<PAGE>
FILED PURSUANT TO RULE 424(B)(5) UNDER THE SECURITIES ACT OF 1933 (NO.
33-319505)
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 14, 1997)
PRIME RETAIL, INC.
175,800 SHARES
[LOGO]
8.5% SERIES B CUMULATIVE PARTICIPATING CONVERTIBLE PREFERRED STOCK
[LOGO]
2,080,000 SHARES
COMMON STOCK
---------------------
All of the 175,800 shares of 8.5% Series B Cumulative Participating
Convertible Preferred Stock, $.01 par value per share (the "Convertible
Preferred Stock"), and 2,080,000 shares of Common Stock, $.01 par value per
share (the "Common Stock" and together with the Convertible Preferred Stock, the
"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") engaged in the ownership, development, construction,
acquisition, leasing, marketing and management of factory outlet centers. All of
the Company's business and operations are conducted through Prime Retail, L.P.
(the "Operating Partnership"). The Company has paid and intends to continue to
pay regular quarterly distributions to holders of the Convertible Preferred
Stock and the Common Stock.
The Convertible Preferred Stock and the Common Stock are quoted in the
Nasdaq National Market under the trading symbols "PRMEP" and "PRME",
respectively. On February 13, 1997, the last reported per share sale prices of
the Convertible Preferred Stock and the Common Stock on the Nasdaq National
Market were $23.00 and $12.75, respectively. See "Price Range of Stock and
Distribution History."
Subject to certain exceptions specified in the charter of the Company (the
"Charter"), no person may own shares of Convertible Preferred Stock if, as a
result of such ownership, such person (i) 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 or (ii) would own in excess of 9.9% of the
outstanding Common Stock assuming the conversion of all outstanding shares of
Convertible Preferred Stock. Ownership of the Common Stock is restricted in the
Charter, subject to certain exceptions, to 9.9% of the outstanding shares of
Common Stock. See "Description of Capital Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE 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 Convertible Preferred Stock................. $22.75(3) $1.1375 $21.6125
Per Share of Common Stock................................ $12.50 $0.6250 $11.8750
Total (4)................................................ $29,999,450.00 $1,499,972.50 $28,499,477.50
</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 $150,000 payable by the
Company.
(3) Plus accrued dividends, if any, from the date of original issuance.
(4) The Company has granted to the Underwriters an option, exercisable for 30
days after the date hereof, to purchase up to 312,000 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 $33,899,450.00, $1,694,972.50 and
$32,204,477.50, respectively. See "Underwriting."
------------------------
The 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 Stock will be made in Arlington, Virginia on or
about February 20, 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN KEEGAN & COMPANY, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
<PAGE>
The date of this Prospectus Supplement is February 14, 1997.
<PAGE>
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE>
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 December 31, 1996, the
Company's portfolio included 21 factory outlet centers in 16 states with 5.8
million square feet of gross leasable area ("GLA") that was 91% 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 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
1996 OPERATING RESULTS
On January 30, 1997, the Company announced its operating results for the
fourth quarter of 1996 and the year ended December 31, 1996.
As determined in accordance with the new definition of funds from operations
("FFO") established by the National Association of Real Estate Investment Trusts
("NAREIT") in 1995, the Company's FFO before allocations to preferred
shareholders and minority interests increased 29.3% to $9.7 million for the
three months ended December 31, 1996, compared to $7.5 million for the three
months ended December 31, 1995.
The Company's FFO before allocations to preferred shareholders and minority
interests was $27.6 million for the year ended December 31, 1996, after
deducting non-recurring charges of $6.1 million in the second quarter related to
a debt refinancing, compared to $28.0 million for the year ended December 31,
1995. The non-recurring charge of $6.1 million noted above related primarily to
the write down of nonrefundable deferred financing fees and the unamortized cost
of certain interest rate protection contracts. The non-recurring charge had no
effect on distributable net cash flow of the Company.
Income before allocations to preferred shareholders, minority interests and
extraordinary loss (determined in accordance with generally accepted accounting
principles ("GAAP")) was $7.0 million and $12.8 million for the years ended
December 31, 1996 and 1995, respectively, and $3.7 million and $3.4 million for
the three months ended December 31, 1996 and 1995, respectively. The Company
reported a net loss per common share of $(0.75) and $(0.96) for the years ended
December 31, 1996 and 1995, respectively.
The Company generally considers FFO an appropriate measure of liquidity of
an equity REIT because industry analysts have accepted it as a performance
measure of equity REITs. FFO as defined by NAREIT 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's FFO is not comparable to funds from operations reported by other REITs
that do not define the term using the current NAREIT definition or that
interpret the current NAREIT definition differently than does the Company. 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
S-3
<PAGE>
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.
1997 PLANNED DEVELOPMENT
The Company expects to open approximately 300,000 square feet of GLA during
1997 in connection with expansions of certain existing factory outlet centers.
At December 31, 1996, budgeted capital expenditures for these expansions
aggregated approximately $33.0 million, while anticipated expenditures related
to the completion of new factory outlet centers and expansions opened during the
year ended December 31, 1996 (aggregating 930,000 square feet of GLA)
approximated $16.8 million.
Management believes that the Company has sufficient capital and capital
commitments to fund the remaining capital expenditures associated with its 1996
and 1997 development activities. These funding requirements are expected to be
met, in large part, with the proceeds from the Offering, various loan
facilities, and joint venture partners. If adequate financing for such
development and expansion is not available, the Company may not be able to
develop new centers or expand existing centers at currently planned levels.
RECENT ACQUISITIONS
On February 13, 1997, the Company acquired Oak Creek Factory Outlets
(located in Sedona, Arizona), Bend Factory Outlets (located in Bend, Oregon) and
Coeur D'Alene Factory Outlets (located in Post Falls, Idaho) (the "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 promissory note issued to the seller.
The Acquired Properties contain approximately 358,000 square feet of gross
leasable area that was 92.3% occupied at December 31, 1996.
On February 7, 1997, the Company purchased an additional 20.0% partnership
interest in Oxnard Factory Outlet from an unrelated third party for $0.3
million, thus increasing to 50.0% its equity interest in this property. The
remaining 50.0% equity interest in this center is owned by an affiliate of
Fru-Con Development Corporation.
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 $28.3 million ($32.1 million if the Underwriters' over-allotment
option is exercised in full). The Company will use the net proceeds of the
Offering to acquire 175,800 and 2,080,000 additional Convertible Preferred Units
and Common Units, respectively, (2,392,000 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
units by increasing its investment in the Operating Partnership by the amount of
the net proceeds from the Offering.
The Operating Partnership will use approximately $4.0 million of the funds
it receives from the Company to repay borrowings under a short-term acquisition
facility provided by a financial institution and the balance of $24.3 million
(approximately $28.1 million if the Underwriters' over-allotment option is
exercised in full) to fund development and construction activities and for
general corporate purposes.
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-4
<PAGE>
As of February 13, 1997, the indebtedness to be repaid in connection with
the Offering had a weighted average interest rate of 11.41% per annum and a
weighted average maturity of 6 months. Such indebtedness was incurred to finance
a portion of the purchase price of the Acquired Properties. See "Recent
Developments--Recent Acquisitions."
PRICE RANGE OF STOCK
AND DISTRIBUTION HISTORY
The Convertible Preferred Stock and the Common Stock commenced trading on
the Nasdaq National Market on March 15, 1994. The initial public offering prices
per share of the Convertible Preferred Stock and the Common Stock were $25.00
and $19.00, respectively. The shares offered hereby have been included for
listing on the Nasdaq National Market.
The following table sets forth the high and low closing prices of the
Convertible Preferred Stock, as reported by NASDAQ, and cash distributions paid
during the periods indicated:
<TABLE>
<CAPTION>
CLOSING PRICE PER
SHARE CASH
-------------------- DISTRIBUTIONS
HIGH LOW PAID(1)
--------- --------- ------------
<S> <C> <C> <C>
1995
First Quarter................................................................... $ 21.00 $ 17.19 $ 0.53125
Second Quarter.................................................................. 18.75 17.00 0.53125
Third Quarter................................................................... 19.75 17.75 0.53125
Fourth Quarter.................................................................. 19.13 17.75 0.53125
1996
First Quarter................................................................... 18.50 16.25 0.53125
Second Quarter.................................................................. 19.00 16.50 0.53125
Third Quarter................................................................... 20.75 17.75 0.53125
Fourth Quarter.................................................................. 22.00 20.25 0.53125
1997
First Quarter (through February 13, 1997)....................................... 23.13 21.75 --(2)
</TABLE>
- ------------------------
NOTE:
(1) For each quarter during 1995, the portion of cash distributions paid that
represented a return of capital for Federal income tax purposes was
$0.129625. For each quarter during 1996, the portion of the cash
distributions paid that represented a return of capital for Federal income
tax purposes was $0.329269.
(2) A cash distribution of $0.53125 per share is payable on February 15, 1997 to
holders of record of Convertible Preferred Stock on February 3, 1997. The
shares of Convertible Preferred Stock offered hereby will not entitle the
holders thereof to receive such distribution.
S-5
<PAGE>
The following table sets forth the high and low closing prices of the Common
Stock, as reported by NASDAQ, and cash distributions paid, during the periods
indicated:
<TABLE>
<CAPTION>
CLOSING 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 (through February 13, 1997)...................................... 13.25 12.38 --(3)
</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 July, 1996.
(3) A cash distribution of $0.295 per share is payable on February 15, 1997 to
holders of record of Common Stock on February 3, 1997. The shares of Common
Stock offered hereby will not entitle the holders thereof to receive such
distribution.
The closing prices for the Convertible Preferred Stock and the Common Stock
as reported on the Nasdaq National Market as of a recent date are set forth on
the cover page of this Prospectus Supplement. As of February 10, 1997 there were
108 record holders of Convertible Preferred Stock and 294 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 both the
Convertible Preferred Stock and 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. Convertible Preferred Stock
distributions are subject to the preferential rights of the Senior Preferred
Stock (as defined below) and any other series of Preferred Stock ranking senior
as to dividends or distributions to the Convertible Preferred Stock and to the
provisions of the Charter regarding Excess Stock (as defined below). Common
Stock distributions are also subject to the preferential rights of any other
shares or series of shares and to the provisions of the Charter regarding
Preferred Stock, including the Senior Preferred Stock and the Convertible
Preferred Stock, and to the provisions of the Charter regarding Excess Stock.
See "Description of Capital Stock."
In addition, until the Preferential Distribution (as defined below)
terminates, the Company does not intend to pay a quarterly distribution per
share of Common Stock in excess of $0.295. For a discussion of the Preferential
Distribution, see "Description of Capital Stock--Common Stock."
S-6
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED SHARES
As of December 31, 1996, the Company has authorized 75,000,000 shares of
Common Stock, 24,315,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"), and 51,000,000 shares of Excess Stock, par value $.01 per
share ("Excess Stock"). As of December 31, 1996, the Charter designated
2,300,000 shares of Preferred Stock as 10.5% Series A Senior Cumulative
Preferred Stock (the "Senior Preferred Stock") and 7,015,000 shares of Preferred
Stock as Convertible Preferred Stock (4,209,000 of which are no longer subject
to issuance as a result of the exchange of such shares for shares of Common
Stock in June 1996). In connection with the Offering, the Charter will be
amended by certain Articles Supplementary to designate 175,800 of the authorized
but unissued shares of Preferred Stock as Convertible Preferred Stock.
Accordingly, following the Offering the Board of Directors will have authority
to issue an additional 14,824,200 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series without
further vote or action by the stockholders, subject to the rights of the holders
of the Senior Preferred Stock and the Convertible Preferred Stock. The Board of
Directors could authorize the issuance of Preferred Stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction which holders of some, or a majority, of the Common Stock and/or the
Convertible Preferred Stock might believe to be in their interests or in which
holders of some, or a majority, of the Common Stock and/or the Convertible
Preferred Stock might receive a premium for their shares over the then market
price of such shares.
As of the date of this Prospectus Supplement, the Company has no plans to
issue any additional shares of Preferred Stock other than the Convertible
Preferred Stock to be sold in connection with the Offering.
As of December 31, 1996, 2,300,000 shares of Senior Preferred Stock were
issued and outstanding, 2,806,000 shares of Convertible Preferred Stock were
issued and outstanding, 13,404,651 shares of Common Stock were issued and
outstanding (an additional 3,356,459 shares of Common Stock are reserved for
issuance upon conversion of issued and outstanding Convertible Preferred Stock,
8,505,472 shares of Common Stock are reserved for issuance upon exchange of
issued and outstanding Common Units and 903,500 shares of Common Stock are
reserved for issuance upon exercise of outstanding stock options) and no shares
of Excess Stock were issued and outstanding.
The following summary of the terms of the Convertible Preferred Stock and
the Common Stock does not purport to be complete and is qualified in its
entirety by reference to the pertinent sections of the Charter, a form of which
has been incorporated by reference into the registration statement of which this
Prospectus Supplement is a part. See also "Description of Preferred Stock" and
"Description of Common Stock" in the accompanying Prospectus.
CONVERTIBLE PREFERRED STOCK
DIVIDENDS. Subject to the preferential rights of the Senior Preferred Stock
and any other series of Preferred Stock ranking senior as to dividends to the
Convertible Preferred Stock and to the provisions of the Charter regarding
Excess Stock, holders of shares of the Convertible Preferred Stock are entitled
to receive, when and as declared by the Board of Directors, out of funds legally
available for the payment of distributions and dividends, cumulative
preferential cash dividends in an amount per share of Convertible Preferred
Stock equal to the greater of (i) $2.125 per annum or (ii) the distributions and
dividends (determined on each of the quarterly Convertible Preferred Dividend
Payment Dates referred to below) on number of shares of Common Stock (or
fraction thereof) into which a share of Convertible Preferred Stock will be
convertible on or after March 31, 1997. The amount referred to in clause (ii)
above will equal the number of shares of Common Stock, or fraction thereof, into
which a share of Convertible Preferred
S-7
<PAGE>
Stock will be convertible on or after March 31, 1997, multiplied by the
quarterly distribution declared or paid with respect to a share of Common Stock
on or most recently prior to the applicable Convertible Preferred Dividend
Payment Date.
Dividends with respect to the Convertible Preferred Stock are cumulative
from the date of original issuance and are payable quarterly in arrears on the
fifteenth day of each May, August, November, and February, or, if such day is
not a business day, on the next succeeding business day (each, a "Convertible
Preferred Dividend Payment Date"). Such distribution or dividend and any
distribution or dividend payable on the Convertible Preferred Stock for any
partial dividend period are computed on the basis of a 360-day year consisting
of twelve 30-day months. Distributions and dividends payable on the Convertible
Preferred Stock for each full dividend period are computed by dividing the
annual dividend rate by four. Distributions and dividends are payable to holders
of record as they appear in the stock records of the Company at the close of
business on the applicable record date, which is the first day of the calendar
month in which the applicable Convertible Preferred Dividend Payment Date falls
or such other date designated by the Board of Directors of the Company for the
payment of distributions and dividends that is no more than thirty (30) nor less
than ten (10) days prior to such Convertible Preferred Dividend Payment Date
(each, a "Convertible Preferred Dividend Record Date").
No distributions or dividends on shares of Convertible Preferred Stock will
be declared by the Board of Directors of the Company or paid or set apart for
payment by the Company at such time as, and to the extent that, the terms and
provisions of any agreement of the Company, including any agreement relating to
its indebtedness, or any provisions of the Charter relating to any series of
Preferred Stock ranking senior to the Convertible Preferred Stock as to
dividends (including the Senior Preferred Stock), prohibit such declaration,
payment or setting apart for payment or provide that such declaration, payment
or setting apart for payment would constitute a breach thereof or a default
thereunder, or if such declaration or payment would be restricted or prohibited
by law. Notwithstanding the foregoing, dividends on the Convertible Preferred
Stock accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Holders of the Convertible Preferred Stock will not
be entitled to any distributions or dividends in excess of full cumulative
dividends as described above.
If any shares of Convertible Preferred Stock are outstanding, no full
distributions or dividends will be declared or paid or set apart for payment on
the capital stock of the Company of any other series ranking, as to dividends,
on a parity with or junior to the Convertible Preferred Stock for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for such
payment on the Convertible Preferred Stock for all past dividend periods and the
then current dividend period. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the shares of the
Convertible Preferred Stock and the shares of any other series of Preferred
Stock ranking on a parity as to dividends with the Convertible Preferred Stock,
all dividends declared upon shares of Convertible Preferred Stock and any other
series of Preferred Stock ranking on a parity as to dividends with the
Convertible Preferred Stock will be declared pro rata so that the amount of
distributions and dividends declared per share on the Convertible Preferred
Stock and such other series of Preferred Stock will in all cases bear to each
other the same ratio that accrued and unpaid distributions and dividends per
share on the shares of the Convertible Preferred Stock and such other series of
Preferred Stock bear to each other. No interest, or sum of money in lieu of
interest, is payable in respect of any dividend payment or payments on
Convertible Preferred Stock which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Convertible Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past dividend periods and the then
current dividend period, no distributions or dividends (other than dividends
payable in Common Stock or other capital stock ranking junior to the Convertible
Preferred Stock as to dividends and upon liquidation,
S-8
<PAGE>
dissolution or winding up) will be declared or paid or set aside for payment,
and no other distribution or dividend will be declared or made, upon the Common
Stock or any other capital stock of the Company ranking junior to or on a parity
with the Convertible Preferred Stock as to dividends, nor will any Common Stock
or any other capital stock of the Company ranking junior to or on a parity with
the Convertible Preferred Stock as to dividends or upon liquidation, dissolution
or winding up be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Convertible Preferred Stock as to dividends and upon liquidation, dissolution
and winding up).
Any distribution or dividend payment made on shares of Convertible Preferred
Stock is first credited against the earliest accrued but unpaid dividend due
with respect to shares of such Convertible Preferred Stock which remains
payable.
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of stock (the "Total
Dividends"), then the portion of the Capital Gains Amount that will be allocable
to the holders of Convertible Preferred Stock will be the Capital Gains Amount
multiplied by a fraction, the numerator of which shall be the total dividends
(within the meaning of the Code) paid or made available to the holders of the
Convertible Preferred Stock for the year and the denominator of which shall be
the Total Dividends.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding
up of the Company, subject to the prior rights of any series of capital stock
ranking senior to the Convertible Preferred Stock, the holders of shares of
Convertible Preferred Stock will be entitled to be paid out of the assets of the
Company legally available for distribution to its stockholders a liquidation
preference equal to the sum of $25.00 per share plus an amount equal to any
accrued and unpaid dividends thereon (whether or not earned or declared) to the
date of payment (the "Convertible Preferred Liquidation Preference Amount"),
before any distribution of assets is made to holders of Common Stock or any
other capital stock that ranks junior to the Convertible Preferred Stock as to
liquidation rights. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Convertible Preferred
Stock will have no right or claim to any of the remaining assets of the Company.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of the Company are
insufficient to pay the Convertible Preferred Liquidation Preference Amount on
all outstanding shares of Convertible Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of capital stock of the
Company ranking on a parity with the Convertible Preferred Stock in the
distribution of assets upon liquidation, dissolution or winding up, then the
holders of the Convertible Preferred Stock and all other such classes or series
of capital stock will share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
If liquidating distributions have been made in full to all holders of shares
of Convertible Preferred Stock, the remaining assets of the Company will be
distributed among the holders of any other classes or series of capital stock
ranking junior to the Convertible Preferred Stock upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in each
case according to their respective number of shares.
The consolidation or merger of the Company with or into any other
corporation, or the sale, lease, transfer or conveyance of all or substantially
all of the property or business of the Company, will not be deemed to constitute
a liquidation, dissolution or winding up of the Company for these purposes.
REDEMPTION. The Convertible Preferred Stock will not be redeemable at the
option of the Company prior to March 31, 1999. On and after March 31, 1999, the
Convertible Preferred Stock may be redeemed
S-9
<PAGE>
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 benefit of any
sinking fund.
VOTING RIGHTS. Holders of the Convertible Preferred Stock do not have any
voting rights, except as set forth below or as otherwise from time to time
required by law. Subject to the provisions in the Charter regarding Excess
Stock, in any matter in which the Convertible Preferred Stock may vote,
including any action by written consent, each share of Convertible Preferred
Stock is entitled to one vote. The holders of each share of the Convertible
Preferred Stock may separately designate a proxy for the vote to which that
share of Convertible Preferred Stock is entitled.
Whenever dividends on any shares of the Convertible Preferred Stock have
been in arrears for six or more consecutive quarterly periods, the holders of
such shares of Convertible Preferred Stock (voting separately as a class with
all other series of Preferred Stock (including the Senior Preferred Stock) upon
which rights to vote on such matter with the Convertible Preferred Stock have
been conferred and are then exercisable) will be entitled to vote for the
election of two additional directors of the Company at a special meeting called
by the holders of record of at least 10% of the Convertible Preferred Stock and
such other Preferred Stock, if any (unless such request is received less than 90
days before the date fixed for the next annual or special meeting of the
stockholders) or at the next annual meeting of stockholders, and at each
subsequent annual meeting until all dividends accumulated on such shares of the
Convertible Preferred Stock for the past dividend periods and the then current
dividend period have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment. In such event, the entire Board of
Directors of the Company will be increased by two directors. Each of such two
directors will be elected to serve until the earlier of (i) the election and
qualification of such director's successor or (ii) payment of the dividend
arrearage for the Convertible Preferred Stock.
So long as any shares of the Convertible Preferred Stock remain outstanding,
the Company will not, without the affirmative vote or consent of the holders of
at least a majority of the shares of the Convertible Preferred Stock outstanding
at the time, given in person or by proxy, either in writing or at a meeting
(such series voting separately as a class), (i) authorize or create, or increase
the authorized or issued amount of, any class or series of capital stock ranking
senior to the Convertible Preferred Stock with respect to payment of dividends
or the distribution of assets upon liquidation, dissolution or winding up, or
Excess Convertible Preferred Stock with respect to distributions upon
liquidation, dissolution or winding up or reclassify any authorized capital
stock of the Company into any such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Charter,
whether by merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of the Convertible
Preferred Stock or the holders thereof; PROVIDED, HOWEVER, that any increase in
the amount of the authorized Preferred Stock or the creation or issuance of any
other series of Preferred Stock, or any increase in the amount of authorized
shares of the Convertible Preferred Stock or any other series of Preferred
Stock, in each case ranking on a parity with or junior to the Convertible
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up, will not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers. In addition, so long as any shares of the Convertible Preferred Stock
remain outstanding, the Company will not terminate the Company's status as a
REIT without the affirmative vote or consent of the holders of at least a
majority of the shares of Senior Preferred Stock, Convertible Preferred Stock
and Common Stock outstanding at the time, voting together as a single class,
given in person or by proxy, either in writing or at a meeting.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required is
effected, all outstanding shares of the Convertible
S-10
<PAGE>
Preferred Stock have been redeemed or called for redemption upon proper notice
and sufficient funds have been deposited in trust to effect such redemption.
CONVERSION. Subject to certain exceptions, holders of the Convertible
Preferred Stock have the right, as provided in the Charter, exercisable on or
after March 31, 1997, except in the case of Convertible Preferred Stock called
for redemption, to convert all or any of the Convertible Preferred Stock (based
upon the Convertible Preferred Liquidation Preference Amount determined
immediately following the most recent Convertible Preferred Dividend Payment
Date) into shares of Common Stock at the conversion price of $20.90 per share of
Common Stock, subject to adjustment upon the occurrence of certain events, as
described below. In the case of Convertible Preferred Stock called for
redemption, conversion rights will expire at the close of business on the third
business day immediately preceding the date fixed for redemption.
Shares of Convertible Preferred Stock will be deemed to have been converted
immediately prior to the close of business on the date such shares are
surrendered for conversion and notice of election to convert the same is
received by the Company. Upon conversion, no adjustment or prepayment will be
made for distributions or dividends, but if any holder surrenders Convertible
Preferred Stock for conversion after the close of business on a Convertible
Preferred Dividend Record Date and prior to the opening of business on the
related Convertible Preferred Dividend Payment Date, then, notwithstanding such
conversion, the distribution or dividend payable on such Convertible Preferred
Dividend Payment Date will be paid on such Convertible Preferred Dividend
Payment Date to the registered holder of such shares on such Convertible
Preferred Dividend Record Date. Shares of Convertible Preferred Stock
surrendered for conversion during the period from the close of business on a
Convertible Preferred Dividend Record Date to the Convertible Preferred Dividend
Payment Date must also pay the amount of the distribution or dividend which is
payable. No fractional shares of Common Stock will be issued upon conversion
and, if the conversion results in a fractional interest, an amount will be paid
in cash equal to the value of such fractional interest based on the market price
of the Common Stock on the last trading day prior to the date of conversion.
The number of shares of Common Stock or other assets issuable upon
conversion and the conversion price are subject to adjustment upon the
occurrence of the following events: (i) the issuance of Common Stock as a
dividend or distribution on shares of Common Stock; (ii) the subdivision,
combination or reclassification of the outstanding shares of Common Stock, (iii)
the issuance to all holders of Common Stock of rights or warrants to subscribe
for or purchase Common Stock (or securities convertible into Common Stock) at a
price per share less than the then current market price per share, as determined
in accordance with the provisions of the Charter; (iv) the distribution to all
holders of Common Stock of evidences of indebtedness or assets (including
securities, but excluding Ordinary Cash Dividends, as defined below, and those
dividends, distributions, rights or warrants referred to above); and (v) the
distribution to all holders of Common Stock of rights or warrants to subscribe
for securities (other than those referred to in clause (iii) above).
The adjustments to be made in each such event are set forth in the Charter.
In the event of a distribution of evidence of indebtedness or other assets (as
described in clause (iv)) or a distribution to all holders of Common Stock of
rights to subscribe for additional shares of the Company's capital stock (other
than those referred to in clause (iii) above), the Company may, instead of
making an adjustment of the Conversion Price, make proper provision so that each
holder who converts such shares will be entitled to receive upon such
conversion, in addition to shares of Common Stock, an appropriate number of such
rights, warrants, evidences of indebtedness or other assets. No adjustment will
be made for Ordinary Cash Dividends (defined as distributions to holders of
Common Stock in an amount not exceeding the Operating Partnership's accumulated
FFO since the Initial Public Offering (as defined in the accompanying
Prospectus), after deducting dividends or other distributions (i) paid in
respect of all classes of capital stock of the Company and Common Units held by
persons other than the Company or (ii) accrued in respect of Convertible
Preferred Stock, the Senior Preferred Stock and any other shares of Preferred
Stock
S-11
<PAGE>
of the Company ranking on a parity with or senior to the Convertible Preferred
Stock as to dividends). In addition, no adjustment of the conversion price will
be made until cumulative adjustments amount to one percent or more of the
conversion price as last adjusted. Any adjustments not so required to be made
will be carried forward and taken into account in subsequent adjustments.
Whenever the number of shares of Common Stock or other assets issuable upon
conversion and the conversion price are adjusted as herein provided, the Company
(i) will promptly make available at the office of the transfer agent a statement
describing in reasonable detail such adjustment, and (ii) will cause to be
mailed by first class mail, postage prepaid, as soon as practicable, to each
holder of record of shares of Convertible Preferred Stock, a notice stating that
certain adjustments have been made and stating the adjusted conversion price.
In the event of any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale, transfer or lease of all or substantially all
of its assets to another corporation, is effected in such a way that holders of
Common Stock will be entitled to receive stock, securities or other assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger, sale, transfer or
lease, the holder of each share of Convertible Preferred Stock shall have the
right immediately to convert such share into the kind and amount of stock,
securities or other assets which the holders of such shares would have owned or
been entitled to receive immediately after the transaction if such holders had
converted such shares immediately before the effective date of the transaction,
subject to further adjustment upon the occurrence of the events described above.
RANK. The Convertible Preferred Stock, with respect to dividend rights and
distributions upon liquidation, dissolution, and winding up, ranks (i) senior to
the Common Stock, all other shares of Common Stock of the Company of all classes
and series, all classes of Excess Stock (other than the Excess Senior Preferred
Stock and Excess Convertible Preferred Stock, as to which the Convertible
Preferred Stock is senior only as to dividends), and shares of all other series
of capital stock issued by the Company other than any series of capital stock
the terms of which specifically provide that the capital stock of such series
rank senior to or on a parity with such Convertible Preferred Stock with respect
to dividend rights or distributions upon liquidation, dissolution, or winding up
of the Company; (ii) on a parity with the Excess Convertible Preferred Stock
(upon liquidation, dissolution and winding up) and the shares of all other
capital stock issued by the Company the terms of which specifically provide that
the shares rank on a parity with the Convertible Preferred Stock with respect to
dividends and distributions upon liquidation, dissolution, or winding up of the
Company or make no specific provision as to their ranking; and (iii) junior to
the Senior Preferred Stock, the Excess Senior Preferred Stock (only upon
liquidation, dissolution or winding up) and all other capital stock issued by
the Company the terms of which specifically provide that the shares rank senior
to the Convertible Preferred Stock with respect to dividends and distributions
upon liquidation, dissolution, or winding up of the Company (the issuance of
which must have been approved by a vote of at least a majority of the
outstanding shares of Convertible Preferred Stock).
The transfer agent and registrar for the Convertible Preferred Stock is
American Stock Transfer and Trust Company.
The Convertible Preferred Stock is quoted in the Nasdaq National Market
under the trading symbol "PRMEP."
All of the Convertible Preferred Stock offered hereby will, when issued, be
duly authorized, fully paid and nonassessable.
COMMON STOCK
All of the Common Stock offered hereby is duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares and to the provisions of the Charter regarding
S-12
<PAGE>
Preferred Stock, including the Senior Preferred Stock and the Convertible
Preferred Stock, and Excess Stock, holders of shares of Common Stock are
entitled to receive distributions on such shares if, as and when authorized and
declared by the Board of Directors out of assets legally available therefor and
to share ratably in the assets of the Company legally available for distribution
to the stockholders in the event of the liquidation, dissolution or winding-up
of the Company after payment of, or adequate provision for, all known debts and
liabilities of the Company. The Company intends to continue to pay quarterly
distributions. Subject to the payment in full of all current and any accumulated
dividends in respect of Senior Preferred Units (the "Senior Preferred Units")
and Convertible Preferred Units ("Convertible Preferred Units") of partnership
interest in the Operating Partnership, the preferential distribution of $0.295
per share of Common Stock (the "Preferential Distribution") (plus any
Preferential Distribution not paid in a previous quarter) will be payable by the
Company for each quarter before any distribution by the Operating Partnership in
respect of the Common Units of partnership interest in the Operating Partnership
(the "Common Units") held by the Limited Partners. After payment of the
Preferential Distribution, up to $0.295 will be distributed by the Operating
Partnership in respect of the Common Units held by the Limited Partners. Any
further amounts distributed in such quarter will be distributed ratably among
all holders of Common Units. If the Operating Partnership has not distributed to
the Company the amount specified above in any quarter, then the deficit will
cumulate and be distributable on a preferential basis in subsequent quarters.
Distributions not paid on the Common Units held by the limited partners of the
Operating Partnership for any quarter will not cumulate. The Preferential
Distribution will terminate when distributions of at least $0.295 have been paid
with respect to each Common Unit (held by the Company and others) during four
quarters without distributing to the Convertible Preferred Units and the Common
Units more than 90% of FFO after payment of the dividends on the Senior
Preferred Units for any such quarter. For purposes of determining whether the
Company's FFO is sufficient to terminate the Preferential Distribution, FFO is
calculated based on the old definition of FFO employed by NAREIT. For a
discussion of such definition, see the section entitled "The Company" beginning
on page 4 of the accompanying Prospectus. The Company believes that it has
satisfied the distribution requirement necessary to terminate the Preferential
Distribution for each of the two consecutive quarters ended December 31, 1996.
Based on the Common Units and Preferred Units to be outstanding immediately
following the completion of the Offering, the Company must generate FFO (old
definition) in excess of $11.1 million for each of the next two consecutive
quarters in order to terminate the Preferential Distribution ($11.2 million
assuming the Underwriters' overallotment option is exercised in full). Once the
Preferential Distribution has terminated, distributions in respect of the Common
Units will be made pro rata to the holders thereof.
The Convertible Preferred Stock is entitled to payment of distributions and
dividends at the rate declared on the Common Stock if such rate is greater than
the stated dividend rate on the Convertible Preferred Stock of $2.125 per share
per annum. Accordingly, at such time as the distribution or dividend rate on the
Common Stock is greater than the stated rate on the Convertible Preferred Stock,
holders of Convertible Preferred Stock will be entitled to participate in any
further growth of FFO together with the holders of Common Stock.
The Company will not, without the affirmative vote or consent of holders of
at least two-thirds of the shares of the Common Stock outstanding at the time,
amend, alter or repeal the provisions of the limited partnership agreement
governing the Operating Partnership or the Charter so as to reduce the
Preferential Distribution. In addition, the Company will not terminate the
Company's status as a REIT without the affirmative vote or consent of the
holders of at least a majority of the shares of Senior Preferred Stock,
Convertible Preferred Stock and Common Stock outstanding at the time, voting
together as a single class, given in person or by proxy, either in writing or at
a meeting.
Subject to the provisions of the Charter regarding Excess Stock, the Senior
Preferred Stock and Convertible Preferred Stock, each outstanding share of
Common Stock entitles the holder to one vote on all matters submitted to a vote
of stockholders, including the election of directors and, except as otherwise
S-13
<PAGE>
required by law or except as provided with respect to any other class or series
of shares, the holders of such shares will possess exclusive voting power. There
is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the directors then standing for election and the holders of the remaining shares
will not be able to elect any directors.
Holders of Common Stock have no conversion, sinking fund, redemption rights
or preemptive rights to subscribe for any securities of the Company.
Subject to the provisions of the Charter regarding Excess Stock, shares of a
particular class of issued Common Stock have equal dividend, distribution,
liquidation and other rights, and have no preference, appraisal or exchange
rights.
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.
The Common Stock is quoted in the Nasdaq National Market under the trading
symbol "PRME."
OTHER CAPITAL STOCK
For a description of the Senior Preferred Stock see "Description of
Preferred Stock" commencing on page 12 of the accompanying Prospectus.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For a description of the restrictions on ownership and transfer of the
capital stock of the Company, including the Convertible Preferred Stock and the
Common Stock, see "Description of Common Stock-- Restrictions on Ownership and
Transfer" commencing on page 24 of the accompanying Prospectus.
S-14
<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 Convertible Preferred Stock and
Common Stock set forth below opposite their respective names. Under the
Underwriting Agreement, the Underwriters are obligated to purchase all of the
shares of Stock offered hereby if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
OF CONVERTIBLE SHARES OF
UNDERWRITERS PREFERRED STOCK COMMON STOCK
- ------------------------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
Friedman, Billings, Ramsey & Co., Inc.......................................... 175,800 980,000
Morgan Keegan & Company, Inc................................................... -- 550,000
Stifel, Nicolaus & Company, Incorporated....................................... -- 550,000
------- --------------
Total...................................................................... 175,800 2,080,000
------- --------------
------- --------------
</TABLE>
The Underwriters have advised the Company that they propose to initially
offer the Stock to the public at the respective offering prices 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 $0.375
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 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 312,000
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 Stock or any security
substantially similar thereto, or any other security exchangeable for shares of
Stock or any security substantially similar thereto, for a period of 90 days
after the date of this Prospectus without the prior written consent of the
Representative, except for any stock issued by the Company upon conversion of
Convertible Preferred Stock or Common Units or pursuant to any stock incentive
plan of the Company.
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 Common Stock and the Convertible Preferred Stock are listed on the
Nasdaq National Market. There can be no assurance, however, that the Company
will be able to maintain the inclusion of the Common Stock and the Convertible
Preferred Stock in the Nasdaq National Market 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.
S-15
<PAGE>
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K as amended by Form 10-K/A-1) for the year
ended December 31, 1995, and 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, 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.
S-16
<PAGE>
PROSPECTUS
$100,000,000
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 $100,000,000 (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 additional 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 5 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.
------------------------
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY 14, 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 informational 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.
The Company has filed with the Commission a registration statement on Form
S-3 (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 Commission maintains a
"web site" that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission. The
address of such site is "http://www.sec.gov."
2
<PAGE>
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,
1995, as amended by Form 10-K/A-1 filed May 3, 1996.
2. Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996, June 30, 1996 (as amended by Form 10-Q/A filed January 30, 1997) and
September 30, 1996 (as amended by Form 10-Q/A filed January 30, 1997).
3. The Company's Current Reports on Form 8-K filed January 11, 1996,
February 26, 1996, April 1, 1996, April 29, 1996, June 6, 1996, January 30,
1997, February 13, 1997, and February 14, 1997 and 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.
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 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).
3
<PAGE>
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 December 31, 1996, the
Company's portfolio included 21 factory outlet centers in 16 states with 5.8
million square feet of gross leasable area ("GLA") that was 91% 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 in partnerships (the
"Property Partnerships") that are controlled by, 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 December 31, 1996, 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 61.2% 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"), the Operating Partnership must pay a preferential
distribution (the "Preferential Distribution") of $0.295 in each quarter (plus
any Preferential Distribution that is unpaid in any previous quarter) for each
Common Unit held by the Company (the amount of such units is equal to the number
of outstanding shares of Common Stock and totaled 13,404,651 as of December 31,
1996) before any distributions may be paid in respect of the Common Units held
by the Limited Partners of the Operating Partnership (which totaled 8,505,472 as
of December 31, 1996). The Operating Partnership Agreement provides that any
quarterly distributions made by the Operating Partnership in excess of the
Preferential Distribution must first be allocated pro rata among the Common
Units held by the Limited Partners up to $0.295 for each such Common Unit and
then be allocated pro rata among all of the Common Units. The Operating
Partnership Agreement further provides that the Preferential Distribution will
terminate only after the Operating Partnership has paid quarterly distributions
of at least $0.295 in respect of all of the Common Units during four successive
quarters without distributing more than 90% of its Funds from Operations ("FFO")
(calculated in the manner discussed below) in respect of the Convertible
Preferred Units and Common Units after payment in full of the distributions for
the Senior Preferred Units in any such quarter. Once the Preferential
Distribution is terminated, distributions with respect to the Common Units will
be allocated pro rata among all of the holders thereof.
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 both under 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 Preferential Distribution has
been terminated, FFO is calculated using the Old Definition and is defined as
net income (loss) (determined in accordance with GAAP) excluding gains (or
losses) from debt restructuring and sales of
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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. Pursuant to the Operating Partnership
Agreement, 7,951,675, or approximately 93% of the Common Units held by the
Limited Partners, are prohibited from being exchanged into Common Stock (or
cash) until the later of March 22, 1997 or the termination of the Preferential
Distribution without the consent of the Company and Friedman, Billings, Ramsey &
Co., Inc., the underwriter engaged in the Company's initial public offering.
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 December 31, 1996, the Prime Group, Inc. ("PGI") owned Common Units
representing a 35.4% 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.
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
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factory outlet centers by competitors. As of December 31, 1996, 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.
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 5.8 million square feet of GLA as of December 31, 1996. 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 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 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 Company's initial public offering in 1994 (the "Initial Public
Offering"), the Company established a policy of not incurring debt that would
result in a debt to total market capitalization of more
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<PAGE>
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.
POSSIBLE ADVERSE EFFECTS ON STOCK PRICE ARISING FROM SHARES AVAILABLE FOR FUTURE
SALE
No prediction can be made as to the effect, if any, of further sales of
shares, or the possibility of such sales, on the market price of the Common
Stock. In connection with the Company's Initial Public Offering, approximately
8.5 million Common Units were issued to Limited Partners. Pursuant to the
Operating Partnership Agreement, those Common Units are prohibited from being
exchanged for Common Stock (or cash, at the company's option) without the
consent of the Company or Friedman, Billings, Ramsey & Co., Inc. until the later
of (i) March 22, 1997 or (ii) the termination of the Preferential Distribution
(the "Effective Date"). For a discussion of the Preferential Distribution, see
"The Company." In addition, the Company has granted the Limited Partners certain
"demand" and "piggyback" registration rights with respect to their respective
shares of Common Stock which become effective on the Effective Date. Upon the
Effective Date, any shares of Common Stock obtained upon exchange of such Common
Units may be sold in the public market pursuant to registration rights that have
been granted by the Company or available exemptions from registration.
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.
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
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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 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 distributions to stockholders may be adversely affected.
DEBT FINANCING. The Company is subject to the risks associated with debt
financing, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest, the risk that the Company
will not be able to refinance existing indebtedness on the Properties or that
the terms of such refinancing will not be as favorable to the Company as the
terms of existing indebtedness and the risk that necessary capital expenditures
for purposes such as renovations and reletting space will not be able to be
financed on favorable terms. If a Property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, the Property
could be transferred to the mortgagee with a consequent loss of income and asset
value to the Company.
UNINSURED LOSS. The Company carries comprehensive liability, fire, flood,
extended coverage and rental loss insurance with respect to the Properties with
policy specifications and insured limits customarily carried for similar
properties. There are, however, certain types of losses (such as from wars or,
in certain locations, earthquakes) that may be either uninsurable or not
economically viable. Should an uninsured loss occur, the Company could lose its
capital investment and/or the anticipated profits and cash flow from one or more
Properties.
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)
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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.
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.
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"
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requirement, the Company's status as a REIT will terminate, and the Company will
not be able to prevent such termination.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost. Such disqualification would reduce the net
earnings of the Company available for investment or distribution to its
stockholders due to the additional tax liability of the Company for the years
involved.
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 (i) 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 or (ii) would beneficially own
more than 9.9% of the outstanding shares of Common Stock assuming the conversion
of all the outstanding shares of Convertible Preferred Stock but not the
exchange of any then outstanding Common Units.
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.
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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 with preferences and rights corresponding to
such Offered Securities. Unless otherwise specified in the applicable Prospectus
Supplement, the Operating Partnership intends to use the net proceeds received
from the Company in connection with 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 PREDECESSOR (1)
THE COMPANY ---------------------------------------------
NINE MONTHS ---------------------------- PERIOD JAN.
ENDED SEPTEMBER 30, YEAR ENDED PERIOD MARCH 22 1 YEAR ENDED DECEMBER 31,
- --------------------- DEC. 31, TO DEC. 31, TO MARCH 21, -------------------------------
1996 1995 1995 1994 1994 1993 1992 1991
- ---------- --------- ----------- --------------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (10,164) $ (8,881) $ (11,312) $ (8,185) $ (2,366) $ (4,423) $ (7,500) $ (7,328)
</TABLE>
- ------------------------
(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.
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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 $100,000,000. 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 December 31, 1996, 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 2,806,000 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
15,000,000 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 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
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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 will be convertible on or after March 31, 1997.
Shares of Convertible Preferred Stock currently outstanding are quoted in the
Nasdaq National Market under the trading symbol "PRMEP". 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 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, exercisable on or after March
31, 1997, except in the case of Convertible Preferred Stock called for
redemption, to convert all or any of the Convertible Preferred Stock 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 (i)
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 or
(ii) would beneficially own more than 9.9% of the outstanding shares of Common
Stock assuming the conversion of all the outstanding shares of Convertible
Preferred Stock but not the exchange of any then outstanding Common Units. 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.
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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;
(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.
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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.
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
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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.
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
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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 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
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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 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
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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.
RESTRICTION ON OWNERSHIP
As discussed below under "Description of Common Stock--Restrictions on
Ownership and Transfer" and elsewhere herein, 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.
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
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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 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
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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 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.
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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 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.
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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 December 31,
1996, there were 13,404,651 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 903,500 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options. Shares of Common Stock
currently outstanding are quoted in the Nasdaq National Market under the trading
symbol "PRME".
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, 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.
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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.
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 (i)
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 or
(ii) would beneficially own more than 9.9% of the outstanding shares of Common
Stock assuming the conversion of all the outstanding shares of Convertible
Preferred Stock but not the exchange of any then outstanding Common Units (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.
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
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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.
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
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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 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.
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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."
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
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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 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.
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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 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.
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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 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
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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 "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant," without incurring unrelated business taxable income.
Services which would give rise to unrelated business taxable income if provided
by a tax-exempt organization must be provided by an "independent contractor" who
is adequately compensated and from whom the Company does not derive or receive
any income. Receipts for services furnished to a tenant (whether or not rendered
by an independent contractor) which are not customarily provided to tenants in
properties of a similar class in the geographic market in which the property is
located will in no event qualify as "rents from real property."
Substantially all of the gross income of the Company is attributable
generally to investments in real property and specifically to rents attributable
to and gains from the disposition of real property. The Company does not receive
rents in excess of a DE MINIMIS amount based on the net income or profits of a
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tenant. Moreover, the Company believes that it does not receive any rents from a
Related Party Tenant, and does not receive rent attributable to personal
property leased in connection with a lease of real property that exceeds 15% of
the total rents received under any such lease.
The Operating Partnership provides certain services with respect to the
Properties, but does not satisfy the "independent contractor" requirements
described above. To the extent necessary to preserve the Company's status as a
REIT, the Operating Partnership will arrange to have services provided by
independent contractors from whom the Company does not derive or receive any
income.
The Operating Partnership also receives fees in exchange for the performance
of certain usual and customary services relating to property not owned entirely
by the Operating Partnership. The ratable portion of these fees attributable to
the part of the property not owned by the Operating Partnership does not
constitute qualifying income under the 75% or 95% gross income tests. The
remainder of these fees is ignored under the 75% and 95% gross income test. The
Company believes that the aggregate amount of such nonqualifying fees (and any
other nonqualifying income) in any taxable year will not exceed the limits on
nonqualifying income under the three gross income tests described above.
Should the potential amount of nonqualifying income in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid 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 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
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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.
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
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"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.
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
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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 change, and, as a result,
the Company would most likely be unable to satisfy the income and asset tests,
which would thus prevent the Company from qualifying as a REIT. In addition, any
change in the status for tax purposes of any of the Partnerships might be
treated as a taxable event, in which case the Company could incur a tax
liability without any related cash distribution. Further, if any of the
Partnerships were to be treated as an association taxable as a corporation,
items of income, gain, loss, deduction and credit of such Partnership would not
pass through to its partners; instead, the Partnership would be taxable as a
corporation, subject to entity-level taxation on its net income at regular
corporate tax rates. The partners of any such Partnership would be treated for
federal income tax purposes as stockholders, with distributions to such partners
being treated as dividends. See "Certain Federal Income Tax Considerations--
Requirements for Qualification--Income Tests, Asset Tests."
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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 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.
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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, or (iii) is
an estate or trust which is subject to taxation in the United States regardless
of the source of its income or which is under the primary supervision or
authority of a United States court or a United States fiduciary.
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 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.
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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 must treat a certain
percentage of all dividends received from the REIT during the year as unrelated
business taxable income. The percentage is equal to the ratio of the REIT's
gross income (less direct expenses related thereto) derived from the conduct of
unrelated trades or businesses determined as if the REIT were a tax-exempt
pension fund, to the REIT's gross income (less direct expenses related thereto)
from all sources. The special rules will not apply to require a pension fund to
recharacterize a portion of its dividends as unrelated business taxable income
unless the percentage computed is at least 5%.
A REIT will be treated as a "pension held REIT" if the REIT is predominantly
held by tax-exempt pension funds and if the REIT would otherwise fail to satisfy
the "five or fewer" ownership requirements discussed above, see "Certain Federal
Income Tax Considerations--Requirements for Qualification-- Organizational
Requirements," if the stock of the REIT held by such tax-exempt pension funds
were not treated as held directly by their respective beneficiaries. A REIT is
predominantly held by tax-exempt pension funds if at least one tax-exempt
pension fund holds more than 25% (measured by value) of the REIT's stock, or if
one or more tax-exempt pension funds (each of which owns more than 10% (measured
by value) of the REIT's stock) own in the aggregate more than 50% (measured by
value) of the REIT's stock. The Company believes that it will not be treated as
a pension-held REIT. However, because the
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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 nonresident
alien individuals, foreign corporations, foreign partnerships, foreign trusts
and estates and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are highly complex, and the following discussion is intended only
as a summary of such rules. Prospective Non-U.S. Stockholders should consult
with their own tax advisors to determine the impact of United States federal,
state, and local income tax laws on an investment in shares of Common Stock 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.
Distributions made by the Company that are not attributable to gain from the
sale or exchange by the Company of United States real property interests and
that are not designated by the Company as capital gain dividends will be treated
as ordinary income dividends to the extent made out of current or accumulated
earnings and profits of the Company. Generally, such ordinary income dividends
will be subject to United States withholding tax at the rate of 30% on the gross
amount of the dividend paid unless reduced or eliminated by an applicable United
States income tax treaty. The Company expects to withhold United States income
tax at the rate of 30% on the gross amount of any such dividends paid to a
Non-U.S. Stockholder unless a lower treaty rate applies and the Non-U.S.
Stockholder has filed an IRS Form 1001 with the Company, certifying the Non-U.S.
Stockholder's entitlement to treaty benefits.
Distributions made by the Company in excess of its current and accumulated
earnings and profits will be treated first as a tax-free return of capital to
each Non-U.S. Stockholder, reducing the adjusted basis which such Non-U.S.
Stockholder has in his/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 described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of the Company's current and accumulated earnings and profits, the distribution
will be subject to withholding at the rate applicable to a dividend
distribution. However, the Non-U.S. Stockholder may seek a refund from the IRS
of any amount withheld if it is subsequently determined that such distribution
was, in fact, in excess of the Company's then current and accumulated earnings
and profits.
As long as the Company continues to qualify as a REIT, distributions made by
the Company that are attributable to gain from the sale or exchange by the
Company of United States real property interests will be taxed to a Non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Stockholder
as if such distributions were gains "effectively connected" with the conduct of
a trade or business in the United States. Accordingly, a Non-U.S. Stockholder
will be taxed on such distributions at the same capital gain rates applicable to
U.S. Stockholders (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of non-resident alien individuals).
Distributions subject to FIRPTA also may
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be subject to the 30% branch profits tax in the case of a corporate Non-U.S.
Stockholder that is not entitled to treaty relief or exemption. The Company will
be required to withhold tax from any distribution to a Non-U.S. Stockholder that
could be designated by the Company as a capital gain dividend in an amount equal
to 35% of the gross distribution. The amount of tax withheld is fully creditable
against the Non-U.S. Stockholder's FIRPTA tax liability, and if such amount
exceeds the Non-U.S. Stockholder's federal income tax liability for the
applicable taxable year, the Non-U.S. Stockholder may seek a refund of the
excess from the IRS. In addition, if the Company designates prior distributions
as capital gain dividends, subsequent distributions, up to the amount of such
prior distributions, will be treated as capital gain dividends for purposes of
withholding.
Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of
shares of Common Stock or Convertible Preferred Stock generally will not be
subject to United States taxation unless the Common Stock or Convertible
Preferred Stock constitutes a "United States real property interest" within the
meaning of FIRPTA. The Common Stock or Convertible Preferred Stock will not
constitute a "United States real property interest" so long as the Company is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock is held directly or indirectly by Non-U.S. Stockholders. The Company
believes that it is and will continue to be a "domestically controlled REIT,"
and therefore that the sale of shares of Common Stock 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." 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.
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 "United States real property interest" only if the
selling Non-U.S. Stockholder's interest in the Company exceeded 5% at any time
during the 5 years preceding the sale or exchange. If gain on the sale or
exchange of shares of Common Stock 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.
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
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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.
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.
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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 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.
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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.
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, 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 inclusion in the Nasdaq National Market under the trading symbol
"PRME" and "PRMEP", respectively, subject to official notice of issuance. 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.
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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 other institutions, but in all cases
such institutions must be approved by the Company. The obligations of any
purchaser under any such contract will not be subject to any conditions other
than (i) 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 and (ii) if the Offered Securities are being sold to
underwriters, the Company shall have sold to such underwriters the total amount
of the Offered Securities less the amount thereof covered by such contracts. 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 Prime Retail, Inc. appearing in the
Company's Annual Report (Form 10-K as amended by Form 10-K/A-1) for the year
ended December 31, 1995, and 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 Prime Retail, Inc. 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, 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.
44
<PAGE>
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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 UNDERWRITER. 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
The Company............................................................... S-3
Recent Developments....................................................... S-3
Use of Proceeds........................................................... S-4
Price Range of Stock and Distribution
History................................................................. S-5
Description of Capital Stock.............................................. S-7
Underwriting.............................................................. S-15
Legal Matters............................................................. S-15
Experts................................................................... S-16
<CAPTION>
PROSPECTUS
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 3
The Company............................................................... 4
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 11
Excess of Combined Fixed Charges and Preferred Stock Dividends Over
Earnings................................................................ 11
General Description of the Offered Securities............................. 12
Description of Preferred Stock............................................ 12
Description of Depositary Shares.......................................... 19
Description of Common Stock............................................... 23
Description of the Warrants to Purchase Common Stock or Preferred Stock... 27
Certain Federal Income Tax Considerations................................. 27
Plan of Distribution...................................................... 43
Legal Opinions............................................................ 44
Experts................................................................... 44
</TABLE>
PRIME RETAIL, INC.
175,800 SHARES
8.5% SERIES B
CUMULATIVE PARTICIPATING
CONVERTIBLE PREFERRED STOCK
2,080,000 SHARES
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
FEBRUARY 14, 1997
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