<PAGE>
FILED PURSUANT TO RULE 424(B)(5) UNDER THE SECURITIES ACT OF 1933
REGISTRATION NO. 333-29437
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 27, 1997)
10,000,000 SHARES
[LOGO]
PRIME RETAIL, INC.
[LOGO]
COMMON STOCK
All of the 10,000,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Prime Retail,
Inc. (the "Company"). The Company is a self-administered and self-managed real
estate investment trust ("REIT") that develops, acquires, owns and operates
factory outlet centers in the United States. All of the Company's business and
operations are conducted through Prime Retail, L.P. (the "Operating
Partnership"). As of June 30, 1997, the Company's portfolio included 24 factory
outlet centers located in 18 states with 6.1 million square feet of gross
leasable area ("GLA") that was 94% leased. The Company has paid and intends to
continue to pay regular quarterly distributions to holders of the Common Stock.
Commencing on August 27, 1997, the Common Stock will be listed on the New
York Stock Exchange under the trading symbol "PRT." Prior thereto, the Common
Stock was quoted in the Nasdaq National Market under the trading symbol "PRME."
On August 26, 1997, the last reported per share sale price of the Common Stock
on the Nasdaq National Market was $13.75. See "Price Range of Common Stock and
Distribution History."
SEE "RISK FACTORS" COMMENCING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK.
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 SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT (1) THE COMPANY (2)
<S> <C> <C> <C>
Per Share of Common Stock............................... $14.00 $0.63 $13.37
Total (3)............................................... $140,000,000 $6,300,000 $133,700,000
</TABLE>
(1) The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated offering expenses of $1,300,000 payable by the
Company.
(3) The Company has granted to the Underwriters an option, exercisable for 30
days after the date hereof, to purchase up to 1,500,000 additional shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to the Company will be $161,000,000, $7,245,000 and $153,755,000,
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 Arlington,
Virginia on or about September 2, 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
The date of this Prospectus Supplement is August 27, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF COMMON STOCK TO STABILIZE ITS MARKET PRICE OR TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE
UNDERWRITERS, OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
CERTAIN DISCUSSIONS IN THIS PROSPECTUS SUPPLEMENT CONTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS WHICH REFLECT
MANAGEMENT'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE EFFECTS OF FUTURE EVENTS ON
THE COMPANY'S FINANCIAL PERFORMANCE; RISKS RELATED TO THE RETAIL INDUSTRY IN
WHICH THE COMPANY'S FACTORY OUTLET CENTERS COMPETE, INCLUDING THE POTENTIAL
ADVERSE IMPACT OF EXTERNAL FACTORS, SUCH AS INFLATION, CONSUMER CONFIDENCE,
UNEMPLOYMENT RATES AND CONSUMER TASTES AND PREFERENCES; RISKS ASSOCIATED WITH
THE COMPANY'S PROPERTY DEVELOPMENT ACTIVITIES, SUCH AS THE POTENTIAL FOR COST
OVERRUNS, DELAYS AND THE LACK OF PREDICTABILITY WITH RESPECT TO THE FINANCIAL
RETURNS ASSOCIATED WITH THESE DEVELOPMENT ACTIVITIES; THE RISK OF A POTENTIAL
INCREASE IN MARKET INTEREST RATES FROM CURRENT LEVELS; RISKS ASSOCIATED WITH THE
COMPANY'S PROPERTY ACQUISITION ACTIVITIES, SUCH AS THE UNCERTAINTY TO WHETHER
THESE TRANSACTIONS MAY BE COMPLETED AND THE LACK OF PREDICTABILITY WITH RESPECT
TO FINANCIAL RETURNS; RISKS ASSOCIATED WITH REAL ESTATE OWNERSHIP, SUCH AS THE
POTENTIAL ADVERSE IMPACT OF CHANGES IN LOCAL ECONOMIC CLIMATE ON THE REVENUES
AND THE VALUE OF THE COMPANY'S PROPERTIES; AND OTHER RISKS DESCRIBED IN THE
ACCOMPANYING PROSPECTUS. SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE
ACCOMPANYING PROSPECTUS FOR FURTHER DISCUSSION OF THESE RISKS.
THE COMPANY
The Company is a self-administered and self-managed REIT that develops,
acquires, owns and operates factory outlet centers in the United States. Based
upon industry publications, the Company believes it is one of the largest owners
and operators of factory outlet centers in the United States. As of June 30,
1997, the Company's portfolio included 24 factory outlet centers located in 18
states with 6.1 million square feet of GLA that was 94% leased. 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 Prime Retail, L.P. (the "Operating
Partnership"). The Company controls the Operating Partnership as its sole
general partner and is dependent upon the distributions or other payments from
the Operating Partnership in order to meet its financial obligations.
The Company strives to differentiate itself from competitors in the outlet
center industry by owning and operating larger outlet centers with highly
accessible locations, a larger and more diverse merchandising mix, extensive
food and recreational amenities and quality architecture and landscaping, all
designed to create an upscale environment in which to showcase merchandise and
encourage shopping. The average outlet center in the Company's portfolio
contained 255,750 square feet of GLA at June 30, 1997, compared to an industry
average of 156,932 square feet.(1) 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 is a Maryland corporation that was incorporated in July 1993.
The Company's executive offices are located at 100 East Pratt Street, Nineteenth
Floor, Baltimore, Maryland 21202 and its telephone number is (410) 234-0782.
RECENT DEVELOPMENTS
$60.0 MILLION PRIVATE CONVERTIBLE PREFERRED EQUITY INVESTMENT
On August 8, 1997, the Company entered into a purchase agreement with an
institutional investor pursuant to which a new series of cumulative convertible
non-voting preferred securities (the "Preferred Securities") will be issued in
exchange for an aggregate $60.0 million. Proceeds from the issuance will be used
to fund the Company's continued acquisition and development programs.
- ------------------------
(1) As reported in January 1997 by VALUE RETAIL NEWS, an industry trade magazine
whose executive committee includes William H. Carpenter, Jr., President and
Chief Operating Officer of the Company.
S-2
<PAGE>
The Preferred Securities will be issued at $13.75 per unit, subject to
adjustment in certain circumstances to an amount not less than $13.25. An
initial $10.0 million of proceeds will be drawn on or before September 8, 1997.
The balance of the proceeds may be drawn through December 6, 1997, with the
timing and amount of draws determined, subject to certain limitations, at the
discretion of the Company. The Preferred Securities will pay dividends
equivalent to the amount being paid on the Common Stock, with a minimum equal to
the current annual amount of $1.18 per share. The Preferred Securities may be
converted into shares of Common Stock on a one-to-one basis commencing August 8,
1998 (or earlier under certain conditions). In addition, the Company has waived
the ownership limitations set forth in the Company's charter with respect to the
Common Stock to permit the investor to own, at any one time, the shares of
Common Stock issuable upon conversion of the Preferred Securities. The Company
has the right to call the Preferred Securities after ten years. Subject to
certain conditions, the Preferred Securities may take the form of shares of
preferred stock in the Company or preferred units of partnership interest in the
Operating Partnership that will be exchangeable for shares of preferred stock or
Common Stock (subject to the same limitation on conversion noted above) on a
one-to-one basis.
Pursuant to the purchase agreement, as long as the investor owns more than
9.9% of the outstanding shares of Common Stock, the investor will be subject to
certain standstill restrictions, including restrictions relating to the
acquisition of additional shares and various other matters. Pursuant to a
registration rights agreement, the Company has granted the investor certain
registration rights to facilitate resale of its shares under certain conditions.
SECOND QUARTER 1997 OPERATING RESULTS
On July 28, 1997, the Company announced its operating results for the three
and six months ended June 30, 1997.
The Company's funds from operations ("FFO"), before allocations to preferred
shareholders and minority interests, increased 49.5% to $10.6 million for the
three months ended June 30, 1997 compared to $7.1 million for the three months
ended June 30, 1996, after excluding the effects of a nonrecurring charge of
$6.1 million related to a debt refinancing entered into in June, 1996 (the
"Nonrecurring Charge"). The Nonrecurring Charge related primarily to the
write-down of nonrefundable deferred financing costs and the unamortized cost of
certain interest rate protection contracts and had no effect on distributable
net cash flow of the Company. The Company's FFO before allocations to preferred
shareholders and minority interests increased 41.5% to $20.8 million for the six
months ended June 30, 1997 compared to $14.7 million for the six months ended
June 30, 1996, after excluding the effects of the Nonrecurring Charge.(2)
Income (loss) before allocations to preferred shareholders, minority
interests and extraordinary loss (determined in accordance with generally
accepted accounting principles ("GAAP")) was $7.1 million and $(0.9) million for
the six months ended June 30, 1997 and 1996, respectively, and $3.6 million and
$(3.9) million for the three months ended June 30, 1997 and 1996, respectively.
The Company reported a net loss per common share of $(0.29) and $(1.22) for the
six months ended June 30, 1997 and 1996, respectively.
- ------------------------
(2)The Company generally considers FFO an appropriate measure of performance of
an equity REIT because industry analysts have accepted it as a performance
measure of equity REITs. FFO, as defined by the new definition established by
the National Association of Real Estate Investment Trusts ("NAREIT") in 1995,
means net income (computed in accordance with GAAP) excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that in order to
facilitate a clear understanding of the operating results of the Company, FFO
should be examined in conjunction with net income determined in accordance
with GAAP. FFO does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions.
S-3
<PAGE>
For the six months ended June 30, 1997, same-space sales in centers owned by
the Company increased 2.2% compared to the same period in 1996. Excluding 1996
sales reported by a tenant that departed Triangle Factory Shops in July 1996,
same-space sales increased 6.3% for the six months ended June 30, 1997 compared
to the same period in 1996. "Same-space sales" is defined as the weighted
average sales per square foot reported by merchants for space open since January
1, 1996. The Company's same-space sales for the year ended December 31, 1996
were $232.45 per square foot. For the six months ended June 30, 1997, same-store
sales increased by 4.4% compared to the same period in 1996. "Same-store sales"
is defined as the weighted average sales per square foot reported by merchants
for stores open since January 1, 1996. As of June 30, 1997, the Company's
factory outlet center portfolio was approximately 94% leased compared to
approximately 91% leased at December 31, 1996.
RECENT ACQUISITIONS
Since November 1996 the Company has acquired five factory outlet centers and
the remaining 50% interest in an existing center for an aggregate purchase price
of $166.1 million. These acquisitions are summarized below.
ACQUISITIONS OF ROCKY MOUNTAIN FACTORY STORES AND KANSAS CITY FACTORY
OUTLETS. On November 1, 1996, the Company acquired the Rocky Mountain Factory
Stores (located in Loveland, Colorado) and the Kansas City Factory Outlets
(located in Odessa, Missouri) (the "1996 Acquired Properties") for an aggregate
purchase price of approximately $71.7 million from an unrelated third party. The
Company financed the purchase with a portion of the proceeds from a secured loan
transaction and the issuance to the seller of $12.0 million of unsecured term
loans to the seller. The 1996 Acquired Properties contain approximately 624,000
square feet of GLA that was 90.4% and 92.1% leased at November 1, 1996 and June
30, 1997, respectively.
ACQUISITION OF REMAINING 50% INTEREST IN GROVE CITY FACTORY SHOPS. On
November 1, 1996, the Company purchased its joint venture partner's first
mortgage and 50.0% ownership interest in Grove City Factory Shops ("Grove City")
for $57.1 million. The Company financed the purchase with a portion of the
proceeds from a secured loan transaction. Effective November 1, 1996, the
Company owns 100% of Grove City which contains approximately 533,000 square feet
of GLA that was 99.3% leased at June 30, 1997.
ACQUISITIONS OF OAK CREEK FACTORY OUTLETS, BEND FACTORY OUTLETS AND THE
FACTORY OUTLETS AT POST FALLS. On February 13, 1997, the Company acquired Oak
Creek Factory Outlets (located in Sedona, Arizona), Bend Factory Outlets
(located in Bend, Oregon) and The Factory Outlets at Post Falls (located in Post
Falls, Idaho) (the "1997 Acquired Properties") for an aggregate purchase price
of $37.3 million from an unrelated third party. The Company financed the
purchase with loan proceeds from a financial institution and a $4.0 million
unsecured promissory note issued to the seller. The 1997 Acquired Properties
contain approximately 358,000 square feet of GLA that was 93.8% leased at June
30, 1997.
OTHER RECENT DEVELOPMENTS
PLANNED DEVELOPMENT. Management believes that there is sufficient demand
for continued development of new factory outlet centers and the expansion of
certain existing factory outlet centers. The Company expects to open
approximately 250,000 square feet of GLA during the remainder of 1997 in
connection with planned expansions of existing factory outlet centers. At June
30, 1997, the remaining budgeted capital expenditures for these expansions
aggregated approximately $19.6 million. In March 1997, the Company commenced
construction on Lebanon Factory Shops located east of Nashville, Tennessee.
Lebanon Factory Shops, which will contain approximately 215,000 square feet of
GLA, has a total expected development cost of approximately $27.5 million and is
expected to open in the second quarter of 1998.
S-4
<PAGE>
1997 STOCK OFFERING. During the first quarter of 1997, the Company
completed a public offering of 2,390,000 shares of its Common Stock at $12.50
per share and 175,800 shares of its Series B Cumulative Participating
Convertible Preferred Stock (the "Convertible Preferred Stock") at $22.75 per
share. As a result of this offering, the Company received net proceeds of $31.9
million that were used (i) to repay certain outstanding indebtedness aggregating
$26.5 million, (ii) to fund development and construction activities and (iii)
for general corporate purposes.
REVOLVING LOAN AMENDMENT. Effective December 31, 1996, the Company amended
the terms of its $40.0 million revolving loan facility (the "Revolving Loan") to
reduce the interest rate applicable to such facility from LIBOR plus 2.25% to
LIBOR plus 1.75% and extend the maturity date to December 31, 1997. No
borrowings were outstanding under the Revolving Loan as of June 30, 1997.
S-5
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
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 consumer include (i)
maintaining brand name 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.
PORTFOLIO OF PROPERTIES AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
GRAND GLA PERCENTAGE
FACTORY OUTLET CENTER PHASE OPENING DATE (SQ. FT.) LEASED(12)
- -------------------------------------------------------------- ----------- ---------------- ---------- -------------
<S> <C> <C> <C> <C>
Warehouse Row Factory Shops(1)(2)--Chattanooga,
Tennessee................................................... I November 1989 95,000 92%
II August 1993 26,000 94
---------- ---
121,000 92
Oak Creek Factory Outlets(3)--Sedona, Arizona................. I August 1990 82,000 99
San Marcos Factory Shops--San Marcos, Texas................... I August 1990 177,000 100
II August 1991 67,000 100
III August 1993 117,000 100
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
---------- ---
416,000 100
The Factory Outlets at Post Falls(3)--Post Falls, Idaho....... I July 1991 111,000 88
II July 1992 68,000 89
---------- ---
179,000 88
Gulf Coast Factory Shops--Ellenton, Florida................... I October 1991 187,000 99
II August 1993 123,000 99
III October 1996 30,000 100
---------- ---
340,000 99
Triangle Factory Shops--Raleigh-Durham, North Carolina........ I October 1991 181,000 99
II July 1996 6,000 100
---------- ---
187,000 99
Coral Isle Factory Shops--Naples/Marco Island, Florida........ I December 1991 94,000 98
II December 1992 32,000 100
---------- ---
126,000 99
Castle Rock Factory Shops--Castle Rock, Colorado.............. I November 1992 181,000 100
II August 1993 94,000 99
III November 1993 95,000 100
---------- ---
370,000 100
Bend Factory Outlets(3)--Bend Oregon.......................... I December 1992 97,000 100
</TABLE>
S-6
<PAGE>
PORTFOLIO OF PROPERTIES AS OF JUNE 30, 1997 (CONTINUED)
<TABLE>
<CAPTION>
GRAND GLA PERCENTAGE
FACTORY OUTLET CENTER PHASE OPENING DATE (SQ. FT.) LEASED(12)
- -------------------------------------------------------------- ----------- ---------------- ---------- -------------
<S> <C> <C> <C> <C>
Ohio Factory Shops--Jeffersonville, Ohio...................... I July 1993 186,000 99%
II November 1993 100,000 100
IIB November 1994 13,000 100
IIIA August 1996 35,000 100
---------- ---
334,000 99
Gainesville Factory Shops--Gainesville, Texas................. I August 1993 210,000 92
II November 1994 106,000 89
---------- ---
316,000 91
Nebraska Crossing Factory Shops--Gretna, Nebraska............. I October 1993 192,000 92
Rocky Mountain Factory Stores(4)--Loveland, Colorado.......... I May 1994 139,000 100
II November 1994 50,000 100
III May 1995 114,000 100
IV May 1996 25,000 100
---------- ---
328,000 100
Oxnard Factory Outlet(5)--Oxnard, California.................. I June 1994 148,000 90
Grove City Factory Shops(6)--Grove City, Pennsylvania......... I August 1994 235,000 100
II November 1994 95,000 100
III November 1995 85,000 99
IV November 1996 118,000 97
---------- ---
533,000 99
Huntley Factory Shops--Huntley, Illinois...................... I August 1994 192,000 90
II November 1995 90,000 71
---------- ---
282,000 84
Florida Keys Factory Shops--Florida City, Florida............. I September 1994 208,000 98
Indiana Factory Shops--Daleville, Indiana..................... I November 1994 208,000 97
IIA November 1996 26,000 35
---------- ---
234,000 90
Kansas City Factory Outlets(4)--Odessa, Missouri.............. I July 1995 191,000 98
II November 1996 105,000 67
---------- ---
296,000 87
Magnolia Bluff Factory Shops(7)--Darien, Georgia.............. I July 1995 238,000 86
IIA November 1995 56,000 69
IIB July 1996 21,000 66
---------- ---
315,000 82
Arizona Factory Shops(8)--Phoenix, Arizona.................... I September 1995 217,000 96
II September 1996 109,000 82
---------- ---
326,000 91
Gulfport Factory Shops(9)--Gulfport, Mississippi.............. I November 1995 228,000 99
IIA November 1996 40,000 85
---------- ---
268,000 97
Buckeye Factory Shops(10)--Burbank, Ohio...................... I November 1996 205,000 94
Carolina Factory Shops--Gaffney, South Carolina............... I November 1996 235,000 91
---------- ---
TOTAL FACTORY OUTLET CENTERS(11).............................. 6,138,000 94%
---------- ---
---------- ---
</TABLE>
- ------------------------
NOTES ON FOLLOWING PAGE.
S-7
<PAGE>
- ------------------------
NOTES:
(1) 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. An unrelated third
party 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.
(2) Phase I of this mixed-use development includes 154,000 square feet of office
space and Phase II includes 5,000 square feet of office space. The total
office space of 159,000 square feet of GLA is not included in this table and
such space was 100% leased as of June 30, 1997.
(3) The Company acquired this factory outlet center on February 13, 1997 from an
unrelated third party.
(4) The Company acquired this factory outlet center on November 1, 1996 from an
unrelated third party.
(5) On February 7, 1997, the Company purchased an additional 20% partnership
interest from a joint venture partner which increased the Company's
ownership interest to 50%.
(6) On November 1, 1996, the Company purchased its joint venture partner's 50%
partnership interest in Grove City Factory Shops Partnership and now owns
100% of this factory outlet center.
(7) The Company operates this property pursuant to a long-term lease under which
it receives the economic benefit of a 100% ownership interest.
(8) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(9) The real property on which this outlet center is located is subject to a
long-term ground lease. The Company receives the economic benefit of a 100%
ownership interest.
(10) The Company owns 75% of this factory outlet center in a joint venture
partnership with an unrelated third party. The Company will use a portion of
the proceeds from the Offering to acquire the remaining 25% interest in this
property. See "Use of Proceeds."
(11) The Company also owns three community centers containing 424,000 square
feet of GLA in the aggregate that were 96% leased as of June 30, 1997.
(12) Fully executed leases as of June 30, 1997 as a percent of square feet of
GLA.
TENANTS
In management's view, the tenant mix is one of the most important factors in
promoting an outlet center's success. Virtually all aspects of 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 and retailers of upscale designer and brand-name products. Crucial
to the development of a new outlet center is having lead tenants committed to
the outlet center early in the process. In management's view, lead tenants are
manufacturers and retailers that, during the development of an outlet center,
attract other high-quality tenants to the outlet center and provide for a
well-balanced and diversified mix of merchandise that will attract consumers to
the outlet center. During the six months ended June 30, 1997, no group of
tenants under common control accounted for more than 6.9% of the gross revenues
of the Company or occupied more than 6.1% of the total GLA of the Company.
S-8
<PAGE>
The following list includes some of the lead tenants in the Company's outlet
centers based on leases executed as of June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF % OF LEASED
TENANT STORES GLA
- --------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
PHILLIPS-VAN HEUSEN:
BASS......................................................... 18 2.02%
VAN HEUSEN................................................... 22 1.62
GEOFFREY BEENE............................................... 21 1.57
IZOD......................................................... 15 0.57
GANT......................................................... 6 0.29
--- -----
SUBTOTAL PHILLIPS-VAN HEUSEN........................... 82 6.07
DRESS BARN, INC.:
WESTPORT, LTD./WESTPORT WOMAN/DRESS BARN..................... 27 3.05
SBX.......................................................... 3 0.23
--- -----
SUBTOTAL DRESS BARN, INC............................... 30 3.28
CASUAL CORNER GROUP, INC.:
CASUAL CORNER OUTLET......................................... 16 1.29
PETITE SOPHISTICATE.......................................... 16 0.70
CASUAL CORNER WOMAN.......................................... 9 0.41
--- -----
SUBTOTAL CASUAL CORNER GROUP, INC...................... 41 2.40
DESIGN'S INC./BOSTON TRADER.................................... 17 2.37
SARA LEE:
L'EGGS/HANES/BALI/PLAYTEX.................................... 20 1.56
CHAMPION..................................................... 6 0.35
COACH LEATHER................................................ 7 0.34
SOCKS GALORE................................................. 3 0.07
--- -----
SUBTOTAL SARA LEE...................................... 36 2.32
BUGLE BOY...................................................... 18 2.08
SAKS OFF 5TH AVENUE............................................ 6 2.06
MIKASA......................................................... 15 2.05
SPRINGMAID-WAMSUTTA............................................ 13 1.64
OSHKOSH B'GOSH/GENUINE KIDS.................................... 23 1.63
REEBOK......................................................... 10 1.55
CARTERS........................................................ 18 1.53
CORNING-REVERE................................................. 18 1.51
ANN TAYLOR..................................................... 8 1.49
JONES NEW YORK................................................. 16 1.41
VANITY FAIR/LEE/WRANGLER/BARBIZON.............................. 3 1.28
READING CHINA & GLASS.......................................... 3 1.25
NIKE........................................................... 6 1.04
POLO/RALPH LAUREN.............................................. 7 1.02
COUNTY SEAT.................................................... 6 1.01
JOCKEY......................................................... 15 0.91
AMERICAN EAGLE OUTFITTERS...................................... 11 0.77
ESPRIT......................................................... 5 0.72
DANSKIN........................................................ 8 0.67
EDDIE BAUER.................................................... 5 0.66
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF LEASED
TENANT STORES GLA
- --------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
GUESS?......................................................... 6 0.61%
BROOKS BROTHERS................................................ 6 0.53
LEVI'S OUTLET.................................................. 6 0.49
J. CREW........................................................ 4 0.46
BOSE........................................................... 7 0.46
DONNA KARAN.................................................... 6 0.44
SONY........................................................... 4 0.38
TOMMY HILFIGER................................................. 5 0.32
HE-RO GROUP.................................................... 4 0.28
NORDIC TRACK................................................... 6 0.28
NAUTICA........................................................ 5 0.28
ANNE KLEIN..................................................... 3 0.16
LAURA ASHLEY................................................... 2 0.15
ELLEN TRACY.................................................... 2 0.12
FIRST CHOICE/ESCADA............................................ 3 0.11
--- -----
TOTAL.................................................. 489 47.79%
--- -----
--- -----
</TABLE>
LEASE EXPIRATIONS
The following table sets forth, as of June 30, 1997, tenant lease
expirations for the next ten years at the Company's factory outlet centers
(assuming that none of the tenants exercise any renewal option and including
leases at factory outlet centers owned through joint venture partnerships):
<TABLE>
<CAPTION>
LEASE EXPIRATIONS--OUTLET CENTERS
% OF TOTAL
ANNUALIZED
NUMBER OF ANNUALIZED MINIMUM RENT
LEASES APPROXIMATE MINIMUM RENT OF REPRESENTED BY
YEAR EXPIRING GLA EXPIRING LEASES EXPIRING LEASES
- -------------------------------- ------------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C>
1997............................ 134 393,813 $ 5,030,703 5.94%
1998............................ 167 538,468 7,415,045 8.75
1999............................ 260 860,339 12,265,532 14.47
2000............................ 331 1,064,815 16,687,975 19.69
2001............................ 358 1,179,216 18,937,029 22.34
2002............................ 172 614,697 9,547,721 11.27
2003............................ 47 223,622 3,469,225 4.09
2004............................ 46 331,949 4,562,498 5.38
2005............................ 39 209,443 3,242,303 3.83
2006............................ 24 159,276 2,224,858 2.63
Thereafter...................... 11 137,657 1,365,974 1.61
</TABLE>
S-10
<PAGE>
GROWTH AND FINANCING STRATEGIES
GROWTH STRATEGIES
The Company intends, on a long-term basis, to increase its FFO per share 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. In order to achieve
the foregoing objective, the Company employs the following strategies:
- 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, leasing, operating and marketing expertise to
improve such centers through expansion and/or remerchandising or
reletting. Properties may be acquired separately or as part of a
portfolio, and may be acquired for cash and/or in exchange for equity
securities of the Company. In accordance with the terms of its joint
venture partnership agreement, the Company intends to acquire the 25%
ownership interest of its joint venture partner in Buckeye Factory Shops
Limited Partnership for $23.1 million (including the repayment of $22.6
million of mortgage indebtedness relating to such property) concurrently
with the completion of the Offering. The Company has entered into binding
agreements to acquire, subject to the satisfactory completion of its due
diligence and other customary closing conditions, four factory outlet
centers containing a total of approximately 850,000 square feet of GLA for
an aggregate purchase price of approximately $131.5 million. These
properties contain a diverse mix of nationally and internationally
recognized manufacturers and retailers of upscale designer and brand-name
products consistent with the Company's existing factory outlet portfolio.
The Company believes that the underlying demographics and location of
these centers coupled with management's expertise in improving tenant mix,
operating procedures and enhancing cash flows provide an attractive
long-term investment opportunity. In addition, the Company is engaged in
negotiations with several other unrelated third parties to acquire other
factory outlet centers that contain manufacturers and retailers of upscale
designer and brandname products. There can be no assurance that the
Company will be successful in completing any acquisitions during the
foreseeable future, or that the final terms of any such acquisitions will
be as favorable as the Company has experienced in prior transactions.
- 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. In March
1997, the Company commenced construction on Lebanon Factory Shops located
east of Nashville, Tennessee. Lebanon Factory Shops, which will contain
approximately 208,000 square feet of GLA, has a total expected development
cost of approximately $27.5 million and is expected to open in the second
quarter of 1998.
- 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. The Company
expects to open approximately 225,000 square feet of GLA during the
remainder of 1997 in connection with planned expansions of existing
centers. As of June 30, 1997, the Company owned, or held under long-term
lease, land contiguous to its outlet centers sufficient to construct
additional phases totaling approximately 1,593,000 square feet of GLA. The
Company also holds options to purchase property adjoining certain of its
existing factory outlet centers upon which additional expansions could be
constructed.
FINANCING STRATEGIES
The Offering represents one of a series of steps the Company has taken since
June, 1996 to strengthen its financial condition and better position the Company
for future growth. These steps have included (i)
S-11
<PAGE>
the arranged private placement of the Preferred Securities for aggregate
proceeds of $60.0 million (the "Private Placement"), (ii) the consummation of an
exchange offer in which the Company issued approximately 6.7 million shares of
Common Stock in exchange for approximately 4.2 million shares of the Convertible
Preferred Stock, (iii) the closing of two equity offerings generating aggregate
net proceeds of approximately $77.0 million and (iv) the closing of various loan
facilities with a financial institution providing for aggregate borrowings of
$428.3 million. Through these transactions the Company has substantially
increased its level of common equity, reduced its exposure to refinancing risk
and provided financial resources to further its property acquisition and
development activities.
As a result of the Offering, the Company will further reduce its leverage
ratios and enhance its financial flexibility. At June 30, 1997, the Company had
a ratio of debt-to-total market capitalization of approximately 54.0%. The
debt-to-total market capitalization ratio, which is based upon market values of
equity and fluctuates with changes in the price of the Company's equity
securities, differs from debt-to-book capitalization ratios which are based upon
book values. As adjusted for the Offering and the Private Placement (assuming a
purchase price per Preferred Security of $13.75) (the "Transactions"), the pro
forma debt-to-total market capitalization ratio at June 30, 1997 was 42.3%.
Immediately following the Offering, $51.2 million, or 10.4%, of the Company's
total indebtedness will bear interest at fixed interest rates and $439.9
million, or 89.6%, of such indebtedness will bear interest at variable interest
rates. Of such variable rate indebtedness, $357.4 million is scheduled to
convert to a fixed rate of 7.782% per annum in November 1998. Additionally,
$383.7 million, or 87.2% of the Company's aggregate variable rate indebtedness,
will be subject to various interest rate protection contracts that reduce the
Company's exposure to significant increases in interest rates. At June 30, 1997,
the Company's outstanding indebtedness had a weighted average maturity of 6.3
years and bore interest at a weighted average rate of 7.3% per annum. As
adjusted for the Offering, the Company's pro forma indebtedness at June 30, 1997
had a weighted average maturity of 6.8 years and bore interest at a weighted
average rate of 7.2%.
The repayment of certain indebtedness with a portion of the net proceeds
from the Offering (and related release of certain mortgages) will enable the
Company to pledge two of its existing factory outlet centers as collateral under
the Revolving Loan. The amount available to be drawn under the Revolving Loan is
based upon the net cash flow of the properties pledged as collateral thereunder.
Management intends to use any borrowings under the Revolving Loan to fund its
property acquisition and development activities.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered..................... 10,000,000 shares (assuming the Underwriters'
over- allotment option to purchase up to
1,500,000 shares of Common Stock is not
exercised). See "Underwriting."
Common Stock to be Outstanding after the
Offering............................... 25,794,951 shares (1).
New York Stock Exchange Symbol........... PRT.
Use of Proceeds.......................... The net proceeds from the Offering will be used
(i) to repay certain outstanding indebtedness,
(ii) to acquire the 25% ownership interest of
the Company's joint venture partner in Buckeye
Factory Shops Limited Partnership, (iii) to fund
development, acquisition and construction
activities, and (iv) for general corporate
purposes. See "Use of Proceeds" and
"Capitalization."
</TABLE>
- ------------------------
(1) Excludes 8,505,472 shares of Common Stock exchangeable (at the Company's
option in lieu of cash) for a like number of common units of partnership
interest (the "Common Units") held by the limited partners of the Operating
Partnership, 4,363,636 shares of Common Stock issuable upon conversion or
exchange of the Preferred Securities, and 1,099,750 shares of Common Stock
reserved for issuance pursuant to the Company's Stock Incentive Plans as of
June 30, 1997.
S-12
<PAGE>
DISTRIBUTION POLICY
The Company currently intends to continue to pay regular quarterly
distributions on its Common Stock and to distribute amounts sufficient to
maintain its status as a REIT. Distributions are reviewed quarterly by the Board
of Directors and future distributions will depend upon factors deemed relevant
by the Board of Directors including operating performance, cash requirements,
covenants contained in the Company's various debt instruments and the
preferential rights of any other shares or series of shares. Although the
Company intends to continue to make quarterly distributions to its stockholders,
no assurance can be given as to the amounts to be distributed in the future. See
"Price Range of Common Stock and Distribution History" herein and "Description
of Preferred Stock" in the accompanying Prospectus."
SELECTED FINANCIAL DATA
The following selected financial data for the six months ended June 30, 1997
and 1996, the years ended December 31, 1996 and 1995, the periods from January
1, 1994 to March 21, 1994 and March 22, 1994 to December 31, 1994 and the two
years 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 two 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 The Prime Group, Inc. in
connection with the Company's initial public offering. Because of the Company's
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.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRIME RETAIL PROPERTIES
(COMBINED)
PRIME RETAIL, INC. ------------------------
--------------------------------------------------------- YEAR
PERIOD FROM PERIOD FROM ENDED
SIX MONTHS ENDED YEAR ENDED MARCH 22 JANUARY 1 DECEMBER
JUNE 30 DECEMBER 31 TO TO 31
-------------------- -------------------- DECEMBER 31, MARCH 21, ---------
1997 1996 1996 1995 1994 1994 1993
--------- --------- --------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Base rents................................ $ 37,072 $ 25,530 $ 54,710 $ 46,368 $ 28,657 $ 3,670 $ 14,298
Percentage rents.......................... 1,390 811 1,987 1,520 1,404 187 709
Tenant reimbursements..................... 17,918 12,034 25,254 22,283 11,858 2,113 5,370
Income from investment partnerships....... (60) 609 1,239 1,729 453 336 821
Interest and other........................ 5,055 2,297 5,850 5,498 2,997 24 602
--------- --------- --------- --------- ------------- ------------- ---------
Total revenues............................ 61,375 41,281 89,040 77,398 45,369 6,330 21,800
EXPENSES
Property operating........................ 13,655 9,415 20,421 17,389 9,952 1,927 5,046
Real estate taxes......................... 4,789 2,485 5,288 4,977 2,462 497 1,558
Depreciation and amortization............. 12,871 8,999 19,256 15,438 9,803 2,173 7,632
Corporate general and administrative...... 2,619 1,859 4,018 3,878 2,710 -- --
Interest.................................. 18,872 12,204 24,485 20,821 9,485 3,280 8,928
Property management fees.................. -- -- -- -- -- 299 777
Other charges............................. 1,493 7,212 8,586 2,089 1,503 562 1,732
--------- --------- --------- --------- ------------- ------------- ---------
Total expenses............................ 54,299 42,174 82,054 64,592 35,915 8,738 25,673
--------- --------- --------- --------- ------------- ------------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS... 7,076 (893) 6,986 12,806 9,454 (2,408) (3,873)
(Income) loss allocated to minority
interests............................... (5,263) 6,470 2,092 5,364 5,204 -- --
--------- --------- --------- --------- ------------- ------------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... 1,813 5,577 9,078 18,170 14,658 (2,408) (3,873)
Extraordinary item........................ -- (1,017) (1,017) -- -- -- --
--------- --------- --------- --------- ------------- ------------- ---------
NET INCOME (LOSS)......................... 1,813 4,560 8,061 18,170 14,658 $ (2,408) $ (3,873)
------------- ---------
------------- ---------
Income allocated to preferred
shareholders............................ 6,186 8,236 14,236 20,944 16,290
--------- --------- --------- --------- -------------
NET LOSS APPLICABLE TO COMMON SHARES...... $ (4,373) $ (3,676) $ (6,175) $ (2,774) $ (1,632)
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
NET LOSS PER COMMON SHARE................. $ (0.29) $ (1.22) $ (0.75) $ (0.96) $ (0.57)
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
<CAPTION>
1992
---------
<S> <C>
REVENUES
Base rents................................ $ 10,905
Percentage rents.......................... 654
Tenant reimbursements..................... 3,675
Income from investment partnerships....... 66
Interest and other........................ 390
---------
Total revenues............................ 15,690
EXPENSES
Property operating........................ 3,986
Real estate taxes......................... 817
Depreciation and amortization............. 6,397
Corporate general and administrative...... --
Interest.................................. 8,991
Property management fees.................. 626
Other charges............................. 1,930
---------
Total expenses............................ 22,747
---------
INCOME (LOSS) BEFORE MINORITY INTERESTS... (7,057)
(Income) loss allocated to minority
interests............................... --
---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM... (7,057)
Extraordinary item........................ --
---------
NET INCOME (LOSS)......................... $ (7,057)
---------
---------
Income allocated to preferred
shareholders............................
NET LOSS APPLICABLE TO COMMON SHARES......
NET LOSS PER COMMON SHARE.................
</TABLE>
S-13
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
PRIME RETAIL PROPERTIES
(COMBINED)
PRIME RETAIL, INC. ------------------------
--------------------------------------------------------- YEAR
PERIOD FROM PERIOD FROM ENDED
SIX MONTHS ENDED YEAR ENDED MARCH 22 JANUARY 1 DECEMBER
JUNE 30 DECEMBER 31 TO TO 31
-------------------- -------------------- DECEMBER 31, MARCH 21, ---------
1997 1996 1996 1995 1994 1994 1993
--------- --------- --------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
Funds from operations..................... $ 20,838 $ 14,696(1) $ 33,768(1) $ 27,996 $ 21,476 $ 139 $ 4,351
Distributions declared per common share... $ 0.590 $ 0.590(2) $ 1.18(2) $ 1.18 $ 0.623 -- --
Total factory outlet center GLA at end of
period (in thousands)................... 6,138(3) 4,331 5,780(3) 4,331 3,382 1,839 1,839
Number of factory outlet centers at end of
period.................................. 24(3) 17 21(3) 17 14 7 7
<CAPTION>
1992
---------
<S> <C>
OTHER DATA
Funds from operations..................... $ (628)
Distributions declared per common share... --
Total factory outlet center GLA at end of
period (in thousands)................... 888
Number of factory outlet centers at end of
period.................................. 5
</TABLE>
<TABLE>
<CAPTION>
PRIME
RETAIL
PRIME RETAIL, INC. PROPERTIES
----------------------------------------------------- (COMBINED)
-----------
JUNE 30 DECEMBER 31
-------------------- ------------------------------- MARCH 21,
1997 1996 1996 1995 1994 1994
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Rental property (before accumulated depreciation)...... $ 703,619 $ 482,612 $ 640,759 $ 454,480 $ 376,181 $ 180,170
Net investment in rental property...................... 634,618 434,340 583,085 414,290 349,513 164,159
Total assets........................................... 717,552 460,792 666,803 462,405 385,930 186,034
Bonds and notes payable................................ 534,439 318,777 499,523 305,954 214,025 188,378
Total liabilities...................................... 559,483 349,676 527,594 326,465 233,236 198,244
Shareholders' equity (deficit)......................... 158,069 110,686 139,209 121,484 127,651 (12,210)
<CAPTION>
DECEMBER 31
--------------------
1993 1992
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA
Rental property (before accumulated depreciation)...... $ 185,394 $ 131,413
Net investment in rental property...................... 169,674 122,152
Total assets........................................... 190,685 145,989
Bonds and notes payable................................ 184,037 142,005
Total liabilities...................................... 197,400 149,411
Shareholders' equity (deficit)......................... (6,715) (3,422)
</TABLE>
- ------------------------
NOTES:
(1) Excludes a nonrecurring charge of $6,131 related to the execution of a
binding loan commitment related to the pre-payment of long-term debt
recorded during the three months ended June 30, 1996.
(2) Excludes a special cash distribution of $0.145 per common share relating to
the Company's exchange offer completed in June 1996.
(3) Includes four factory outlet centers with an aggregate GLA of 800,000 square
feet operated under joint venture partnerships with unrelated third parties.
S-14
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering after payment of all expenses of the
Offering (including the underwriting discount) payable by the Company, are
expected to be $132.4 million ($152.4 million if the Underwriters'
over-allotment option is exercised in full). The Company will use the net
proceeds of the Offering to acquire 10,000,000 additional Common Units
(11,500,000 additional Common Units if the Underwriters' over-allotment option
is exercised in full) in the Operating Partnership. 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 from the Offering.
The Operating Partnership will use a portion of the funds it receives from
the Company to (i) repay indebtedness of $43.3 million and (ii) acquire the 25%
ownership interest of the Company's joint venture partner in Buckeye Factory
Shops Limited Partnership for $23.1 million (including the repayment of $22.6
million of mortgage indebtedness relating to such property). The balance of such
funds, or $66.0 million (approximately $86.0 million if the Underwriters'
over-allotment option is exercised in full), will be used by the Operating
Partnership to fund development and construction activities, acquisitions, and
for general corporate purposes. As of June 30, 1997, the indebtedness to be
repaid in connection with the Offering had a weighted average interest rate of
8.16% per annum and a weighted average maturity of 1.4 years. All of such
indebtedness was incurred within the past 12 months in order to finance the
construction or acquisition of certain Properties.
Upon the repayment of indebtedness described above, the Company will incur
an extraordinary loss of approximately $1.0 million relating to the write-off of
certain unamortized deferred financing costs. This extraordinary loss will have
no effect on distributable net cash flow of the Company and will be excluded
from the calculation of FFO in accordance with the NAREIT definition.
Pending the above uses, the net proceeds may be invested in short-term
income producing investments such as investment grade commercial paper,
government and government agency securities, money market funds that invest in
government securities, certificates of deposit, or interest-bearing bank
accounts.
S-15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 on a historical basis and as adjusted to reflect the completion of the
Transactions, including the application of the net proceeds therefrom as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
--------------------------
<S> <C> <C>
AS
HISTORICAL ADJUSTED
---------- --------------
Long-term debt:
Variable rate (1)................................................................. $ 476,255 $ 439,955(2)
Fixed rate........................................................................ 58,184 51,184
---------- --------------
Total long-term debt.......................................................... 534,439 491,139
Shareholders' equity:
Minority interests.................................................................... -- --
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock, $0.01 par value, liquidation
preference $25 per share, 2,300,000 shares issued and outstanding............... 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock, $0.01 par
value, liquidation preference $25 per share, 2,981,800 shares issued and
outstanding..................................................................... 30 30
Series C Preferred Stock, $0.01 par value, liquidation preference $13.75 per
share, no shares and 4,363,636 shares issued and outstanding on a historical and
as adjusted basis, respectively(3).............................................. -- 44
Common Stock, 75,000,000 shares authorized, $0.01 par value, 15,794,951 and 25,794,951
shares issued and outstanding on a historical and as adjusted basis, respectively... 158 258
Additional paid-in capital............................................................ 197,074 388,130
Distributions in excess of net income(4).............................................. (39,216) (40,211)
---------- --------------
Total shareholders' equity........................................................ 158,069 348,274
---------- --------------
Total capitalization.............................................................. $ 692,508 $ 839,413
---------- --------------
---------- --------------
</TABLE>
- ------------------------
NOTES:
(1) Of such variable rate indebtedness, $357,362 is scheduled to convert to a
fixed rate of 7.782% per annum in November 1998.
(2) Immediately following the Offering, $383,665, or 87.2% of the Company's
aggregate variable rate indebtedness, will be subject to various interest
rate protection contracts that reduce the Company's exposure to significant
increases in interest rates.
(3) The Preferred Securities may take the form of shares of preferred stock in
the Company or preferred units of partnership interest in the Operating
Partnership. The as adjusted amounts reflect the issuance of such security
as preferred stock. If the issuance of such security is in the form of
preferred units, the as adjusted amounts for minority interests, Series C
Preferred Stock, and additional paid-in capital are $58,800, $0, and
$329,374, respectively. See "Recent Developments."
(4) The as adjusted amount reflects an estimated extraordinary loss of $995
relating to the write-off of certain unamortized deferred financing costs
upon prepayment of certain indebtedness with a portion of the net proceeds
of the Offering.
S-16
<PAGE>
PRICE RANGE OF COMMON STOCK
AND DISTRIBUTION HISTORY
Commencing on August 27, 1997, the Common Stock, including the shares
offered hereby, will be listed on the New York Stock Exchange. The Common Stock
commenced trading on the Nasdaq National Market on March 15, 1994 and continued
trading thereon through August 26, 1997.
The following table sets forth the high and low sales prices of the Common
Stock, as reported on the Nasdaq National Market, and the cash distributions
paid in respect of the Common Stock, during the periods indicated:
<TABLE>
<CAPTION>
SALES PRICE PER
SHARE CASH
-------------------- DISTRIBUTIONS
HIGH LOW PAID(1)
--------- --------- ------------
<S> <C> <C> <C>
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................................................................. 12.00 10.88 0.295
Third Quarter.................................................................. 12.25 11.00 0.440(2)
Fourth Quarter................................................................. 12.75 11.38 0.295
1997
First Quarter.................................................................. 13.38 12.00 0.295
Second Quarter................................................................. 13.63 11.88 0.295
Third Quarter (through August 26, 1997)........................................ 14.56 13.13 0.295
</TABLE>
- ------------------------
NOTES:
(1) For 1995 and 1996, all of the cash distributions paid represented a return
of capital for Federal income tax purposes.
(2) Includes a special cash distribution of $0.145 per share of Common Stock
paid by the Company in connection with the completion of its exchange offer
in July, 1996.
The last reported per share sales 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 Supplement. As of July 31, 1997, there were 333 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 the Common
Stock. However, no assurances can be given as to the amount of future
distributions because such distributions 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 subject to the preferential
rights of any other shares or series of shares including the Senior Preferred
Stock and the Convertible Preferred Stock. See "Description of Preferred Stock"
and "Description of Common Stock" in the accompanying Prospectus.
S-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Company and the Underwriters (the "Underwriting Agreement"), the
Company has agreed to sell to 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 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. ........................................................ 5,000,000
Morgan Keegan & Company, Inc. ................................................................. 2,500,000
Stifel, Nicolaus & Company Incorporated........................................................ 2,500,000
-----------------
Total...................................................................................... 10,000,000
-----------------
-----------------
</TABLE>
The Underwriters have advised the Company 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 Supplement and may offer the Common Stock to
certain dealers at such offering price less a concession not in excess of $0.37
per share of Common Stock. The Underwriters may allow, and such dealers may
reallow, a concession not to exceed $0.10 per share of Common Stock on certain
sales to other dealers. After the shares of Common Stock have been released for
sale to the public, such offering prices and concessions may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 1,500,000
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 Supplement.
The Company has agreed, subject to certain exceptions, not to offer, sell,
contract to sell or otherwise dispose of any shares of the Common Stock or any
security substantially similar thereto, or any other security exchangeable for
shares of Common Stock or any security substantially similar thereto, for a
period of 90 days after the date of this Prospectus Supplement without the prior
written consent of the Representative, except for any stock issued by the
Company upon conversion or exchange of the Preferred Securities, Convertible
Preferred Stock or Common Units or pursuant to any stock incentive plan of the
Company.
Until the distribution of the shares of Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
to bid for or purchase the Common Stock. As an exception to these rules, the
Representative is permitted to engage in certain transactions that stabilize the
price of the Common Stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing, or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more Common Stock than are set
forth on the cover page of this Prospectus Supplement, the Representative may
reduce that short position by purchasing Common Stock in the open market. The
Representative may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representative may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases shares of
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, it may reclaim the
S-18
<PAGE>
amount of the selling concession from the Underwriters and selling group members
who sold the Common Stock as part of the Offering.
In general, purchases of securities for the purpose of stabilization to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representative will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
In the Underwriting Agreement, the Company and the Operating Partnership
have agreed, jointly and severally, to indemnify the Underwriters against
certain liabilities, including civil liabilities under the Securities Act of
1933, as amended (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 Representative for its reasonable
out-of-pocket expenses incurred in connection with the Offering.
The Company will pay the Representative a fee of $700,000 ($805,000 in the
event the Underwriters' over-allotment option is exercised in full) for
financial advisory and related services rendered in connection with the
Offering.
Commencing on August 27, 1997, the Common Stock will be listed on the New
York Stock Exchange. Prior thereto, the Common Stock was quoted in the Nasdaq
National Market. There can be no assurance, however, that the Company will be
able to maintain its listing of the Common Stock on the New York Stock Exchange
or that an active trading market will be maintained in such stock.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Winston &
Strawn, Chicago, Illinois. In addition, certain legal matters will be passed
upon 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 financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the year ended December 31, 1996, the
statements of revenue and certain expenses of Grove City Factory Shops and the
JMJ Acquired Properties for the year ended December 31, 1995 included in the
Company's Current Report on Form 8-K filed November 1, 1996, as amended by Form
8-K/A filed December 31, 1996 and Form 8-K/A-2 filed January 30, 1997, and the
statements of revenue and certain expenses of the Benderson Acquired Properties
and Buckeye Factory Shops Limited Partnership for the year ended December 31,
1996 included in the Company's Current Report on Form 8-K filed August 8, 1997,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon included therein and incorporated herein by reference.
Such financial statements are incorporated herein by reference in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
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PROSPECTUS
$300,000,000
PRIME RETAIL, INC.
PREFERRED STOCK, DEPOSITARY SHARES,
PREFERRED STOCK WARRANTS,
COMMON STOCK AND COMMON STOCK WARRANTS
------------------
Prime Retail, Inc. (the "Company") may from time to time offer in one or
more series (i) shares of preferred stock, $.01 par value per share ("Preferred
Stock"), of the Company, (ii) shares of Preferred Stock represented by
depositary shares (the "Depositary Shares"), (iii) warrants to purchase shares
of Preferred Stock (the "Preferred Stock Warrants"), (iv) shares of Common
Stock, $.01 par value per share ("Common Stock"), of the Company, or (v)
warrants to purchase shares of Common Stock (the "Common Stock Warrants") with
an aggregate public offering price of up to $300,000,000 (or its equivalent in
another currency based on the exchange rate at the time of sale) in amounts, at
prices and on terms to be determined at the time of offering. The Preferred
Stock, Depositary Shares, Preferred Stock Warrants, Common Stock and Common
Stock Warrants (collectively, the "Offered Securities") may be offered,
separately or together, in separate series, in amounts, at prices and on terms
to be set forth in one or more supplements to this Prospectus (each a
"Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Preferred
Stock, the specific title and stated value, any dividend, liquidation,
redemption, conversion, exchange, voting and other rights, and any initial
public offering price; (ii) in the case of Depositary Shares, the fractional
share of Preferred Stock represented by each such Depositary Share; (iii) in the
case of Preferred Stock Warrants, a description of the Preferred Stock for which
each warrant will be exercisable and the duration, offering price, exercise
price and detachability; (iv) in the case of Common Stock, any initial public
offering price; and (v) in the case of Common Stock Warrants, the duration,
offering price, exercise price and detachability. In addition, such specific
terms may include limitations on direct or beneficial ownership and restrictions
on transfer of the Offered Securities, in each case as may be appropriate to
preserve the status of the Company as a real estate investment trust ("REIT")
for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
SEE "RISK FACTORS" BEGINNING AT PAGE 4 OF THIS PROSPECTUS FOR A DESCRIPTION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PURCHASERS OF THE OFFERED
SECURITIES.
---------------------
The Offered Securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in an accompanying Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of a Prospectus Supplement describing the method and terms of
the offering of such Offered Securities.
------------------------
<PAGE>
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.
The date of this Prospectus is August 27, 1997
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained or
incorporated by reference in this Prospectus or an applicable Prospectus
Supplement and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any underwriter,
dealer or agent. This Prospectus and any applicable Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus or any Prospectus Supplement nor any sale made hereunder shall under
any circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or thereof.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement as well as periodic reports, proxy statements and other information
filed by the Company with the Commission may be inspected at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60601 and Seven World Trade
Center, Suite 1300, New York, New York 10048. In addition, registration
statements and certain other documents filed with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at HTTP://WWW.SEC.GOV.
The Company has filed with the Commission a registration statement (the
"Registration Statement") (of which this Prospectus is a part) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Offered Securities. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Offered Securities, reference is hereby made to
the Registration Statement and such exhibits and schedules, which may be
obtained from the Commission at its principal office in Washington, D.C. upon
payment of the fees prescribed by the Commission. The Registration Statement has
been filed with the Commission through EDGAR.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company under the Exchange Act with the
Commission are incorporated in this Prospectus by reference and are made a part
hereof:
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
2. Quarterly Report on Form 10-Q for the quarters ended March 31, 1997 and
June 30, 1997.
3. The Company's Current Reports on Form 8-K dated January 30, 1997,
February 13, 1997, August 8, 1997 and August 11, 1997 and the Company's
Current Report on Form 8-K dated November 1, 1996, as amended by Form
8-K/A filed December 31, 1996 and Form 8-K/A-2 dated January 30, 1997.
Each document filed by the Company subsequent to the date of this Prospectus
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to
termination of the offering of all Offered Securities to which this Prospectus
relates shall be deemed to be incorporated by reference in this Prospectus and
shall be a part hereof from the date of filing of such document. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed
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<PAGE>
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained in this Prospectus (in the case of a statement in a
previously-filed document incorporated or deemed to be incorporated by reference
herein), in any accompanying Prospectus Supplement relating to a specific
offering of Offered Securities or in any other subsequently filed document that
is also incorporated or deemed to be incorporated by reference herein, modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any accompanying Prospectus Supplement. Subject to the foregoing,
all information appearing in this Prospectus and each accompanying Prospectus
Supplement is qualified in its entirety by the information appearing in the
documents incorporated by reference.
Copies of all documents which are incorporated by reference herein and in
any applicable Prospectus Supplement (not including the exhibits to such
information, unless such exhibits are specifically incorporated by reference in
such information) will be provided without charge to each person, including any
beneficial owner, to whom this Prospectus and such Prospectus Supplement are
delivered, upon written or oral request. Requests should be directed to the
Secretary of the Company, 100 East Pratt Street, Nineteenth Floor, Baltimore,
Maryland 21202 (telephone number: (410) 234-0782).
THE COMPANY
The Company is a self-administered and self-managed REIT that develops, owns
and operates factory outlet centers in the United States. Based upon industry
publications, the Company believes it is one of the largest owners and operators
of factory outlet centers in the United States. As of June 30, 1997, the
Company's portfolio included 24 factory outlet centers in 18 states with 6.1
million square feet of gross leasable area ("GLA") that was 94% leased. 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 Prime Retail, L.P. (the "Operating
Partnership"). The Company controls the Operating Partnership as its sole
general partner and is dependent upon the distributions or other payments from
the Operating Partnership in order to meet its financial obligations.
As of June 30, 1997, the Company held all of the Senior Preferred Units (the
"Senior Preferred Units") and Convertible Preferred Units (the "Convertible
Preferred Units") of partnership interests in the Operating Partnership. In
addition, the Company owned 65.0% of the Common Units of partnership interest in
the Operating Partnership (the "Common Units"). The balance of the Common Units
were held by the limited partners of the Operating Partnership (the "Limited
Partners").
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 the Company's Series A Senior Preferred Stock, $.01 par
value per share (the "Senior Preferred Stock"), and Series B Cumulative
Participating Convertible Preferred Stock, $.01 par value per share
("Convertible Preferred Stock"), respectively, prior to the payment by the
Operating Partnership of distributions in respect of Common Units. Pursuant to
the partnership agreement governing the Operating Partnership (the "Operating
Partnership Agreement"), distributions with respect to the Common Units held by
the Company and the Limited Partners are made pro rata to the holders thereof.
In March 1995, the National Association of Real Estate Investment Trusts
("NAREIT") established guidelines clarifying the definition of FFO (as so
modified, the "New Definition"). The Company reports FFO under both the old
definition employed by NAREIT (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
generally accepted accounting principles ("GAAP"). For purposes of the Operating
Partnership Agreement and determining whether the Threshold Amount has been
achieved, FFO is calculated using the Old Definition and is defined as net
income (loss) (determined
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<PAGE>
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.
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 Company is a Maryland corporation that was incorporated in July 1993.
The Company's executive offices are located at 100 East Pratt Street, Nineteenth
Floor, Baltimore, Maryland 21202 and its telephone number is (410) 234-0782.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
As of June 30, 1997, The Prime Group, Inc. ("PGI") owned Common Units
representing a 32.0% common equity interest in the Operating Partnership.
Because of PGI's ownership interest in the Operating Partnership and the fact
that Michael W. Reschke, Chairman of the Board and Director, and Glenn D.
Reschke, Executive Vice President, 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.
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 Internal Revenue Code of 1986, as amended (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.
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.
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 thus would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate tax rates. Moreover, unless entitled
to relief under certain statutory provisions, 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.
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<PAGE>
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.
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, 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.
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 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 factory 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 factory 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.
COMPETITION FROM OTHER FACTORY OUTLET CENTERS. There are numerous
developers and real estate companies that are engaged in the development or
ownership of factory outlet centers and compete with the Company in seeking
merchants for factory 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 factory outlet centers are located in
relatively undeveloped areas, there are often other potential sites near the
Company's factory outlet centers that may be developed into factory outlet
centers by competitors. As of June 30, 1997, 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), were located within twelve miles of competing factory outlet centers and
thus are subject to existing competition. The development of an outlet center
with a more convenient location or lower rents may attract 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 factory outlet centers.
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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 factory outlet centers are typically
constructed at least 20 miles from the nearest regional mall. These locations
are generally less attractive to consumers because they tend to require more
travel time. A reduction of pricing discounts by manufacturers, increased
competition by traditional retailers or a perception by consumers that such
pricing differentials are not significant would reduce the competitive advantage
offered by outlet stores to consumers and, consequently, adversely affect the
business, revenues and/or sales volume of the Company's factory 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.
LIMITED OPERATING HISTORY AND RAPID GROWTH. Since the Company opened its
first factory outlet center in 1989, its outlet center portfolio has increased
to approximately 6.1 million square feet of GLA as of June 30, 1997. The Company
expects to continue to experience growth through the development of new factory
outlet centers, the expansion of existing factory outlet centers and the
selective acquisition of factory outlet 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.
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.
RISKS OF ACQUISITION ACTIVITIES
The Company intends to continue to pursue acquisitions of factory outlet
centers in the United States. The Company can provide no assurance as to whether
any of the potential acquisitions it is presently exploring will be consummated
nor as to the final terms or conditions upon which any such transactions may be
completed. Acquisitions of factory outlet centers, like other commercial real
estate, entail risks that the investment will fail to perform in accordance with
expectations. The success of the Company's acquisition strategy will be
determined by numerous factors, including the Company's ability to identify
suitable acquisition opportunities, the degree of competition for such
acquisitions, the Company's ability to finance such acquisitions on acceptable
terms, the financial performance of the properties following acquisition and the
ability of the Company to effectively integrate the operations of acquired
properties. The failure by the Company to achieve its acquisition plans or to
integrate or operate acquired facilities effectively may have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS OF DEVELOPMENT ACTIVITIES
The Company intends to continue to pursue 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, that occupancy
rates and rents at a completed project will not be sufficient to make the
project profitable, and that the Company may be unable to obtain any required
governmental
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approvals or permits. The occurrence of any of the foregoing may adversely
affect the ability of the Company to pay expected distributions or dividends to
stockholders.
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON INCURRENCE OF DEBT
Following the initial public offering in 1994, the Company established a
policy of not incurring debt that would result in a debt to total market
capitalization of more than 50%. In 1995, the Company modified this policy to
increase such limit to 60%. Such increase responded primarily to the substantial
decline in the market prices of the Company's publicly traded equity securities
and the significant increase in the Company's total debt related to its property
development activities. There can be no assurance, however, that this policy
will not be further modified to enable the Company to become more highly
leveraged. Moreover, the organizational documents of the Company do not contain
any limitation on the amount of indebtedness the Company might incur. If the
Company were to become more highly leveraged, the resulting increase in the
Company's debt service obligations could adversely affect the Company's
available cash flow and ability to make expected distributions to stockholders
and increase the risk of default on the Company's obligations.
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 factory outlet centers, changes in market rental rates, and the need to
periodically renovate, repair and relet space and to pay the costs thereof.
Equity real estate investments are relatively illiquid compared to most
financial assets and, therefore, tend to limit the ability of 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. 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 factory 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 available cash flow 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 factory 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 factory 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. If the Company is unable to promptly relet or renew its leases for all
or a substantial portion of the space currently leased, or if the rental rates
upon such renewal or reletting are
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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.
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.
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. 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.
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 Amended and Restated Articles of Incorporation
of the Company (the "Charter") 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
8
<PAGE>
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.
The Charter 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.
The board of directors of the Company (the "Board of Directors" or the
"Board") may, subject to the receipt of certain representations as required by
the Charter and a ruling from the Internal Revenue Service (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 limitations set forth in the Charter will
be deemed void and the shares purportedly transferred would be converted into
shares of a separate class of capital stock with no voting rights and no rights
to distributions. In addition, ownership, either directly or under the
applicable attribution rules of the Code, of the capital stock in excess of the
ownership limitations set forth in the Charter generally will result in the
conversion of those shares into shares of a separate class of capital stock with
no voting rights and no rights to distributions.
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 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.
9
<PAGE>
USE OF PROCEEDS
The Company is required by the terms of the Operating Partnership Agreement
to invest the net proceeds of any sale of any Offered Securities in exchange for
Preferred Units or Common Units (or warrants to purchase such units) with
preferences and rights corresponding to such Offered Securities. Unless
otherwise specified in the applicable Prospectus Supplement, the Company intends
to use the net proceeds from the sale of Offered Securities for general
corporate purposes, including the development or acquisition of additional
properties, the expansion and improvement of certain Properties, and the
repayment of certain indebtedness outstanding at such time. Further details
relating to the use of the net proceeds will be set forth in the applicable
Prospectus Supplement.
EXCESS OF COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS OVER EARNINGS
The following table sets forth the excess of fixed charges and preferred
stock dividends over earnings for the Company and Prime Retail Properties, the
predecessor to the Company (the "Predecessor"), for the periods indicated (in
thousands).
<TABLE>
<CAPTION>
THE COMPANY
- ------------------------------------------------------------------ THE PREDECESSOR (1)
-----------------------------------
SIX MONTHS YEAR ENDED DECEMBER
ENDED JUNE 30, YEAR ENDED DECEMBER 31, PERIOD MARCH 22 PERIOD JAN. 1 31,
- ---------------------- ------------------------ TO DEC. 31, TO MARCH 21, --------------------
1997 1996 1996 1995 1994 1994 1993 1992
- --------- ----------- ----------- ----------- ---------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (1,019) $ (10,427) $ (10,629) $ (11,312) $ (8,185) $ (2,366) $ (4,423) $ (7,500)
</TABLE>
- ------------------------
NOTE:
(1) Reflects results of operations of eleven predecessor partnerships, the 40%
interest in predecessor partnerships that previously owned two of the
Properties and the management and development operations acquired by the
Company in connection with its initial public offering in March 1994.
For purposes of the foregoing 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 or distributions.
GENERAL DESCRIPTION OF THE OFFERED SECURITIES
The Company may offer under this Prospectus Preferred Stock, Depositary
Shares, Preferred Stock Warrants, Common Stock, Common Stock Warrants or any
combination of the foregoing, either individually or as units consisting of two
or more Offered Securities. The aggregate offering price of Offered Securities
offered by the Company will not exceed $300,000,000. If Offered Securities are
offered as units, the terms of the units will be set forth in a Prospectus
Supplement.
DESCRIPTION OF PREFERRED STOCK
As of June 30, 1997, the Company had issued and outstanding 2,300,000 shares
of Preferred Stock designated as 10.5% Series A Senior Cumulative Preferred
Stock (the "Senior Preferred Stock") and 2,981,800 shares of Preferred Stock
designated as 8.5% Series B Cumulative Participating Convertible Preferred Stock
(the "Convertible Preferred Stock"). The Board has the authority to issue
14,824,200 additional shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof.
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 Company's Charter regarding Excess Stock (as defined therein), holders of
shares of the Senior Preferred Stock are entitled to receive, when and as
declared by the Board, out of funds legally available for the payment of
dividends, cumulative preferential cash
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<PAGE>
dividends in an amount per share of Senior Preferred Stock equal to $2.625 per
annum. 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. 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.
Holders of the Senior Preferred Stock do not have any voting rights, except (i)
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 will be entitled to vote for the election of
two additional directors of the Company; (ii) 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, 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 dividend and liquidation, dissolution and winding up rights; or (iii)
as otherwise from time to time required by law. 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. 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. See "Description of
Common Stock-- Restrictions on Ownership and Transfer."
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, 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 on
number of shares of Common Stock (or fraction thereof) into which a share of
Convertible Preferred Stock is convertible. Prior to August 27, 1997, the
Convertible Preferred Stock was quoted in the Nasdaq National Market under the
trading symbol "PRMEP." Commencing on August 27, 1997, the Convertible Preferred
Stock will be listed on the New York Stock Exchange under the symbol "PRT.PR."
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. On
and after March 31, 1999, the Convertible Preferred Stock may be redeemed for
cash at 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
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<PAGE>
benefit of any sinking fund. Holders of the Convertible Preferred Stock do not
have any voting rights, except (i) 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
will be entitled to vote for the election of two additional directors of the
Company; (ii) 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 shares of the Convertible Preferred Stock
outstanding at the time, 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 dividend and liquidation,
dissolution and winding up rights; or (iii) as otherwise from time to time
required by law. 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. Subject to
certain exceptions, holders of the Convertible Preferred Stock have the right,
as provided in the Charter, except in the case of Convertible Preferred Stock
called for redemption, to convert all or any of the Convertible Preferred Stock
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. 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
certain events. 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. See "Description of Common Stock--Restrictions on Ownership and
Transfer."
The preceding summary of the terms of the Senior Preferred Stock and the
Convertible Preferred Stock does not purport to be complete and is qualified in
its entirety by reference to the pertinent sections of the Charter.
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Charter and Bylaws (the "Bylaws") and any
applicable amendment to the Charter designating terms of a series of Preferred
Stock (a "Designating Amendment").
GENERAL
Subject to the limitations prescribed by Maryland law and the Charter, the
Board is authorized to fix the number of shares constituting each series of
Preferred Stock and the designations and powers, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereof, including such provisions as may be desired concerning
voting, redemption, dividends, dissolution or the distribution of assets,
conversion or exchange, and such other subjects or matters as may be fixed by
resolution of the Board or duly authorized committee thereof. The Preferred
Stock will, when issued, be fully paid and nonassessable by the Company.
The Prospectus Supplement relating to any Preferred Stock offered thereby
will contain the specific terms thereof, including, without limitation:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
12
<PAGE>
(4) The date from which dividends on such Preferred Stock shall accumulate,
if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred Stock
will be convertible into Common Stock of the Company, including the
conversion price (or manner of calculation thereof) and conversion
period;
(10) Whether interests in such Preferred Stock will be represented by
Depositary Shares;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(12) A discussion of certain material federal income tax considerations
applicable to such Preferred Stock;
(13) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(14) Any limitation on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(15) Any limitations on direct or beneficial ownership and restrictions on
transfer of such Preferred Stock, in each case as may be appropriate to
preserve the status of the Company as a REIT.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Stock and any Excess Stock of such class, and to all
equity securities of the Company other than those referred to in clauses (ii)
and (iii) below; (ii) on a parity with all equity securities issued by the
Company the terms of which specifically provide that such equity securities rank
on a parity with the Preferred Stock with respect to dividend rights and/or
rights upon liquidation, dissolution or winding up of the Company, as the case
may be; and (iii) junior to all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank senior to
the Preferred Stock with respect to dividend rights and/or rights upon
liquidation, dissolution or winding up of the Company, as the case may be. The
term "equity securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive
cash dividends, when, as and if declared by the Board, out of funds legally
available for the payment of cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Each such dividend
shall be payable to holders of record as they appear on the stock transfer books
of the Company on such record dates as shall be fixed by the Board.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board fails to declare a dividend
payable on a dividend payment date on any series of the Preferred Stock for
which dividends are non-cumulative, then the holders of such series of the
Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
13
<PAGE>
Unless otherwise specified in the Prospectus Supplement, if any shares of
Preferred Stock of any series are outstanding, no full dividends will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, 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 Preferred Stock of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends for the then current dividend period 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 Preferred Stock of such series. When dividends
are not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Stock of any series and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Preferred Stock of
such series, all dividends declared upon Preferred Stock of such series and any
other series of Preferred Stock ranking on a parity as to dividends with such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such series and such other series of
Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Preferred Stock of such series (which shall
not include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend) and such
other series of Preferred Stock bear to each other. No interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series 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, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period, no dividends (other than in shares of Common Stock or other equity
securities of the Company ranking junior to the Preferred Stock of such series
as to dividends and upon liquidation, dissolution or winding up of the Company)
shall be declared or paid or set aside for payment or other distribution or
shall be declared or made upon the Common Stock, Excess Stock or any other
equity securities of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, dissolution
or winding up of the Company, nor shall any shares of Common Stock, or any other
capital shares of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, dissolution
or winding up of the Company nor shall any Common Stock, Excess Stock or any
other equity securities of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, dissolution
or winding up of the Company, 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 such shares) by the Company (except by conversion into
or exchange for other equity securities of the Company ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation, dissolution
or winding up of the Company).
If, for any taxable year, the Company elects to designate as "capital gains
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 shares of beneficial
interest (the "Total Dividends"), then the portion of the Capital Gains Amount
that will be allocable to the holders of shares of 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 shares of Preferred Stock for the year and the denominator of
which shall be the Total Dividends.
14
<PAGE>
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Stock
will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend periods) to
the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of equity securities of the Company, the terms of such
Preferred Stock may provide that, if no such equity securities shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into the applicable equity securities
of the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all shares of any series
of Preferred Stock shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof irrevocably set apart for
payment for all past dividend periods and the then current dividend period, and
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of any series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for the then current dividend period, no shares of any
series of Preferred Stock shall be redeemed unless all outstanding Preferred
Stock of such series is simultaneously redeemed; PROVIDED, HOWEVER, that the
foregoing shall not prevent the purchase or acquisition of shares of Preferred
Stock of such series to preserve the REIT status of the Company or pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
Preferred Stock of such series. In addition, unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends on all
outstanding shares of any series of 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, and (ii) if such series of Preferred Stock does not
have a cumulative dividend, full dividends on the Preferred Stock of any series
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for the then current
dividend period, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of Preferred Stock of such series (except by conversion
into or exchange for equity securities of the Company ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation, dissolution
or winding up of the Company; PROVIDED, HOWEVER, that the foregoing shall not
prevent the purchase or acquisition of Preferred Stock of such series to
preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Preferred Stock of
such series.
If fewer than all of the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places
15
<PAGE>
where certificates for such Preferred Stock are to be surrendered for payment of
the redemption price; (v) that dividends on the shares to be redeemed will cease
to accrue on such redemption date; and (vi) the date upon which the holder's
conversion rights, if any, as to such shares shall terminate. If fewer than all
the shares of Preferred Stock of any series are to be redeemed, the notice
mailed to each such holder thereof shall also specify the number of shares of
Preferred Stock to be redeemed from each such holder. If notice of redemption of
any Preferred Stock has been given and if the funds necessary for such
redemption have been set aside by the Company in trust for the benefit of the
holders of any Preferred Stock so called for redemption, then from and after the
redemption date dividends will cease to accrue on such Preferred Stock, such
Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock, Excess Stock or any other class or
series of equity securities of the Company ranking junior to the Preferred Stock
in the distribution of assets upon any liquidation, dissolution or winding up of
the Company, the holders of each series of Preferred Stock shall be entitled to
receive out of assets of the Company legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference per share (set forth in the applicable Prospectus Supplement), plus
an amount equal to all dividends accrued and unpaid thereon (which shall not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Stock does not have a cumulative dividend). After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of 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 available assets of
the Company are insufficient to pay the amount of the liquidating distributions
on all outstanding Preferred Stock and the corresponding amounts payable on all
shares of other classes or series of equity securities of the Company ranking on
a parity with the Preferred Stock in the distribution of assets upon
liquidation, dissolution or winding up of the Company, then the holders of the
Preferred Stock and all other such classes or series of equity securities shall
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 shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of equity securities ranking junior
to the 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. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Whenever dividends on any shares of Preferred Stock shall be in arrears for
six or more consecutive quarterly periods, the holders of such shares of
Preferred Stock (voting separately as a class with all other series of Preferred
Stock upon which like voting rights have been conferred and are 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 ten
percent (10%) of any series of Preferred Stock so in arrears (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 meeting until (i) if such series of
Preferred Stock has a cumulative dividend, all dividends accumulated on such
shares of Preferred Stock for the past dividend periods and the then current
dividend period shall have been fully
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paid or declared and a sum sufficient for the payment thereof set aside for
payment or (ii) if such series of Preferred Stock does not have a cumulative
dividend, four consecutive quarterly dividends shall have been fully paid or
declared and a sum sufficient for the payment thereof set aside for payment. In
such case, the entire Board will be increased by two directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of the shares
of each series of 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 equity securities ranking senior to such series of
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up or reclassify any authorized
securities of the Company into any such equity securities, or create, authorize
or issue any obligation or security convertible into or evidencing the right to
purchase any such equity securities; or (ii) amend, alter or repeal the
provisions of the Company's Charter or the Designating Amendment for such series
of Preferred Stock, whether by merger, consolidation or otherwise (an "Event"),
so as to materially and adversely affect any right, preference, privilege or
voting power of such series of Preferred Stock or the holders thereof; PROVIDED,
HOWEVER, with respect to the occurrence of any of the Events set forth in (ii)
above, so long as the Preferred Stock remains outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event,
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Preferred Stock and provided further
that (x) any increase in the amount of the authorized Preferred Stock or the
creation or issuance of any other series of Preferred Stock, or (y) any increase
in the amount of authorized shares of such series or any other series of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or 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.
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 shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
irrevocably deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into shares of Common Stock will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
shares of Common Stock into which the shares of Preferred Stock are convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock--Restrictions on
Ownership and Transfer," for the Company to qualify as a REIT under the Code not
more than 50% in value of its outstanding capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year. To assist the Company
in meeting this requirement, the Company may take certain actions to limit the
beneficial ownership, directly or indirectly, by a single person of the
Company's outstanding equity securities, including any Preferred Stock of the
Company. Therefore, the Designating Amendment for each series of Preferred Stock
may contain certain provisions restricting the ownership and transfer of the
Preferred Stock. The applicable Prospectus Supplement will specify any
additional ownership limitation relating to a series of Preferred Stock.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
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DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Stock, as specified in the applicable Prospectus
Supplement. Shares of Preferred Stock of each series represented by Depositary
Shares will be deposited under a separate deposit agreement (each, a "Deposit
Agreement") among the Company, the depositary named therein (a "Preferred Stock
Depositary") and the holders from time to time of the Depositary Receipts.
Subject to the terms of the applicable Deposit Agreement, each owner of a
Depositary Receipt will be entitled, in proportion to the fractional interest of
a share of a particular series of Preferred Stock represented by the Depositary
Shares evidenced by such Depositary Receipt, to all the rights and preferences
of the Preferred Stock represented by such Depositary Shares (including
dividend, voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Stock by the Company to a Preferred Stock
Depositary, the Company will cause such Preferred Stock Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request, and the statements made hereunder relating to Deposit Agreements and
the Depositary Receipts to be issued thereunder are summaries of certain
anticipated provisions thereof and do not purport to be complete and are subject
to, and qualified in their entirety by reference to, all of the provisions of
the applicable Deposit Agreement and related Depositary Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
A Preferred Stock Depositary will be required to distribute all cash
dividends or other cash distributions received in respect of the applicable
Preferred Stock to the record holders of Depositary Receipts evidencing the
related Depositary Shares in proportion to the number of such Depositary
Receipts owned by such holders, subject to certain obligations of holders to
file proofs, certificates and other information and to pay certain charges and
expenses to such Preferred Stock Depositary.
In the event of a distribution other than in cash, a Preferred Stock
Depositary will be required to distribute property received by it to the record
holders of Depositary Receipts entitled thereto, subject to certain obligations
of holders to file proofs, certificates and other information and to pay certain
charges and expenses to such Preferred Stock Depositary, unless such Preferred
Stock Depositary determines that it is not feasible to make such distribution,
in which case such Preferred Stock Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Stock which has been converted or
exchanged.
WITHDRAWAL
Upon surrender of the Depositary Receipts at the corporate trust office of
the applicable Preferred Stock Depositary (unless the related Depositary Shares
have previously been called for redemption or converted), the holders thereof
will be entitled to delivery at such office, to or upon each such holder's
order, of the number of whole or fractional shares of the applicable Preferred
Stock and any money or other property represented by the Depositary Shares
evidenced by such Depositary Receipts. Holders of Depositary Receipts will be
entitled to receive whole or fractional shares of the related Preferred Stock on
the basis of the proportion of Preferred Stock represented by each Depositary
Share as specified in the applicable Prospectus Supplement, but holders of such
shares of Preferred Stock will not thereafter be
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entitled to receive Depositary Shares therefor. If the Depositary Receipts
delivered by the holder evidence a number of Depositary Shares in excess of the
number of Depositary Shares representing the number of shares of Preferred Stock
to be withdrawn, the applicable Preferred Stock Depositary will be required to
deliver to such holder at the same time a new Depositary Receipt evidencing such
excess number of Depositary Shares.
REDEMPTION
Whenever the Company redeems shares of Preferred Stock held by a Preferred
Stock Depositary, such Preferred Stock Depositary will be required to redeem as
of the same redemption date the number of Depositary Shares representing shares
of the Preferred Stock so redeemed, provided the Company shall have paid in full
to such Preferred Stock Depositary the redemption price of the Preferred Stock
to be redeemed plus an amount equal to any accrued and unpaid dividends thereon
to the date fixed for redemption. The redemption price per Depositary Share will
be equal to the redemption price and any other amounts per share payable with
respect to the Preferred Stock. If fewer than all the Depositary Shares are to
be redeemed, the Depositary Shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional Depositary Shares) or
by any other equitable method determined by the Company that preserves the REIT
status of the Company. See "Description of Preferred Stock--Redemption."
VOTING
Upon receipt of notice of any meeting at which the holders of the applicable
Preferred Stock are entitled to vote, a Preferred Stock Depositary will be
required to mail the information contained in such notice of meeting to the
record holders of the Depositary Receipts evidencing the Depositary Shares which
represent such Preferred Stock. Each record holder of Depositary Receipts
evidencing Depositary Shares on the record date (which will be the same date as
the record date for the Preferred Stock) will be entitled to instruct such
Preferred Stock Depositary as to the exercise of the voting rights pertaining to
the amount of Preferred Stock represented by such holder's Depositary Shares.
Such Preferred Stock Depositary will be required to vote the amount of Preferred
Stock represented by such Depositary Shares in accordance with such
instructions, and the Company will agree to take all reasonable action which may
be deemed necessary by such Preferred Stock Depositary in order to enable such
Preferred Stock Depositary to do so. Such Preferred Stock Depositary will be
required to abstain from voting the amount of Preferred Stock represented by
such Depositary Shares to the extent it does not receive specific instructions
from the holders of Depositary Receipts evidencing such Depositary Shares. A
Preferred Stock Depositary will not be responsible for any failure to carry out
any instruction to vote, or for the manner or effect of any such vote made, as
long as any such action or non-action is in good faith and does not result from
negligence or willful misconduct of such Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each share of
Preferred Stock represented by the Depositary Share evidenced by such Depositary
Receipt, as set forth in the applicable Prospectus Supplement.
CONVERSION
The Depositary Shares, as such, will not be convertible into shares of
Common Stock or any other securities or property of the Company, except in
connection with certain conversions in connection with the preservation of the
Company's status as a REIT. See "Description of Preferred Stock--Restrictions on
Ownership." Nevertheless, if so specified in the applicable Prospectus
Supplement relating to an offering of Depositary Shares, the Depositary Receipts
may be surrendered by holders thereof to the applicable
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Preferred Stock Depositary with written instructions to such Preferred Stock
Depositary to instruct the Company to cause conversion of the Preferred Stock
represented by the Depositary Shares evidenced by such Depositary Receipts into
whole shares of Common Stock, other shares of Preferred Stock of the Company or
other shares of stock, and the Company will agree that upon receipt of such
instructions and any amounts payable in respect thereof, it will cause the
conversion thereof utilizing the same procedures as those provided for delivery
of Preferred Stock to effect such conversion. If the Depositary Shares evidenced
by a Depositary Receipt are to be converted in part only, a new Depositary
Receipt or Receipts will be issued for any Depositary Shares not to be
converted. No fractional shares of Common Stock will be issued upon conversion,
and if such conversion will result in a fractional share being issued, an amount
will be paid in cash by the Company equal to the value of the fractional
interest based upon the closing price of the Common Stock on the last business
day prior to the conversion.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
Any form of Depositary Receipt evidencing Depositary Shares which will
represent Preferred Stock and any provision of a Deposit Agreement will be
permitted at any time to be amended by agreement between the Company and the
applicable Preferred Stock Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Receipts or that
would be materially and adversely inconsistent with the rights granted to the
holders of the related Preferred Stock will not be effective unless such
amendment has been approved by the existing holders of at least two-thirds of
the applicable Depositary Shares evidenced by the applicable Depositary Receipts
then outstanding. No amendment shall impair the right, subject to certain
anticipated exceptions in the Deposit Agreements, of any holder of Depositary
Receipts to surrender any Depositary Receipt with instructions to deliver to the
holder the related Preferred Stock and all money and other property, if any,
represented thereby, except in order to comply with law. Every holder of an
outstanding Depositary Receipt at the time any such amendment becomes effective
shall be deemed, by continuing to hold such Depositary Receipt, to consent and
agree to such amendment and to be bound by the applicable Deposit Agreement as
amended thereby.
A Deposit Agreement will be permitted to be terminated by the Company upon
not less than 30 days' prior written notice to the applicable Preferred Stock
Depositary if (i) such termination is necessary to preserve the Company's status
as a REIT or (ii) a majority of each series of Preferred Stock affected by such
termination consents to such termination, whereupon such Preferred Stock
Depositary will be required to deliver or make available to each holder of
Depositary Receipts, upon surrender of the Depositary Receipts held by such
holder, such number of whole or fractional shares of Preferred Stock as are
represented by the Depositary Shares evidenced by such Depositary Receipts
together with any other property held by such Preferred Stock Depositary with
respect to such Depositary Receipts. The Company will agree that if a Deposit
Agreement is terminated to preserve the Company's status as a REIT, then the
Company will use its best efforts to list the Preferred Stock issued upon
surrender of the related Depositary Shares on a national securities exchange. In
addition, a Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares thereunder shall have been redeemed, (ii) there
shall have been a final distribution in respect of the related Preferred Stock
in connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Depositary
Receipts evidencing the Depositary Shares representing such Preferred Stock or
(iii) each share of the related Preferred Stock shall have been converted into
stock of the Company not so represented by Depositary Shares.
CHARGES OF PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of a Deposit Agreement. In addition, the
Company will pay the fees and expenses of a Preferred Stock Depositary in
connection with the performance of its duties under a Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of a
Preferred Stock Depositary for any
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duties requested by such holders to be performed which are outside of those
expressly provided for in the applicable Deposit Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
A Preferred Stock Depositary will be permitted to resign at any time by
delivering to the Company notice of its election to do so, and the Company will
be permitted at any time to remove a Preferred Stock Depositary, any such
resignation or removal to take effect upon the appointment of a successor
Preferred Stock Depositary. A successor Preferred Stock Depositary will be
required to be appointed within 60 days after delivery of the notice of
resignation or removal and will be required to be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
A Preferred Stock Depositary will be required to forward to holders of
Depositary Receipts any reports and communications from the Company which are
received by such Preferred Stock Depositary with respect to the related
Preferred Stock.
Neither a Preferred Stock Depositary nor the Company will be liable if it is
prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under a Deposit Agreement. The obligations of the
Company and a Preferred Stock Depositary under a Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of Preferred
Stock represented by the applicable Depositary Shares), gross negligence or
willful misconduct, and neither the Company nor any applicable Preferred Stock
Depositary will be obligated to prosecute or defend any legal proceeding in
respect of any Depositary Receipts, Depositary Shares or shares of Preferred
Stock represented thereby unless satisfactory indemnity is furnished. The
Company and any Preferred Stock Depositary will be permitted to rely on written
advice of counsel or accountants, or information provided by persons presenting
shares of Preferred Stock represented thereby for deposit, holders of Depositary
Receipts or other persons believed in good faith to be competent to give such
information, and on documents believed in good faith to be genuine and signed by
a proper party.
In the event a Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, such Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
DESCRIPTION OF COMMON STOCK
GENERAL
The authorized capital stock of the Company includes 75,000,000 shares of
Common Stock, par value $.01 per share. Each outstanding share of Common Stock
entitles the holder to one vote on all matters presented to shareholders for a
vote. Holders of Common Stock have no preemptive rights. As of June 30, 1997,
there were 15,794,951 shares of Common Stock issued and outstanding, 8,505,472
shares of Common Stock reserved for issuance upon exchange of issued and
outstanding Common Units and 1,099,750 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options. Prior to August 27,
1997, the Common Stock was quoted in the Nasdaq National Market under the
trading symbol "PRME". Commencing on August 27, 1997, the Common Stock will be
listed on the New York Stock Exchange under the symbol "PRT."
The Charter of the Company provides for the Board to be divided into three
classes of directors, each class to consist as nearly as possible of one-third
of the directors. At each annual meeting of shareholders,
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the class of directors to be elected at such meeting will be elected for a
three-year term and the directors in the other two classes will continue in
office. The overall effect of the provisions in the Charter with respect to the
classified board may be to render more difficult a change of control of the
Company or removal of incumbent management. Holders of Common Stock have no
right to cumulative voting for the election of directors. Consequently, at each
annual meeting of shareholders, the holders of a majority of the shares of
Common Stock are able to elect all of the successors of the class of directors
whose term expires at that meeting.
Subject to the right of the holders of Preferred Stock to elect directors
under certain circumstances, directors may be removed only for cause and only by
the affirmative vote of the holders of at least two-thirds of the aggregate
number of votes then entitled to be cast generally in the election of directors.
All shares of Common Stock issued will be duly authorized, fully paid, and
non-assessable. Distributions may be paid to the holders of Common Stock if and
when declared by the Board out of funds legally available therefor. The Company
intends to continue to pay quarterly dividends.
Under Maryland law, shareholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of any
holders of Preferred Stock, if any, to receive preferential distributions, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company.
The Registrar and Transfer Agent for the Common Stock is American Stock
Transfer and Trust Company.
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, 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
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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 share 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.
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 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 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.
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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 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 shall have authority at any
time to waive the requirements that 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 Company 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
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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, 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.
DESCRIPTION OF THE WARRANTS TO PURCHASE
COMMON STOCK OR PREFERRED STOCK
The Company has no Common Stock Warrants and Preferred Stock Warrants
(collectively, the "Warrants") outstanding. The Company may issue Warrants for
the purchase of Preferred Stock or Common Stock. Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement and may be attached to or separate from such Offered
Securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any provisions of the
Warrants offered hereby. Further terms of the Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered including, where
applicable, the following: (1) the title of such Warrants; (2) the aggregate
number of such Warrants; (3) the price or prices at which such Warrants will be
issued; (4) the designation, terms and number of shares of Preferred Stock or
Common Stock purchasable upon exercise of such Warrants; (5) the designation and
terms of the Offered Securities, if any, with which such Warrants are issued and
the number of such Warrants issued with each such Offered Security; (6) the
date, if any, on and after which such Warrants and the related Preferred Stock
or Common Stock will be separately transferable; (7) the price at which each
share of Preferred Stock or Common Stock purchasable upon exercise of such
Warrants may be purchased; (8) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire; (9) the
minimum or maximum amount of such Warrants which may be exercised at any one
time; (10) information with respect to book-entry procedures, if any; (11) a
discussion of certain Federal income tax considerations; and (12) any other
terms of such Warrants, including terms, procedures and limitations relating to
the exchange and exercise of such Warrants. The exercise of any such Warrants
will be subject to and limited by the transfer and ownership restrictions in the
Company's Charter. See "Description of Common Stock--Restrictions on Ownership
and Transfer."
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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 Convertible Preferred Stock,
Common Stock, or warrants for Convertible Preferred Stock or Common Stock
("Warrants"). Winston & Strawn has acted as special tax counsel ("Tax Counsel")
to the Company in connection with this Prospectus 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 Common Stock,
Convertible Preferred Stock or Warrants. The discussion contained herein does
not address all aspects of federal income taxation that may be relevant to
particular holders in light of their personal investment or tax circumstances,
or to certain types of holders (including, without limitation, insurance
companies, tax-exempt entities, financial institutions, broker-dealers, persons
whose functional currency is other than the United States dollar, persons who
hold the Common Stock, Convertible Preferred Stock or Warrants as part of a
straddle, hedging, or conversion transaction or, except as specifically
described herein, foreign persons) who are subject to special treatment under
the federal income tax laws. In addition, this summary is generally limited to
investors who will hold the Common Stock, Convertible Preferred Stock, or
Warrants as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Code. To the extent the federal income tax
treatment of particular issuances of Convertible Preferred Stock, Common Stock,
or Warrants differs from the summary below, any additional tax considerations
will be disclosed in the applicable Prospectus Supplement.
The statements in this discussion are based on current provisions of the
Code, Treasury Regulations promulgated thereunder, and administrative and
judicial interpretations thereof, as of the date hereof, all of which are
subject to change, possibly with retroactive effect. No assurance can be given
that future legislative, judicial, or administrative actions or decisions will
not affect the accuracy of any statements in this summary. No ruling will be
sought from the IRS with respect to any matter discussed herein.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON STOCK, CONVERTIBLE PREFERRED STOCK OR WARRANTS AND
OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST
("REIT"), 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.
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 (i) the Company is organized in conformity
with the requirements for qualification as a REIT; (ii) the Company's method of
operation has enabled it to meet the requirements for qualification and taxation
as a REIT; and (iii) 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 or a court and there can be no
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assurance that the IRS or a court will not take a position different from that
expressed by Tax Counsel. It also 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, the actual operating results, distribution levels,
diversity of stock ownership and the various other qualification tests imposed
by the Code as 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 maintain 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, (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, may alter this rule
for assets transferred to a REIT by certain C corporations after December 31,
1997. Under this proposed legislation, C corporations having stock with a value
greater than $5 million would have to recognize any 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
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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.
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 Preferred Stock, Convertible
Preferred Stock and Common Stock (collectively, "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, 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
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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 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 corresponding to
the REIT's capital interest in such 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. Income realized by the Company on the expiration of
unexercised Warrants would not constitute qualifying income for the purposes of
this 75% test. 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, gain from the sale or other disposition of stock or securities
held for less than one year, 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 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
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"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered for the convenience of
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 as
long as the Operating Partnership maintains a significant interest in the
properties. 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 not qualifying as a REIT. The Company may for instance
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 such 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 would not be
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).
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
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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 a corporation, which indirectly performs certain activities
at the Properties, but none of such corporation's voting stock. The Company does
not believe that its pro rata share of the stock the Operating Partnership owns
in such corporation exceeds 5% of the total value of the Company's assets. The
Company owns 100% of the stock of certain financing corporations which will
constitute "qualified REIT subsidiaries" under the Code. Qualified REIT
subsidiaries are not treated as separate corporations for federal income tax
purposes. Instead, their assets, liabilities, and items of income, deduction,
and credit 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. A distribution which
is not PRO RATA within a class of stock entitled to a dividend or which is not
consistent with the rights to distributions between classes of stock (a
"preferential dividend") is not taken into consideration for the purpose of
meeting the distribution requirement. Accordingly, the payment of a preferential
dividend could affect the Company's ability to meet this distribution
requirement.
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.
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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, some of 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
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 sales of such
outparcels allocable to the Company would be subject to a 100% tax. In the event
that the Company determines that the level of such sale 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 permitted 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 would not be 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). 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.
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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.
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.
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.
Prior to January 1, 1997, an organization formed as a partnership was
treated as a partnership for federal income tax purposes rather than a
corporation only if it had no more that two of the four corporate
characteristics that the Treasury Regulations in effect at that time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of management,
(iii) limited liability, and (iv) free transferability of interests. Under final
Treasury Regulations which became effective January 1, 1997, the four factor
test has been eliminated and an entity with two or more members formed as a
partnership will be taxed as a partnership for federal income tax purposes
unless it specifically elects otherwise. These final regulations provide that
the IRS will not challenge the classification of an existing partnership for tax
periods prior to January 1, 1997 so long as (i) the entity had a reasonable
basis for its claimed classification, (2) the entity and all its members
recognized the federal income tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (3) neither
the entity nor any member of the entity had been notified in writing on or
before May 8, 1996, that the classification of the entity was under examination
by the IRS. The Company believes that the Partnerships should be currently
treated as partnerships for federal income tax purposes because the Company and
the Partnerships had a reasonable basis for their claimed partnership
classification, and none of those entities or members of those entities had been
notified of any examination by the IRS on or before May 8, 1996. Furthermore,
under the Treasury Regulations, because none of the interests in the
Partnerships are registered under the Securities Act of 1933 or traded on an
established securities market and none of the Partnerships have more than 100
partners, the Company believes that none of the Partnerships should be treated
as publicly traded partnerships within the meaning of Code section 7704 which
are taxed as corporations for federal income tax purposes.
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
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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 (or publicly traded
partnership) 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 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
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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 section
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.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock or Convertible Preferred 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, (iii) is an
estate which is subject to taxation in the United States regardless of the
source of its income or (iv) is a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust.
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
Convertible Preferred Stock and Common Stock are out of current or accumulated
earnings and profits, the earnings and profits of the Company will be allocated
first
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to the Senior Preferred Stock, then the Convertible Preferred Stock, and then
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, 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 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/her shares of Common Stock or Convertible
Preferred 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 will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in his/her shares of Common Stock or Convertible Preferred Stock
for tax purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Stockholder's adjusted basis in his/her 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 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.
Upon any sale or other disposition of shares of Common Stock or Convertible
Preferred Stock, a U.S. Stockholder will generally 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
stock. Such gain or loss will generally be capital gain or loss 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 or Convertible Preferred 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." 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 with "acquisition indebtedness" within the meaning of
the Code, or the shares 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 may be required to 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
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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. 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 the Company is not or will not become a
pension-held REIT.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the Company's
shareholders who do not qualify as U.S. 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 or
Convertible Preferred 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 or
Convertible Preferred 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 Common Stock or Convertible
Preferred 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 or Convertible Preferred Stock is not effectively
connected with the conduct of a trade or business in the United States.
ORDINARY DIVIDENDS. 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.
NON-ORDINARY DIVIDEND DISTRIBUTIONS. Distributions made by the Company in
excess of its current and accumulated earnings and profits will generally 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/her
shares of Common Stock or Convertible Preferred 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/her shares being
treated as gain from the sale or exchange of such shares, the tax treatment of
which is
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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 a United States real property interest ("USRPI") 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 USRPI 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 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.
SALE OR EXCHANGE OF THE COMPANY'S STOCK. Gain recognized by a Non-U.S.
Stockholder upon the sale or exchange of shares of Common Stock or Convertible
Preferred Stock generally will not be subject to United States taxation unless
the Common Stock or Convertible Preferred Stock constitutes a USRPI within the
meaning of FIRPTA. The Common Stock or Convertible Preferred Stock will not
constitute a USRPI 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 or Convertible Preferred 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."
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 or Convertible Preferred Stock would be subject to United States taxation
under FIRPTA as a sale of a USRPI unless (i) the stock is regularly traded (as
defined in the applicable Treasury Regulations) and (ii) the selling Non-U.S.
Stockholder's interest (after application of certain constructive ownership
rules) in the Company is 5% or less at all times during the 5 years preceding
the sale or exchange. If gain on the sale or exchange of shares of Common Stock
or Convertible Preferred 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 or Convertible Preferred Stock would be required to withhold
and remit to the IRS 10% of the purchase price. Additionally, in such case,
distributions treated as a return of capital or capital gain from sale of the
stock would be subject to a 10% withholding tax.
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Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock or Convertible Preferred 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.
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/her 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 non-foreign 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.
SPECIAL RULES REGARDING THE TAXATION OF HOLDERS OF CONVERTIBLE PREFERRED STOCK
REDEMPTION OF CONVERTIBLE PREFERRED STOCK. A redemption of shares of
Convertible Preferred Stock will be treated under Section 302 of the Code as a
distribution taxable as a dividend (to the extent of the Company's current and
accumulated earnings and profits) at ordinary income rates unless the redemption
satisfies one of the tests set forth in Section 302(b) of the Code and is
therefore treated as a sale or exchange of the redeemed shares. The redemption
will be treated as a sale or exchange under Section 302(b) if it (i) is
"substantially disproportionate" with respect to the holder, (ii) results in a
"complete termination" of the holder's stock interest in the Company, or (iii)
is "not essentially equivalent to a dividend" with respect to the holder within
the meaning of Section 302(b)(2) of the Code. In determining whether any of
these tests have been met, shares of Stock (and other equity interests in the
Company) considered to be owned by the holder by reason of certain constructive
ownership rules set forth in Section 318 of the Code, as well as shares of Stock
actually owned by the holder, must generally be taken into account. Because the
determination as to whether any of the alternative tests of Section 302(b) of
the Code will be satisfied with respect to any particular holder of Convertible
Preferred Stock depends upon the facts and circumstances at the time that the
determination must be made, holders of Convertible Preferred Stock are advised
to consult their own tax advisors to determine such treatment.
If a redemption of shares of Convertible Preferred Stock is not treated as a
distribution taxable as a dividend to a particular holder, it will be treated,
as to that holder, as a taxable sale or exchange. As a result, such holder 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 (less any portion thereof attributed to accumulated and
declared but unpaid dividends, which will be taxable as a dividend to the extent
of the Company's current and accumulated earnings and profits), and (ii) the
holder's adjusted basis in the shares of Convertible Preferred Stock for tax
purposes. Such gain or loss will be capital gain or loss if the shares of
Convertible Preferred Stock have been held as a capital asset, and will be
long-term gain or loss if such shares have been held for more than one year.
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If a redemption of shares of Convertible Preferred Stock is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
Convertible Preferred Stock for tax purposes will be transferred to the holder's
remaining shares of Stock in the Company, if any. If the holder owns no other
shares of Stock, such basis may, under certain circumstances, be transferred to
a related person or it may be lost entirely.
REDEMPTION PREMIUM. Under Section 305(c) of the Code and applicable
Treasury Regulations, if the redemption price of the Convertible Preferred Stock
exceeds its issue price by more than a DE MINIMIS amount then, in certain
circumstances, the amount of such excess may be deemed to be a constructive
distribution (treated as a dividend to the extent of the Company's current and
accumulated earnings and profits) which is taxable to the holder at a constant
yield (as if it was original issue discount on a debt instrument) over the
period the Convertible Preferred Stock cannot be redeemed.
A redemption premium is considered DE MINIMIS under the Treasury Regulations
if it is less than the product of .25% times the redemption price of the
Convertible Preferred Stock times the number of complete years the Convertible
Preferred Stock is outstanding. The Company does not expect that the price paid
for the redemption of the Convertible Preferred Stock would be considered DE
MINIMIS.
However, the constant yield method, described above, which must be used to
take into account the redemption premium on preferred stock only applies if the
subject preferred stock is (i) mandatorily redeemable, (ii) redeemable at the
holder's option, or (iii) redeemable at the issuer's option if at the time of
issue, based on all the facts and circumstances, it is more likely than not that
the issuer will exercise such option. With respect to situation (iii) in the
preceding sentence, the Treasury Regulations further provide that, even if the
redemption is more likely than not to occur, this constant yield method will not
apply if the redemption premium is solely in the nature of a penalty for
premature redemption. A redemption premium is considered to be a penalty for
premature redemption only if it is paid as a result of changes in economic or
market conditions over which the issuer of the stock or the holder does not have
legal or practical control.
The Convertible Preferred Stock is not mandatorily redeemable or redeemable
at the holder's option, and the Company does not believe that at the time of
issue it is more likely than not that the Convertible Preferred Stock will be
redeemed; thus, the Company does not expect that a holder of such stock will be
required to take the redemption premium into income as a dividend distribution
at a constant yield over the period the holder holds such stock. However, no
assurance can be given that the IRS will not take a contrary position.
CONVERSION OF CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK. In general, no
gain or loss will be recognized for federal income tax purposes upon the
conversion of the Convertible Preferred Stock solely into shares of Common
Stock. The basis that a holder will have for tax purposes in the shares of the
Common Stock received upon the conversion will be equal to the adjusted basis
the holder had in the shares of Convertible Preferred Stock so converted, and,
provided that the shares of Convertible Preferred Stock were held as a capital
asset, the holding period for the shares of Common Stock received will include
the holding period for the shares of Convertible Preferred Stock converted. A
holder, however, will generally recognize gain or loss on the receipt of cash in
lieu of fractional shares of Common Stock in an amount equal to the difference
between the amount of cash received and the holder's adjusted basis in such
fractional shares. Furthermore, under certain circumstances, a holder of shares
of Convertible Preferred Stock may recognize gain or dividend income to the
extent there are dividends in arrears on the Convertible Preferred Stock at the
time of conversion into Common Stock.
ADJUSTMENTS TO CONVERSION PRICE. Adjustments in the conversion price (or
the failure to make such adjustments) pursuant to the anti-dilution provisions
of the Convertible Preferred Stock or otherwise may result in constructive
distributions to the holders of Convertible Preferred Stock that could, under
certain
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circumstances, be taxable to them as dividends pursuant to Section 305 of the
Code. If such a constructive distribution were to occur, a holder of Convertible
Preferred Stock could be required to recognize ordinary income for tax purposes
without receiving a corresponding distribution of cash. Additionally, such a
constructive dividend may constitute a preferential dividend by the Company.
TREATMENT OF WARRANT HOLDERS
The federal income tax treatment of purchasers of Warrants will be more
fully discussed in the applicable Prospectus Supplement. Generally, a holder of
a Warrant does not recognize any gain or loss on the acquisition of the Warrant.
If the holder exercises the Warrant for stock in the Company, the amount paid by
such holder for the Warrant generally will become part of the holder's basis in
the stock received upon exercise of such Warrant. The sale or disposition of the
Warrant or the allowing of a Warrant to expire unexercised generally will cause
the holder to recognize gain or loss for federal income tax purposes with the
character of such gain or loss generally determined by reference to the
character of the stock in the holder's hands which would have been received upon
the exercise of the Warrant.
OTHER TAX CONSIDERATIONS
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX
CONSEQUENCES. Prospective holders 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 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 Common Stock,
Convertible Preferred Stock, or Warrants. Congress is currently considering tax
bills that would modify many of the REIT provisions of the Code, including a
repeal of the 30% income test and a credit for the tax paid by the REIT on
retained capital gains. These provisions which are currently under consideration
should not adversely affect most shareholders.
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 holders
should consult their own tax advisors regarding the effect of state and local
tax laws on an investment in Common Stock, Convertible Preferred Stock or
Warrants.
PLAN OF DISTRIBUTION
The Company may sell Offered Securities to or through one or more
underwriters, and also may sell Offered Securities directly to other purchasers
or through agents.
The distribution of the Offered Securities may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Offered Securities, underwriters may receive
compensation from the Company or from purchasers of Offered Securities, for whom
they may act as agents, in the form of discounts, concessions, or commissions.
Underwriters may sell Offered Securities to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions, or commissions
from the underwriters and/or commissions from the purchasers for whom they may
act as agents. Underwriters,
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dealers, and agents that participate in the distribution of Offered Securities
may be deemed to be underwriters, and any discounts or commissions they receive
from the Company, and any profit on the resale of Offered Securities they
realize may be deemed to be underwriting discounts and commissions, under the
Securities Act. Any such underwriter or agent will be identified, and any such
compensation received from the Company will be described, in the applicable
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each series
of Offered Securities will be a new issue with no established trading market,
other than the Common Stock or the Convertible Preferred Stock which have been
authorized for listing on the New York Stock Exchange under the trading symbols
"PRT" and "PRT.PR", respectively. The Company may elect to list any series of
Preferred Stock, Depositary Shares or Warrants on an exchange, but it is not
obligated to do so. It is possible that one or more underwriters may make a
market in a series of Offered Securities, but will not be obligated to do so and
may discontinue any market making at any time without notice. Therefore, no
assurance can be given as to the liquidity of the trading market for the Offered
Securities.
Under agreements the Company may enter into, underwriters, dealers, and
agents who participate in the distribution of Offered Securities may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be customers of, the Company in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Offered Securities from the
Company pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
the Offered Securities shall not at the time of delivery be prohibited under the
laws of the jurisdiction to which such purchaser is subject. The underwriters
and such other agents will not have any responsibility in respect of the
validity or performance of such contracts.
LEGAL OPINIONS
The legality of the Offered Securities will be passed upon for the Company
by Winston & Strawn, Chicago, Illinois. The Honorable James R. Thompson, a
partner in Winston & Strawn, is a director of the Company.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the year ended December 31, 1996, the
statements of revenue and certain expenses of Grove City Factory Shops and the
JMJ Acquired Properties for the year ended December 31, 1995 included in the
Company's Current Report on Form 8-K filed November 1, 1996, as amended by Form
8-K/A filed December 31, 1996 and Form 8-K/A-2 filed January 30, 1997, and the
statements of revenue and certain expenses of the Benderson Acquired Properties
and Buckeye Factory Shops Limited Partnership for the year ended December 31,
1996 included in the Company's Current Report on Form 8-K filed August 8, 1997,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon included therein and incorporated herein by reference.
Such financial statements are incorporated herein by reference in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING 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 SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE 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 SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
The Company..................................... S-2
Recent Developments............................. S-2
Business and Properties......................... S-6
Growth and Financing Strategies................. S-11
The Offering.................................... S-12
Distribution Policy............................. S-13
Selected Financial Data......................... S-13
Use of Proceeds................................. S-15
Capitalization.................................. S-16
Price Range of Common Stock and Distribution
History....................................... S-17
Underwriting.................................... S-18
Legal Matters................................... S-19
Experts......................................... S-19
PROSPECTUS
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 2
The Company..................................... 3
Risk Factors.................................... 4
Use of Proceeds................................. 10
Excess of Combined Fixed Charges and Preferred
Stock Dividends Over Earnings................. 10
General Description of the Offered Securities... 10
Description of Preferred Stock.................. 10
Description of Depositary Shares................ 18
Description of Common Stock..................... 21
Description of the Warrants to Purchase Common
Stock or Preferred Stock...................... 25
Certain Federal Income Tax
Considerations................................ 26
Plan of Distribution............................ 41
Legal Opinions.................................. 42
Experts......................................... 42
</TABLE>
10,000,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
AUGUST 27, 1997
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