeable for Capital
Stock), in each case whether voluntary or involuntary, whether of record or
beneficially (including without limitation Transfers of interests in other
entities which result in changes in Beneficial Ownership of Capital Stock),
and whether by operation of law or otherwise.
TRUST. The term "Trust" shall mean each of the trusts provided for in
Sections 4.4.1, 4.6.1 and 4.10.1.
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TRUSTEE. The term "Trustee" shall mean the Corporation, acting as
trustee for any of the Trusts or any successor trustee appointed by the
Corporation.
UNITS. The term "Units" shall mean units of senior preferred
partnership interests, convertible preferred partnership interests and common
partnership interests in the Operating Partnership.
4.3 SERIES A PREFERRED STOCK
Section 4.3.1. DIVIDENDS.
(a) Subject to the preferential rights of any series of stock
ranking senior as to dividends to the Series A Preferred Stock and to the
provisions of SECTION 4.4.2 of these Amended and Restated Articles of
Incorporation, the record holders of Series A Preferred Stock shall be
entitled to receive dividends, when and as declared by the Board of Directors
of the Corporation, out of funds legally available for payment of dividends.
Such dividends shall be payable by the Corporation in cash at the rate of
$2.625 per annum per share.
(b) Dividends on shares of Series A Preferred Stock shall accrue
and be cumulative from the Initial Issue Date. Dividends shall be payable
quarterly in arrears when and as declared by the Board of Directors of the
Corporation on August 15, November 15, February 15, and May 15 of each year
(each, a "Series A Dividend Payment Date"), commencing on August 15, 1994.
If any Series A Dividend Payment Date occurs on a day that is not a Business
Day, any accrued dividends otherwise payable on such Series A Dividend
Payment Date shall be paid on the next succeeding Business Day. The amount
of dividends payable on Series A Preferred Stock for each full Dividend
Period shall be computed by dividing by four (4) the annual dividend rate set
forth in SECTION 4.3.1(a) above. Dividends payable in respect of any
Dividend Period which is less or more than a full Dividend Period in length
will be computed from the immediately preceding Dividend Payment Date (or the
Initial Issue Date in the case of the first Dividend Period) to, but not
including, the date on which dividends are paid (or May 15, 1994, in the case
of the first Dividend Period) on the basis of a 360-day year consisting of
twelve 30-day months. The dividend accruing for the Dividend Period ending
May 15, 1994 will be payable on August 15, 1994, together with the dividend
accruing for the Dividend Period ending on that date. Dividends shall be
paid to the holders of record of the Series A Preferred Stock as their names
shall appear on the stock transfer records of the Corporation at the close of
business on the Record Date for such dividend. Dividends in respect of any
past Dividend Period that is in arrears may be declared and paid at any time
to holders of record on the Record Date for such payment. Any dividend
payment made on shares of Series A Preferred Stock shall be first credited
against the earliest accrued but unpaid dividend due which remains payable.
No interest, or sum of money in lieu of interest, shall be payable in respect
of any dividend payment or payments on the Series A Preferred Stock which may
be in arrears.
(c) Notwithstanding anything contained herein to the contrary, no
dividends on shares of Series A Preferred Stock shall be declared by the
Board of Directors of the Corporation or paid or set apart for payment by the
Corporation at such time as, and to the extent that, the terms and provisions
of any agreement of the Corporation, including any agreement relating to its
indebtedness, or any provisions of these Amended and Restated Articles of
Incorporation relating to any series of Preferred Stock ranking senior to the
Series A Preferred Stock, prohibits such declaration, payment or setting
apart for payment or provides that such declaration, payment or setting apart
for payment would constitute a breach thereof or a default thereunder, or if
such declaration or payment shall be restricted or prohibited by law.
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(d) If any shares of Series A Preferred Stock are outstanding, no
full dividends shall be declared or paid or set apart for payment on any
series of Capital Stock ranking junior to or on a parity with the Series A
Preferred Stock as to dividends for any period unless full cumulative
dividends have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for such payment on
the Series A Preferred Stock for all past Dividend Periods and the then
current Dividend Period. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the shares of the
Series A Preferred Stock and the shares of any series of Preferred Stock
ranking on a parity as to dividends with the Series A Preferred Stock, all
dividends declared upon the shares of the Series A Preferred Stock and any
other such series of Preferred Stock ranking on a parity as to dividends with
the Series A Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share on the Series A Preferred Stock and such other
series of preferred stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of the Series
A Preferred Stock and such other series of Preferred Stock bear to each other.
(e) Except as provided in SECTION 4.3.1(d), unless full cumulative
dividends on the Series A Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past Dividend Periods and the then current
Dividend Period, no dividends (other than dividends payable in Common Stock
or other Capital Stock ranking junior to the Series A Preferred Stock as to
dividends and upon liquidation, dissolution and winding up) shall be declared
or paid or set aside for payment or other distribution shall be declared or
made upon any series of Capital Stock ranking junior to or on a parity with
the Series A Preferred Stock as to dividends nor subject to the Corporation's
right to purchase Excess Stock as otherwise provided herein, shall shares of
any series of Capital Stock ranking junior to or on a parity with the Series
A Preferred Stock upon liquidation, dissolution, or winding up be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid
to or made available for a sinking fund for the redemption of any shares of
any series of Capital Stock ranking junior to or on a parity with the Series
A Preferred Stock) by the Corporation (except by conversion into or exchange
for other Capital Stock of the Corporation ranking junior to the Series A
Preferred Stock as to dividends and upon liquidation, dissolution and winding
up).
(f) Notwithstanding anything contained herein to the contrary,
dividends on the Series A Preferred Stock, if not paid on a Series A Dividend
Payment Date, will accrue whether or not dividends are declared for such
Series A Dividend Payment Date, whether or not the Corporation has earnings
and whether or not there are funds legally available for the payment of such
dividends. Any dividend payment made on shares of Series A Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such Series A Preferred Stock which remains payable.
(g) If, for any taxable year, the Corporation elects to designate
as "capital gain dividends" (as defined in Section 857 of the Code) any
portion (the "Capital Gains Amount") of the dividends paid or made available
for the year to holders of all classes of stock (the "Total Dividends"), then
the portion of the Capital Gains Amount that shall be allocable to holders of
the Series A Preferred Stock shall be the Capital Gains Amount multiplied by
a fraction, the numerator of which shall be the total dividends (within the
meaning of the Code) paid or made available to the holders of the Series A
Preferred Stock for the year and the denominator of which shall be the Total
Dividends.
Section 4.3.2 DISTRIBUTION UPON LIQUIDATION, DISSOLUTION OR WINDING UP.
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(a) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, subject to the prior
preferences and other rights of any series of Capital Stock ranking senior to
the Series A Preferred Stock upon liquidation, dissolution, or winding up,
but before any distribution or payment shall be made to the holders of
Capital Stock ranking junior to the Series A Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Stock shall be entitled to
receive out of the assets of the Corporation legally available for
distribution to its stockholders liquidating distributions in cash or
property at its fair market value as determined by the Board of Directors of
the Corporation in the amount of the Liquidation Preference per share. After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Series A Preferred Stock will have no right or claim
to any of the remaining assets of the Corporation and shall not be entitled
to any other distribution in the event of liquidation, dissolution or winding
up of the affairs of the Corporation.
(b) In the event that, upon any such voluntary or involuntary
liquidation, dissolution or other winding up, the legally available assets of
the Corporation are insufficient to pay the amount of the Liquidation
Preference per share and the corresponding amounts payable on all shares of
Capital Stock ranking on a parity with the Series A Preferred Stock in the
distribution of assets upon liquidation, dissolution or winding up, then the
holders of the Series A Preferred Stock and all such other Capital Stock
shall share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.
(c) Neither the consolidation or merger of the Corporation into or
with another corporation or any other entity nor the sale, lease, transfer or
conveyance of all or substantially all of the assets of the Corporation to
another corporation or any other entity shall be deemed to constitute a
liquidation, dissolution or winding up of the affairs of the Corporation
within the meaning of this SECTION 4.3.2.
Section 4.3.3 REDEMPTION BY THE CORPORATION.
(a) The Series A Preferred Stock may be redeemed, in whole or from
time to time in part, at any time on and after March 31, 1999 at the option
of the Corporation at the price per share set forth below (the "Series A
Redemption Price"):
If the Redemption Date is: Price Per Share
-------------------------- ---------------
On or after March 31, 1999 but prior to March 31, 2000 $ 26.75
On or after March 31, 2000 but prior to March 31, 2001 $ 26.40
On or after March 31, 2001 but prior to March 31, 2002 $ 26.05
On or after March 31, 2002 but prior to March 31, 2003 $ 25.70
On or after March 31, 2003 but prior to March 31, 2004 $ 25.35
On or after March 31, 2004 $ 25.00
---------------
in each case plus all accrued and unpaid dividends thereon to the Redemption
Date, except as may be provided below, without interest.
(b) Each date fixed for redemption pursuant to SECTION 4.3.3 (d)
below is called a "Series A Redemption Date." If the Series A Redemption
Date is after a Record Date and before the related Series A Dividend Payment
Date, the dividend payable on such Series A Dividend Payment Date
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shall be paid to the holder in whose name the Series A Preferred Stock to be
redeemed is registered at the close of business on such Record Date
notwithstanding the redemption thereof between such Record Date and the
related Series A Dividend Payment Date or the Corporation's default in the
payment of the dividend due.
(c) In case of redemption of less than all shares of Series A
Preferred Stock at the time outstanding, the shares to be redeemed shall be
selected pro rata from the holders of record of such shares in proportion to
the number of shares held by such holders (with adjustments to avoid
redemption of fractional shares) or by any other equitable method determined
by the Corporation, to the extent practicable, that will not result in a
violation of the Series A Preferred Stock Ownership Limit.
(d) Notice of any redemption will be given by publication in a
newspaper of general circulation in the City of New York, such publication to
be made once a week for two successive weeks commencing not less than 30 nor
more than 60 days prior to the Series A Redemption Date. A similar notice
will be mailed by the Corporation, postage prepaid, not less than 30 nor more
than 60 days prior to the Series A Redemption Date, addressed to the
respective holders of record of the Series A Preferred Stock to be redeemed
at their respective addresses as they appear on the stock transfer records of
the Corporation. No failure to give such notice or any defect therein or in
the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Series A Preferred Stock except as to the holder
to whom the Corporation has failed to give notice or except as to the holder
to whom notice was defective. In addition to any information required by law
or by the applicable rules of any exchange upon which Series A Preferred
Stock may be listed or admitted to trading, such notice shall state: (i) the
Series A Redemption Date; (ii) the Series A Redemption Price; (iii) the
aggregate number of shares of Series A Preferred Stock to be redeemed and, if
less than all shares held by such holder are to be redeemed, the number of
such shares to be redeemed; (iv) the place or places where certificates for
such shares are to be surrendered for payment of the Series A Redemption
Price; and (v) that dividends on the shares to be redeemed will cease to
accrue on the Series A Redemption Date.
(e) If notice has been mailed in accordance with SECTION 4.3.3 (d)
above and provided that on or before the Series A Redemption Date specified
in such notice all funds necessary for such redemption shall have been set
aside by the Corporation, separate and apart from its other funds in trust
for the pro rata benefit of the holders of the shares so called for
redemption, so as to be and to continue to be available therefor, then, from
and after the Series A Redemption Date, dividends on the shares of the Series
A Preferred Stock so called for redemption shall cease to accrue, and such
shares shall no longer be deemed to be outstanding and shall not have the
status of shares of Series A Preferred Stock, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from
the Corporation the Series A Redemption Price) shall cease. Notwithstanding
the foregoing, upon the Corporation's default in the payment of the dividend
due, the holders of Series A Preferred Stock at the close of business on any
Record Date will be entitled to receive the dividend payable with respect to
such Series A Preferred Stock on the corresponding Series A Dividend Payment
Date, although such Series A Preferred Stock shall have been redeemed between
such Record Date and such corresponding Series A Dividend Payment Date. Upon
surrender, in accordance with the redemption notice, of the certificates for
any shares of Series A Preferred Stock so redeemed (properly endorsed or
assigned for transfer, if the Corporation shall so require and the notice
shall so state), such shares shall be redeemed by the Corporation at the
Series A Redemption Price. In case fewer than all the shares represented by
any such certificate are redeemed, a new certificate or certificates shall be
issued representing the unredeemed shares without cost to the holder thereof.
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(f) Any deposit of funds with a bank or trust company for the
purpose of redeeming Series A Preferred Stock shall be irrevocable except
that:
(i) the Corporation shall be entitled to receive from such
bank or trust company the interest or other earnings, if any, earned on
any money so deposited in trust, and the holders of any shares redeemed
shall have no claim to such interest or other earnings; and
(ii) any balance of monies so deposited by the Corporation and
unclaimed by the holders of the Series A Preferred Stock entitled thereto
at the expiration of two (2) years after the applicable Series A Redemption
Date shall be repaid, together with any interest or other earnings earned
thereon, to the Corporation, and after such repayment, the holders of the
shares entitled to the funds so repaid to the Corporation shall look only
to the Corporation for payment without interest or other earnings.
(g) No Series A Preferred Stock may be redeemed except with funds
legally available for the payment of the Series A Redemption Price.
(h) Unless full cumulative dividends on all shares of Series A
Preferred Stock shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment
for all past Dividend Periods and the then current Dividend Period, no shares
of any Series A Preferred Stock shall be redeemed unless all outstanding
shares of Series A Preferred Stock are simultaneously redeemed, PROVIDED,
HOWEVER, that the foregoing shall not prevent the purchase or acquisition of
shares of Series A Preferred Stock pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Series A
Preferred Stock; and, unless full cumulative dividends on all outstanding
shares of Series A Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past Dividend Periods and the then current
Dividend Period, the Corporation shall not purchase or otherwise acquire
directly or indirectly, through a subsidiary or otherwise, any shares of
Series A Preferred Stock (except by conversion into or exchange for capital
stock of the Corporation ranking junior to the Series A Preferred Stock as to
divi-dends and upon liquidation, dissolution and winding up).
(i) All shares of Series A Preferred Stock redeemed pursuant to
this SECTION 4.3.3 shall be retired and shall be restored to the status of
authorized and unissued shares of Preferred Stock, without designation as to
series, and subject to the applicable limitations set forth herein may
thereafter be reissued as shares of any series of Preferred Stock.
Section 4.3.4 VOTING RIGHTS.
(a) The holders of record of shares of Series A Preferred Stock
shall not be entitled to any voting rights except as hereinafter provided in
this SECTION 4.3.4 or as otherwise provided by law. The Corporation shall
not, without the affirmative vote or consent of the holders of at least a
majority of the shares of the Series A Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
Series A Preferred Stock voting separately as a class), (i) authorize,
create, or increase the authorized or issued amount of, any class or series
of capital stock ranking senior to or on a parity with the Series A Preferred
Stock as to dividends or upon liquidation, dissolution or winding up or the
Excess Series A Preferred Stock upon liquidation, dissolution or winding up,
or reclassify any authorized Capital Stock into any such senior stock or
parity stock, or create, authorize or issue any
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obligation or security convertible into or evidencing the right to purchase
any such senior stock or parity stock; or (ii) amend, alter or repeal the
provisions of these Amended and Restated Articles of Incorporation, whether
by merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of the Series A
Preferred Stock or the holders thereof; PROVIDED, HOWEVER, that any increase
in the amount of the authorized Preferred Stock or the creation or issuance
of any other series of Preferred Stock, or any increase in the amount of
authorized shares of the Series B Preferred Stock or any other series of
Preferred Stock, in each case ranking junior to the Series A Preferred Stock
with respect to payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
(b) If and whenever dividends payable on Series A Preferred Stock
shall be in arrears for six (6) or more consecutive quarterly periods, then
the holders of Series A Preferred Stock, voting separately as a class (with
any such other series as provided in SECTION 4.3.4(f) below), shall be
entitled at the next annual meeting of the stockholders or at any special
meeting called as hereafter provided to elect two (2) additional directors.
Upon election, such directors shall become additional directors of the
Corporation and the authorized number of directors of the Corporation shall
thereupon be automatically increased by such number of directors.
(c) Whenever the voting right described under SECTION 4.3.4(b)
shall become exercisable, such right may be exercised initially either at a
special meeting of the holders of Series A Preferred Stock, called as
hereinafter provided, or at any annual meeting of stockholders held for the
purpose of electing directors, and thereafter at such annual meetings or by
the written consent of holders of Series A Preferred Stock. Such right of
the holders of Series A Preferred Stock to elect directors may be exercised
until all dividends to which the holders of Series A Preferred Stock shall
have been entitled for all previous Dividend Periods and the current Dividend
Period shall have been paid in full or declared and a sum of money sufficient
for the payment thereof set aside for payment, at which the time the right of
the holders of Series A Preferred Stock to elect such number of directors
shall cease, the term of such directors previously elected shall thereupon
terminate, and the authorized number of directors of the Corporation shall
thereupon return to the number of authorized directors otherwise in effect,
but subject always to the same provisions for the renewal and divestment of
such special voting rights in the case of any such future dividend default or
defaults and subject to the rights of any other series of Preferred Stock to
vote for the election of directors, together with the Series A Preferred
Stock, as described in SECTION 4.3.4(e), that shall not have then expired.
(d) At any time when the voting right described under SECTION
4.3.4(b) shall become exercisable in the holders of Series A Preferred Stock,
and if such right shall not already have been initially exercised, a proper
officer of the Corporation shall, upon the written request of holders of
record of at least ten percent (10%) of the shares of Series A Preferred
Stock, and of any other series of Preferred Stock entitled to vote on such
matter as described in SECTION 4.3.4(f), then outstanding, addressed to the
Secretary of the Corporation, call a special meeting of holders of Series A
Preferred Stock. Such meeting shall be held at the earliest practicable date
upon the notice required for annual meetings of stockholders at the place for
holding annual meetings of stockholders of the Corporation or, if none, at a
place designated by the Secretary of the Corporation. If such meeting shall
not be called by the proper officers of the Corporation within thirty (30)
days after the personal service of such written request upon the Secretary of
the Corporation, or within thirty (30) days after mailing the same within the
United States, by registered mail, addressed to the Secretary of the
Corporation at its principal office (such mailing to be evidenced by the
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registry receipt issued by the postal authorities), then the holders of
record of at least ten percent (10%) of the shares of Series A Preferred
Stock, and of any other series of Preferred Stock entitled to vote on such
matter as described in SECTION 4.3.4(f), then outstanding, may designate in
writing a holder of Series A Preferred Stock or such other preferred stock to
call such meeting at the expense of the Corporation, and such meeting may be
called by such person so designated upon the notice required for annual
meetings of stockholders and shall be held at the place of holding annual
meetings of the Corporation or, if none, at a place designated by such
holder. Any holder of Series A Preferred Stock that would be entitled to
vote at such meeting shall have access to the stock books of the Corporation
for the purpose of causing a meeting of stockholders to be called pursuant to
the provisions of this SECTION 4.3.4(d). Notwithstanding the provisions of
this SECTION 4.3.4(d), however, no such special meeting shall be called if
any such request is received less than 90 days before the date fixed for the
next ensuing annual or special meeting of stockholders.
(e) If any director so elected by the holders of Series A
Preferred Stock shall cease to serve as a director before such director's
term shall expire, the holders of Series A Preferred Stock (and any other
series of Preferred Stock, if any, entitled to vote on such matter, as
described in SECTION 4.3.4(f)) then outstanding may, at a special meeting of
the holders called as provided above, elect a successor to hold office for
the unexpired term of the director whose place shall be vacant.
(f) If, at any time when the holders of Series A Preferred Stock
are entitled to elect directors pursuant to the foregoing provisions of this
SECTION 4.3.4, the holders of any one or more additional series of Preferred
Stock are entitled to elect directors by reason of any default or event
specified in these Amended and Restated Articles of Incorporation, as in
effect at the time, or the articles supplementary for such series, and if the
terms for such other additional series so permit, then the voting rights of
the two or more series then entitled to vote shall be combined (with each
series having a number of votes proportional to the aggregate liquidation
preference of its outstanding shares). In such case, the holders of Series A
Preferred Stock and of all such other series then entitled so to vote, voting
as a class, shall elect such directors. If the holders of any such other
series have elected such directors prior to the happening of the default or
event permitting the holders of Series A Preferred Stock to elect directors,
or prior to a written request for the holding of a special meeting being
received by the Secretary of the Corporation as elsewhere required in SECTION
4.3.4(d) above, then a new election shall be held with all such other series
of Preferred Stock and the Series A Preferred Stock voting together as a
single class for such directors, resulting in the termination of the term of
such previously elected directors upon the election of such new directors.
If the holders of any such other series are entitled to elect in excess of
two directors, the Series A Preferred Stock shall not participate in the
election of more than two such directors, and those directors whose terms
first expire shall be deemed to be the directors elected by the holder of
Series A Preferred Stock; PROVIDED that, if at the expiration of such terms,
the holders of Series A Preferred Stock are entitled to vote in the election
of directors pursuant to the provisions of this SECTION 4.3.4, then the
Secretary of Corporation shall call a meeting (which meeting may be the
annual meeting or special meeting of stockholders referred to in SECTION
4.3.4(c) above) of holders of Series A Preferred Stock for the purpose of
electing replacement directors (in accordance with the provisions of this
SECTION 4.3.4) to be held at or prior to the time of expiration of the
expiring terms referred to above.
(g) The holders of record of shares of Series A Preferred Stock,
then outstanding, shall be entitled to vote, together with any other class or
series of Capital Stock entitled to vote, then outstanding, on any resolution
presented by the Board of Directors pursuant to SECTION 5.2.
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(h) In any matter in which the Series A Preferred Stock may vote,
including any action by written consent, each share of Series A Preferred
Stock shall be entitled to one (1) vote (except as expressly provided herein
or as may be required by law).
(i) Except as required by law, the foregoing voting provisions
shall not apply if, at or prior to the time when the act with respect to
which such vote would otherwise be required shall be effected, all
outstanding shares of the Series A Preferred Stock shall have been redeemed
or shall have been called for redemption upon proper notice and sufficient
funds shall have been deposited in trust to effect such redemption.
Section 4.3.5 RANKING.
The Series A Preferred Stock shall, with respect to dividend rights and
distributions upon liquidation, dissolution, and winding up, rank (i) senior
to the Series B Preferred Stock, the Common Stock and shares of all other
Capital Stock issued from time to time by the Corporation other than any
series of Capital Stock the terms of which specifically provide that the
Capital Stock of such series rank senior to or on a parity with to Series A
Preferred Stock with respect to dividend rights or distributions upon
liquidation, dissolution, or winding up of the Corporation; (ii) on a parity
with the shares of all other Capital Stock issued by the Corporation the
terms of which specifically provide that the shares rank on a parity with the
Series A Preferred Stock with respect to dividends and distributions upon
liquidation, dissolution, or winding up of the Corporation (the issuance of
which must have been approved by a vote of at least a majority of the
outstanding shares of Series A Preferred Stock); and (iii) junior to all
Capital Stock issued by the Corporation the terms of which specifically
provide that the shares rank senior to the Series A Preferred Stock with
respect to dividends and distributions upon liquidation, dissolution, or
winding up of the Corporation (the issuance of which must have been approved
by a vote of at least a majority of the outstanding shares of Series A
Preferred Stock). The Series A Preferred Stock ranks on a parity with the
Excess Series A Preferred Stock with respect to distributions upon
liquidation, dissolution, or winding up.
Section 4.3.6 SERIES A PREFERRED STOCK OWNERSHIP LIMITATIONS.
(a) Except as provided in SECTION 4.3.14, during the period
commencing on the date of the closing of the Initial Public Offering and
prior to the Restriction Termination Date:
(i) No Person, other than an Existing Holder, shall Acquire
or Beneficially Own any shares of Series A Preferred Stock if, as the
result of such Acquisition or Beneficial Ownership, such Person shall
Beneficially Own shares of Series A Preferred Stock in excess of the
Series A Preferred Stock Ownership Limit.
(ii) No Existing Holder shall Acquire or Beneficially Own
any shares of Series A Preferred Stock if, as the result of such
Acquisition or Beneficial Ownership, such Person shall Beneficially Own
shares of Series A Preferred Stock in excess of the Existing Holder
Limit for such Existing Holder.
(b) Except as provided in SECTION 4.3.14, during the period
commencing on the date of the closing of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer of shares of Series A
Preferred Stock that, if effective, would result in a violation of any of the
restrictions in SECTION 4.3.6(a) shall be void AB INITIO as to the Transfer
of that number of shares of Series A Preferred
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Stock that would cause the violation of the applicable restriction in Section
4.3.6(a) (rounding up to the nearest whole share), and the intended
transferee shall acquire no rights in such excess number of shares of Series
A Preferred Stock.
(c) Notwithstanding any other provisions contained herein, from
the date of the closing of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer of shares of Series A Preferred
Stock or other event that, if effective, would result in (i) the Corporation
being "closely held" within the meaning of Section 856(h) of the Code, (ii) the
outstanding shares of the Capital Stock of the Corporation being beneficially
owned by less than 100 Persons (determined without reference to any rules of
attribution), or (iii) the Corporation otherwise failing to qualify as a REIT
(including, but not limited to, a Transfer or other event that would result
in the Corporation owning (directly or Constructively) an interest in a
tenant that is described in Section 856(d)(2)(B) of the Code if the income
derived by the Corporation from such tenant would cause the Corporation to
fail to satisfy any of the gross income requirements of Section 856(c) of the
Code), shall be void AB INITIO as to the Transfer of that number of shares of
Series A Preferred Stock (rounding up to the nearest whole share) or other
event that would cause the Corporation to be "closely held" within the
meaning of Section 856(h) of the Code, would result in the outstanding shares
of the Capital Stock of the Corporation being beneficially owned by less than
100 Persons (determined without reference to any rules of attribution), or
would otherwise result in the Corporation failing to qualify as a REIT, and
the intended transferee shall Acquire, or the Beneficial Owner shall retain,
as the case may be, no rights in such shares of Series A Preferred Stock.
Section 4.3.7 REMEDIES FOR BREACH. If the Board of Directors or any
duly authorized committee thereof shall at any time determine in good faith
that a Transfer or other event has taken place that results in a violation of
SECTION 4.3.6 or that a Person intends to Acquire or has attempted to Acquire
Beneficial Ownership of any shares of Series A Preferred Stock in violation
of SECTION 4.3.6 (whether or not such violation is intended), the Board of
Directors or a committee thereof shall take such action as it or they deem
advisable, subject to SECTION 5.3 hereof, to refuse to give effect to or to
prevent such Transfer or other event, including, but not limited to, refusing
to give effect to such Transfer on the books of the Corporation or
instituting proceedings to enjoin such Transfer; PROVIDED, HOWEVER, that any
Transfers or attempted Transfers or, in the case of an event other than a
Transfer, Beneficial Ownership in violation of SECTION 4.3.6 shall be void AB
INITIO and automatically result in the exchange described in SECTION 4.3.8,
irrespective of any action (or non-action) by the Board of Directors or a
committee thereof.
Section 4.3.8 EXCHANGE FOR EXCESS SERIES A PREFERRED STOCK. If,
notwithstanding the other provisions contained in this SECTION 4.3, at any
time after the date of the closing of the Initial Public Offering and prior
to the Restriction Termination Date, there is a purported Transfer or other
event such that one or more of the restrictions on Beneficial Ownership and
Transfer of the Series A Preferred Stock described in SECTION 4.3.6 would be
violated, then, except as otherwise provided in SECTION 4.3.14, the shares of
Series A Preferred Stock being Transferred (or, in the case of an event other
than a Transfer, the shares of Series A Preferred Stock Beneficially Owned,
which would cause one or more of such restrictions to be violated) (rounded
up to the nearest whole share), shall be automatically exchanged for an equal
number of shares of Excess Series A Preferred Stock. Such exchange shall be
effective as of the close of business on the business day prior to the date
of such purported Transfer or other event.
Section 4.3.9 NOTICE OF RESTRICTED TRANSFER. Any Person who Acquires
or attempts or intends to Acquire shares of Series A Preferred Stock in
violation of SECTION 4.3.6, or any Person who is a transferee in a Transfer
or is otherwise affected by an event other than a Transfer that results in
the
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issuance of Excess Series A Preferred Stock pursuant to SECTION 4.3.8,
shall immediately give written notice to the Corporation of such Transfer or
other event and shall provide to the Corporation such other information as
the Corporation may request in order to determine the effect, if any, of such
Transfer or attempted, intended or purported Transfer or other event on the
Corporation's status as a REIT.
Section 4.3.10 OWNERS REQUIRED TO PROVIDE INFORMATION. From the date of
the closing of the Initial Public Offering and prior to the Restriction
Termination Date:
(a) each Person who is an Existing Holder shall, within thirty
(30) days of the Initial Issue Date, give written notice to the Corporation
stating the name and address of such Existing Holder, the number of shares of
Series A Preferred Stock and other shares of the Capital Stock of the
Corporation Beneficially Owned by such Existing Holder at the close of
business on the Initial Issue Date and Acquired by such Existing Holder
directly from Friedman, Billings, Ramsey & Co., Inc. in the closing of the
Initial Public Offering, and a description of the manner in which such shares
are currently held as well as a description of the nature of the Beneficial
Ownership of such shares;
(b) every Beneficial Owner of more than 5% (or such lower
percentage as required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding Series A Preferred Stock of the Corporation
shall, within 30 days after December 31 of each year, give written notice to
the Corporation stating the name and address of such Beneficial Owner, the
number of shares of Series A Preferred Stock and other shares of the Capital
Stock of the Corporation, Beneficially Owned, and a description of the manner
in which such shares are held. Each such Beneficial Owner shall provide to
the Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT and to ensure compliance with the Series A
Preferred Stock Ownership Limit; and
(c) each Person who is a Beneficial Owner of Series A Preferred
Stock and each Person (including the stockholder of record) who is holding
Series A Preferred Stock for a Beneficial Owner shall provide to the
Corporation such information that the Corporation may request, in good faith,
in order to determine the Corporation's status as a REIT.
Section 4.3.11 REMEDIES NOT LIMITED. Subject to SECTION 5.2, nothing
contained in this SECTION 4.3 shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving
the Corporation's status as a REIT.
Section 4.3.12 AMBIGUITY. In the case of an ambiguity in the
application of any of the provisions of this SECTION 4.3 or any definition
contained in SECTION 4.2, the Board of Directors shall have the power to
determine the application of the provisions of this SECTION 4.3 with respect
to any situation based on the facts known to it.
Section 4.3.13 MODIFICATION OF EXISTING HOLDER LIMITS. The Existing
Holder Limit for an Existing Holder shall be reduced at any time that (i) such
Existing Holder Transfers shares of Series A Preferred Stock, (ii) the
Corporation issues additional shares of Series A Preferred Stock or (iii) any
other event occurs which terminates such Existing Holder's Beneficial
Ownership in shares of Series A Preferred Stock, in each case by reducing the
percentages calculated pursuant to the definition of Existing Holder Limit to
the percentages in effect immediately after such Transfer or issuance or
other event. Each
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Existing Holder shall give the Corporation written notice of any Transfer of
shares within 10 business days thereafter. Notwithstanding the foregoing, no
Existing Holder Limit shall be reduced to a percentage which is less than the
Series A Preferred Stock Ownership Limit.
Section 4.3.14 EXCEPTIONS.
(a) Subject to SECTION 4.3.6(c), the Board of Directors, in its
sole discretion, may exempt a Person from the Series A Preferred Stock
Ownership Limit or the Existing Holder Limit, as the case may be, (A) if such
Person is not an individual for purposes of Section 542(a)(2) of the Code and
the Board of Directors obtains such representations and undertakings from
such Person as are reasonably necessary to ascertain that no such
individual's Beneficial Ownership of such shares of Series A Preferred Stock
will violate the Series A Preferred Stock Ownership Limit or otherwise
violate SECTION 4.3.6(c), (B) if such Person does not and represents that it
will not own, directly or Constructively, more than a 9.9% interest (as set
forth in Section 856(d)(2)(B) of the Code) in a tenant of the Corporation (or
a tenant of any entity owned or controlled by the Corporation) and the Board
of Directors obtains such representations and undertakings from such Person
as are reasonably necessary to ascertain this fact, and (C) if such Person
agrees that any violation of such representations or undertaking (or other
action which is contrary to the restrictions contained in SECTIONS 4.3.6
THROUGH 4.3.13 of this Article IV) or attempted violation will result in such
shares of Series A Preferred Stock being exchanged for Excess Series A
Preferred Stock in accordance with SECTION 4.3.8.
(b) Prior to granting any exception pursuant to SECTION 4.3.14(a),
the Board of Directors shall require a ruling from the Internal Revenue
Service, or an opinion of counsel, in either case in form and substance
satisfactory to the Board of Directors in it sole discretion, as it may deem
necessary or advisable in order to determine or ensure the Corporation's
status as a REIT. Notwithstanding the receipt of any ruling or opinion, the
Board of Directors may impose such conditions or restrictions as it deems
appropriate in connection with granting such exception.
Section 4.3.15 LEGEND. Each certificate for Series A Preferred Stock
shall bear the following legend:
"The shares represented by this certificate are subject to restrictions
on Beneficial Ownership and Transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment
Trust under the Internal Revenue Code of 1986, as amended (the "Code").
Subject to certain further restrictions and except as expressly provided
in the Corporation's Amended and Restated Articles of Incorporation, no
Person may (i) Beneficially Own shares of the Corporation's Series A
Preferred Stock in excess of 10.0% of the outstanding Series A Preferred
Stock of the Corporation; or (ii) Beneficially Own Series A Preferred
Stock that would result in the Corporation being "closely held" under
Section 856(h) of the Code. Any Person who Beneficially Owns or attempts
to Beneficially Own shares of Series A Preferred Stock which causes or
will cause a Person to Beneficially Own shares of Series A Preferred
Stock in excess of the above limitations must immediately notify the
Corporation. Any Transfer of shares of Series A Preferred Stock in
violation of the limitations set forth in the Corporation's Amended and
Restated Articles of Incorporation shall be void AB INITIO. If the
restrictions on Transfer are violated, the shares of Series A Preferred
Stock represented hereby will be automatically exchanged for shares of
Excess Series A Preferred Stock which will be held in trust by the
Corporation. All capitalized terms in this legend have the meanings
defined in the Corporation's Amended and Restated Articles of
Incorporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer, will be sent without
charge to each holder of Series A Preferred Stock who so requests."
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4.4 EXCESS SERIES A PREFERRED STOCK
Section 4.4.1 OWNERSHIP IN TRUST. Upon any purported Transfer or other
event that results in an exchange of Series A Preferred Stock for Excess
Series A Preferred Stock pursuant to SECTION 4.3.8, such Excess Series A
Preferred Stock shall be deemed to have been Transferred to the Corporation,
as Trustee of a Trust for the exclusive benefit of the Beneficiary or
Beneficiaries to whom an interest in such Trust may later be transferred
pursuant to SECTION 4.4.5. Shares of Excess Series A Preferred Stock so held
in trust shall be issued and outstanding stock of the Corporation but shall
not be considered issued and outstanding for purposes of any stockholder
vote. The Purported Record Transferee or, in the case of Excess Series A
Preferred Stock resulting from an event other than a Transfer, the Purported
Record Holder, shall have no rights in such Excess Series A Preferred Stock
except the right to designate a transferee of such Excess Series A Preferred
Stock upon the terms specified in SECTION 4.4.5. The Purported Beneficial
Transferee or, in the case of Excess Series A Preferred Stock resulting from
an event other than a Transfer, the Purported Beneficial Holder, shall have
no rights in such Excess Series A Preferred Stock except as provided in
SECTION 4.4.5.
Section 4.4.2 DIVIDEND RIGHTS. Excess Series A Preferred Stock shall
not be entitled to any dividends or periodic distributions. Any dividend or
distribution paid prior to the discovery by the Corporation that shares of
Series A Preferred Stock have been exchanged for Excess Series A Preferred
Stock shall be repaid to the Corporation upon demand, and any dividend or
distribution declared but unpaid shall be rescinded as void AB INITIO with
respect to such shares of Series A Preferred Stock.
Section 4.4.3 RIGHTS UPON LIQUIDATION. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of, or any distribution
of the assets of, the Corporation, the Corporation, as holder of shares of
Excess Series A Preferred Stock in trust, shall be entitled to receive that
portion of the assets of the Corporation which a holder of the Series A
Preferred Stock that was exchanged for such Excess Series A Preferred Stock
would have been entitled to receive had the Series A Preferred Stock remained
outstanding. The Corporation, as holder of the Excess Series A Preferred
Stock in trust, or if the Corporation shall have been dissolved, any trustee
appointed by the Corporation prior to its dissolution, shall distribute
ratably to the Beneficiaries of the Trust, when and if determined in
accordance with SECTION 4.4.5, any such assets received in respect of the
Excess Series A Preferred Stock in any liquidation, dissolution or winding up
of, or any distribution of the assets, of the Corporation.
Section 4.4.4 VOTING RIGHTS. The holders of shares of Excess Series A
Preferred Stock shall not be entitled to vote on any matters (except as
required by the MGCL).
Section 4.4.5 RESTRICTIONS ON TRANSFER; DESIGNATION OF BENEFICIARY.
(a) Excess Series A Preferred Stock shall not be transferrable. A
Purported Record Transferee or, in the case of Excess Series A Preferred
Stock resulting from an event other than a Transfer, a Purported Record
Holder, may freely designate a Beneficiary of its interest in the Trust
(representing the number of shares of Excess Series A Preferred Stock held by
the Trust attributable to the purported Transfer or other event that resulted
in the issuance of such Excess Series A Preferred Stock), if (i) the shares
of Excess Series A Preferred Stock held in the Trust would not be Excess
Series A Preferred Stock in the hands of such Beneficiary and (ii) the
Purported Beneficial Transferee or, in the case of Excess Series A Preferred
Stock resulting from an event other than a Transfer, the Purported Beneficial
Holder, does not receive consideration for the designation of such
Beneficiary that reflects a price per share for
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such Excess Series A Preferred Stock that exceeds the "Series A Preferred
Stock Limitation Price". The Series A Preferred Stock Limitation Price is
the lesser of (A) in the case of Excess Series A Preferred Stock resulting
from a Transfer for value, the price per share that the Purported Beneficial
Transferee paid for the Series A Preferred Stock in the purported Transfer
that resulted in the issuance of the Excess Series A Preferred Stock, or, in
the case of Excess Series A Preferred Stock resulting from (I) a Transfer
other than for value (such as a gift, devise or similar Transfer) or (II) an
event other than a Transfer, a price per share equal to the Market Price of
the Series A Preferred Stock that was exchanged for such Excess Series A
Preferred Stock on the date of the purported Transfer or other event that
resulted in the issuance of the Excess Series A Preferred Stock or (B) a
price per share equal to the Market Price of the Excess Series A Preferred
Stock on the date of the designation of the Beneficiary of the interest in
the Trust. Prior to any transfer of any interest in the Trust, the Purported
Record Transferee or Purported Record Holder, as the case may be, must give
advance notice to the Corporation of the intended transfer and the
Corporation must have waived in writing its purchase rights under SECTION
4.4.6. Upon any transfer of an interest in the Trust, the corresponding
shares of Excess Series A Preferred Stock in the Trust shall be automatically
exchanged for an equal number of shares of Series A Preferred Stock and such
shares of Series A Preferred Stock shall be transferred of record to the
Beneficiary of the interest in the Trust designated by the Purported Record
Transferee or Purported Record Holder as described above if such Series A
Preferred Stock would not be Excess Series A Preferred Stock in the hands of
such Beneficiary.
(b) Notwithstanding the foregoing, if a Purported Beneficial
Transferee or Purported Beneficial Holder receives consideration for the
designation by the Purported Record Transferee or Purported Record Holder of
a Beneficiary of an interest in the Trust that exceeds the Series A Preferred
Stock Limitation Price, such Purported Beneficial Transferee or Purported
Beneficial Holder shall pay, or cause the Beneficiary of the interest in the
Trust to pay, to the Corporation the amount by which such consideration
exceeds the Series A Preferred Stock Limitation Price.
Section 4.4.6 PURCHASE RIGHT IN EXCESS SERIES A PREFERRED STOCK.
Notwithstanding SECTION 4.4.5, shares of Excess Series A Preferred Stock
shall be deemed to have been offered for sale to the Corporation, or its
designee, at a price per share equal to the Series A Preferred Stock
Limitation Price (determined by substituting "the date on which the
Corporation, or its designee, accepts the offer to sell" for "the date of the
designation of the Beneficiary of the interest in the Trust" in clause (B) of
the definition of the Series A Preferred Stock Limitation Price in SECTION
4.4.5(a)). The Corporation shall have the right to accept such offer for a
period of ninety days after the later of (i) the date of the Transfer or
other event which resulted in the issuance of such Excess Series A Preferred
Stock and (ii) if the Corporation does not receive actual notice of a
Transfer or other event pursuant to SECTION 4.3.9, the date the Board of
Directors determines in good faith that such a Transfer or other event
resulting in the issuance of Excess Series A Preferred Stock has occurred.
Section 4.4.7 RANKING. The Excess Series A Preferred Stock shall rank,
with respect to distributions upon liquidation, dissolution, or winding up,
(i) senior to the Series B Preferred Stock, the Excess Series B Preferred
Stock, the Common Stock, the Excess Common Stock and shares of all other
Capital Stock issued from time to time by the Corporation, other than any
series of Capital Stock the terms of which specifically provide that the
Capital Stock of such series rank senior to or on a parity with the Excess
Series A Preferred Stock with respect to distributions upon liquidation,
dissolution, or winding up of the Corporation (the issuance of which must
have been approved by a vote of at least a majority of the outstanding shares
of Series A Preferred Stock); (ii) on a parity with the Series A Preferred
Stock and all
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Capital Stock issued by the Corporation the terms of which specifically
provide that the Capital Stock of such series rank on a parity with the
Excess Series A Preferred Stock with respect to distributions upon
liquidation, dissolution, or winding up of the Corporation (the issuance of
which must have been approved by a vote of at least a majority of the
outstanding shares of Series A Preferred Stock); and (iii) junior to all
Capital Stock issued by the Corporation the terms of which specifically
provide that the Capital Stock of such series rank senior to the Excess
Series A Preferred Stock with respect to distributions upon liquidation,
dissolution, or winding up of the Corporation (the issuance of which must
have been approved by a vote of at least a majority of the outstanding shares
of Series A Preferred Stock).
Section 4.4.8. CORPORATION INDUCED EVENTS: REDEMPTION OF SERIES A
PREFERRED STOCK IN CERTAIN CIRCUMSTANCES. Notwithstanding anything to the
contrary in SECTION 4.3.3, prior to the Restriction Termination Date, if a
purported Transfer, change in the capital structure of the Corporation or
other event would result in a violation of one or more of the restrictions in
SECTION 4.3.6 and such violation would not occur but for the occurrence of
one or more Corporation Induced Events then, immediately prior to the
occurrence of such Transfer, change in the capital structure of the
Corporation or other event, an amount of Series A Preferred Stock (rounded up
to the nearest one-tenth of a share) shall be automatically redeemed by the
Corporation from the actual owner of Series A Preferred Stock which is
Beneficially Owned by any Person who (but for this SECTION 4.4.8) would
Beneficially Own Series A Preferred Stock in violation of one or more of the
restrictions in SECTION 4.3.6 after the occurrence of the Transfer, change in
the capital structure of the Corporation or other event. The redemption
price of each share of Series A Preferred Stock automatically redeemed
pursuant to this SECTION 4.4.8 shall be (i) the price per share paid for the
Series A Preferred Stock in the purported Transfer that resulted in the
redemption, or (ii) if the Transfer or other event that resulted in the
redemption were not a transaction in which the full value was paid for such
Series A Preferred Stock, a price per share equal to the Market Price on the
date of the purported Transfer or other event that resulted in the
redemption. In either case, dividends which were accrued but unpaid with
respect to the redeemed shares as of the date of the purported Transfer or
other event that resulted in the redemption shall be paid. Any dividend or
other distribution paid prior to the discovery of the Corporation that shares
of Series A Preferred Stock have been automatically redeemed by the
Corporation shall be repaid to the Corporation upon demand.
4.5 SERIES B PREFERRED STOCK
Section 4.5.1 DIVIDENDS.
(a) Subject to the preferential rights of the Series A Preferred
Stock and any other series of stock ranking senior as to dividends to the
Series B Preferred Stock and to SECTION 4.6.2, the record holders of Series B
Preferred Stock shall be entitled to receive dividends, when and as declared
by the Board of Directors of the Corporation, out of funds legally available
for payment of dividends. Such dividends shall be payable by the Corporation
in cash at the greater of (i) the rate of $2.125 per annum per share or (ii)
the dividends (determined on each of the quarterly Series B Dividend Payment
Dates referred to below) payable on the number of shares of Common Stock (or
fraction thereof), into which a share of Series B Preferred Stock will be
convertible on or after the Conversion Commencement Date. The amount
referred to in clause (ii) above will equal the number of shares of Common
Stock, or fraction thereof, into which a share of Series B Preferred Stock
will be convertible on or after the Conversion Commencement Date, multiplied
by the most recent quarterly distribution declared or paid in respect of a
share of Common Stock on or before the applicable Series B Dividend Payment
Date.
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(b) Dividends on shares of Series B Preferred Stock shall accrue
and be cumulative from the Initial Issue Date. Dividends shall be payable
quarterly in arrears when and as declared by the Board of Directors of the
Corporation on August 15, November 15, February 15, and May 15 of each year
(each, a "Series B Dividend Payment Date"), commencing on August 15, 1994.
If any Series B Dividend Payment Date occurs on a day that is not a Business
Day, any accrued dividends otherwise payable on such Series B Dividend
Payment Date shall be paid on the next succeeding Business Day. The amount
of dividends payable on Series B Preferred Stock for each full Dividend
Period shall be computed by dividing by four (4) the annual dividend rate set
forth in SECTION 4.4.1(a) above. Dividends payable in respect of any
Dividend Period which is less than a full Dividend Period in length will be
computed from the immediately preceding Dividend Payment Date (or the Initial
Issue Date in the case of the first Dividend Period) to, but not including,
the date on which dividends are paid (or May 15, 1994, in the case of the
first Dividend Period) on the basis of a 360-day year consisting of twelve
30-day months. Dividends shall be paid to the holders of record of the
Series B Preferred Stock as their names shall appear on the stock transfer
records of the Corporation at the close of business on the Record Date for
such dividend. The dividend accruing for the Dividend Period ending May 15,
1994 will be payable on August 15, 1994, together with the dividend accruing
for the Dividend Period ending on that date. Dividends in respect of any
past Dividend Period that is in arrears may be declared and paid at any time
to holders of record on the Record Date for such payment. Any dividend
payment made on shares of Series B Preferred Stock shall be first credited
against the earliest accrued but unpaid dividend due which remains payable.
No interest, or sum of money in lieu of interest, shall be payable in respect
of any dividend payment or payments on the Series B Preferred Stock which may
be in arrears.
(c) Notwithstanding anything contained herein to the contrary, no
dividends on shares of Series B Preferred Stock shall be declared by the
Board of Directors of the Corporation or paid or set apart for payment by the
Corporation at such time as, and to the extent that, the terms and provisions
of any agreement of the Corporation, including any agreement relating to its
indebtedness, or any provisions of these Amended and Restated Articles of
Incorporation relating to any series of Preferred Stock ranking senior to the
Series B Preferred Stock (including the Series A Preferred Stock), prohibits
such declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
(d) If any shares of Series B Preferred Stock are outstanding, no
full dividends shall be declared or paid or set apart for payment on any
series of Capital Stock ranking junior to or on a parity with the Series B
Preferred Stock as to dividends for any period unless full cumulative
dividends have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for such payment on
the Series B Preferred Stock for all past Dividend Periods and the then
current Dividend Period. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the shares of the
Series B Preferred Stock and the shares of any series of Preferred Stock
ranking on a parity as to dividends with the Series B Preferred Stock, all
dividends declared upon the shares of the Series B Preferred Stock and any
other such series of Preferred Stock ranking on a parity as to dividends with
the Series B Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share on the Series B Preferred Stock and such other
series of preferred stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of the Series
B Preferred Stock and such other series of Preferred Stock bear to each other.
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(e) Except as provided in SECTION 4.4.1(d), unless full cumulative
dividends on the Series B Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past Dividend Periods and the then current
Dividend Period, no dividends (other than dividends payable in Common Stock
or other Capital Stock ranking junior to the Series B Preferred Stock as to
dividends and upon liquidation, dissolution and winding up) shall be declared
or paid or set aside for payment or other distribution shall be declared or
made upon any series of Capital Stock ranking junior to or on a parity with
the Series B Preferred Stock as to dividends nor, subject to the
Corporation's right to purchase Excess Stock as otherwise provided herein,
shall shares of any series of Capital Stock ranking junior to or on a parity
with the Series B Preferred Stock upon liquidation, dissolution or winding up
be redeemed, purchased or otherwise acquired for any consideration (or any
moneys be paid to or made available for a sinking fund for the redemption of
any shares of any series of Capital Stock ranking junior to or on a parity
with the Series B Preferred Stock) by the Corporation (except by conversion
into or exchange for other Capital Stock of the Corporation ranking junior to
the Series B Preferred Stock as to dividends and upon liquidation,
dissolution and winding up).
(f) Notwithstanding anything contained herein to the contrary,
dividends on the Series B Preferred Stock, if not paid on a Series B Dividend
Payment Date, will accrue whether or not dividends are declared for such
Series B Dividend Payment Date, whether or not the Corporation has earnings
and whether or not there are funds legally available for the payment of such
dividends. Any dividend payment made on shares of Series B Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such Series B Preferred Stock which remains payable.
(g) If, for any taxable year, the Corporation elects to designate
as "capital gain dividends" (as defined in Section 857 of the Code) any
portion (the "Capital Gains Amount") of the dividends paid or made available
for the year to holders of all classes of stock (the "Total Dividends"), then
the portion of the Capital Gains Amount that shall be allocable to holders of
the Series B Preferred Stock shall be the Capital Gains Amount multiplied by
a fraction, the numerator of which shall be the total dividends (within the
meaning of the Code) paid or made available to the holders of the Series B
Preferred Stock for the year and the denominator of which shall be the Total
Dividends.
Section 4.5.2 DISTRIBUTION UPON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, subject to the prior
preferences and other rights of any series of Capital Stock ranking senior to
the Series B Preferred Stock upon liquidation, dissolution or winding up
(including the Series A Preferred Stock), but before any distribution or
payment shall be made to the holders of Capital Stock ranking junior to the
Series B Preferred Stock in the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, the holders of Series B
Preferred Stock shall be entitled to receive out of the assets of the
Corporation legally available for distribution to its stockholders
liquidating distributions in cash or property at its fair market value as
determined by the Board of Directors of the Corporation in the amount of the
Liquidation Preference per share. After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of Series B
Preferred Stock will have no right or claim to any of the remaining assets of
the Corporation and shall not be entitled to any other distribution in the
event of liquidation, dissolution or winding up of the affairs of the
Corporation.
(b) In the event that, upon any such voluntary or involuntary
liquidation, dissolution or other winding up, the legally available assets of
the Corporation are insufficient to pay the amount of
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the Liquidation Preference per share and the corresponding amounts payable on
all shares of Capital Stock ranking on a parity with the Series B Preferred
Stock in the distribution of assets upon liquidation, dissolution or winding
up, then the holders of the Series B Preferred Stock and all such other
Capital Stock shall share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
(c) Neither the consolidation or merger of the Corporation into or
with another corporation or any other entity nor the sale, lease, transfer or
conveyance of all or substantially all of the assets of the Corporation to
another corporation or any other entity shall be deemed to constitute a
liquidation, dissolution or winding up of the affairs of the Corporation
within the meaning of this SECTION 4.5.2.
Section 4.5.3 REDEMPTION BY THE CORPORATION.
(a) The Series B Preferred Stock may be redeemed, in whole or from
time to time in part, at any time on and after March 31, 1999 at the option
of the Corporation at the price per share set forth below (the "Series B
Redemption Price"):
If the Redemption Date is: Price Per Share
-------------------------- ---------------
On or after March 31, 1999 but prior to March 31, 2000 $ 27.125
On or after March 31, 2000 but prior to March 31, 2001 $ 26.70
On or after March 31, 2001 but prior to March 31, 2002 $ 26.275
On or after March 31, 2002 but prior to March 31, 2003 $ 25.85
On or after March 31, 2003 but prior to March 31, 2004 $ 25.425
On or after March 31, 2004 $ 25.00
in each case plus all accrued and unpaid dividends thereon to the Redemption
Date, except as may be provided below, without interest.
(b) Each date fixed for redemption pursuant to SECTION 4.5.3(d)
below is called a "Series B Redemption Date." If the Series B Redemption
Date is after a Record Date and before the related Series B Dividend Payment
Date, the dividend payable on such Series B Dividend Payment Date shall be
paid to the holder in whose name the Series B Preferred Stock to be redeemed
is registered at the close of business on such Record Date notwithstanding
the redemption thereof between such Record Date and the related Series B
Dividend Payment Date or the Corporation's default in the payment of the
dividend due.
(c) In case of redemption of less than all shares of Series B
Preferred Stock at the time outstanding, the shares to be redeemed shall be
selected pro rata from the holders of record of such shares in proportion to
the number of shares held by such holders (with adjustments to avoid
redemption of fractional shares) or by any other equitable method determined
by the Corporation, to the extent practicable, that will not result in a
violation of the Series B Preferred Stock Ownership Limit.
(d) Notice of any redemption will be given by publication in a
newspaper of general circulation in the City of New York, such publication to
be made once a week for two successive weeks commencing not less than 30 nor
more than 60 days prior to the Series B Redemption Date. A similar notice
will be mailed by the Corporation, postage prepaid, not less than 30 nor more
than 60 days prior to the Series B Redemption Date, addressed to the
respective holders of record of the Series B Preferred
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Stock to be redeemed at their respective addresses as they appear on the
stock transfer records of the Corporation. No failure to give such notice or
any defect therein or in the mailing thereof shall affect the validity of the
proceedings for the redemption of any shares of Series B Preferred Stock
except as to the holder to whom the Corporation has failed to give notice or
except as to the holder to whom notice was defective. In addition to any
information required by law or by the applicable rules of any exchange upon
which Series B Preferred Stock may be listed or admitted to trading, such
notice shall state: (i) the Series B Redemption Date; (ii) the Series B
Redemption Price; (iii) the aggregate number of shares of Series B Preferred
Stock to be redeemed and, if less than all shares held by such holder are to
be redeemed, the number of such shares to be redeemed; (iv) the place or
places where certificates for such shares are to be surrendered for payment
of the Series B Redemption Price; (v) that dividends on the shares to be
redeemed will cease to accrue on the Series B Redemption Date; and (vi) that
any conversion rights with respect to such shares shall terminate at the
close of business on the third business day immediately preceding the Series
B Redemption Date.
(e) If notice has been mailed in accordance with SECTION 4.5.3 (d)
above and provided that on or before the Series B Redemption Date specified
in such notice all funds necessary for such redemption shall have been set
aside by the Corporation, separate and apart from its other funds in trust
for the pro rata benefit of the holders of the shares so called for
redemption, so as to be and to continue to be available therefor, then, from
and after the Series B Redemption Date, dividends on the shares of the Series
B Preferred Stock so called for redemption shall cease to accrue, and such
shares shall no longer be deemed to be outstanding and shall not have the
status of shares of Series B Preferred Stock, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from
the Corporation the Series B Redemption Price) shall cease. Notwithstanding
the foregoing, upon the Corporation's default in the payment of the dividend
due, the holders of Series B Preferred Stock at the close of business on any
Record Date will be entitled to receive the dividend payable with respect to
such Series B Preferred Stock on the corresponding Series B Dividend Payment
Date, although such Series B Preferred Stock shall have been redeemed between
such Record Date and such corresponding Series B Dividend Payment Date. Upon
surrender, in accordance with the redemption notice, of the certificates for
any shares of Series B Preferred Stock so redeemed (properly endorsed or
assigned for transfer, if the Corporation shall so require and the notice
shall so state), such shares shall be redeemed by the Corporation at the
Series B Redemption Price. In case fewer than all the shares represented by
any such certificate are redeemed, a new certificate or certificates shall be
issued representing the unredeemed shares without cost to the holder thereof.
(f) Any deposit of funds with a bank or trust company for the
purpose of redeeming Series B Preferred Stock shall be irrevocable except
that:
(i) the Corporation shall be entitled to receive from such
bank or trust company the interest or other earnings, if any, earned on
any money so deposited in trust, and the holders of any shares redeemed
shall have no claim to such interest or other earnings; and
(ii) any balance of monies so deposited by the Corporation
and unclaimed by the holders of the Series B Preferred Stock entitled
thereto at the expiration of two (2) years after the applicable Series
B Redemption Date shall be repaid, together with any interest or other earnings
earned thereon, to the Corporation, and after such repayment, the holders of
the shares entitled to the funds so repaid to the Corporation shall look
only to the Corporation for payment without interest or other earnings.
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(g) No Series B Preferred Stock may be redeemed except with
funds legally available for the payment of the Series B Redemption Price.
(h) Unless full cumulative dividends on all shares of Series B
Preferred Stock shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment
for all past Dividend Periods and the then current Dividend Period, no shares
of any Series B Preferred Stock shall be redeemed unless all outstanding
shares of Series B Preferred Stock are simultaneously redeemed, PROVIDED,
HOWEVER, that the foregoing shall not prevent the purchase or acquisition of
shares of Series B Preferred Stock pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Series B
Preferred Stock; and, unless full cumulative dividends on all outstanding
shares of Series B Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past Dividend Periods and the then current
Dividend Period, the Corporation shall not purchase or otherwise acquire
directly or indirectly, through a subsidiary or otherwise, any shares of
Series B Preferred Stock (except by conversion into or exchange for capital
stock of the Corporation ranking junior to the Series B Preferred Stock as to
divi-dends and upon liquidation, dissolution and winding up).
(i) All shares of Series B Preferred Stock redeemed pursuant to
this SECTION 4.5.3 shall be retired and shall be restored to the status of
authorized and unissued shares of Preferred Stock, without designation as to
series, and subject to the applicable limitations set forth herein may
thereafter be reissued as shares of any series of Preferred Stock.
Section 4.5.4 VOTING RIGHTS.
(a) The holders of record of shares of Series B Preferred Stock
shall not be entitled to any voting rights except as hereinafter provided in
this SECTION 4.5.4 or as otherwise provided by law. The Corporation shall
not, without the affirmative vote or consent of the holders of at least a
majority of the shares of the Series B Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
Series B Preferred Stock voting separately as a class), (i) authorize,
create, or increase the authorized or issued amount of, any class or series
of capital stock ranking senior to the Series B Preferred Stock as to
dividends or upon liquidation, dissolution or winding up or the Excess Series
B Preferred Stock as to the distribution terms upon liquidation, dissolution
or winding up, or reclassify any authorized capital stock into any such
senior stock, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such Capital Stock;
or (ii) amend, alter or repeal the provisions of these Amended and Restated
Articles of Incorporation, whether by merger, consolidation or otherwise, so
as to materially and adversely affect any right, preference, privilege or
voting power of the Series B Preferred Stock or the holders thereof;
PROVIDED, HOWEVER, that any increase in the amount of the authorized
Preferred Stock or the creation or issuance of any other series of Preferred
Stock, or any increase in the amount of authorized shares of the Series B
Preferred Stock or any other series of Preferred Stock, in each case ranking
on a parity with or junior to the Series B Preferred Stock with respect to
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
(b) If and whenever dividends payable on Series B Preferred Stock
shall be in arrears for six (6) or more consecutive quarterly periods, then
the holders of Series B Preferred Stock, voting separately as a class (with
any such other series as provided in SECTION 4.5.4(f) below), shall be
entitled
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at the next annual meeting of the stockholders or at any special meeting
called as hereinafter provided to elect two (2) additional directors. Upon
election, such directors shall become additional directors of the Corporation
and the authorized number of directors of the Corporation shall thereupon be
automatically increased by such number of directors.
(c) Whenever the voting right described under SECTION 4.5.4(b)
shall become exercisable, such right may be exercised initially either at a
special meeting of the holders of Series B Preferred Stock, called as
hereinafter provided, or at any annual meeting of stockholders held for the
purpose of electing directors, and thereafter at such annual meetings or by
the written consent of holders of Series B Preferred Stock. Such right of
the holders of Series B Preferred Stock to elect directors may be exercised
until all dividends to which the holders of Series B Preferred Stock shall
have been entitled for all previous Dividend Periods and the current Dividend
Period shall have been paid in full or declared and a sum of money sufficient
for the payment thereof set aside for payment, at which the time the right of
the holders of Series B Preferred Stock to elect such number of directors
shall cease, the term of such directors previously elected shall thereupon
terminate, and the authorized number of directors of the Corporation shall
thereupon return to the number of authorized directors otherwise in effect,
but subject always to the same provisions for the renewal and divestment of
such special voting rights in the case of any such future dividend default or
defaults and subject to the rights of any other series of preferred stock to
vote for the election of directors, together with the Series B Preferred
Stock, as described in SECTION 4.5.4(f), that shall not have then expired.
(d) At any time when the voting right described under SECTION
4.5.4(b) shall become exercisable in the holders of Series B Preferred Stock
and if such right shall not already have been initially exercised, a proper
officer of the Corporation shall, upon the written request of holders of
record of at least ten percent (10%) of the shares of Series B Preferred
Stock, and of any other series of Preferred Stock entitled to vote on such
matter as described in SECTION 4.5.4(f), then outstanding, addressed to the
Secretary of the Corporation, call a special meeting of holders of Series B
Preferred Stock. Such meeting shall be held at the earliest practicable date
upon the notice required for annual meetings of stockholders at the place for
holding annual meetings of stockholders of the Corporation or, if none, at a
place designated by the Secretary of the Corporation. If such meeting shall
not be called by the proper officers of the Corporation within thirty (30)
days after the personal service of such written request upon the Secretary of
the Corporation, or within thirty (30) days after mailing the same within the
United States, by registered mail, addressed to the Secretary of the
Corporation at its principal office (such mailing to be evidenced by the
registry receipt issued by the postal authorities), then the holders of
record of at least ten percent (10%) of the shares of Series B Preferred
Stock, and of other preferred stock entitled to vote on such matter as
described in SECTION 4.5.4(f), then outstanding may designate in writing a
holder of Series B Preferred Stock or such other Preferred Stock to call such
meeting at the expense of the Corporation, and such meeting may be called by
such person so designated upon the notice required for annual meetings of
stockholders and shall be held at the place of holding annual meetings of the
Corporation or, if none, at a place designated by such holder. Any holder of
Series B Preferred Stock that would be entitled to vote at such meeting shall
have access to the stock books of the Corporation for the purpose of causing
a meeting of stockholders to be called pursuant to the provisions of this
SECTION 4.5.4(d). Notwithstanding the provisions of this SECTION 4.5.4(d),
however, no such special meeting shall be called if any such request is
received less than 90 days before the date fixed for the next ensuing annual
or special meeting of stockholders.
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(e) If any director so elected by the holders of Series B
Preferred Stock shall cease to serve as a director before such director's
term shall expire, the holders of Series B Preferred Stock (and any other
series of Preferred Stock, if any, entitled to vote on such matter, as
described in SECTION 4.5.4(f)) then outstanding may, at a special meeting of
the holders called as provided above, elect a successor to hold office for
the unexpired term of the director whose place shall be vacant.
(f) If, at any time when the holders of Series B Preferred Stock
are entitled to elect directors pursuant to the foregoing provisions of this
SECTION 4.5.4, the holders of any one or more additional series of Preferred
Stock are entitled to elect directors by reason of any default or event
specified in these Amended and Restated Articles of Incorporation, as in
effect at the time, or the articles supplementary for such series, and if the
terms for such other additional series so permit, then the voting rights of
the two or more series then entitled to vote shall be combined (with each
series having a number of votes proportional to the aggregate liquidation
preference of its outstanding shares). In such case, the holders of Series B
Preferred Stock and of all such other series then entitled so to vote, voting
as a class, shall elect such directors. If the holders of any such other
series have elected such directors prior to the happening of the default or
event permitting the holders of Series B Preferred Stock to elect directors,
or prior to a written request for the holding of a special meeting being
received by the Secretary of the Corporation as elsewhere required in SECTION
4.5.4(d) above, then a new election shall be held with all such other series
of Preferred Stock and the Series B Preferred Stock voting together as a
single class for such directors, resulting in the termination of the term of
such previously elected directors upon the election of such new directors.
If the holders of any such other series are entitled to elect in excess of
two directors, the Series B Preferred Stock shall not participate in the
election of more than two such directors, and those directors whose terms
first expire shall be deemed to be the directors elected by the holder of
Series B Preferred Stock; PROVIDED that, if at the expiration of such terms,
the holders of Series B Preferred Stock are entitled to vote in the election
of directors pursuant to the provisions of this SECTION 4.5.4, then the
Secretary of Corporation shall call a meeting (which meeting may be the
annual meeting or special meeting of stockholders referred to in SECTION
4.5.4(c) above) of holders of Series B Preferred Stock for the purpose of
electing replacement directors (in accordance with the provisions of this
SECTION 4.5.4) to be held at or prior to the time of expiration of the
expiring terms referred to above.
(g) The holders of record of shares of Series B Preferred Stock,
then outstanding, shall be entitled to vote, together with any other class or
series of Capital Stock entitled to vote, then outstanding, on any resolution
presented by the Board of Directors pursuant to SECTION 5.2.
(h) Subject to SECTIONS 4.5.4(a) and 4.6.4, in any matter in which
the Series B Preferred Stock may vote, including any action by written
consent, each share of Series B Preferred Stock shall be entitled to one (1)
vote (except as expressly provided herein or as may be required by law).
(i) Except as required by law, the foregoing voting provisions
shall not apply if, at or prior to the time when the act with respect to
which such vote would otherwise be required shall be effected, all
outstanding shares of the Series B Preferred Stock shall have been redeemed
or shall have been called for redemption upon proper notice and sufficient
funds shall have been deposited in trust to effect such redemption.
Section 4.5.5 RANKING.
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The Series B Preferred Stock shall, with respect to dividend rights
and distributions upon liquidation, dissolution, and winding up, rank (i)
senior to the Common Stock, the Excess Common Stock and shares of all other
Capital Stock issued from time to time by the Corporation the terms of which
specifically provide that the Capital Stock of such series rank junior to
such Series B Preferred Stock with respect to dividend rights or
distributions upon liquidation, dissolution, or winding up of the
Corporation, (ii) on a parity with the shares of all other Capital Stock
issued by the Corporation the terms of which specifically provide that the
shares rank on a parity with the Series B Preferred Stock with respect to
dividends and distributions upon liquidation, dissolution, or winding up of
the Corporation or make no specific provision as to their ranking; and (iii)
junior to the Series A Preferred Stock, the Excess Series A Preferred Stock
(as to distribution upon liquidation, dissolution or winding up) and all
other Capital Stock issued by the Corporation the terms of which specifically
provide that the shares rank senior to the Series B Preferred Stock with
respect to dividends and distributions upon liquidation, dissolution or
winding up of the Corporation (the issuance of which must have been approved
by a vote of at least a majority of the outstanding shares of Series B
Preferred Stock). The Series B Preferred Stock ranks on a parity with the
Excess Series B Preferred Stock with respect to distributions upon
liquidation, dissolution, or winding up.
Section 4.5.6 CONVERSION RIGHTS.
Subject to any other provisions of this Article IV and Article V hereof,
the holders of shares of Series B Preferred Stock shall have the right, at
their option, to convert such shares into shares of Common Stock on the
following terms and conditions:
(a) Shares of Series B Preferred Stock shall be convertible at any
time and from time to time on or after the Conversion Commencement Date into
fully paid and nonassessable shares of Common Stock at a conversion price of
$20.90 per share of Common Stock (as such price may be adjusted from time to
time, the "Conversion Price"). For purposes of this SECTION 4.5.6,
references to shares of Series B Preferred Stock shall apply equally to
fractional shares thereof. The Conversion Price shall be subject to
adjustment from time to time as hereinafter provided. For purposes of such
conversion, each share of Series B Preferred Stock will be valued at $25.00
plus an amount equal to any accrued and unpaid dividends on such share to the
date of conversion. No payment or adjustment shall be made on account of any
accrued and unpaid dividends on shares of Series B Preferred Stock
surrendered for conversion prior to the Record Date for the determination of
stockholders entitled to such dividends or on account of any dividends on the
shares of Common Stock issued upon such conversion subsequent to the Record
Date for the determination of stockholders entitled to such dividends. If
any shares of Series B Preferred Stock shall be called for redemption, the
right to convert the shares designated for redemption shall terminate at the
close of business on the third business day immediately preceding the date
fixed for redemption unless default is made in the payment of the Series B
Redemption Price. In the event of default in the payment of the Series B
Redemption Price, the right to convert the shares designated for redemption
shall terminate at the close of business on the business day immediately
preceding the date that such default is cured.
(b) In order to convert shares of Series B Preferred Stock into
Common Stock, the holder thereof shall, on or after the Conversion
Commencement Date, surrender the certificates therefor, duly endorsed if the
Corporation shall so require, or accompanied by appropriate instruments of
transfer satisfactory to the Corporation, at the office of the transfer agent
for the Series B Preferred Stock or at such other office as may be designated
by the Corporation, together with written notice that such holder irrevocably
elects to convert such shares. Such notice shall also state the name and
address in which such holder wishes the certificate for the shares of Common
Stock issuable upon conversion to be issued. As
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soon as practicable after receipt of the certificates representing the shares
of Series B Preferred Stock to be converted and the notice of election to
convert the same, the Corporation shall issue and deliver at said office a
certificate for the number of whole shares of Common Stock issuable upon
conversion of the shares of Series B Preferred Stock surrendered for
conversion, together with a cash payment in lieu of any fraction of a share,
as hereinafter provided, to the person entitled to receive the same. If more
than one stock certificate for Series B Preferred Stock shall be surrendered
for conversion at one time by the same holder, the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the basis
of the aggregate number of shares represented by all the certificates so
surrendered. Shares of Series B Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the date such shares
are surrendered for conversion and notice of election to convert the same is
received by the Corporation in accordance with the foregoing provision, and
the person entitled to receive the Common Stock issuable upon such conversion
shall be deemed for all purposes as the record holder of such Common Stock as
of such date.
(c) In the case of any share of Series B Preferred Stock which is
converted after any Record Date with respect to the payment of a dividend on
the Series B Preferred Stock and on or prior to the corresponding Series B
Dividend Payment Date, the dividend due on such Series B Dividend Payment
Date shall be payable on such Series B Dividend Payment Date to the holder of
record of such shares on such preceding Record Date notwithstanding such
conversion. Shares of Series B Preferred Stock surrendered for conversion
during the period from the close of business on any Record Date with respect
to the payment of a dividend on the Series B Preferred Stock next preceding
any Series B Dividend Payment Date to the opening of business on such Series
B Dividend Payment Date shall (except in the case of shares of Series B
Preferred Stock which have been called for redemption on a Series B
Redemption Date within such period) be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Corporation of an
amount equal to the dividend payable on such Series B Dividend Payment Date
on the shares of Series B Preferred Stock being surrendered for conversion.
The dividend with respect to a share of Series B Preferred Stock called for
redemption on a Series B Redemption Date during the period from the close of
business on any Record Date with respect to the payment of a dividend on the
Series B Preferred Stock next preceding any dividend payment to the opening
of business on such Series B Dividend Payment Date shall be payable on such
Series B Dividend Payment Date to the holder of record of such share on such
Record Date, notwithstanding the conversion of such share of Series B
Preferred Stock after such Record Date and prior to such Series B Dividend
Payment Date, and the holder converting such share of Series B Preferred
Stock called for redemption need not include a payment of such dividend
amount upon surrender of such share of Series B Preferred Stock for
conversion.
(d) No fractional shares of Common Stock shall be issued upon
conversion of any shares of Series B Preferred Stock. If more than one share
of Series B Preferred Stock is surrendered at one time by the same holder,
the number of full shares issuable upon conversion thereof shall be computed
on the basis of the aggregate number of shares so surrendered. If the
conversion of any shares of Series B Preferred Stock results in a fractional
share of Common Stock, the Corporation shall pay cash in lieu thereof in an
amount equal to such fraction multiplied by the closing price of the Common
Stock, determined as provided in SECTION 4.5.6(e)(vi) below, on the date on
which the shares of Series B Preferred Stock are duly surrendered for
conversion, or if such date is not a trading date, on the next succeeding
trading date.
(e) The Conversion Price shall be adjusted from time to time as
follows:
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(i) In case the Corporation shall pay or make a dividend or
other distribution on shares of Common Stock in Common Stock, the
Conversion Price in effect at the opening of business on the date
following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the denominator
shall be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day
following the date fixed for such determination. For purposes of this
subsection, the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Corporation but
shall include shares issuable in respect to scrip certificates issued in
lieu of fractions of shares of Common Stock. The Corporation will not
pay any dividend or make any distribution on shares of Common Stock held
in the treasury of the Corporation.
(ii) In case the Corporation shall issue additional rights or
warrants to all holders of its Common Stock entitling them to subscribe
for or purchase shares of Common Stock at a price per share less than
the then current market price per share (determined as provided in
SECTION 4.5.6(e)(vi) below) of the Common Stock on the date fixed for
the determination of stockholders entitled to receive such rights or
warrants (other than pursuant to a dividend reinvestment plan), the
Conversion Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination plus the number of
shares of Common Stock which the aggregate of the offering price of
the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such current market price (determined as
provided in SECTION 4.5.6(e)(vi) below) and the denominator shall be the
number of shares of Common Stock outstanding at the close of business on
the date fixed for such determination plus the number of shares of
Common Stock so offered for subscription or purchase, such reduction to
become effective immediately after the opening of business on the day
following the date fixed for such determination. For the purposes of
this SECTION 4.5.6(e)(ii), the number of shares of Common Stock at any
time outstanding shall not include shares held in the treasury of the
Corporation but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The
Corporation will not issue any rights or warrants in respect of shares
of Common Stock held in the treasury of the Corporation during the
period so held.
(iii) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
Conversion Price in effect at the opening of business on the date
following the day upon which such subdivision becomes effective shall be
proportionately reduced, and, conversely, in case outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common
Stock, the Conversion Price in effect at the opening of business on the
day following the day upon which such combination becomes effective
shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective.
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(iv) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidence of its
indebtedness or assets (including securities, but excluding (1) any
rights or warrants referred to in SECTION 4.5.6(e)(ii) above, (2) any
dividend described in SECTION 4.5.6(e)(ix) below, and (3) any dividend
or distribution referred to in SECTION 4.5.6(e)(i) above), the
Conversion Price shall be adjusted so that the same shall equal the
price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such distributions by
a fraction of which the numerator shall be the current market price per
share (determined as provided in SECTION 4.5.6(e)(vi) below) of the
Common Stock on the date fixed for such determination less the fair
market value (as determined by the Board of Directors, whose
determination shall be conclusive and shall be described in a statement
filed with the transfer agent for the Series B Preferred Stock) of the
portion of the evidences of the indebtedness or assets so distributed
applicable to one share of Common Stock and the denominator shall be
such current market price per share of Common Stock, such adjustment to
become effective immediately prior to the opening of business on the day
following the date fixed for the determination of stockholders entitled
to receive such distribution.
(v) For the purposes of this SECTION 4.5.6, the
reclassification of Common Stock into securities including securities
other than Common Stock (other than any reclassification upon a
consolidation or merger to which SECTION 4.5.6(g) below applies) shall
be deemed to involve (A) a distribution of such securities other than
Common Stock to all holders of Common Stock (and the effective date of
such reclassification shall be deemed to be "the date fixed for the
determination of stockholders entitled to receive such distribution" and
the "date fixed for such determination" within the meaning of SECTION
4.5.6(e)(iv) above), and (B) a subdivision or combination, as the case
may be, of the number of shares of Common Stock outstanding immediately
thereafter (and the effective date of such reclassification shall be
deemed to be "the day upon which such subdivision became effective" and
"the day upon which such subdivision or combination becomes effective,"
as the case may be) within the meaning of SECTION 4.5.6(e)(iii) above.
(vi) For the purpose of any computation under SECTION
4.5.6(e)(ii) and (iv) above, the "current market price per share" of
Common Stock on any day shall be deemed to be the average of the daily
closing prices for the 30 consecutive trading days commencing 45 trading
days before the day in question. The closing price for each day shall be
the reported last sale price or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asking
prices, in either case on the New York Stock Exchange, or, if the Common
Stock is not quoted on such exchange, on the principal national
securities exchange on which the Common Stock is then listed or admitted
to trading or, if the Common Stock is not quoted on any national
securities exchange, the average of the closing bid and asked prices in
the NASDAQ Stock Market, or in the over-the-counter market as furnished
by a New York Stock Exchange member firm selected from time to time by
the Board of Directors for that purpose.
(vii) Notwithstanding the foregoing, no adjustment in
the Conversion Price for the Series B Preferred Stock shall be required
unless such adjustment would require an increase or decrease of at least
1% in such price; PROVIDED, HOWEVER, that any adjustment which by reason
of this SECTION 4.5.6(e)(vii) is not required to be made shall be
carried forward and taken into
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account in any subsequent adjustment. All calculations under this
SECTION 4.5.6 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
(viii) In the event of a distribution of evidences of
indebtedness or other assets (as described in SECTION 4.5.6(e)(iv)) or a
dividend to all holders of Common Stock of rights to subscribe for
additional shares of the Corporation's Capital Stock (other than those
referred to in SECTION 4.5.6(e)(ii) above), the Corporation may, instead
of making an adjustment of the Conversion Price, make proper provision
so that each holder who converts such shares will be entitled to receive
upon such conversion, in addition to shares of Common Stock, an
appropriate number of such rights, warrants, evidences of indebtedness
or other assets.
(ix) No adjustment will be made for Ordinary Cash
Dividends (defined as dividends or other distributions to holders of
Common Stock in an amount not exceeding the accumulated Funds from
Operations of the Operating Partnership since the Initial Issue Date,
after deducting cumulative dividends or other distributions (A) paid in
respect of all classes of Capital Stock of the Corporation and in
respect of Units held by persons other than the Corporation or (B)
accrued in respect of Series B Preferred Stock and any other shares of
Preferred Stock of the Corporation ranking on a parity with or senior to
the Series B Preferred Stock as to dividends, in each case since the
Initial Issue Date). For this purpose, "Funds from Operations of the
Operating Partnership" shall mean net income (loss) (computed in
accordance with generally accepted accounting principles consistently
applied), excluding gains (or losses) from debt restructuring and sales
of property, plus depreciation and amortization of, and after
adjustments for unconsolidated partnerships and joint ventures of the
Operating Partnership.
(f) Whenever the Conversion Price shall be adjusted as herein
provided (i) the Corporation shall forthwith make available at the office of
the transfer agent for the Series B Preferred Stock a statement describing in
reasonable detail the adjustment, the facts requiring such adjustment and the
method of calculation used; and (ii) the Corporation shall cause to be mailed
by first class mail, postage prepaid, as soon as practicable to each holder
of record of shares of Series B Preferred Stock a notice stating that the
Conversion Price has been adjusted and setting forth the adjusted Conversion
Price.
(g) In the event of any consolidation of the Corporation with or
merger of the Corporation into any other corporation (other than a merger in
which the Corporation is the surviving corporation) or a sale, lease (other
than in the ordinary course of business) or conveyance of the assets of the
Corporation as an entirety or substantially as an entirety, or any statutory
exchange of securities with another corporation, the holder of each share of
Series B Preferred Stock shall, notwithstanding anything in this SECTION
4.5.6 to the contrary, have the right, after such consolidation, merger,
sale, lease (other than in the ordinary course of business), conveyance or
exchange, to convert such share into the number and kind of shares of stock
or other securities and the amount and kind of property which such holder
would have been entitled to receive immediately upon such consolidation,
merger, sale, lease (other than in the ordinary course of business),
conveyance or exchange for the number of shares of Common Stock that would
have been issued to such holder had such shares of Series B Preferred Stock
been converted immediately prior to such consolidation, merger, sale, lease
(other than in the ordinary course of business), conveyance or exchange. The
provisions of this SECTION 4.5.6(g) shall similarly apply to successive
consolidations, mergers, sales, leases (other than in the ordinary course of
business), conveyances or exchanges.
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(h) The Corporation shall pay any taxes that may be payable in
respect of the issuance of shares of Common Stock upon conversion of shares
of Series B Preferred Stock, but the Corporation shall not be required to pay
any taxes which may be payable in respect of any transfer involved in the
issuance of shares of Common Stock in a name other than that in which the
shares of Series B Preferred Stock so converted are registered, and the
Corporation shall not be required to issue or deliver any such shares unless
and until the person requesting such issuance shall have paid to the
Corporation the amount of any such taxes, or shall have established to the
satisfaction of the Corporation that such taxes have been paid.
(i) The Corporation may (but shall not be required to) make such
reductions in the Conversion Price, in addition to those required by SECTIONS
4.5.6(e)(i) through (iv) above, as it considers to be advisable in order that
any event treated for federal income tax purposes as a dividend of stock or
stock rights shall not be taxable to the recipients.
(j) The Corporation shall at all times reserve and keep available
out of its authorized but unissued Common Stock the full number of shares of
Common Stock issuable upon the conversion of all shares of Series B Preferred
Stock then outstanding.
(k) In the event that:
(i) the Corporation shall declare a dividend or any other
distribution on its Common Stock, other than an Ordinary Cash Dividend;
or
(ii) the Corporation shall authorize the granting to the
holders of its Common Stock of rights to subscribe for or purchase any
shares of capital stock of any class or of any other rights; or
(iii) any capital reorganization of the Corporation,
reclassification of the Capital Stock of the Corporation, consolidation
or merger of the Corporation with or into another corporation (other
than a merger in which the Corporation is the surviving corporation), or
sale, lease (other than in the ordinary course of business) or
conveyance of the assets of the Corporation as an entirety or
substantially as an entirety to another corporation occurs; or
(iv) the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation shall occur;
the Corporation shall cause to be mailed to the holders of record of Series B
Preferred Stock at least 15 days prior to the applicable date hereinafter
specified a notice stating (A) the date on which a record is to be taken for
the purpose of such dividend, distribution or grant of rights or, if a record
is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution or grant of rights are
to be determined or (B) the date on which such reorganization,
reclassification, consolidation, merger, sale, lease (other than in the
ordinary course of business), conveyance, dissolution, liquidation or winding
up is expected to take place, and the date, if any is to be fixed, as of
which holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, lease (other
than in the ordinary course of business), conveyance, dissolution,
liquidation or winding up. Failure to give such notice, or any defect
therein, shall not affect the legality of such dividend, distribution,
grant,
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reorganization, reclassification, con-solidation, merger, sale, lease
(other than in the ordinary course of business), conveyance, dissolution,
liquidation or winding up.
Section 4.5.7 SERIES B PREFERRED STOCK OWNERSHIP LIMITATIONS.
(a) Except as provided in SECTION 4.5.14, during the period
commencing on the date of the closing of the Initial Public Offering and
prior to the Restriction Termination Date, (i) no Person shall Acquire or
Beneficially Own any shares of Series B Preferred Stock if, as the result of
such Acquisition or Beneficial Ownership, such Person shall Beneficially Own
shares of Capital Stock in excess of the Series B Preferred Stock Ownership
Limit; and (ii) no Person may Acquire or Beneficially Own shares of Series B
Preferred Stock to the extent that as a result of such Acquisition or
Beneficial Ownership the aggregate of the shares of Common Stock Beneficially
Owned by such holder and the shares of Common Stock that would be issued to
such holder upon Conversion of all the shares of Series B Preferred Stock
then Beneficially Owned by such holder, assuming that all of the outstanding
shares of Series B Preferred Stock were converted into Common Stock at such
time, would exceed 9.9% of the total shares of Common Stock of the
Corporation that would be outstanding, assuming all of the outstanding shares
of Series B Preferred Stock were converted into shares of Common Stock and
without giving effect to the exchange of any Units for Common Stock.
(b) Except as provided in SECTION 4.5.14, during the period
commencing on the date of the closing of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer of shares of Series B
Preferred Stock that, if effective, would result in a violation of the
restriction in SECTION 4.5.7(a) shall be void AB INITIO as to the Transfer of
that number of shares of Series B Preferred Stock or Common Stock, as the
case may be, that would cause the violation (rounding up to the nearest whole
share), and the intended transferee shall acquire no rights in such excess
number of shares of Series B Preferred Stock or Common Stock, as the case may
be.
(c) Notwithstanding any other provisions contained herein, from
the date of the closing of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer of shares of Series B Preferred
Stock or other event that, if effective, would result in (i) the Corporation
being "closely held" within the meaning of Section 856(h) of the Code, (ii)
the outstanding shares of the Capital Stock of the Corporation being
beneficially owned by less than 100 Persons (determined without reference to
any rules of attribution), or (iii) the Corporation otherwise failing to
qualify as a REIT (including, but not limited to, a Transfer or other event
that would result in the Corporation owning (directly or Constructively) an
interest in a tenant that is described in Section 856(d)(2)(B) of the Code if
the income derived by the Corporation from such tenant would cause the
Corporation to fail to satisfy any of the gross income requirements of
Section 856(c) of the Code), shall be void AB INITIO as to the Transfer of
that number of shares of Series B Preferred Stock (rounding up to the nearest
whole share) or other event that would cause the Corporation to be "closely
held" within the meaning of Section 856(h) of the Code, would result in the
outstanding shares of the Capital Stock of the Corporation being beneficially
owned by less than 100 Persons (determined without reference to any rules of
attribution), or would otherwise result in the Corporation failing to qualify
as a REIT, and the intended transferee shall Acquire, or the Beneficial Owner
shall retain, as the case may be, no rights in such shares of Series B
Preferred Stock.
Section 4.5.8 REMEDIES FOR BREACH. If the Board of Directors or any
duly authorized committee thereof shall at any time determine in good faith
that a Transfer or other event has taken place that results in a violation of
SECTION 4.5.7 or that a Person intends to Acquire or has attempted to Acquire
Beneficial
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Ownership of any shares of Series B Preferred Stock in violation of SECTION
4.5.7 (whether or not such violation is intended), the Board of Directors or
a committee thereof shall take such action as it or they deem advisable,
subject to SECTION 5.3 hereof, to refuse to give effect to or to prevent such
Transfer or other event, including, but not limited to, refusing to give
effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin such Transfer; PROVIDED, HOWEVER, that any Transfers or
attempted Transfers or, in the case of an event other than a Transfer,
Beneficial Ownership, in violation of SECTION 4.5.7 shall be void AB INITIO
and automatically result in the exchange described in SECTION 4.5.9,
irrespective of any action (or non-action) by the Board of Directors or a
committee thereof.
Section 4.5.9 EXCHANGE FOR EXCESS SERIES B PREFERRED STOCK. If,
notwithstanding the other provisions contained in this SECTION 4.5, at any
time after the date of the closing of the Initial Public Offering and prior
to the Restriction Termination Date, there is a purported Transfer or other
event such that one or more of the restrictions on Beneficial Ownership and
Transfer of the Series B Preferred Stock described in SECTION 4.5.7 would be
violated, then, except as otherwise provided in SECTION 4.5.14, the shares of
Series B Preferred Stock being Transferred (or, in the case of an event other
than a Transfer, the shares of Series B Preferred Stock Beneficially Owned,
which would cause one or more of such restrictions to be violated) (rounded
up to the nearest whole share) shall be automatically exchanged for an equal
number of shares of Excess Series B Preferred Stock. Such exchange shall be
effective as of the close of business on the business day prior to the date
of such purported Transfer or other event.
Section 4.5.10 NOTICE OF RESTRICTED TRANSFER. Any Person who Acquires
or attempts or intends to Acquire shares of Series B Preferred Stock in
violation of SECTION 4.5.7 or any Person who is a transferee in a Transfer or
is otherwise affected by an event other than a Transfer that results in the
issuance of Excess Series B Preferred Stock pursuant to SECTION 4.5.9, shall
immediately give written notice to the Corporation of such Transfer or other
event and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or attempted, intended or purported Transfer or other event on the
Corporation's status as a REIT.
Section 4.5.11 OWNERS REQUIRED TO PROVIDE INFORMATION. From the date of
the closing of the Initial Public Offering and prior to the Restriction
Termination Date:
(a) every Beneficial Owner of more than 5% (or such lower
percentage as required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding Series B Preferred Stock of the Corporation
shall, within 30 days after December 31 of each year, give written notice to
the Corporation stating the name and address of such Beneficial Owner, the
number of shares of Series B Preferred Stock and other shares of the Capital
Stock of the Corporation Beneficially Owned, and a description of the manner
in which such shares are held. Each such Beneficial Owner shall provide to
the Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT and to ensure compliance with the Series B
Preferred Stock Ownership Limit; and
(b) each Person who is a Beneficial Owner of Series B Preferred
Stock and each Person (including the stockholder of record) who is holding
Series B Preferred Stock for a Beneficial Owner shall provide to the
Corporation such information that the Corporation may request, in good faith,
in order to determine the Corporation's status as a REIT.
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Section 4.5.12 REMEDIES NOT LIMITED. Subject to SECTION 5.2 nothing
contained in this SECTION 4.5 shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving
the Corporation's status as a REIT.
Section 4.5.13 AMBIGUITY. In the case of an ambiguity in the
application of any of the provisions of this SECTION 4.5 or any definition
contained in SECTION 4.2, the Board of Directors shall have the power to
determine the application of the provisions of this SECTION 4.5 with respect
to any situation based on the facts known to it.
Section 4.5.14 EXCEPTIONS.
(a) Subject to SECTION 4.5.7(c), the Board of Directors, in its
sole discretion, may exempt a Person from the Series B Preferred Stock
Ownership Limit (A) if such Person is not an individual for purposes of
SECTION 542(a)(2) of the Code and the Board of Directors obtains such
representations and undertakings from such Person as are reasonably necessary
to ascertain that no such individual's Beneficial Ownership of such shares of
Series B Preferred Stock will violate the Series B Preferred Stock Ownership
Limit or otherwise violate SECTION 4.5.7(c), (B) if such Person does not and
represents that it will not own, directly or Constructively more than a 9.9%
interest (as set forth in SECTION 856(d)(2)(B) of the Code) in a tenant of
the Corporation (or a tenant of any entity owned or controlled by the
Corporation) and the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain this
fact, and (C) if such Person agrees that any violation of such
representations or undertaking (or other action which is contrary to the
restrictions contained in this SECTIONS 4.5.7 through 4.5.13 of this Article
IV) or attempted violation will result in such shares of Series B Preferred
Stock being exchanged for Excess Series B Preferred Stock in accordance with
SECTION 4.5.9.
(b) Prior to granting any exception pursuant to SECTION 4.5.14(a)
of this Article IV, the Board of Directors shall require a ruling from the
Internal Revenue Service, or an opinion of counsel, in either case in form
and substance satisfactory to the Board of Directors in it sole discretion,
as it may deem necessary or advisable in order to determine or ensure the
Corporation's status as a REIT. Notwithstanding the receipt of any ruling or
opinion, the Board of Directors may impose such conditions or restrictions as
it deems appropriate in connection with granting such exception.
Section 4.5.15 LEGEND. Each certificate for Series B Preferred Stock
shall bear the following legend:
"The shares represented by this certificate are subject to restrictions
on Beneficial Ownership and Transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment
Trust under the Internal Revenue Code of 1986, as amended (the "Code").
Subject to certain further restrictions and except as expressly provided
in the Corporation's Amended and Restated Articles of Incorporation, no
Person shall (i)(x) Acquire or Beneficially Own any shares of the
Corporation's Series B Preferred Stock if, as a result of such
Acquisition or Beneficial Ownership, such person shall Beneficially Own
shares of the Corporation's Capital Stock in excess of 9.9% of the value
of the Corporation's outstanding Capital Stock or (y) Acquire or
Beneficially Own shares of Series B Preferred Stock to the extent that
as a result of such Acquisition or Beneficial Ownership, shares of the
Corporation's Common Stock held by such person, assuming Conversion of
such Person's Series B Preferred Stock into Common Stock, would exceed
9.9% of the outstanding Common Stock, assuming such Conversion of such
Person's Series B Preferred Stock into Common Stock; or (ii)
Beneficially Own Series B Preferred Stock or Common Stock that would
result in the Corporation being "closely held" under Section 856(h) of
the Code. Any Person who Beneficially Owns or attempts to Beneficially
Own shares of Series B Preferred Stock or Common Stock which causes or
will cause a Person to Beneficially Own shares of Series B Preferred
Stock or
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Common Stock in excess of the above limitations must immediately notify
the Corporation. Any Transfer of shares of Series B Preferred Stock in
violation of the limitations set forth in the Corporation's Amended and
Restated Articles of Incorporation shall be void AB INITIO. If the
restrictions on Transfer are violated, the shares of Series B Preferred
Stock represented hereby will be automatically exchanged for shares of
Excess Series B Preferred Stock which will be held in trust by the
Corporation. All capitalized terms in this legend have the meanings
defined in the Corporation's Amended and Restated Articles of
Incorporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer, will be sent without
charge to each holder of Series B Preferred Stock who so requests."
4.6 EXCESS SERIES B PREFERRED STOCK
Section 4.6.1 OWNERSHIP IN TRUST. Upon any purported Transfer or other
event that results in an exchange of Series B Preferred Stock for Excess
Series B Preferred Stock pursuant to SECTION 4.5.9, such Excess Series B
Preferred Stock shall be deemed to have been Transferred to the Corporation,
as Trustee of a Trust for the exclusive benefit of the Beneficiary or
Beneficiaries to whom an interest in such Trust may later be transferred
pursuant to SECTION 4.6.5. Shares of Excess Series B Preferred Stock so held
in trust shall be issued and outstanding stock of the Corporation but shall
not be considered issued and outstanding for purposes of any stockholder
vote. The Purported Record Transferee or, in the case of Excess Series B
Preferred Stock resulting from an event other than a Transfer, the Purported
Record Holder, shall have no rights in such Excess Series B Preferred Stock
except the right to designate a transferee of such Excess Series B Preferred
Stock upon the terms specified in SECTION 4.6.5. The Purported Beneficial
Transferee or, in the case of Excess Series B Preferred Stock resulting from
an event other than a Transfer, the Purported Beneficial Holder, shall have
no rights in such Excess Series B Preferred Stock except as provided in
SECTION 4.6.5.
Section 4.6.2 DIVIDEND RIGHTS. Excess Series B Preferred Stock shall
not be entitled to any dividends or periodic distributions. Any dividend or
distribution paid prior to the discovery by the Corporation that shares of
Series B Preferred Stock have been exchanged for Excess Series B Preferred
Stock shall be repaid to the Corporation upon demand, and any dividend or
distribution declared but unpaid shall be rescinded as void AB INITIO with
respect to such shares of Series B Preferred Stock.
Section 4.6.3 RIGHTS UPON LIQUIDATION. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of, or any distribution
of the assets of, the Corporation, the Corporation, as holder of shares of
Excess Series B Preferred Stock in trust, shall be entitled to receive that
portion of the assets of the Corporation which a holder of the Series B
Preferred Stock that was exchanged for such Excess Series B Preferred Stock
would have been entitled to receive had the Series B Preferred Stock remained
outstanding. The Corporation, as holder of the Excess Series B Preferred
Stock in trust, or if the Corporation shall have been dissolved, any trustee
appointed by the Corporation prior to its dissolution, shall distribute
ratably to the Beneficiaries of the Trust, when and if determined in
accordance with SECTION 4.6.5, any such assets received in respect of the
Excess Series B Preferred Stock in any liquidation, dissolution or winding up
of, or any distribution of the assets, of the Corporation.
Section 4.6.4 VOTING RIGHTS. The holders of shares of Excess Series B
Preferred Stock shall not be entitled to vote on any matters (except as
required by the MGCL).
Section 4.6.5 RESTRICTIONS ON TRANSFER; DESIGNATION OF BENEFICIARY.
(a) Excess Series B Preferred Stock shall not be transferrable. A
Purported Record Transferee or, in the case of Excess Series B Preferred
Stock resulting from an event other than a Transfer,
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a Purported Record Holder, may freely designate a Beneficiary of its interest
in the Trust (representing the number of shares of Excess Series B Preferred
Stock held by the Trust attributable to the purported Transfer or other event
that resulted in the issuance of such Excess Series B Preferred Stock), if
(i) the shares of Excess Series B Preferred Stock held in the Trust would not
be Excess Series B Preferred Stock in the hands of such Beneficiary and (ii)
the Purported Beneficial Transferee or, in the case of Excess Series B
Preferred Stock resulting from an event other than a Transfer, the Purported
Beneficial Holder, does not receive consideration for the designation of such
Beneficiary that reflects a price per share for such Excess Series B
Preferred Stock that exceeds the "Series B Preferred Stock Limitation Price".
The Series B Preferred Stock Limitation Price is the lesser of (A) in the
case of Excess Series B Preferred Stock resulting from a Transfer for value,
the price per share that the Purported Beneficial Transferee paid for the
Series B Preferred Stock in the purported Transfer that resulted in the
issuance of the Excess Series B Preferred Stock, or, in the case of Excess
Series B Preferred Stock resulting from (I) a Transfer other than for value
(such as a gift, devise or similar Transfer) or (II) an event other than a
Transfer, a price per share equal to the Market Price of the Series B
Preferred Stock that was exchanged for such Excess Series B Preferred Stock
on the date of the purported Transfer or other event that resulted in the
issuance of the Excess Series B Preferred Stock or (B) a price per share
equal to the Market Price of the Excess Series B Preferred Stock on the date
of the designation of the Beneficiary of the interest in the Trust. Prior to
any transfer of any interest in the Trust, the Purported Record Transferee or
Purported Record Holder, as the case may be, must give advance notice to the
Corporation of the intended transfer and the Corporation must have waived in
writing its purchase rights under SECTION 4.6.6. Upon Transfer of an
interest in the Trust, the corresponding shares of Excess Series B Preferred
Stock in the Trust shall be automatically exchanged for an equal number of
shares of Series B Preferred Stock and such shares of Series B Preferred
Stock shall be transferred of record to the Beneficiary of the interest in
the Trust designated by the Purported Record Transferee or Purported Record
Holder as described above if such Series B Preferred Stock would not be
Excess Series B Preferred Stock in the hands of such Beneficiary.
(b) Notwithstanding the foregoing, if a Purported Beneficial
Transferee or Purported Beneficial Holder receives consideration for the
designation by the Purported Record Transferee or Purported Record Holder of
a Beneficiary of an interest in the Trust that exceeds the Limitation Price,
such Purported Beneficial Transferee or Purported Beneficial Holder shall
pay, or cause the Beneficiary of the interest in the Trust to pay, to the
Corporation the amount by which such consideration exceeds the Series B
Preferred Stock Limitation Price.
Section 4.6.6 PURCHASE RIGHT IN EXCESS SERIES B PREFERRED STOCK.
Notwithstanding SECTION 4.6.5, shares of Excess Series B Preferred Stock
shall be deemed to have been offered for sale to the Corporation, or its
designee, at a price per share equal to the Series B Preferred Stock
Limitation Price (as determined by substituting "the date on which the
Corporation, or its designee, accepts the offer to sell" for "the date of the
designation of the Beneficiary of the interest in the Trust" in clause (B) of
the definition of Series B Preferred Stock Limitation Price in SECTION
4.6.5(a)). The Corporation shall have the right to accept such offer for a
period of ninety days after the later of (i) the date of the Transfer or
other event which resulted in the issuance of such Excess Series B Preferred
Stock and (ii) if the Corporation does not receive actual notice of a
Transfer or other event pursuant to SECTION 4.5.10, the date the Board of
Directors determines in good faith that such a Transfer or other event
resulting in the issuance of Excess Series B Preferred Stock has occurred.
Section 4.6.7 RANKING. The Excess Series B Preferred Stock shall rank,
with respect to distributions upon liquidation, dissolution, or winding up,
(i) senior to the Common Stock, the Excess
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Common Stock and shares of all other Capital Stock issued from time to time
by the Corporation the terms of which specifically provide that the Capital
Stock of such series rank junior to the Excess Series A Preferred Stock with
respect to distributions upon liquidation, dissolution, or winding up of the
Corporation; (ii) on a parity with the Series B Preferred Stock and all
Capital Stock issued by the Corporation the terms of which specifically
provide that the Capital Stock of such series rank on a parity with the
Excess Series B Preferred Stock with respect to distributions upon
liquidation, dissolution, or winding up of the Corporation or make no
specific provision as to their ranking; and (iii) junior to all Capital Stock
Issued by the Corporation the terms of which specifically provide that the
Capital Stock of such series rank senior to the Excess Series B Preferred
Stock with respect to distributions upon liquidation, dissolution, or winding
up of the Corporation (the issuance of which must have been approved by a
vote of at least a majority of the outstanding shares of Series B Preferred
Stock).
Section 4.6.8. CORPORATION INDUCED EVENTS: REDEMPTION OF SERIES B
PREFERRED STOCK IN CERTAIN CIRCUMSTANCES. Notwithstanding anything to the
contrary in SECTION 4.5.3, prior to the Restriction Termination Date, if a
purported Transfer, change in the capital structure of the Corporation or
other event would result in a violation of one or more of the restrictions in
SECTION 4.5.7 and such violation would not occur but for the occurrence of
one or more Corporation Induced Events then, immediately prior to the
occurrence of such Transfer, change in the capital structure of the
Corporation or other event, an amount of Series B Preferred Stock (rounded up
to the nearest one-tenth of a share) shall be automatically redeemed by the
Corporation from the actual owner of Series B Preferred Stock which is
Beneficially Owned by any Person who (but for this SECTION 4.6.8) would
Beneficially Own Series B Preferred Stock in violation of one or more of the
restrictions in SECTION 4.5.7 after the occurrence of the Transfer, change in
the capital structure of the Corporation or other event. The redemption
price of each share of Series B Preferred Stock automatically redeemed
pursuant to this SECTION 4.6.8 shall be (i) the price per share paid for the
Series B Preferred Stock in the purported Transfer that resulted in the
redemption, or (ii) if the Transfer or other event that resulted in the
redemption were not a transaction in which the full value was paid for such
Series B Preferred Stock, a price per share equal to the Market Price on the
date of the purported Transfer or other event that resulted in the
redemption. In either case, dividends which were accrued but unpaid with
respect to the redeemed shares as of the date of the purported Transfer or
other event that resulted in the redemption shall be paid. Any dividend or
other distribution paid prior to the discovery of the Corporation that shares
of Series B Preferred Stock have been automatically redeemed by the
Corporation shall be repaid to the Corporation upon demand.
4.7 PREFERRED STOCK
Section 4.7.1 Subject to the rights of any other class of capital stock
having voting rights with respect thereto, the Preferred Stock may be issued
from time to time in one or more series, and the Board of Directors may, by
resolution providing for the issuance of such Preferred Stock, designate with
respect to such shares: (a) their voting powers; (b) their rights of
redemption; (c) their right to receive dividends (which may be cumulative or
noncumulative) including the dividend rate or rates, the conditions to
payment, and the relative preferences in relation to the dividends payable on
any other class or classes or series of stock; (d) their rights upon the
dissolution of, or upon any distribution of the assets of, the Corporation;
(e) their rights to convert into, or exchange for, shares of any other class
or classes of stock of the Corporation, including the price or prices or the
rates of exchange; (f) restrictions on transfer and ownership to preserve
REIT status; and (g) other relative, participating, optional or special
rights, qualifications, limitations or restrictions.
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4.8 EXCESS STOCK
Section 4.8.1 Subject to the rights of any other class of capital stock
having voting rights with respect thereto, the Excess Stock may be issued
from time to time in one or more series, and the Board of Directors may, by
resolution providing for the issuance of such Excess Stock, designate with
respect to such shares: (a) their voting powers; (b) their rights of
redemption; (c) their right to receive dividends (which may be cumulative or
noncumulative) including the dividend rate or rates, the conditions to
payment, and the relative preferences in relation to the dividends payable on
any other class or classes or series of stock; (d) their rights upon the
dissolution of, or upon any distribution of the assets of, the Corporation;
(e) their rights to convert into, or exchange for, shares of any other class
or classes of stock of the Corporation, including the price or prices or the
rates of exchange; (f) restrictions on transfer and ownership to preserve
REIT status; (g) designation of Beneficiaries; (h) purchase right in Excess
Stock, and (i) other relative, participating, optional or special rights,
qualifications, limitations or restrictions.
4.9 COMMON STOCK
Section 4.9.1 DIVIDENDS.
Subject to the preferential rights of any class or series within any
such class of Capital Stock ranking senior as to dividends to the Common
Stock, including the Series A Preferred Stock and the Series B Preferred
Stock, and to the provisions of SECTION 4.10 of these Amended and Restated
Articles of Incorporation, the record holder of shares of Common Stock shall
be entitled to receive, out of the assets of the Corporation which are
legally available therefor, such dividends as from time to time may be
declared by the Board of Directors of the Corporation. All such holders
shall share ratably, in accordance with the number of shares of Common Stock
held by each such holder, in all dividends paid on the Common Stock.
Section 4.9.2 DISTRIBUTION UPON LIQUIDATION, DISSOLUTION OR WINDING UP.
In the event of any dissolution, liquidation or winding up of the
affairs of the Corporation, after payment or provision for payment of the
debts and other liabilities of the Corporation and subject to the
preferential rights of any class of Capital Stock ranking senior to the
Common Stock as to liquidation preferences and to the provisions of Articles
IV and V of these Amended and Restated Articles of Incorporation (including
Series A Preferred Stock, Excess Series A Preferred Stock, Series B Preferred
Stock, Excess Series B Preferred Stock all classes or series of Preferred
Stock and Excess Preferred Stock,) the holders of shares of Common Stock
shall be entitled to receive, ratably with each other holder of shares of
Common Stock and Excess Common Stock which results from the ownership of
Common Stock in excess of the applicable limits specified in Articles IV and
V (the "Excess Common Stock"), a portion of the assets of the Corporation
available for distribution to the holders of its Common Stock and Excess
Common Stock calculated by dividing the number of shares of Common Stock held
by such holder by the total number of shares of Common Stock and Excess
Common Stock then outstanding.
Section 4.9.3 VOTING RIGHTS.
(a) Except as otherwise provided in these Amended and Restated
Articles of Incorporation or required by applicable law, each holder of
shares of Common Stock shall be entitled to notice of, and the right to vote
at, any meeting of the stockholders of Common Stock. Each holder of
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shares of Common Stock shall be entitled to one vote for each share of Common
Stock held by such holder. The holders of record of shares of Common Stock
shall be entitled to vote, together with any other class or series of Capital
Stock entitled to vote, then outstanding, on any resolution presented by the
Board of Directors pursuant to SECTION 5.2.
(b) The Corporation shall not consent to an amendment of the
Partnership Agreement that would reduce the preferential distribution to
Common Units held by the Corporation without the consent of holders of
two-thirds of the outstanding shares of Common Stock.
Section 4.9.4 EXCLUSION OF OTHER RIGHTS.
Except as may otherwise be required by law, the shares of Common
Stock shall not have any preferences or relative, participating, optional or
other special rights, other than those specifically set forth in these
Amended and Restated Articles of Incorporation.
Section 4.9.5 COMMON STOCK OWNERSHIP LIMITATIONS.
(a) Except as provided in SECTION 4.9.12, during the period
commencing on the date of the closing of the Initial Public Offering and
prior to the Restriction Termination Date:
(i) No Person, other than a Conversion Holder, shall Acquire
or Beneficially Own any shares of Common Stock if, as the result of such
acquisition or Beneficial Ownership, such Person shall Beneficially Own
shares of Common Stock in excess of the Common Stock Ownership Limit.
(ii) No Conversion Holder shall Acquire or Beneficially Own
(other than by reason of the Conversion of shares of Series B Preferred
Stock, which Conversion shall not be subject to this Section
4.9.5(a)(ii)) any additional shares of Common Stock to the extent that
as a result of such Acquisition or Beneficial Ownership the aggregate of
the shares of Common Stock Beneficially Owned by such holder and the
shares of Common Stock that would be issued to such holder upon
conversion of all the shares of Series B Preferred Stock then
Beneficially Owned by such holder, assuming that all of the outstanding
shares of Series B Preferred Stock were converted into Common Stock at
such time, would exceed 9.9% of the total shares of Common Stock that
would be outstanding assuming the conversion of all of the outstanding
shares of Series B Preferred Stock but without giving effect to the
exchange of Common Units for Common Stock.
(b) Except as provided in SECTION 4.9.12, during the period
commencing on the date of the closing of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer of shares of Common
Stock that, if effective, would result in a violation of any of the
restrictions in SECTION 4.9.5(a) shall be void AB INITIO as to the Transfer
of that number of shares of Common Stock that would cause the violation of
the applicable restriction in SECTION 4.9.5(a) (rounding up to the nearest
whole share), and the intended transferee shall acquire no rights in such
excess number of shares of Common Stock.
(c) Notwithstanding any other provisions contained herein, from
the date of the closing of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer of shares of Common Stock or other
event that, if effective, would result in (i) the Corporation being "closely
held" within the meaning of Section 856(h) of the Code, (ii) the outstanding
shares of the Capital Stock of the
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Corporation being beneficially owned by less than 100 Persons (determined
without reference to any rules of attribution), or (iii) the Corporation
otherwise failing to qualify as a REIT (including, but not limited to, a
Transfer or other event that would result in the Corporation owning (directly
or Constructively) an interest in a tenant that is described in Section
856(d)(2)(B) of the Code if the income derived by the Corporation from such
tenant would cause the Corporation to fail to satisfy any of the gross income
requirements of Section 856(c) of the Code), shall be void AB INITIO as to
the Transfer of that number of shares of Common Stock (rounding up to the
nearest whole share) or other event that would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code, would result
in the outstanding shares of the Capital Stock of the Corporation being
beneficially owned by less than 100 Persons (determined without reference to
any rules of attribution), or would otherwise result in the Corporation
failing to qualify as a REIT, and the intended transferee shall Acquire, or
the Beneficial Owner shall retain, as the case may be, no rights in such
shares of Common Stock.
(d) It is expressly intended that the restrictions on ownership
and transfer described in this SECTION 4.9.5 shall apply to the exchange
rights provided in Section 11.1 of the Partnership Agreement. Notwithstanding
any of the provisions of the Partnership Agreement to the contrary, a partner
of the Operating Partnership shall not be entitled to effect an exchange of
an interest in the Operating Partnership into shares of Common Stock if the
Beneficial Ownership of such shares of Common Stock would be prohibited under
the provisions of SECTION 4.9.5.
Section 4.9.6 REMEDIES FOR BREACH. If the Board of Directors or any
duly authorized committee thereof shall at any time determine in good faith
that a Transfer or other event has taken place that results in a violation of
SECTION 4.9.5 or that a Person intends to Acquire or has attempted to
Acquire Beneficial Ownership of any shares of Common Stock in violation of
SECTION 4.9.5 (whether or not such violation is intended), the Board of
Directors or a committee thereof shall take such action as it or they deem
advisable, subject to SECTION 5.3 hereof, to refuse to give effect to or to
prevent such Transfer or other event, including, but not limited to, refusing
to give effect to such Transfer on the books of the Corporation or
instituting proceedings to enjoin such Transfer; PROVIDED, HOWEVER, that any
Transfers or attempted Transfers or, in the case of an event other than a
Transfer, Beneficial Ownership in violation of SECTION 4.9.5 shall be void AB
INITIO and automatically result in the exchange described in SECTION 4.9.7,
irrespective of any action (or non-action) by the Board of Directors or a
committee thereof.
Section 4.9.7 EXCHANGE FOR EXCESS COMMON STOCK. If, notwithstanding
the other provisions contained in this SECTION 4.9, at any time after the
date of the closing of the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer or other event
such that one or more of the restrictions on Beneficial Ownership and
Transfer of the Common Stock described in SECTION 4.9.5 would be violated,
then, except as otherwise provided in SECTION 4.9.12, the shares of Common
Stock being Transferred (or, in the case of an event other than a Transfer,
the shares of Common Stock Beneficially Owned, which would cause one or more
of such restrictions to be violated) (rounded up to the nearest whole share)
shall be automatically exchanged for an equal number of shares of Excess
Common Stock. Such exchange shall be effective as of the close of business
on the business day prior to the date of such purported Transfer or other
event.
Section 4.9.8 NOTICE OF RESTRICTED TRANSFER. Any Person who Acquires
or attempts or intends to Acquire shares of Common Stock in violation of
SECTION 4.9.5, or any Person who is a transferee in a Transfer or is
otherwise affected by an event other than a Transfer that results in the
issuance of Excess Common Stock pursuant to SECTION 4.9.7, shall immediately
give written notice to the Corporation of such
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Transfer or other event and shall provide to the Corporation such other
information as the Corporation may request in order to determine the effect,
if any, of such Transfer or attempted, intended or purported Transfer or
other event on the Corporation's status as a REIT.
Section 4.9.9 OWNERS REQUIRED TO PROVIDE INFORMATION. From the date of
the closing of the Initial Public Offering and prior to the Restriction
Termination Date:
(a) every Beneficial Owner of more than 5% (or such lower
percentage as required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding Common Stock of the Corporation shall, within
30 days after December 31 of each year, give written notice to the
Corporation stating the name and address of such Beneficial Owner, the number
of shares of Common Stock and other shares of the Capital Stock of the
Corporation Beneficially Owned, and a description of the manner in which such
shares are held. Each such Beneficial Owner shall provide to the Corporation
such additional information as the Corporation may request in order to
determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT and to ensure compliance with the Common Stock
Ownership Limit; and
(b) each Person who is a Beneficial Owner of Common Stock and each
Person (including the stockholder of record) who is holding Common Stock for
a Beneficial Owner shall provide to the Corporation such information that the
Corporation may request, in good faith, in order to determine the
Corporation's status as a REIT.
Section 4.9.10 REMEDIES NOT LIMITED. Subject to SECTION 5.2, nothing
contained in this SECTION 4.9 shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving
the Corporation's status as a REIT.
Section 4.9.11 AMBIGUITY. In the case of an ambiguity in the
application of any of the provisions of this SECTION 4.9 or any definition
contained in SECTION 4.2, the Board of Directors shall have the power to
determine the application of the provisions of this SECTION 4.9 with respect
to any situation based on the facts known to it.
Section 4.9.12 EXCEPTIONS.
(a) Subject to SECTION 4.9.5(c), the Board of Directors, in its
sole discretion, may exempt a Person from the Common Stock Ownership Limit
(A) if such Person is not an individual for purposes of Section 542(a)(2) of
the Code and the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that
no such individual's Beneficial Ownership of such Common Stock will violate
the Common Stock Ownership Limit or otherwise violate SECTION 4.9.5(c), (B) if
such Person does not and represents that it will not own, directly or
Constructively, more than a 9.9% interest (as set forth in Section
856(d)(2)(B) of the Code) in a tenant of the Corporation (or a tenant of any
entity owned or controlled by the Corporation) and the Board of Directors
obtains such representations and undertakings from such Person as are
reasonably necessary to ascertain this fact, and (C) if such Person agrees
that any violation of such representations or undertaking (or other action
which is contrary to the restrictions contained in SECTIONS 4.9.5 through
4.9.11 of this Article IV) or attempted violation will result in such Common
Stock being exchanged for Excess Common Stock in accordance with SECTION
4.9.7.
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(b) Prior to granting any exception pursuant to SECTION 4.9.12(a),
the Board of Directors shall require a ruling from the Internal Revenue
Service, or an opinion of counsel, in either case in form and substance
satisfactory to the Board of Directors in it sole discretion, as it may deem
necessary or advisable in order to determine or ensure the Corporation's
status as a REIT. Notwithstanding the receipt of any ruling or opinion, the
Board of Directors may impose such conditions or restrictions as it deems
appropriate in connection with granting such exception.
Section 4.9.13 LEGEND. Each certificate for Common Stock shall bear the
following legend:
"The shares represented by this certificate are subject to restrictions
on Beneficial Ownership and Transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment
Trust under the Internal Revenue Code of 1986, as amended (the "Code").
Subject to certain further restrictions and except as expressly provided
in the Corporation's Amended and Restated Articles of Incorporation, no
Person may (i) Beneficially Own shares of the Corporation's Common Stock
in excess of 9.9%, or (ii) Beneficially Own Common Stock that would
result in the Corporation being "closely held" under Section 856(h) of
the Code. Any Person who Beneficially Owns or attempts to Beneficially
Own shares of Common Stock which causes or will cause a Person to
Beneficially Own shares of Common Stock in excess of the above
limitations must immediately notify the Corporation. Any Transfer of
shares of Common Stock in violation of the limitations set forth in the
Corporation's Amended and Restated Articles of Incorporation shall be
void AB INITIO. If the restrictions on Transfer are violated, the shares
of Common Stock represented hereby will be automatically exchanged for
shares of Excess Common Stock which will be held in trust by the
Corporation. All capitalized terms in this legend have the meanings
defined in the Corporation's Amended and Restated Articles of
Incorporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer, will be sent without
charge to each holder of Common Stock who so requests."
4.10 EXCESS COMMON STOCK
Section 4.10.1 OWNERSHIP IN TRUST. Upon any purported Transfer or other
event that results in an exchange of Common Stock for Excess Common Stock
pursuant to SECTION 4.9.7, such Excess Common Stock shall be deemed to have
been Transferred to the Corporation, as Trustee of a Trust for the exclusive
benefit of the Beneficiary or Beneficiaries to whom an interest in such Trust
may later be transferred pursuant to SECTION 4.10.5. Shares of Excess Common
Stock so held in trust shall be issued and outstanding stock of the
Corporation but shall not be considered issued and outstanding for purposes
of any stockholder vote. The Purported Record Transferee or, in the case of
Excess Common Stock resulting from an event other than a Transfer, the
Purported Record Holder, shall have no rights in such Excess Common Stock
except the right to designate a transferee of such Excess Common Stock upon
the terms specified in SECTION 4.10.5. The Purported Beneficial Transferee
or, in the case of Excess Common Stock resulting from an event other than a
Transfer, the Purported Beneficial Holder, shall have no rights in such
Excess Common Stock except as provided in SECTION 4.10.5.
Section 4.10.2 DIVIDEND RIGHTS. Excess Common Stock shall not be
entitled to any dividends or periodic distributions. Any dividend or
distribution paid prior to the discovery by the Corporation that shares of
Common Stock have been exchanged for Excess Common Stock shall be repaid to
the Corporation upon demand, and any dividend or distribution declared but
unpaid shall be rescinded as void AB INITIO with respect to such shares of
Common Stock.
Section 4.10.3 RIGHTS UPON LIQUIDATION. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of, or any distribution
of the assets of, the Corporation, the Corporation, as holder of shares of
Excess Common Stock in trust, shall be entitled to receive, subject to the
preferential rights of holders of Preferred Stock or Excess Preferred Stock,
ratably with each other holder of Common
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Stock and Excess Common Stock, that portion of the assets of the Corporation
available for distribution to the holders of its Common Stock and Excess
Common Stock as the number of shares of the Excess Common Stock held by the
Corporation in trust bears to the total number of shares of Common Stock and
Excess Common Stock then outstanding. The Corporation, as holder of the
Excess Common Stock in trust, or if the Corporation shall have been
dissolved, any trustee appointed by the Corporation prior to its dissolution,
shall distribute ratably to the Beneficiaries of the Trust, when and if
determined in accordance with SECTION 4.10.5, any such assets received in
respect of the Excess Common Stock in any liquidation, dissolution or winding
up of, or any distribution of the assets, of the Corporation.
Section 4.10.4 VOTING RIGHTS. The holders of shares of Excess Common
Stock shall not be entitled to vote on any matters (except as required by the
MGCL).
Section 4.10.5 RESTRICTIONS ON TRANSFER; DESIGNATION OF BENEFICIARY.
(a) Excess Common Stock shall not be transferrable. A Purported
Record Transferee or, in the case of Excess Common Stock resulting from an
event other than a Transfer, a Purported Record Holder, may freely designate
a Beneficiary of its interest in the Trust (representing the number of shares
of Excess Common Stock held by the Trust attributable to the purported
Transfer or other event that resulted in the issuance of such Excess Common
Stock), if (i) the shares of Excess Common Stock held in the Trust would not
be Excess Common Stock in the hands of such Beneficiary and (ii) the
Purported Beneficial Transferee or, in the case of Excess Common Stock
resulting from an event other than a Transfer, the Purported Beneficial
Holder, does not receive consideration for the designation of such
Beneficiary that reflects a price per share for such Excess Common Stock that
exceeds the "Excess Common Stock Limitation Price". The Excess Common Stock
Limitation Price is the lesser of (A) in the case of Excess Common Stock
resulting from a Transfer for value, the price per share that the Purported
Beneficial Transferee paid for the Common Stock in the purported Transfer
that resulted in the issuance of the Excess Common Stock, or, in the case of
Excess Common Stock resulting from (I) a Transfer other than for value (such
as a gift, devise or similar Transfer) or (II) an event other than a
Transfer, a price per share equal to the Market Price of the Common Stock
that was exchanged for such Excess Common Stock on the date of the purported
Transfer or other event that resulted in the issuance of the Excess Common
Stock or (B) a price per share equal to the Market Price of the Excess Common
Stock on the date of the designation of the Beneficiary of the interest in
the Trust. Prior to any transfer of any interest in the Trust, the Purported
Record Transferee or Purported Record Holder, as the case may be, must give
advance notice to the Corporation of the intended transfer and the
Corporation must have waived in writing its purchase rights under SECTION
4.10.6. Upon any transfer of an interest in the Trust, the corresponding
shares of Excess Common Stock in the Trust shall be automatically exchanged
for an equal number of shares of Common Stock and such shares of Common Stock
shall be transferred of record to the Beneficiary of the interest in the
Trust designated by the Purported Record Transferee or Purported Record
Holder as described above if such Common Stock would not be Excess Common
Stock in the hands of such Beneficiary.
(b) Notwithstanding the foregoing, if a Purported Beneficial
Transferee or Purported Beneficial Holder receives consideration for the
designation by the Purported Record Transferee or Purported Record Holder of
a Beneficiary of an interest in the Trust that exceeds the Excess Common
Stock Limitation Price, such Purported Beneficial Transferee or Purported
Beneficial Holder shall pay, or
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cause the Beneficiary of the interest in the Trust to pay, to the Corporation
the amount by which such consideration exceeds the Excess Common Stock
Limitation Price.
Section 4.10.6 PURCHASE RIGHT IN EXCESS COMMON STOCK. Notwithstanding
SECTION 4.10.5, shares of Excess Common Stock shall be deemed to have been
offered for sale to the Corporation, or its designee, at a price per share
equal to the Excess Common Stock Limitation Price (determined by substituting
"the date on which the Corporation, or its designee, accepts the offer to
sell" for "the date of the designation of the Beneficiary of the interest in
the Trust" in clause (B) of the definition of Limitation Price in SECTION
4.10.5 (a)). The Corporation shall have the right to accept such offer for a
period of ninety days after the later of (i) the date of the Transfer or
other event which resulted in the issuance of such Excess Common Stock and
(ii) if the Corporation does not receive actual notice of a Transfer or
other event pursuant to SECTION 4.9.8, the date the Board of Directors
determines in good faith that such a Transfer or other event resulting in the
issuance of Excess Common Stock has occurred.
ARTICLE V
GENERAL REIT PROVISIONS
Section 5.0.1 GENERAL LIMITATIONS. Notwithstanding anything else in
these Amended and Restated Articles of Incorporation (i) no Person shall
Acquire any shares of Capital Stock if, as a result of such Acquisition, the
outstanding shares of the Capital Stock would be owned beneficially and not
of record by less than 100 Persons (determined without reference to any rules
of attribution), (ii) no Person shall Acquire or Beneficially Own any shares
of Capital Stock if, as a result of such Acquisition or Beneficial Ownership,
the Corporation would be "closely held" within the meaning of Section 856(h)
of the Code and (iii) no person shall Acquire or Beneficially Own any shares
of Capital Stock if, as a result of such Acquisition or Beneficial Ownership,
the Corporation would fail to qualify as a REIT (including, but not limited
to, a Transfer or other event that would result in the Corporation owning
(directly or Constructively) an interest in a tenant that is described in
Section 856(d)(2)(B) of the Code if the income derived by the Corporation
from such tenant would cause the Corporation to fail to satisfy any of the
gross income requirements of Section 856(c) of the Code).
Section 5.0.2 TERMINATION OF REIT STATUS. The Board of Directors shall
take no action to terminate the Corporation's status as a REIT until such
time as (i) the Board of Directors adopts a resolution recommending that the
Corporation terminate its status as a REIT, (ii) the Board of Directors
presents the resolution at an annual or special meeting of the stockholders
and (iii) such resolution is approved by the vote of a majority of the shares
entitled to be cast on the resolution.
Section 5.0.3 EXCHANGE OR MARKET TRANSACTIONS. Nothing in Article IV
or this Article V shall preclude the settlement of any transaction entered
into through the facilities of any national securities exchange or automated
inter-dealer quotation system.
Section 5.0.4 KEMPER CORPORATION LIMITATIONS. Notwithstanding anything
in these Amended and Restated Articles of Incorporation to the contrary,
Kemper Corporation, KILICO Realty Corporation, Kemper Investors Life
Insurance Company, KR Gainesville, Inc., KR Gulf Coast Factory Shops, Inc.,
KR Huntley 1, Inc., KFC Portfolio Corp., Federal Kemper Life Assurance
Company, or Kemper Portfolio Corp., or any direct or indirect majority-owned
subsidiary of any such entity, shall not be subject to the Common Stock
Ownership Limit with respect to the Acquisition of any shares of Common Stock
at or
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above the Common Stock Ownership Limit if prior to such Acquisition such
entity shall have (a) delivered to the Corporation either a ruling from the
Internal Revenue Service or an opinion of nationally recognized tax counsel
which, in either case, concludes that such Acquisition of Common Stock will
not cause any "individual" (within the meaning of Section 542(a)(2) of the
Code) to Beneficially Own in excess of 9.9% of the outstanding Common Stock,
(b) represented to the Corporation that it does not and will not own,
directly or Constructively, more than a 9.9% interest (as set forth in
Section 856(d)(2)(B) of the Code) in a tenant of the Corporation (or a tenant
of an entity owned or controlled by the Corporation) and (c) agreed that any
violation of the foregoing representation and undertaking will result in its
shares of Common Stock being exchanged for Excess Common Stock in accordance
with SECTION 4.9.7.
Section 5.0.5 SEVERABILITY. If any provision of Article IV or this
Article V or any application of any such provision is determined to be
invalid by any federal or state court having jurisdiction over the issues,
the validity of the remaining provisions shall not be affected and other
applications of such provision shall be affected only to the extent necessary
to comply with the determination of such court.
Section 5.0.6 WAIVER. The Corporation shall have authority at any time
to waive the requirements that Excess Stock be issued or be deemed
outstanding in accordance with the provisions of Article IV or that the
Corporation redeem shares of Series A Preferred Stock or Series B Preferred
Stock pursuant to SECTIONS 4.4.8 AND 4.6.8 if the Corporation determines,
based on an opinion of nationally recognized tax counsel, that the issuance
of such Excess Stock or the fact that such Excess Stock is deemed to be
outstanding, or any such redemption would jeopardize the status of the
Corporation as a REIT for federal income tax purposes.
ARTICLE VI
BOARD OF DIRECTORS
Section 6.0.1 MANAGEMENT. The management of the business and the
conduct of the affairs of the Corporation shall be vested in its Board of
Directors.
Section 6.0.2 NUMBER. The number of directors which will constitute
the entire Board of Directors shall be fixed by, or in the manner provided
in, the By-laws but shall in no event be less than three. Any increases or
decreases in the size of the board shall be apportioned equally among the
classes of directors to prevent stacking in any one class of directors.*
Section 6.0.3 CLASSIFICATION. The directors shall be classified, with
respect to the time for which they severally hold office, into three classes,
as nearly equal in number as possible. As shall be provided in the By-laws of
the Corporation, one class shall originally be elected for a term expiring at
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Note:
* The following sentence was contained in the Amended and Restated Articles
of Incorporation of Prime Retail, Inc. as filed on March 22, 1994, and has
been deleted for purposes of this restatement pursuant to Regulation ST
232.102(c) only: "There are currently three
directors in office whose names are as follows: Michael W. Reschke, Abraham
Rosenthal, William H. Carpenter, Jr."
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<PAGE>
the annual meeting of stockholders to be held in 1995, another class shall
originally be elected for a term expiring at the annual meeting of
stockholders to be held in 1996, and another class shall originally be
elected for a term expiring at the annual meeting of stockholders to be held
in 1997, with each class to hold office until its successors are elected and
qualified. Except as otherwise provided in these Amended and Restated
Articles of Incorporation, at each annual meeting of the stockholders of the
Corporation, the date of which shall be fixed by or pursuant to the By-laws
of the Corporation, the successors of the class of directors whose terms
expire at that meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year
of their election. No election of directors need be by written ballot. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Section 6.0.4 VACANCIES. Except as otherwise provided in these Amended
and Restated Articles of Incorporation, newly created directorships resulting
from any increase in the number of directors may be filled by the majority
vote of the Board of Directors, and any vacancies on the Board of Directors
resulting from death, resignation, removal or other cause shall be filled by
the affirmative vote of a majority of the remaining directors then in office,
even if less than a quorum of the Board of Directors, or, if applicable, by a
sole remaining director. Any director elected in accordance with the
preceding sentence shall hold office until the next annual meeting of the
Corporation, at which time a successor shall be elected to fill the remaining
term of the position filled by such director.
Section 6.0.5 REMOVAL. Except as otherwise provided in these Amended
and Restated Articles of Incorporation, any director may be removed from
office only for cause and only by the affirmative vote of two-thirds of the
aggregate number of votes then entitled to be cast generally in the election
of directors. For purposes of this SECTION 6.5, "cause" shall mean the
willful and continuous failure of a director to substantially perform the
duties to the Corporation of such director (other than any such failure
resulting from temporary incapacity due to physical or mental illness) or the
willful engaging by a director in gross misconduct materially and
demonstrably injurious to the Corporation.
Section 6.0.6 BY-LAWS. Except as otherwise provided in the MGCL, the
Board of Directors shall have power to adopt, amend, alter, change and repeal
any By-laws of the Corporation by vote of the majority of the Board of
Directors then in office. Any adoption, amendment, alteration, change or
repeal of any By-laws by the stockholders of the Corporation shall require
the affirmative vote of a majority of the aggregate number of votes then
entitled to be cast generally in the election of directors. Notwithstanding
anything in this SECTION 6.6 to the contrary, no amendment, alteration,
change or repeal of any provision of the By-laws relating to the
classification or removal of directors or the amendment or repeal of the
By-laws shall be effected without the vote of two-thirds of the aggregate
number of votes entitled be cast generally in the election of Directors.
Section 6.0.7 POWERS. The enumeration and definition of particular
powers of the Board of Directors included elsewhere in these Amended and
Restated Articles of Incorporation shall in no way be limited or restricted
by reference to or inference from the terms of any other clause of this or
any other Article of these Amended and Restated Articles of Incorporation, or
construed as excluding or limiting, or deemed by inference or otherwise in
any manner to exclude or limit, the powers conferred upon the Board of
Directors under the MGCL as now or hereafter in force.
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ARTICLE VII
LIABILITY
To the fullest extent permitted by Maryland law, as applicable from
time to time, no person who at any time was or is a director or officer of
the Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of these Amended and Restated
Articles of Incorporation of the Corporation or repeal of any of its
provisions shall limit or eliminate any of the benefits provided to directors
and officers under this Article VII in respect of any act or omission that
occurred prior to such amendment or repeal.
ARTICLE VIII
INDEMNIFICATION
The Corporation shall indemnify, to the fullest extent permitted by
Maryland law, as applicable from time to time, all persons who at any time
were or are directors or officers of the Corporation for any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) relating to any action alleged to have been
taken or omitted in such capacity as a director or an officer. The
Corporation shall pay or reimburse all reasonable expenses incurred by a
present or former director or officer of the Corporation in connection with
any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) in which the present or
former director or officer is a party, in advance of the final disposition of
the proceeding, to the fullest extent permitted by, and in accordance with
the applicable requirements of, Maryland law, as applicable from time to
time. The Corporation may indemnify any other persons permitted but not
required to be indemnified by Maryland law, as applicable from time to time,
if and to the extent indemnification is authorized and determined to be
appropriate, in each case in accordance with applicable law, by the Board of
Directors, the majority of the stockholders of the Corporation entitled to
vote thereon or special legal counsel appointed by the Board of Directors.
No amendment of these Amended and Restated Articles of Incorporation of the
Corporation or repeal of any of its provisions shall limit or eliminate any
of the benefits provided to directors and officers under this Article VIII in
respect of any act or omission that occurred prior to such amendment or
repeal.
ARTICLE IX
WRITTEN CONSENT OF STOCKHOLDERS
Any corporate action upon which a vote of stockholders is required or
permitted may be taken without a meeting or vote of stockholders with the
unanimous written consent of stockholders entitled to vote thereon.
ARTICLE X
AMENDMENT
The Corporation reserves the right to amend, alter or repeal any
provision contained in these Amended and Restated Articles of Incorporation
upon (i) adoption by the Board of Directors of a resolution recommending such
amendment, alteration, or repeal, (ii) presentation by the Board of Directors
to the stockholders of a resolution at an annual or special meeting of the
stockholders and (iii) approval of such resolution by the affirmative vote of
the holders of a majority of the aggregate number of votes
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entitled to be cast generally in the election of directors; PROVIDED,
HOWEVER, subject to the voting rights of the Series A Preferred Stock and the
Series B Preferred Stock, the affirmative vote of the holders of two-thirds
of the aggregate number of votes then entitled to be cast generally in the
election of directors, shall be required to amend SECTIONS 4.9.3(b), 6.3 AND
6.5 and Article X hereof; and PROVIDED, FURTHER, that SECTION 5.4 shall not
be amended or deleted without the unanimous approval of the holders of the
outstanding stock entitled to vote generally in the election of directors.
All rights conferred upon stockholders herein are subject to this reservation.
ARTICLE XI
EXISTENCE
The Corporation is to have a perpetual existence.
* * * * * *
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[Letterhead of Winston & Strawn]
June 25, 1996
Prime Retail, Inc.
100 E. Pratt Street
19th Floor
Baltimore, MD 21202
Re: PRIME RETAIL, INC. REGISTRATION STATEMENT ON FORM S-11
Gentlemen:
We have acted as counsel to Prime Retail Inc., a Maryland
corporation (the "Company"), in connection with the preparation of the
above-referenced Registration Statement on Form S-11 (File No. 333-1666)
filed by the Company with the Securities and Exchange Commission (the
"Commission") on February 26, 1996 (together with all amendments thereto, the
"Registration Statement"). The Registration Statement relates to the
registration under the Securities Act of 1933, as amended (the "Act"), of
shares of the Company's Common Stock, par value $.01 per share (the "Common
Stock"). Of the shares being sold, 3,705,000 shares (or such greater amount
as may be set forth in an amendment to the Registration Statement pursuant to
Rule 462(b) of the Act) are being sold by the Company and 90,328 as being
sold by KILICO Realty Corporation (the "Selling Stockholder") pursuant to an
underwriting agreement (the "Underwriting Agreement") to be entered into
among Friedman, Billings, Ramsey & Co., Inc., the Company and the Selling
Stockholder (the "Underwritten Shares"). Capitalized terms used herein and
not otherwise defined have the meaning given to them in the Registration
Statement.
In connection with this opinion, we have examined and are familiar
with originals or copies, certified or otherwise identified to our
satisfaction, of (i) the Amended and Restated Articles of Incorporation, as
amended, and the Amended and Restated By-Laws of the Company, (ii) certain
resolutions of the Board of Directors of the Company relating to the offering
of the Underwritten Shares, (iii) the Registration Statement and (iv) such
other documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below. In such examination,
<PAGE>
Page 2
we have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents. In making our examination of the documents executed or to be
executed by parties other than the Company, we have assumed that such parties
have the power, corporate or other, to enter into and perform all obligations
thereunder and we have also assumed the due authorization by all requisite
action, corporate or other, and execution and delivery by such parties of such
documents and the validity and binding effect thereof. As to any facts material
to this opinion which we did not independently establish or verify, we have
relied upon statements and representations of officers and other representatives
of the Company and others.
Based upon and subject to the assumptions, qualifications and
limitations set forth herein, we are of the opinion that the Underwritten Shares
have been duly and validly authorized and, when issued and sold pursuant to the
Underwriting Agreement, will be duly and validly issued, fully paid and
nonassessable.
This opinion is rendered as of the date hereof and we undertake no,
and disclaim any, obligation to advise you of any changes in any matter set
forth herein, regardless of whether changes in such matters come to our
attention after the date hereof. This opinion is furnished to you solely for
your benefit in connection with the filing of the Registration Statement and is
not to be used, circulated, quoted or otherwise referred to for any other
purpose without our prior written consent. Notwithstanding the foregoing, we
hereby consent to the filing of this opinion with the Commission as Exhibit 5.1
of the Registration Statement. We also consent to the reference to our firm
under the caption "Legal Matters" in the Registration Statement. In giving this
consent, we do not thereby admit that we are included in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
WINSTON & STRAWN
<PAGE>
June 25, 1996
Prime Retail, Inc.
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
Re: QUALIFICATION AS REIT AND S-11 TAX DISCLOSURE
Ladies and Gentlemen:
We have acted as tax counsel to Prime Retail, Inc., a Maryland
corporation (the "Company"), in connection with the transactions contemplated by
the Company's Registration Statement on Form S-11 (File No. 333-1666), which was
initially filed with the Securities and Exchange Commission ("SEC") on February
26, 1996, amended by Amendment No. 1 thereto filed with the SEC on May 6, 1996,
Amendment No. 2 thereto filed with the SEC on June 6, 1996, amended by Amendment
No. 3 thereto filed with the SEC on June 21, 1996, and amended by Amendment No.
4 thereto filed with the SEC on June 25, 1996 and the Prospectus included
therein (the "Prospectus"). Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to such terms in the Prospectus.
You have requested our opinion concerning (i) whether the Company is
organized in conformity with the requirements for qualification as a real estate
investment trust ("REIT") for federal income tax purposes, (ii) whether the
Company's method of operation has enabled it to meet the requirements for
qualification and taxation as a REIT under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), (iii) whether the Company's
method of operation enables it to continue to meet the requirements for
qualification as a REIT and (iv) whether Prime Retail, L.P., a Delaware limited
partnership (the "Operating Partnership"), and each of the Property Partnerships
will constitute partnerships for federal income tax purposes and not
associations taxable as corporations or "publicly traded partnerships" within
the meaning of section 7704 of the Code. In rendering this opinion, we have
examined and relied upon the descriptions of the Company, the Operating
Partnership, Prime Retail Service, Inc., a Maryland corporation (the "Services
Corporation"), Prime Retail Services Limited Partnership, a Delaware limited
partnership (the "Services Partnership"), Prime Retail Finance, Inc., a Maryland
corporation ("Finance"), Prime Retail Finance II, Inc., a Maryland corporation
<PAGE>
Prime Retail, Inc.
June 25, 1996
Page 2
("Finance II"), each of the Property Partnerships and their respective
investments, as well as proposed investments, activities, operations, and
governance, as set forth in the Registration Statement, including the exhibits
and appendices thereto, and the Prospectus. We have reviewed originals or
copies, certified or otherwise identified to our satisfaction, of the Amended
and Restated Articles of Incorporation of the Company as amended on May 29, 1996
(the "Charter"), the Agreement of Limited Partnership of the Operating
Partnership, each of the Property Partnerships' agreements as amended through
the date hereof, the Registration Statement, the Prospectus, and such other
documents, agreements, and information as we have deemed necessary for purposes
of rendering the opinions contained herein. For purposes of such examination,
we have assumed the genuineness of all signatures on originals or copies, the
legal capacity of natural persons, the authority of any individual or
individuals who executed any such documents on behalf of any other person, the
authenticity of all documents submitted to us as originals and the conformity to
originals or certified copies of all copies submitted to us as certified or
reproduction copies.
We have also reviewed and, with your permission, are relying upon the
Officer's Certificate dated on the date hereof and executed by a duly authorized
officer of the Company, setting forth certain representations relating to the
formation, ownership, operation, future method of operation, and compliance with
the REIT provisions of the Code of the Company, the Operating Partnership, the
Services Corporation, the Services Partnership, Finance, Finance II, and each of
the Property Partnerships. For purposes of rendering this opinion, we have also
relied on the representation letters (the "Representation Letters") dated on the
date hereof of the Company, the Operating Partnership, Prime Warehouse Row
Limited Partnership, and Arizona Factory Shops Limited Partnership for the
Operating Partnership and each of the Property Partnerships relating to the
formation, operation, ownership, and governance of the Operating Partnership and
each of the Property Partnerships. We have further relied on and assumed the
truth and correctness of (i) the Company's representations in the Agreement of
Limited Partnership of the Operating Partnership, and (ii) the certificates of
public officials with respect to the formation of certain limited partnerships.
Moreover, for the purpose of rendering our opinion, we have assumed that no
partner in the Operating Partnership or each of the Property Partnerships will
elect to be excluded from all or part of subchapter K of the Code.
For the purposes of rendering this opinion, we have not made an
independent investigation of the facts set forth in any of the aforementioned
documents, including without limitation, the Prospectus, the Officer's
Certificate, and the Representation Letters. We have consequently relied upon
your representations
<PAGE>
Prime Retail, Inc.
June 25, 1996
Page 3
that the information presented in such documents or otherwise furnished to us
accurately and completely describes all material facts relevant to this opinion.
In rendering this opinion, we have assumed that the transactions
contemplated by the Registration Statement and the Prospectus will be
consummated in accordance with the operative documents, and such documents
accurately reflect the material facts of such transactions. In addition, the
opinions set forth herein are based on the correctness of the following specific
assumptions: (i) the Company, the Operating Partnership, the Property
Partnerships, the Services Corporation, the Services Partnership, Finance and
Finance II will each be operated in the manner described in the relevant
partnership agreement or other organizational documents and in the Prospectus
and in accordance with applicable laws; and (ii) each partner in the Operating
Partnership, in each of the Property Partnerships, and in the Services
Partnership has been motivated in acquiring its respective partnership interest
by such partner's anticipation of economic rewards apart from tax
considerations.
Our opinion is based upon the current provisions of the Code, Treasury
Regulations promulgated thereunder, current administrative rulings, judicial
decisions, and other applicable authorities, all as in effect on the date
hereof. All of the foregoing authorities are subject to change or new
interpretation, both prospectively and retroactively, and such changes or
interpretation, as well as changes in the facts as they have been represented to
us or assumed by us, could affect our opinion. Our opinion is rendered only as
of the date hereof and we take no responsibility to update this opinion after
this date. Our opinion does not foreclose the possibility of a contrary
determination by the Internal Revenue Service (the "IRS") or by a court of
competent jurisdiction, or of a contrary position by the IRS or Treasury
Department in regulations or rulings issued in the future.
Based on the foregoing, and subject to the limitations, qualifications
and exceptions set forth herein, we are of the opinion that:
1. The Company is organized in conformity with the requirements for
qualification as a REIT, and the Company's method of operation has enabled it to
meet the requirements for qualification and taxation as a REIT under the Code,
and its method of operation enables it to continue to meet the requirements for
qualification as a REIT.
2. The Operating Partnership and each of the Property Partnerships
will constitute partnerships for federal income tax
<PAGE>
Prime Retail, Inc.
June 25, 1996
Page 4
purposes and not associations taxable as corporations, or "publicly traded
partnerships" within the meaning of section 7704 of the Code.
3. The discussion in the Prospectus under the heading "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" fairly summarizes the federal income tax
considerations that are likely to be material to a holder of Common Stock.
The Company's qualification and taxation as a REIT depend upon the
Company's ability to meet on a continuing basis, through actual annual operating
and other results, the various requirements under the Code and described in the
Prospectus with regard to, among other things, the sources of gross income, the
composition of assets, the level of distributions to stockholders, and the
diversity of its stock ownership. Winston & Strawn undertakes no responsibility
to, and will not review the Company's compliance with these requirements on a
continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operations, the nature of its assets, the amount and
types of its gross income, the level of its distributions to stockholders and
the diversity of its stock ownership for any given taxable year will satisfy the
requirements under the Code for qualification and taxation as a REIT. In
particular, we would note that, although the Company's Charter contains certain
provisions which restrict the ownership and transfer of the Company's capital
stock and which are intended to prevent concentration of stock ownership, such
provisions do not ensure that the Company will be able to satisfy the
requirement set forth in Code section 856(a)(6) that it not be "closely held"
within the meaning of Code section 856(h) for any given taxable year, primarily,
though not exclusively, as a result of fluctuations in value among the different
classes of the Company's capital stock.
Other than as expressly stated above, we express no opinion on any
issue relating to the Company, the Operating Partnership, the Services
Partnership, the Services Corporation, Finance, Finance II or any of the
Property Partnerships or to any investment therein.
This opinion is being delivered to you solely for use in connection
with the Registration Statement as of the date hereof. This opinion is solely
for the benefit of the above-named addressee and may not be relied upon by any
other person in any manner whatsoever without our prior written permission,
except that we hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name therein and under the caption
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS," "TAX STATUS OF THE COMPANY," and
"LEGAL MATTERS" in the Prospectus filed as part of the Registration Statement.
In giving this consent, we
<PAGE>
Prime Retail, Inc.
June 25, 1996
Page 5
do not admit that we are included in the category of persons whose consent is
required under section 7 of the Securities Act of 1933 or rules and regulations
of the SEC.
Very truly yours,
WINSTON & STRAWN
<PAGE>
EXECUTION COPY
FIRST AMENDMENT TO THE AGREEMENT OF LIMITED PARTNERSHIP
OF PRIME RETAIL, L.P.
This FIRST AMENDMENT (this "Amendment") to the Agreement of Limited
Partnership of Prime Retail, L.P. dated as of March 22, 1994 (the "Limited
Partnership Agreement") is made as of the 24th day of June, 1996 by and among
Prime Retail, Inc., a Maryland corporation ("Prime Retail"), as general partner
of Prime Retail, L.P., a Delaware Limited Partnership (the "Operating
Partnership"), the limited partners of the Operating Partnership executing this
Amendment and certain pledgees of the partnership interests of such limited
partners (the "Pledgees"). Capitalized terms not defined herein shall have the
meanings ascribed to such terms in the Limited Partnership Agreement.
W I T N E S S E T H:
WHEREAS, Prime Retail intends to (i) offer to acquire up to 60% of its
outstanding shares of 8.5% Series B Cumulative Participating Convertible
Preferred Stock, $.01 par value per share (the "Convertible Preferred Stock"),
for consideration equal to 1.6 shares of its common stock, par value $.01 per
share (the "Common Stock") for each share of Convertible Preferred Stock (the
"Exchange Offer"), and (ii) pay a special cash dividend in an amount up to $.145
per share to the record holders of its Common Stock after the consummation of
the Exchange Offer (the "Special Dividend");
WHEREAS, Prime Retail also proposes to issue up to $45 million aggregate
amount (or approximately 3,705,000 shares) of Common Stock in an underwritten
public offering (the "Offering") and has granted to the underwriters thereunder
an option, exercisable for 30 days after the closing of the Offering (such
closing date, the "Offering Closing Date") to purchase up to an additional 15%
of the amount of the Common Stock sold pursuant to the Offering (such purchase,
the "Overallotment Purchase");
WHEREAS, the parties hereto consent to the Exchange Offer, the Offering and
transactions contemplated thereby and the amendment of certain provisions of the
Limited Partnership Agreement as set forth below in order to facilitate the
Exchange Offer and enable Prime Retail to pay the Special Dividend.
NOW, THEREFORE, for and in consideration of the terms and conditions
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby consent
and agree as follows:
1. EXCHANGE OFFER. Section 4.8(b) of the Limited
<PAGE>
Partnership Agreement is hereby amended to insert the following three sentences
at the end thereof:
For purposes of this SECTION 4.8(b), the exchange by the General Partner of
Common Stock for Convertible Preferred Stock pursuant to an offer to
exchange shares of Common Stock for shares of Convertible Preferred Stock
(an "Exchange Offer") shall be deemed to be a "purchase" of Convertible
Preferred Stock by the General Partner and the "purchase price" for such
exchange shall be the aggregate number of shares of Common Units equivalent
to the aggregate number of shares of Common Stock exchangeable for the
Convertible Preferred Stock being acquired pursuant to any such Exchange
Offer. Contemporaneously with the consummation of any such Exchange Offer,
the Operating Partnership shall (i) redeem the number of Convertible
Preferred Units from the General Partner equal to the aggregate number of
shares of Convertible Preferred Stock tendered to and accepted by the
General Partner pursuant to such Exchange Offer, and (ii) issue Common
Units to the General Partner in an amount equal to the aggregate number of
shares of Common Stock issued pursuant to the Exchange Offer. The General
Partner shall amend EXHIBITS A and A-2 as necessary to reflect such
redemption and issuance.
2. SPECIAL DIVIDEND. The following Section 6.2(e) is hereby added to the
Limited Partnership Agreement immediately following Section 6.2(d) (and the
table of contents is deemed to be amended to reflect such addition):
(e) Notwithstanding SECTION 6.2(a) hereof or any other provision of
this Agreement to the contrary, in addition to any amounts otherwise
distributed under SECTION 6.2(a), the Partnership shall be permitted to
make a cash distribution to the General Partner in an amount sufficient to
enable the General Partner to pay a special cash dividend in an amount up
to $.145 per share (the "Permitted Cash Distribution") to the record
holders of its Common Stock after the consummation of the General Partner's
offer to exchange shares of its Common Stock for shares of its Convertible
Preferred Stock as described in that certain prospectus filed as part of a
Registration Statement filed with the Securities and Exchange Commission on
Form S-4 (Registration No. 333-1784), as amended or supplemented. Section
6.2(a) shall not apply with respect to the Permitted Cash Distribution and
no amounts shall be paid or distributed in respect of the Common Units held
by the Limited Partners in connection with the Permitted Cash Distribution.
3. AMENDMENT OF LIMITED PARTNER DISTRIBUTION PROVISION. The parties
hereby amend Section 6.2(a)(vii) of the Limited Partnership
-2-
<PAGE>
Agreement by removing the period at the end thereof and adding the following:
; PROVIDED, HOWEVER, that in the event the Partnership shall issue any
additional Common Units to the General Partner in connection with an
offering of Common Stock by the General Partner (a "Subsequent Common Stock
Offering") other than the initial public offering of Common Stock
consummated by the General Partner in March 1994, the Limited Partners
shall be entitled to receive an additional distribution (the "Additional
Distribution") equal to the product of (x) ($.295 DIVIDED BY 90) TIMES (y)
the number of days in the Quarter in which the Subsequent Common Stock
Offering is consummated (based on three 30-day months) from the first day
of such Quarter to but not including the date such Subsequent Common Stock
Offering is consummated TIMES (z) the number of Common Units issued to the
General Partner in connection with such Subsequent Common Stock Offering on
such date; PROVIDED, FURTHER, HOWEVER, that any Additional Distribution
shall be paid to the Limited Partners concurrently with the first payment
of other distributions to the Limited Partners pursuant to this Section
6.2(a)(vii) for the Quarter in which the Subsequent Common Stock Offering
is consummated; PROVIDED, FURTHER, HOWEVER, that in the event that
dividends on the Common Stock of the General Partner have been declared for
a period of less than a full Quarter (a "Partial Dividend") for the Quarter
in which the Subsequent Common Stock Offering is consummated, then the
number of days in the Quarter to be used in the calculation set forth in
clause (y) of the first proviso of this sentence shall be the number of
days in the period (based on 30-day months) from but not including the last
date through which dividends on the Common Stock of the General Partner
have been or will be paid with respect to the declaration of such Partial
Dividend to but not including the date the Subsequent Common Stock Offering
is consummated. If at the time of the Subsequent Common Stock Offering
dividends have not been paid with respect to shares of Common Stock of the
General Partner for the immediately preceding Quarter and the record date
for payment of such dividends has not passed (an "Unpaid Quarter"), the
Limited Partners shall be entitled to receive an additional distribution
equal to the product of (x) ($.295 DIVIDED BY 90) TIMES (y) the number of
Common Units issued to the General Partner in connection with such
Subsequent Common Stock Offering on such date TIMES (z) (I) if no Partial
Dividend has been declared with respect to such Unpaid Quarter, 90, or (II)
if a Partial Dividend has been declared with respect to such Unpaid
Quarter, the number of days in the period (based on 30-day months) from but
not including the most recent date through which dividends on the Common
Stock of the General Partner have been or will be paid with respect to the
declaration of such Partial Dividend to
-3-
<PAGE>
but not including the last day of such Unpaid Quarter, such additional
distribution to be paid to the Limited Partners concurrently with the
payment of other distributions to the Limited Partners pursuant to this
Section 6.2(a)(vii) for such Unpaid Quarter. Notwithstanding anything
herein to the contrary, the Limited Partners shall not be entitled to
distributions pursuant to this Section 6.2(a)(vii) in excess of the
Preferential Distribution.
For illustration purposes, after giving effect to the foregoing amendment
and assuming that Common Units are issued to the General Partner in connection
with a Subsequent Common Stock Offering that occurs on July 2, 1996 and given
the fact that by July 2, 1996 second quarter Common Stock dividends will not
have not been paid and the Record Date with respect to such dividends (August 1)
will not have passed, on August 15, 1996 (the date of the first quarterly
distribution made to the Limited Partners following consummation of the
Offering), the Preferential Distribution of Net Cash Flow payable to the Limited
Partners pursuant to Section 6.2(a)(vii) of the Limited Partnership Agreement
shall include an additional amount equal to the product of (x) ($.295 DIVIDED BY
90) TIMES (y) the number of Common Units issued to the General Partner in
connection with the Offering on the Offering Closing Date TIMES (z) 90. On
November 15, 1996 (the date of the next quarterly distribution made to the
Limited Partners for the period commencing on July 1, 1996) the Preferential
Distribution of Net Cash Flow payable to the Limited Partners pursuant to
Section 6.2(a)(vii) of the Limited Partnership Agreement shall include an
additional amount equal to the product of (x) ($.295 DIVIDED BY 90) TIMES (y)
the number of days in the current dividend period (based on a 30 day month) from
and including July 1, 1996 to but not including the Offering Closing Date TIMES
(z) the number of Common Units issued to the General Partner in connection with
the Offering on the Offering Closing Date. If the Overallotment Purchase is
consummated on August 2, 1996, the Limited Partners will be entitled to receive
(A) the product of (x) ($.295 DIVIDED BY 90 TIMES) (y) the number of days in the
current dividend period (based on a 30 day month) from and including July 1,
1996 to but not including the date the Overallotment Purchase is consummated
TIMES (z) the number of Common Units issued to the General Partner in connection
with the Overallotment Purchase.
4. EXCHANGE FACTOR. The parties further acknowledge and agree that the
Exchange Factor shall remain 100% immediately after giving effect to the
consummation of the Exchange Offer.
5. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective
contemporaneously with (and subject to) the consummation of the Exchange Offer
and the contribution by Messrs. Rosenthal and Carpenter and an affiliate of The
Prime Group, Inc. of an aggregate
-4-
<PAGE>
625,000 Common Units to the Operating Partnership in connection with the
Exchange Offer.
6. REFERENCE TO AND EFFECT ON THE LIMITED PARTNERSHIP AGREEMENT.
a. Notwithstanding Section 1 hereof, Section 1(d) of Exhibit E to
the Limited Partnership Agreement shall not apply in respect of the Exchange
Offer. Notwithstanding Section 2 hereof, the Permitted Cash Distribution shall
be deemed to be "Net Cash Flow distributed to the General Partner pursuant to
subsections (a)(i) and (a)(ii)" for purposes of Section 1(a) of Exhibit E to the
Limited Partnership Agreement.
b. The Limited Partnership Agreement is hereby deemed to be amended
to the extent necessary to effect the matters contemplated herein. Except as
specifically provided for herein above, the provisions of the Limited
Partnership Agreement shall remain in full force and effect.
c. The execution, delivery and effectiveness of this Amendment shall
not operate (i) as a waiver of any provision, right or obligation of the General
Partner or any Limited Partner under the Limited Partnership Agreement except as
specifically set forth herein or (ii) as a waiver or consent to any subsequent
action or transaction.
7. MISCELLANEOUS.
a. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed an original, but
all such counterparts shall constitute one and the same instrument.
b. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS)
OF THE STATE OF DELAWARE.
c. HEADINGS. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
d. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon the
Partnership, each of the Partners of the Partnership and their respective
successors and assigns.
[SIGNATURE PAGES FOLLOW]
-5-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
day and year first above written.
Number of Common Units PRIME RETAIL, INC., as
- --------------------- General Partner
2,875,000
By: /s/ C. Alan Schroeder
---------------------
Name: C. Alan Schroeder
Title: Senior Vice President -
General Counsel and
Secretary
Number of Convertible Preferred Units
- -------------------------------------
7,015,000
Number of Preferred Units
- -------------------------
2,300,000
<PAGE>
Number of Common Units Limited Partner
- ---------------------- ---------------
5,557,000 PRIME FINANCING, L.P.
By: PRIME FINANCE, INC. its
General Partner
By: /s/ Michael W. Reschke
----------------------
Name: Michael W. Reschke
Title: President
<PAGE>
Number of Common Units Limited Partner
- ---------------------- ---------------
61,632 PRIME GROUP III, L.P.
By: PGLP, INC., its
General Partner
By: /s/ Michael W. Reschke
----------------------
Name: Michael W. Reschke
Title: President
<PAGE>
Number of Common Units Limited Partner
- ---------------------- ---------------
43,000 PRIME GROUP LIMITED PARTNERSHIP
By: Michael W. Reschke, its
General Partner
By: /s/ Michael W. Reschke
----------------------
Name: Michael W. Reschke
<PAGE>
Number of Common Units Limited Partner
- ---------------------- ---------------
266,090
/s/ Abraham Rosenthal
---------------------
Abraham Rosenthal
<PAGE>
Number of Common Units Limited Partner
- ---------------------- ---------------
125,000 ROSENTHAL FAMILY LLC
By: /s/ Abraham Rosenthal
---------------------
Name: Abraham Rosenthal
Title: General Manager
<PAGE>
Number of Common Units Limited Partner
- ---------------------- ---------------
266,090
/s/ William H. Carpenter, Jr.
-----------------------------
William H. Carpenter, Jr.
<PAGE>
Number of Common Units Limited Partner
- ---------------------- ---------------
125,000 CARPENTER FAMILY ASSOCIATES LLC
By: /s/ William H. Carpenter, Jr.
-----------------------------
Name: William H. Carpenter, Jr.
Title: General Manager
<PAGE>
COMMON UNIT CONTRIBUTION AGREEMENT
This COMMON UNIT CONTRIBUTION AGREEMENT (this "Agreement") is made as of
the 29th day of March, 1996 by and among Prime Retail, L.P., a Delaware limited
partnership (the "Operating Partnership"), the limited partners of the Operating
Partnership executing this Agreement (the "Contributing Partners") and The Prime
Group, Inc. ("PGI"). Capitalized terms not defined herein shall have the
meanings ascribed to such terms in the Agreement of Limited Partnership of Prime
Retail, L.P. dated as of March 22, 1994 (the "Limited Partnership Agreement").
W I T N E S S E T H:
WHEREAS, Prime Retail, Inc., a Maryland corporation and general partner of
the Operating Partnership, intends to engage in a series of transactions
including an offer to acquire up to 65% of its outstanding shares of 8.5% Series
B Cumulative Participating Convertible Preferred Stock, $.01 par value per share
(the "Convertible Preferred Stock"), for consideration equal to 1.6 shares of
its common stock, par value $.01 per share (the "Common Stock"), for each share
of Convertible Preferred Stock (the "Exchange Offer") and the issuance of shares
of Common Stock in a public offering (the "Stock Offering", and together with
the Exchange Offer", the "Offerings");
WHEREAS, in order to facilitate the Offerings, the Contributing Partners
wish to contribute an aggregate of 625,000 Common Units to the Operating
Partnership.
NOW, THEREFORE, for and in consideration of the terms and conditions
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. CONTRIBUTION. Each Contributing Partner agrees to contribute, and PGI
agrees to cause an affiliate of PGI(the "Prime Group Affiliate") to contribute,
that number of Common Units set forth opposite such Person's name on Annex I
hereto; PROVIDED, HOWEVER, that in the case of a contribution of Common Units by
the Prime Group Affiliate, such contribution is subject to either (x) the
approval of the pledgee of such Common Units to the contribution thereof or (y)
the release of such pledge; PROVIDED, FURTHER, HOWEVER, that PGI agrees to act
in good faith and use reasonable efforts to obtain such approval or release; AND
-1-
<PAGE>
PROVIDED, FURTHER, HOWEVER, that in the case of the contribution of Common Units
by Abraham Rosenthal and William H. Carpenter, Jr., such contribution is subject
to the prior contribution by the Prime Group Affiliate of that number of Common
Units set forth opposite its name on Annex I hereto. Such Common Units shall be
contributed free and clear of all liens and encumbrances with respect thereto
and each Contributing Partner agrees to deliver to the Operating Partnership
proper evidence of ownership and release of prior encumbrances with respect to
such Common Units as the Operating Partnership may reasonably request.
2. CONDITIONS TO EFFECTIVENESS; DELIVERY OF INSTRUMENTS EVIDENCING COMMON
UNITS. The obligation of each Contributing Partner to contribute Common Units
hereunder is conditioned upon the concurrent consummation of the Exchange Offer.
Except as provided in Section 3 hereof, from and after the consummation of the
Exchange Offer no Contributing Partner shall have any further rights or
obligations with respect to the contributed Common Units and the Contributing
Partners acknowledge that as of such time the contributed Common Units shall be
contributed to and canceled by the Operating Partnership. The General Partner
shall make appropriate adjustments to EXHIBIT A to the Limited Partnership
Agreement as necessary to reflect the transactions contemplated hereby.
3. CERTAIN TAX AND RELATED MATTERS. The contribution of Common Units
pursuant to this Agreement shall not result in any reduction or increase in (i)
the capital interest of any Contributing Partner, as the term "capital interest"
is defined under the Internal Revenue Code of 1986, as amended (the "Code"), or
(ii) the amount of the Capital Account (within the meaning of the Limited
Partnership Agreement) of any Contributing Partner on the date of such
contribution. For all purposes of the Code, the contribution of Common Units
shall be treated as a reduction in the profits interest of any Contributing
Partners as the term "profits interest" is defined under the Code.
4. MISCELLANEOUS.
a. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all other understandings, oral or written, with respect to the
subject matter hereof.
b. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original, but
all such counterparts shall constitute one and the same instrument.
- 2 -
<PAGE>
c. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS)
OF THE STATE OF DELAWARE.
d. HEADINGS. Section headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
e. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Partnership, each of the Contributing Partners and their respective successors
and assigns.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
first above written.
PRIME RETAIL, L.P.
By: Prime Retail, Inc.
Its: General Partner
By: /s/ C. Alan Schroeder
---------------------
Its: Senior Vice President -
General Counsel and
Secretary
ABRAHAM ROSENTHAL
/s/ Abraham Rosenthal
--------------------------
WILLIAM H. CARPENTER, JR.
/s/ William H. Carpenter, Jr.
-----------------------------
THE PRIME GROUP, INC.
By: /s/ Michael W. Reschke
----------------------
Name: Michael W. Reschke
Title: President
-4-
<PAGE>
ANNEX I
CONTRIBUTING PARTNER COMMON UNITS CONTRIBUTED
- -------------------- ------------------------
Prime Group Affiliate 585,000
Abraham Rosenthal 20,000
William H. Carpenter, Jr. 20,000
----------
TOTAL 625,000
----------
----------
-5-
<PAGE>
EXHIBIT 12.1
PRIME RETAIL, INC. AND THE PREDECESSOR
EXHIBIT 12.1: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIO INFORMATION)
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
-----------------------------------------------
AS ADJUSTED
THE PREDECESSOR
----------------------------
HISTORICAL
----------------- ----------------------------------------------------------
58.1% CONVERSION PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED MARCH 22, TO JANUARY 1, TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 21, DECEMBER 31,
1995 1995 1994 1994 1993
----------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income (loss) before minority interests............. $ 15,885 $ 12,806 $ 9,454 $ (2,408) $ (3,873)
Interest incurred................................... 19,315 22,394 8,491 2,585 9,277
Amortization of capitalized interest................ 222 222 152 42 161
Amortization of debt issuance costs................. 3,309 3,309 2,160 695 362
Amortization of interest rate protection
contracts.......................................... 1,276 1,276 797 -- --
Less interest earned on interest rate protection
contracts.......................................... (721) (721) (224) -- --
Less capitalized interest........................... (2,675) (2,675) (1,277) -- (711)
------- ------------- ------------- ------------- -------------
Earnings.......................................... 36,611 36,611 19,553 914 5,216
------- ------------- ------------- ------------- -------------
Interest incurred................................... 19,315 22,394 8,491 2,585 9,277
Amortization of debt issuance costs................. 3,309 3,309 2,160 695 362
Amortization of interest rate protection
contracts.......................................... 1,276 1,276 797 -- --
Preferred stock dividends........................... 12,281 20,944 16,290 -- --
------- ------------- ------------- ------------- -------------
Combined Fixed Charges and Preferred Stock
Dividends........................................ 36,181 47,923 27,738 3,280 9,639
------- ------------- ------------- ------------- -------------
Excess of Combined Fixed Charges and Preferred Stock
Dividends over Earnings............................ $ -- $ (11,312) $ (8,185) $ (2,366) $ (4,423)
------- ------------- ------------- ------------- -------------
------- ------------- ------------- ------------- -------------
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.......................... 1.01x -- -- -- --
------- ------------- ------------- ------------- -------------
------- ------------- ------------- ------------- -------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1992 1991
------------- -------------
<S> <C> <C>
Income (loss) before minority interests............. $ (7,057) $ (4,577)
Interest incurred................................... 9,373 8,130
Amortization of capitalized interest................ 130 78
Amortization of debt issuance costs................. 192 47
Amortization of interest rate protection
contracts.......................................... -- --
Less interest earned on interest rate protection
contracts.......................................... -- --
Less capitalized interest........................... (573) (2,829)
------------- -------------
Earnings.......................................... 2,065 849
------------- -------------
Interest incurred................................... 9,373 8,130
Amortization of debt issuance costs................. 192 47
Amortization of interest rate protection
contracts.......................................... -- --
Preferred stock dividends........................... -- --
------------- -------------
Combined Fixed Charges and Preferred Stock
Dividends........................................ 9,565 8,177
------------- -------------
Excess of Combined Fixed Charges and Preferred Stock
Dividends over Earnings............................ $ (7,500) $ (7,328)
------------- -------------
------------- -------------
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.......................... -- --
------------- -------------
------------- -------------
</TABLE>
<PAGE>
EXHIBIT 12.1
PRIME RETAIL, INC.
EXHIBIT 12.1: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIO INFORMATION)
<TABLE>
<CAPTION>
AS ADJUSTED
----------------- HISTORICAL
--------------------
THREE MONTHS
ENDED MARCH 31, THREE MONTHS ENDED
1996 MARCH 31,
----------------- --------------------
58.1% CONVERSION 1996 1995
----------------- --------- ---------
<S> <C> <C> <C>
Income before minority interests.......................................... $ 3,827 $ 3,057 $ 3,142
Interest incurred......................................................... 5,617 6,387 4,753
Amortization of capitalized interest...................................... 63 63 56
Amortization of debt issuance costs....................................... 823 823 758
Amortization of interest rate protection contracts........................ 319 319 319
Less interest earned on interest rate protection contracts................ (84) (84) (243)
Less capitalized interest................................................. (613) (613) (581)
------ --------- ---------
Earnings................................................................ 9,952 9,952 8,204
------ --------- ---------
Interest incurred......................................................... 5,617 6,387 4,753
Amortization of debt issuance costs....................................... 823 823 758
Amortization of interest rate protection contracts........................ 319 319 319
Preferred stock distributions and dividends............................... 3,070 5,236 5,236
------ --------- ---------
Combined Fixed Charges and Preferred Stock Distributions and
Dividends.............................................................. 9,829 12,765 11,066
------ --------- ---------
Excess of Combined Fixed Charges and Preferred Stock Distributions and
Dividends over Earnings.................................................. $ -- $ (2,813) $ (2,862)
------ --------- ---------
------ --------- ---------
Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Distributions and Dividends.............................................. 1.01x -- --
------ --------- ---------
------ --------- ---------
</TABLE>
<PAGE>
EXHIBIT 12.2
PRIME RETAIL, INC. AND THE PREDECESSOR
EXHIBIT 12.2: COMPUTATION OF RATIO OF FUNDS FROM OPERATIONS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIO INFORMATION)
<TABLE>
<CAPTION>
PRIME RETAIL, INC.
-----------------------------------------------
AS ADJUSTED THE PREDECESSOR
---------------
HISTORICAL
----------------- ---------------------------------------------
58.1% CONVERSION PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED MARCH 22, TO JANUARY 1, TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 21,
1995 1995 1994 1994
----------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Funds from operations............................... $ 36,212 $ 33,133 $ 24,762 $ 834
Interest incurred................................... 17,982 21,061 8,109 2,585
Amortization of capitalized interest................ 217 217 150 42
Amortization of debt issuance costs................. 3,281 3,281 2,154 695
Amortization of interest rate protection
contracts.......................................... 1,276 1,276 797 --
Less interest earned on interest rate protection
contracts.......................................... (721) (721) (224) --
Less capitalized interest........................... (2,602) (2,602) (1,121) --
------- ------------- ------------- ------
Funds from Operations, adjusted................... 55,645 55,645 34,627 4,156
------- ------------- ------------- ------
Interest incurred................................... 17,982 21,061 8,109 2,585
Amortization of debt issuance costs................. 3,281 3,281 2,154 695
Amortization of interest rate protection
contracts.......................................... 1,276 1,276 797 --
Preferred stock dividends........................... 12,281 20,944 16,290 --
------- ------------- ------------- ------
Combined Fixed Charges and Preferred Stock
Dividends........................................ 34,820 46,562 27,350 3,280
------- ------------- ------------- ------
Excess of Combined Fixed Charges and Preferred Stock
Dividends over Funds from Operations............... $ -- $ -- $ -- $ --
------- ------------- ------------- ------
------- ------------- ------------- ------
Ratio of Funds from Operations to Combined Fixed
Charges and Preferred Stock Dividends.............. 1.60x 1.20x 1.27x 1.27x
------- ------------- ------------- ------
------- ------------- ------------- ------
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1991
------------- --------------- -------------
<S> <C> <C> <C>
Funds from operations............................... $ 4,887 $ (436) $ (1,043)
Interest incurred................................... 9,277 9,373 8,130
Amortization of capitalized interest................ 161 130 78
Amortization of debt issuance costs................. 362 192 47
Amortization of interest rate protection
contracts.......................................... -- -- --
Less interest earned on interest rate protection
contracts.......................................... -- -- --
Less capitalized interest........................... (711) (573) (2,829)
------------- ------ -------------
Funds from Operations, adjusted................... 13,976 8,686 4,383
------------- ------ -------------
Interest incurred................................... 9,277 9,373 8,130
Amortization of debt issuance costs................. 362 192 47
Amortization of interest rate protection
contracts.......................................... -- -- --
Preferred stock dividends........................... -- -- --
------------- ------ -------------
Combined Fixed Charges and Preferred Stock
Dividends........................................ 9,639 9,565 8,177
------------- ------ -------------
Excess of Combined Fixed Charges and Preferred Stock
Dividends over Funds from Operations............... $ -- $ (879) $ (3,794)
------------- ------ -------------
------------- ------ -------------
Ratio of Funds from Operations to Combined Fixed
Charges and Preferred Stock Dividends.............. 1.45x -- --
------------- ------ -------------
------------- ------ -------------
</TABLE>
<PAGE>
EXHIBIT 12.2
PRIME RETAIL, INC.
EXHIBIT 12.2: COMPUTATION OF RATIO OF FUNDS FROM OPERATIONS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIO INFORMATION)
<TABLE>
<CAPTION>
AS ADJUSTED HISTORICAL
------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31,
------------------- --------------------
58.1% CONVERSION 1996 1995
------------------- --------- ---------
<S> <C> <C> <C>
Funds from operations.................................................. $ 9,686 $ 8,916 $ 8,033
Interest incurred...................................................... 5,466 6,236 4,484
Amortization of capitalized interest................................... 63 63 54
Amortization of debt issuance costs.................................... 816 816 754
Amortization of interest rate protection contracts..................... 319 319 319
Less interest earned on interest rate protection contracts............. (84) (84) (243)
Less capitalized interest.............................................. (613) (613) (581)
------ --------- ---------
Funds from Operations, adjusted...................................... 15,653 15,653 12,820
------ --------- ---------
Interest incurred...................................................... 5,466 6,236 4,484
Amortization of debt issuance costs.................................... 816 816 754
Amortization of interest rate protection contracts..................... 319 319 319
Preferred stock distributions and dividends............................ 3,070 5,236 5,236
------ --------- ---------
Combined Fixed Charges and Preferred Stock Distributions and
Dividends........................................................... 9,671 12,607 10,793
------ --------- ---------
Excess of Combined Fixed Charges and Preferred Stock Distributions and
Dividends over Funds from Operations.................................. $ -- $ -- $ --
------ --------- ---------
------ --------- ---------
Ratio of Funds from Operations to Combined Fixed Charges and Preferred
Stock Distributions and Dividends..................................... 1.62x 1.24x 1.19x
------ --------- ---------
------ --------- ---------
</TABLE>
<PAGE>
Exhibit 24.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated January 30, 1996, in Amendment No. 4 to the
Registration Statement (Form S-11 No. 333-1666) and related Prospectus of Prime
Retail, Inc., for the registration of 4,351,078 shares of its common stock.
Ernst & Young LLP
Baltimore, Maryland
June 24, 1996
