United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period From to
----------- -----------
Commission file number 333-50139
----------------------
PRIME RETAIL, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 52-1844882
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
- ----------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(410) 234-0782
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address, or former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of June 22, 1998, the issuer had outstanding 53,929,494, Common Units.
<PAGE>
Prime Retail, L.P.
Form 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1998 and December 31,1997 1
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 3
Notes to the Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits or Reports on Form 8-K 18
Signatures 19
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<TABLE>
Prime Retail, L.P.
Consolidated Balance Sheets
(in thousands, except unit information)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 1998 December 31, 1997
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<S> <C> <C>
Assets
Investment in rental property:
Land $ 66,277 $ 66,277
Buildings and improvements 781,583 779,191
Property under development 76,403 53,139
Furniture and equipment 6,101 5,911
--------- -------
930,364 904,518
Accumulated depreciation (89,425) (82,016)
--------- -------
840,939 822,502
Cash and cash equivalents 126 6,277
Restricted cash 27,936 41,736
Accounts receivable, net 9,328 9,745
Deferred charges, net 13,670 16,206
Due from affiliates, net 11,010 9,982
Investment in partnerships 3,921 3,278
Other assets 3,081 2,108
--------- -------
Total assets $910,011 $911,834
========= =======
Liabilities, Minority Interests, Redeemable Equity
and Partners' Capital (Deficit)
Bonds payable $ 32,900 $132,900
Notes payable 492,874 482,365
Accrued interest payable 3,884 3,767
Real estate taxes payable 5,996 4,639
Construction costs payable 5,958 5,849
Accrued distributions payable 14,942 -
Accounts payable and other liabilities 11,710 19,022
--------- -------
Total liabilities 568,264 548,542
Minority interests 3,878 3,911
Redeemable equity:
Series A Senior Cumulative Preferred Units,
2,300,000 units issued and outstanding 59,216 60,525
Series B Cumulative Participating Convertible Preferred Units,
2,981,800 units issued and outstanding 77,751 78,949
Series C Cumulative Participating Convertible Redeemable
Preferred Units, 4,363,636 units issued and outstanding 59,432 60,000
--------- -------
Total redeemable equity 196,399 199,474
--------- -------
Partners' capital (deficit):
General partner 252,050 269,239
Limited partners (110,580) (109,332)
--------- --------
Total partners' capital (deficit) 141,470 159,907
--------- --------
Total liabilities, minority interests, redeemable equity and
partners' capital (deficit) $910,011 $911,834
========= ========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, L.P.
Consolidated Statements of Operations
(in thousands, except per share information)
<CAPTION>
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Three months ended March 31, 1998 1997
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<S> <C> <C>
Revenues
Base rents $ 23,104 $18,066
Percentage rents 865 669
Tenant reimbursements 10,743 8,949
Interest and other 2,704 2,478
-------- ------
Total revenues 37,416 30,162
Expenses
Property operating 8,353 6,633
Real estate taxes 2,856 2,390
Depreciation and amortization 7,791 6,326
Corporate general and administrative 1,423 1,114
Interest 8,374 9,169
Other charges 582 799
-------- ------
Total expenses 29,379 26,431
-------- ------
Income before minority interests 8,037 3,731
Income allocated to minority interests 47 30
-------- ------
Net income 7,990 3,701
Income allocated to preferred unitholders 4,381 3,093
Adjustment to reflect redeemable equity at redemption value 586 576
-------- ------
Net income applicable to common units $ 3,023 $ 32
========= ======
Earnings per common unit:
General partner $ 0.08 $ 0.00
========= ======
Limited partners $ 0.08 $ 0.00
========= ======
Net income applicable to common units:
General partner $ 2,305 $ 20
Limited partners 718 12
--------- ------
Total $ 3,023 $ 32
======== ======
Weighted average common units outstanding:
General partner 27,295 14,344
Limited partners 8,505 8,505
-------- ------
Total 35,800 22,849
======== ======
Distributions declared per common unit:
General partner $ 0.295 $0.295
======== ======
Limited partners $ 0.295 $0.295
======== ======
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, L.P.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
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Three months ended March 31, 1998 1997
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<S> <C> <C>
Operating Activities
Net income $ 7,990 $ 3,701
Adjustments to reconcile net income to
net cash provided by operating activities:
Income allocated to minority interests 47 30
Depreciation 7,479 5,912
Amortization of deferred financing costs and
interest rate protection contracts 509 944
Amortization of leasing commissions 312 414
Provision for uncollectible accounts receivable 306 253
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 111 (1,200)
Increase in due from affiliates, net (1,028) (59)
(Increase) decrease in all other assets 13,469 (1,756)
Increase in accrued interest 117 308
Decrease in accounts payable and other liabilities (4,155) (940)
------- -------
Net cash provided by operating activities 25,157 7,607
Investing Activities
Purchase of buildings and improvements (3,937) (4,770)
Increase in property under development (23,155) (5,107)
Acquisition of outlet centers - (37,658)
------- -------
Cash used in investing activities (27,092) (47,535)
Financing Activities Contributions from general partner:
Common units - 28,130
Series B preferred units - 3,800
Proceeds from notes payable 32,611 58,215
Principal repayments on notes payable (22,102) (23,329)
Deferred financing fees (85) (522)
Distributions paid (14,560) (10,126)
Distributions to minority interests (80) (82)
------- --------
Net cash provided by (used in) financing activities (4,216) 56,086
------- --------
Increase (decrease) in cash and cash equivalents (6,151) 16,158
Cash and cash equivalents at beginning of period 6,277 3,924
------- --------
Cash and cash equivalents at end of period $ 126 $20,082
======= =======
Supplemental disclosure of noncash financing activity:
Adjustment to reflect redeemable equity at
redemption value $ 586 $ 576
======= =======
===================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Prime Retail, L.P.
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 -- Interim Financial Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments consisting only of recurring accruals considered
necessary for a fair presentation have been included. Operating results for such
interim periods are not necessarily indicative of the results which may be
expected for a full fiscal year. For further information, refer to the
consolidated financial statements and footnotes included in Prime Retail L.P.'s
(the "Partnership") Registration Statement on Form S-4 (File No. 333-50139) for
the year ended December 31, 1997.
Unless the context requires otherwise, all references to the Partnership herein
mean Prime Retail, L.P. and those entities owned or controlled by Prime Retail,
L.P. The consolidated financial statements include the accounts of the
Partnership, the Operating Partnership and the partnerships in which the
Partnership has operational control. Profits and losses are allocated in
accordance with the terms of the agreement of limited partnership of the
Operating Partnership. Investments in partnerships in which the Partnership does
not have operational control are accounted for under the equity method of
accounting. Income (loss) applicable to minority interests and common units as
presented in the consolidated statements of operations is allocated based on
income (loss) before minority interests after income allocated to preferred
unitholders.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior year financial statement amounts and
related footnote information have been reclassified to conform with the current
year presentation.
Note 2 -- Merger Agreement
On November 12, 1997 and as amended on February 1, 1998, the Partnership's
General Partner entered into a definitive merger agreement (as amended, the
"Merger Agreement") with Horizon Group, Inc. ("Horizon") for an aggregate
consideration of approximately $945,200, including the assumption of $556,900 of
Horizon debt and transaction costs. The merger was completed on June 15, 1998.
As of June 15, 1998, the Partnership owned and operated 49 outlet centers
totaling approximately 13,700,000 square feet of gross leasable area ("GLA").
Under the terms of the Merger Agreement, the General Partner paid a fixed
exchange ratio of 0.20 of a share of 8.5% Series B Cumulative Participating
Convertible Preferred Stock ("Series B Convertible Preferred Stock") and 0.597
of a share of Common Stock for each share of common stock of Horizon. In
addition, each common unit in Horizon Partnership entitled the holder to receive
0.9193 of a Common Unit of the Partnership that will be exchangeable for a like
number of shares of Common Stock of the General Partner.
<PAGE>
Immediately prior to the merger, Horizon's operating partnership, Horizon Glen
Outlet Centers Limited Partnership ("Horizon Partnership"), contributed 13 of
its 35 centers to Horizon Group Properties, L.P. of which Horizon Group
Properties, Inc. ("HGP"), a subsidiary of Horizon, is the sole general partner.
Immediately after the merger, all of the common equity of HGP was distributed to
the convertible preferred and common shareholders and unitholders of the General
Partner of the Partnership and the shareholders and limited partners of Horizon
based on their ownership in the General Partner of the Partnership immediately
following the merger. One share of common stock of HGP was distributed for every
20 shares of Common Stock or Common Units of the General Partner of the
Partnership, and that approximately 1.196 shares of common stock of HGP was
distributed for every 20 shares of Series B Convertible Preferred Stock held in
the General Partner of the Partnership. Upon consummation of the merger, the
General Partner of the Partnership paid a special cash distribution of $0.60 per
share of Series B Convertible Preferred Stock and $0.50 per share/unit of Common
Stock, Series C Cumulative Participating Convertible Redeemable Preferred
Stock/Unit ("Series C Preferred Security") and Common Unit, as applicable.
Shareholders and limited partners in Horizon did not participate in this
distribution. HGP owns and operates 15 outlet centers (including Indiana Factory
Shops and Nebraska Crossing Factory Stores, collectively the "Prime Transferred
Properties", which was acquired from the Partnership as discussed below)
totaling approximately 3,100,000 square feet of GLA.
In connection with the closing of the merger, the Partnership sold the Prime
Transferred Properties to HGP for an aggregate consideration of approximately
$26,000 resulting in a loss of approximately $15,000.
The merger was accounted for as a purchase. The exchange of shares of Horizon
for shares of the General Partner of the Partnership was made on a tax-free
basis.
On December 10, 1997, a shareholder of Horizon filed a purported class action
lawsuit in the Circuit Court for Muskegon County, Michigan (the "Court") against
Horizon, the General Partner of the Partnership, and certain directors and
former directors of Horizon. The substantive allegations claim that Horizon's
directors breached their fiduciary duties to Horizon's shareholders in approving
the merger of Horizon and the General Partner of the Partnership and that the
consideration to be paid to Horizon's shareholders in connection with the merger
is unfair and inadequate. The lawsuit requests that such merger be enjoined or,
in the event that the purported transaction is consummated, that it be rescinded
or damages be awarded to the class members. On January 16, 1998, the defendants
answered the complaint, denying that the Horizon board of directors breached
their fiduciary duties and denying that such consideration is unfair or
inadequate. On May 4, 1998, counsel for the parties appeared before the Court
for the purpose of reporting that a settlement of the case had been reached
subject to the satisfaction of several conditions including the completion of
the merger.
<PAGE>
The general terms of the settlement are contained in a Memorandum of
Understanding ("Memorandum") among counsel for the parties dated as of May 7,
1998. Under the Memorandum, subject to the terms of the Stipulation of
Settlement, the defendants will pay to class counsel for their fees and
expenses, subject to approval by the Court. The Partnership believes that the
amount of the settlement will not have a material adverse effect on the
consolidated financials statements of the Partnership.
On June 15, 1998, the Partnership completed a $292,000 debt financing with
Nomura Asset Capital Corporation ("Nomura").
The financing consisted of (i) a $180,000 nonrecourse permanent loan (the
"Permanent Loan") and (ii) a $112,000 full recourse bridge loan (the "Bridge
Loan"). The Permanent Loan is (i) collateralized by first mortgages on four
factory outlet centers, (ii) bears a fixed rate of interest of 6.99%, and (iii)
requires monthly principal and interest payments pursuant to an approximate
26-year amortization schedule. The Bridge Loan is (i) collateralized by first
mortgages on six factory outlet centers, (ii) bears a variable rate of interest
equal to 30-day LIBOR plus 1.35%, (iii) matures in three years, and (iv)
requires monthly interest-only payments.
Following the spin-off of HGP, the Partnership will be a guarantor or otherwise
obligated with respect to approximately $42,000 of HGP's indebtedness, including
$12,200 of obligations under HGP's $108,200 three-year secured credit facility
with Nomura and $11,800 of mortgage debt that is scheduled to mature August 14,
1998. The Partnership and HGP are continuing to seek the consent of certain
parties to the assumption by HGP or its affiliates of $14,300 of indebtedness in
connection with the spin-off.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Amounts in thousands, except share, unit and square foot information)
Introduction
The following discussion and analysis of the consolidated financial condition
and results of operations of Prime Retail, L.P. (the "Partnership") should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto. Historical results and percentage relationships set forth herein are
not necessarily indicative of future operations.
Cautionary Statements
The following discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties; including, but not limited to, the effects of future events on
the Partnership's financial performance; the risk that the Partnership may be
unable to finance its planned acquisition and development activities; risks
related to the retail industry in which the Partnership's outlet centers
compete, including the potential adverse impact of external factors, such as
inflation, consumer confidence, unemployment rates and consumer tastes and
preferences; risks associated with the Partnership's property acquisitions, such
as the lack of predictability with respect to financial returns; risks
associated with the Partnership's property development activities, such as the
potential for cost overruns, delays and the lack of predictability with respect
to the financial returns associated with these development activities; the risk
of potential increase in market interest rates from current levels; and risks
associated with real estate ownership, such as the potential adverse impact of
changes in local economic climate on the revenues and the value of the
Partnership's properties.
Results of Operations
General
The Partnership has grown by developing and acquiring factory outlet centers and
expanding certain of its existing factory outlet centers. As summarized in TABLE
1, the Partnership's factory outlet portfolio consisted of 28 operating factory
outlet centers totaling 7,237,000 square feet of gross leasable area ("GLA") at
March 31, 1998, compared to 24 operating factory outlet centers totaling
6,138,000 square feet of GLA at March 31, 1997.
During the three months ending March 31, 1998, the Partnership opened an
expansion to an existing factory outlet center totaling 20,000 square feet of
GLA. During 1997, the Partnership purchased seven factory outlet centers
totaling 1,221,000 square feet of GLA and opened expansions to existing factory
outlet centers totaling 224,000 square feet of GLA. Additionally, the
Partnership acquired its joint venture partner's 25% ownership interest in
Buckeye Factory Shops Limited Partnership ("Buckeye") on September 2, 1997, and
now owns 100% of this factory outlet center with 205,000 square feet of GLA. The
significant increase in the number of the Partnership's operating properties and
total GLA since March 31, 1997 are collectively referred to as the "Portfolio
Expansion".
<PAGE>
<TABLE>
Portfolio of Properties
March 31, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Niagara International Factory Outlets (2)--Niagara Falls, New York...... I July 1982 300,000 95%
II August 1985 234,000 78
------- ---
534,000 88
Prime Retail Outlets of Kittery (3)--Kittery Maine...................... I April 1984 25,000 100
II May 1984 78,000 100
III August 1989 18,000 100
------ ---
121,000 100
Latham Factory Outlets (3)--Latham, New York............................ I August 1987 43,000 100
Warehouse Row Factory Shops (4)--Chattanooga, Tennessee................. I November 1989 95,000 96
II August 1993 26,000 74
------- ---
91
Oak Creek Factory Stores (5)--Sedona, Arizona .......................... I August 1990 82,000 100
San Marcos Factory Shops--San Marcos, Texas............................. I August 1990 177,000 100
II August 1991 70,000 100
III August 1993 117,000 100
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
------- ---
419,000 100
Shasta Factory Stores (2)--Anderson, California......................... I August 1990 165,000 94
Factory Outlets at Post Falls (5)--Post Falls, Idaho ................... I July 1991 111,000 94
II July 1992 68,000 81
------ ---
179,000 89
Gulf Coast Factory Shops--Ellenton, Florida............................. I October 1991 187,000 96
II August 1993 123,000 100
III October 1996 30,000 100
------- ---
340,000 98
Triangle Factory Shops--Raleigh-Durham, North Carolina.................. I October 1991 181,000 100
II July 1996 6,000 100
------- ---
187,000 100
Coral Isle Factory Shops--Naples/Marco Island, Florida.................. I December 1991 94,000 100
II December 1992 32,000 100
III March 1998 20,000 60
------ ---
146,000 95
Castle Rock Factory Shops--Castle Rock, Colorado........................ I November 1992 181,000 97
II August 1993 94,000 98
III November 1993 95,000 93
IV August 1997 110,000 100
------- ---
480,000 97
Bend Factory Outlets (5)--Bend, Oregon.................................. I December 1992 97,000 97
Ohio Factory Shops--Jeffersonville, Ohio................................ I July 1993 186,000 93
II November 1993 100,000 100
IIB November 1994 13,000 75
IIIA August 1996 35,000 100
IIIB March 1997 73,000 72
------- ---
407,000 91
</TABLE>
<TABLE>
Portfolio of Properties (continued)
March 31, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gainesville Factory Shops--Gainesville, Texas........................... I August 1993 210,000 82%
II November 1994 106,000 81
------- ---
316,000 81
Nebraska Crossing Factory Stores (6)--Gretna, Nebraska.................. I October 1993 192,000 83
Rocky Mountain Factory Stores--Loveland, Colorado....................... I May 1994 139,000 100
II November 1994 50,000 100
III May 1995 114,000 100
IV May 1996 25,000 100
--------- ---
328,000 100
Oxnard Factory Outlet (7)--Oxnard, California........................... I June 1994 148,000 88
Grove City Factory Shops--Grove City, Pennsylvania...................... I August 1994 235,000 100
II November 1994 95,000 100
III November 1995 85,000 97
IV November 1996 118,000 99
-------- ---
533,000 99
Huntley Factory Shops--Huntley, Illinois................................ I August 1994 192,000 97
II November 1995 90,000 83
-------- ---
282,000 92
Florida Keys Factory Shops--Florida City, Florida....................... I September 1994 208,000 91
Indiana Factory Shops (6)--Daleville, Indiana........................... I November 1994 208,000 88
IIA November 1996 26,000 35
-------- ---
234,000 82
Kansas City Factory Outlets--Odessa, Missouri........................... I July 1995 191,000 97
II November 1996 105,000 53
-------- ---
296,000 81
Magnolia Bluff Factory Shops (8)--Darien, Georgia....................... I July 1995 238,000 88
IIA November 1995 49,000 99
IIB July 1996 20,000 100
-------- ---
307,000 91
Arizona Factory Shops (9)--Phoenix, Arizona............................. I September 1995 217,000 97
II September 1996 109,000 92
-------- ---
326,000 95
Gulfport Factory Shops (10)--Gulfport, Mississippi...................... I November 1995 228,000 97
IIA November 1996 40,000 100
IIB November 1997 38,000 38
-------- ---
306,000 90
Buckeye Factory Shops (11)--Burbank, Ohio............................... I November 1996 205,000 94
Carolina Factory Shops--Gaffney, South Carolina......................... I November 1996 235,000 96
--------- ---
Total Factory Outlet Centers (12) 7,237,000 93%
========= ===
====================================================================================================================================
</TABLE>
<PAGE>
Notes:
(1) Percentage reflects fully executed leases as of March 31, 1998 as a percent
of square feet of GLA.
(2) The Partnership acquired this factory outlet center on December 2, 1997
from an unrelated third party.
(3) The Partnership acquired this factory outlet center on October 29, 1997
from an unrelated third party.
(4) The Partnership owns a 2% partnership interest as the sole general partner
in Phase I of this property but is entitled to 99% of the property's
operating cash flow and net proceeds from a sale or refinancing. An
unrelated third party holds a 35% limited partnership interest and the
Partnership holds a 65% general partnership interest in the partnership
that owns Phase II of this property. Phase I of this mixed-use development
includes 154,000 square feet of office space and Phase II includes 5,000
square feet of office space. The total office space of 159,000 square feet
is not included in this table and such space was 64% leased as of March 31,
1998.
(5) The Partnership acquired this factory outlet center on February 13, 1997
from an unrelated third party.
(6) Upon consummation of the Merger Agreement, the Partnership intends to sell
this factory outlet cente (see Note 2 - "Merger Agreement" of the Notes to
Consolidated Financial Statements).
(7) On February 7, 1997, the Partnership purchased an additional 20% interest
from a joint venture partner, increasing the Partnership' ownership
interest in this property to 50%.
(8) The Partnership operates this property pursuant to a long-term ground lease
under which the Partnership receives the economic benefit of a 100%
ownership interest.
(9) The Partnership owns 50% of this factory outlet center in a join venture
partnership with an unrelated third party.
(10) The real property on which this outlet center is located is subject to a
long-term ground lease. The Partnership receives the economic benefit of a
100% ownership interest.
(11) On September 2, 1997, the Partnership purchased its joint venture partner's
25% partnership interest in Buckeye Factory Shops Limited Partnership and
now owns 100% of this factory outlet center.
(12) The Partnership also owns three community centers not included in this
table containing 424,000 square feet of GLA in the aggregate that were 90%
leased as of March 31, 1998.
Comparison of the three months ended March 31, 1998 to the three months ended
March 31, 1997.
Summary
The Partnership reported net income of $7,990 and $3,701 for the three months
ended March 31, 1998 and 1997, respectively. For the three months ended March
31, 1998, the net income applicable to common unitholders was $3,023, or $0.08
per common unit. For the three months ended March 31, 1997, the net income
applicable to common unitholders was $32, or $0.00 per common unit.
Revenues
Total revenues were $37,416 for the three months ended March 31, 1998 compared
to $30,162 for the three months ended March 31, 1997, an increase of $7,254, or
24.1%. Base rents increased $5,038, or 27.9%, in 1998 compared to 1997.
Straight-line rents (included in base rents) were $(26) and $125 for the three
months ended March 31, 1998 and 1997, respectively. These increases are
primarily due to the Portfolio Expansion.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, increased $196, or 29.3%, during the three months
ended March 31, 1998 compared to the same period in 1997. This increase was
attributable to the Portfolio Expansion. For the three months ended March 31,
1998, same-space sales in centers owned by the Partnership were flat compared to
the same period in 1997. "Same-space sales" is defined as the weighted average
sales per square foot reported by merchants for space open since January 1,
1997. The Partnership's same-space sales for the year ended December 31, 1997
were $231.89 per square foot. For the three months ended March 31, 1998,
same-store sales decreased by 2.4% compared to the same period in 1997. The
decrease in same-store sales is primarily due to the shift of the Easter
shopping period from March in 1997 to April in 1998. "Same-store sales" is
defined as the weighted average sales per square foot reported by merchants for
stores opened since January 1, 1997. Tenant reimbursements, which represent the
contractual recovery from tenants of certain operating expenses, increased by
$1,794, or 20.0%, during the three months ended March 31, 1998 over the same
period in 1997. These increases were primarily due to the Portfolio Expansion.
<PAGE>
Interest and other income increased by $226, or 9.1%, to $2,704 during the three
months ended March 31, 1998 as compared to $2,478 for the three months ended
March 31, 1997. The increase reflects higher temporary tenant income of $490,
lease termination income of $92 and other ancillary income of $47, partially
offset by a decrease in interest income of $403. The reduction in interest
income was primarily the result of the use of a portion of the Partnership's
expansion loan escrow account to fund certain of its development activities
during 1997 and 1998. The expansion loan escrow account is included in
restricted cash in the Consolidated Balance Sheets.
Expenses
Property operating expenses increased by $1,720, or 25.9%, to $8,353 for the
three months ended March 31, 1998 compared to $6,633 for the same period in
1997. Real estate taxes increased by $466, or 19.5%, to $2,856 for the three
months ended March 31, 1998, from $2,390 in the same period for 1997. The
increases in property operating expenses and real estate taxes are primarily due
to the Portfolio Expansion. As shown in TABLE 2, depreciation and amortization
expense increased by $1,465, or 23.2%, to $7,791 for the three months ended
March 31, 1998, compared to $6,326 for 1997. This increase results from the
depreciation and amortization of assets associated with the Portfolio Expansion.
TABLE 2 -- Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- -------------------------------------------------------------------------------
Three months ended March 31,
1998 1997
- -------------------------------------------------------------------------------
Building and improvements $4,324 $3,258
Land improvements 830 627
Tenant improvements 2,075 1,827
Furniture and fixtures 250 200
Leasing commissions(1) 312 414
------ ------
Total $7,791 $6,326
====== ======
================================================================================
Note:
(1) In accordance with generally accepted accounting principles ("GAAP"),
leasing commissions are classified as intangible assets. Therefore, the
amortization of leasing commissions is reported as a component of
depreciation and amortization expense.
TABLE 3 -- Components of Interest Expense
The components of interest expense are summarized as follows:
- --------------------------------------------------------------------------------
Three months ended March 31, 1998 1997
- --------------------------------------------------------------------------------
Interest incurred $9,276 $9,109
Interest capitalized (1,388) (845)
Interest earned on interest rate protection contracts (23) (39)
Amortization of deferred financing costs 167 608
Amortization of interest rate protection contracts 342 336
----- ------
Total $8,374 $9,169
====== ======
================================================================================
<PAGE>
As shown in TABLE 3, interest expense for the three months ended March 31, 1998
decreased by $795, or 8.7%, to $8,374 compared to $9,169 for the same period in
1997. This decrease reflects (i) an increase in the amount of interest
capitalized in connection with development projects of $543 and, (ii) a decrease
in amortization of deferred financing costs of $441. Partially offsetting these
items were (i) higher interest incurred of $167, (ii) a reduction in interest
earned on interest rate protection contracts of $16, and (iii) an increase in
amortization of interest rate protection contracts of $6.
The increase in interest incurred is primarily attributable to an increase of
approximately $3,342 in the Partnership's average debt outstanding during the
three months ended March 31, 1998 compared to the same period in 1997 offset by
a slight decrease in the weighted average interest rate for the three months
ended March 31, 1998 compared to the same period in 1997. The weighted average
interest rates were 7.10% and 7.12% for the 1998 and 1997 periods, respectively.
In connection with re-leasing space to new merchants, the Partnership incurred
$195 and $235 in capital expenditures during the three months ended March 31,
1998 and 1997, respectively.
Liquidity and Capital Resources
Sources and Uses of Cash
For the three months ended March 31, 1998, net cash provided by operating
activities was $25,157, cash used in investing activities was $27,092, and net
cash used in financing activities was $6,151.
The primary uses of cash for investing activities during the three months ended
March 31, 1998 included: (i) costs associated with the development and
construction of two new factory outlet centers and expansions to existing
factory outlet centers aggregating 751,000 square feet of GLA which are expected
to open during 1998 (20,000 square feet of GLA opened during the first quarter
of 1998), (ii) costs associated with the completion of expansions to existing
factory outlet centers aggregating 224,000 square feet of GLA which opened
during 1997, and (iii) costs for pre-development activities associated with
future developments.
The primary uses of cash for financing activities during the three months ended
March 31, 1998 were principal repayments on notes payable of $22,102, and
preferred and common unit distributions of $14,560. Such uses were partially
offset by proceeds from new borrowings of $32,611 during the period.
Property Acquisitions
During 1998, the Partnership will explore acquisitions of factory outlet centers
in the United States and Europe as well as consider possible strategic
acquisitions of other assets in the retail sector. The Partnership has evaluated
and is evaluating such opportunities and prospects and will continue to do so
throughout 1998. The Partnership cannot predict if any transaction will be
consummated, nor the terms or form of consideration required.
<PAGE>
Merger Agreement
On November 12, 1997 and as amended on February 1, 1998, the Partnership's
General Partner entered into a definitive merger agreement (as amended, the
"Merger Agreement") with Horizon Group, Inc. ("Horizon") for an aggregate
consideration of approximately $945,200, including the assumption of $556,900 of
Horizon debt and transaction costs. The merger was completed on June 15, 1998.
As of June 15, 1998, the Partnership owned and operated 49 outlet centers
totaling approximately 13,700,000 square feet of gross leasable area ("GLA").
Under the terms of the Merger Agreement, the General Partner paid a fixed
exchange ratio of 0.20 of a share of 8.5% Series B Cumulative Participating
Convertible Preferred Stock ("Series B Convertible Preferred Stock") and 0.597
of a share of Common Stock for each share of common stock of Horizon. In
addition, each common unit in Horizon Partnership entitled the holder to receive
0.9193 of a Common Unit of the Partnership that will be exchangeable for a like
number of shares of Common Stock of the General Partner.
Immediately prior to the merger, Horizon's operating partnership, Horizon Glen
Outlet Centers Limited Partnership ("Horizon Partnership"), contributed 13 of
its 35 centers to Horizon Group Properties, L.P. of which Horizon Group
Properties, Inc. ("HGP"), a subsidiary of Horizon, is the sole general partner.
Immediately after the merger, all of the common equity of HGP was distributed to
the convertible preferred and common shareholders and unitholders of the General
Partner of the Partnership and the shareholders and limited partners of Horizon
based on their ownership in the General Partner of the Partnership immediately
following the merger. One share of common stock of HGP was distributed for every
20 shares of Common Stock or Common Units of the General Partner of the
Partnership, and that approximately 1.196 shares of common stock of HGP was
distributed for every 20 shares of Series B Convertible Preferred Stock held in
the General Partner of the Partnership. Upon consummation of the merger, the
General Partner of the Partnership paid a special cash distribution of $0.60 per
share of Series B Convertible Preferred Stock and $0.50 per share/unit of Common
Stock, Series C Cumulative Participating Convertible Redeemable Preferred
Stock/Unit ("Series C Preferred Security") and Common Unit, as applicable.
Shareholders and limited partners in Horizon did not participate in this
distribution. HGP owns and operates 15 outlet centers (including Indiana Factory
Shops and Nebraska Crossing Factory Stores, collectively the "Prime Transferred
Properties", which was acquired from the Partnership as discussed below)
totaling approximately 3,100,000 square feet of GLA.
In connection with the closing of the merger, the Partnership sold the Prime
Transferred Properties to HGP for an aggregate consideration of
approximately $26,000 resulting in a loss of approximately $15,000.
<PAGE>
The merger was accounted for as a purchase. The exchange of shares of Horizon
for shares of the General Partner of the Partnership was made on a tax-free
basis.
On December 10, 1997, a shareholder of Horizon filed a purported class action
lawsuit in the Circuit Court for Muskegon County, Michigan (the "Court") against
Horizon, the General Partner of the Partnership, and certain directors and
former directors of Horizon. The substantive allegations claim that Horizon's
directors breached their fiduciary duties to Horizon's shareholders in approving
the merger of Horizon and the General Partner of the Partnership and that the
consideration to be paid to Horizon's shareholders in connection with the merger
is unfair and inadequate. The lawsuit requests that such merger be enjoined or,
in the event that the purported transaction is consummated, that it be rescinded
or damages be awarded to the class members. On January 16, 1998, the defendants
answered the complaint, denying that the Horizon board of directors breached
their fiduciary duties and denying that such consideration is unfair or
inadequate. On May 4, 1998, counsel for the parties appeared before the Court
for the purpose of reporting that a settlement of the case had been reached
subject to the satisfaction of several conditions including the completion of
the merger.
The general terms of the settlement are contained in a Memorandum of
Understanding ("Memorandum") among counsel for the parties dated as of May 7,
1998. Under the Memorandum, subject to the terms of the Stipulation of
Settlement, the defendants will pay to class counsel for their fees and
expenses, subject to approval by the Court. The Partnership believes that the
amount of the settlement will not have a material adverse effect on the
consolidated financials statements of the Partnership.
On June 15, 1998, the Partnership completed a $292,000 debt financing with
Nomura Asset Capital Corporation ("Nomura").
The financing consisted of (i) a $180,000 nonrecourse permanent loan (the
"Permanent Loan" and (ii) a $112,000 full recourse bridge loan (the "Bridge
Loan"). The Permanent Loan is (i) collateralized by first mortgages on four
factory outlet centers, (ii) bears a fixed rate of interest of 6.99%, and (iii)
requires monthly principal and interest payments pursuant to an approximate
26-year amortization schedule. The Bridge Loan is (i) collateralized by first
mortgages on six factory outlet centers, (ii) bears a variable rate of interest
equal to 30-day LIBOR plus 1.35%, (iii) matures in three years, and (iv)
requires monthly interest-only payments.
<PAGE>
Following the spin-off of HGP, the Partnership will be a guarantor or otherwise
obligated with respect to approximately $42,000 of HGP's indebtedness, including
$12,200 of obligations under HGP's $108,200 three-year secured credit facility
with Nomura and $11,800 of mortgage debt that is scheduled to mature August 14,
1998. The Partnership and HGP are continuing to seek the consent of certain
parties to the assumption by HGP or its affiliates of $14,300 of indebtedness in
connection with the spin-off.
Planned Development
Management believes that there is sufficient demand for continued development of
new factory outlet centers and expansions of certain existing factory outlet
centers. The Partnership expects to open approximately 751,000 square feet of
GLA during 1998 including the Outlet Village of Lebanon which opened on April
17, 1998 and another new factory outlet center currently under construction (the
Outlet Village of Hagerstown). The Outlet Village of Lebanon is located in
Lebanon, Tennessee, approximately 25 miles east of Nashville, and contains
208,000 square feet of GLA and features approximately 50 designer and specialty
outlet stores. The Outlet Village of Lebanon was approximately 86% occupied on
its grand opening. At March 31, 1998, the remaining budgeted capital
expenditures for 1998 planned developments aggregated approximately $59,637,
while anticipated capital expenditures related to the completion of expansions
of existing factory outlet centers opened during 1997 (aggregating 224,000
square feet of GLA) approximated $4,106.
Management believes that the Partnership has sufficient capital and capital
commitments to fund the remaining capital expenditures associated with its 1997
and 1998 development activities. These funding requirements are expected to be
met, in large part, with the proceeds from various loan facilities including the
financing of certain unencumbered properties. If adequate financing for such
development and expansion is not available, the Partnership may not be able to
develop new centers or expand existing centers at currently planned levels.
The Partnership currently plans to open one new factory outlet center and
several expansions in 1999 that are expected to contain approximately 400,000
square feet of GLA, in the aggregate, and have a total expected development cost
of approximately $56,000. The Partnership expects to fund the development cost
of these projects from (i) certain line of credit facilities, (ii) joint venture
partners, (iii) retained cash flow from operations, (iv) construction loans, and
(v) the potential sale of common or preferred equity in the public or private
capital markets. As of March 31, 1998, there were no material commitments with
regard to the construction of the new factory outlet center and expansions
scheduled to open in 1999. There can be no assurance that the Partnership will
be successful in obtaining the required amount of equity capital or debt
financing for the 1999 planned openings or that the terms of such capital
raising activities will be as favorable as the Partnership has experienced in
prior periods.
<PAGE>
Debt Repayments and Preferred Unit Distributions
The Partnership's aggregate indebtedness was $525,774 and $515,265 at March 31,
1998 and December 31, 1997, respectively. At March 31, 1998, such indebtedness
had a weighted average maturity of 6.1 years and bore interest at a weighted
average interest rate of 7.10% per annum. At March 31, 1998, $74,452, or 14.2%,
of such indebtedness bore interest at fixed rates and $451,322, or 85.8%, of
such indebtedness, including $28,250 of tax-exempt bonds, bore interest at
variable-rates. Of the variable rate indebtedness outstanding at March 31, 1998,
$355,178 is scheduled to convert to a fixed rate of 7.782% in November 1998 for
the remaining five-year term of such indebtedness.
At March 31, 1998, the Partnership held interest rate protection contracts on
all $28,250 of its floating rate tax-exempt indebtedness which expire in 1999
and approximately $355,178 of other floating rate indebtedness which expire in
November 1998 (or approximately 85.0% of its total floating rate indebtedness).
In addition, the Partnership held additional interest rate protection contracts
on $43,900 (of which $22,000 expires in July 1998 and $21,900 expires in April
1999) of the $355,178 floating rate indebtedness to further reduce the
Partnership's exposure to increases in interest rates.
The Partnership's ratio of debt to total market capitalization at March 31, 1998
(defined as total debt divided by the sum of: (a) the aggregate market value of
the outstanding Partnership Common Units, assuming the full exchange of
Partnership Series C Preferred Units into Partnership Common Units; (b) the
aggregate market value of the outstanding shares of Series B Convertible
Preferred Units; (c) the aggregate liquidation preference of the 10.5% Series A
Senior Cumulative Preferred Units ("Senior Preferred Units") at $25.00 per unit;
and (d) the total debt of the Partnership) was 41.9%.
The Partnership is obligated to repay $10,851 of mortgage indebtedness during
the remainder of 1998 and $63,790 in 1999. Annualized cumulative distributions
on the Partnership's Senior Preferred Units, Series B Convertible Preferred
Units and Series C Preferred Units outstanding March 31, 1998 are $6,038,
$6,336, and $5,149, respectively. These distributions are payable quarterly, in
arrears.
The Partnership anticipates that cash flow from operations, together with cash
available from borrowings and other sources, will be sufficient to satisfy its
debt service obligations, expected distribution requirements and operating cash
needs for the next year.
Economic Conditions
Substantially all of the merchants' leases contain provisions that somewhat
mitigate the impact of inflation. Such provisions include clauses providing for
increases in base rent and clauses enabling the Partnership to receive
percentage rentals based on merchants' gross sales. Substantially all leases
require merchants to pay their proportionate share of all operating expenses,
including common area maintenance, real estate taxes and promotion, thereby
reducing the Partnership's exposure to increased costs and operating expenses
resulting from inflation.
At March 31, 1998, the Partnership maintained interest rate protection contracts
to protect against significant increases in interest rates on certain floating
rate indebtedness (see "Debt Repayments and Preferred Stock Distributions and
Dividends").
The Partnership intends to reduce operating and leasing risks by managing its
existing portfolio of properties with the goal of improving its tenant mix,
rental rates and lease terms and attracting high fashion, upscale manufacturers
and national brand-name manufacturers as merchants.
<PAGE>
Year 2000
Recognizing the need to ensure that the Partnership's operations will not be
adversely impacted by year 2000 software failures, management has assessed the
potential impact of the year 2000 on the processing of date-sensitive
information by the Partnership's computerized information systems. Based on this
assessment, management believes that the Partnership's primary computerized
information systems are year 2000 compliant and the Partnership's operations
will not be adversely impacted by year 2000 software failures.
Funds from Operations
Management believes that to facilitate a clear understanding of the
Partnership's consolidated operating results, Funds from Operations ("FFO")
should be considered in conjunction with net income (loss) presented in
accordance with GAAP. Management believes that FFO is an important and widely
used measure of the operating performance of REITs which provides a relevant
basis for comparison to other REITs. Therefore, FFO is presented to assist
investors in analyzing the performance of the Partnership. FFO represents net
income (loss) (computed in accordance with GAAP) excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization after adjustments for unconsolidated partnerships and joint
ventures.
The Partnership has adopted the National Association of Real Estate Investment
Trusts' definition of FFO. However, the Partnership cautions that the
calculation of FFO may vary from entity to entity and as such the presentation
of FFO by the Partnership may not be comparable to other similarly titled
measures of other reporting companies. FFO does not represent cash flow from
operating activities in accordance with GAAP and is not indicative of cash
available to fund all of the Partnership's cash needs. FFO should not be
considered as an alternative to net income or any other GAAP measure as an
indicator of performance and should not be considered as an alternative to cash
flows as a measure of liquidity or the ability to service debt or to pay
dividends and distributions.
TABLE 4 provides a reconciliation of income before allocations to minority
interests and preferred unitholders to FFO for the three months ended March 31,
1998 and 1997. FFO increased $5,552, or 52.9% to $16,041 for the three months
ended March 31, 1998 from $10,489 for the three months ended March 31, 1997.
This increase was primarily due to the Portfolio Expansion.
TABLE 4 -- Funds from Operations
- --------------------------------------------------------------------------------
Three months ended March 31, 1998 1997
- --------------------------------------------------------------------------------
Income before allocations to minority interests and
preferred unitholders $ 8,037 $3,731
FFO adjustments:
Real estate depreciation and amortization 7,702 6,273
Unconsolidated joint venture adjustments 302 485
-------- -------
FFO before allocations to minority interests and
preferred unitholders $16,041 $10,489
======== =======
================================================================================
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On December 10, 1997, a shareholder of Horizon filed a purported class action
lawsuit in the Circuit Court for Muskegon County, Michigan (the "Court") against
Horizon, the General Partner of the Partnership, and certain directors and
former directors of Horizon. The substantive allegations claim that Horizon's
directors breached their fiduciary duties to Horizon's shareholders in approving
the merger of Horizon and the General Partner of the Partnership and that the
consideration to be paid to Horizon's shareholders in connection with the merger
is unfair and inadequate. The lawsuit requests that such merger be enjoined or,
in the event that the purported transaction is consummated, that it be rescinded
or damages be awarded to the class members. On January 16, 1998, the defendants
answered the complaint, denying that the Horizon board of directors breached
their fiduciary duties and denying that such consideration is unfair or
inadequate. On May 4, 1998, counsel for the parties appeared before the Court
for the purpose of reporting that a settlement of the case had been reached
subject to the satisfaction of several conditions including the completion of
the merger. The general terms of the settlement are contained in a Memorandum of
Understanding ("Memorandum") among counsel for the parties dated as of May 7,
1998. Under the Memorandum, subject to the terms of the Stipulation of
Settlement, the defendants will pay to class counsel for their fees and
expenses, subject to approval by the Court. The Partnership believes that the
amount of the settlement will not have a material adverse effect on the
consolidated financials statements of the Partnership.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits or Reports on Form 8-K
(a) The following exhibits are included in this Form 10-Q:
Exhibit 12.1 -- Ratio of Earnings to Fixed Charges
and Preferred Stock Distributions
Exhibit 27.1 Financial Data Schedule
(Edgar filing only)
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME RETAIL, L.P.
Registrant
By: Prime Retail, Inc.,
its general partner
Date: June 25, 1998 By: /s/ Abraham Rosenthal
- ------------------- ----------------------
Abraham Rosenthal
Chief Executive Officer
Date: June 25, 1998 By: /s/ Robert P. Mulreaney
- ------------------- ------------------------
Robert P. Mulreaney
Executive Vice President,
Chief Financial Officer and
Treasurer
PRIME RETAIL, L.P.
EXHIBIT 12.1: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS
(Amounts in thousands, except for ratio information)
Three Months Ended March 31
------------------------------------
1998 1997
-------------- --------------
Income before minority interest $ 8,037 $ 3,731
Interest incurred 9,693 9,600
Amortization of capitalized interest 94 79
Amortization of debt issuance costs 167 608
Amortization of interest rate protection
contracts 342 336
Less interest earned on interest rate
protection contracts (23) (39)
Less capitalized interest (1,388) (845)
-------------- --------------
Earnings 16,922 13,470
-------------- --------------
Interest incurred 9,693 9,600
Amortization of debt issuance costs 167 608
Amortization of interest rate protection
contracts 342 336
Preferred stock distributions and dividends 4,166 3,093
-------------- --------------
Combined Fixed Charges and
Preferred Stock Distributions
and Dividends 14,368 13,637
-------------- --------------
Excess of Combined Fixed Charges
and Preferred Stock Distributions
and Dividends over Earnings $ (167)
==============
Ratio of Earnings to Combined
Fixed Charges and Preferred Stock
Distributions and Dividends 1.18 x
==============
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<PERIOD-TYPE> 3-MOS
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<PERIOD-END> Mar-31-1998
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0
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