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 September 30, 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
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PRIME RETAIL, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1844882
- ------------------------------- ------------------------------------
(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
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(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 November 10, 1998, the issuer had outstanding 11,312,131 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 September 30, 1998 and
December 31, 1997. 1
Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1997. 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997. 3
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits or Reports on Form 8-K 26
Signatures 27
<PAGE>
<TABLE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Prime Retail, L.P.
Consolidated Balance Sheets
(in thousands, except share information)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investment in rental property:
Land $ 204,878 $ 66,277
Buildings and improvements 1,702,986 779,191
Property under development 52,024 53,139
Furniture and equipment 10,658 5,911
--------- --------
1,970,546 904,518
Accumulated depreciation (110,011) (82,016)
--------- --------
1,860,535 822,502
Cash and cash equivalents 13,371 6,277
Restricted cash 43,432 41,736
Accounts receivable, net 9,843 9,745
Deferred charges, net 13,422 16,206
Due from affiliates, net 16,098 9,982
Investment in partnerships 5,082 3,278
Other assets 1,303 2,108
---------- --------
Total assets $1,963,086 $911,834
========== ========
Liabilities and shareholders' equity
Bonds payable $ 32,900 $ 32,900
Notes payable 1,146,877 482,365
Accrued interest 7,542 3,767
Real estate taxes payable 14,728 4,639
Construction costs payable 2,948 5,849
Accounts payable and other liabilities 68,491 19,022
Distributions payable 22,899 -
--------- --------
Total liabilities 1,296,385 548,542
Minority interests 3,773 3,911
Redeemable equity:
Series A Senior Cumulative Preferred Units,
2,300,000 units issued and outstanding 61,126 60,525
Series B Cumulative Participating Convertible Preferred Units,
7,828,125 and 2,981,800 units issued and outstanding, respectively 203,562 78,949
Series C Cumulative Participating Convertible Redeemable
Preferred Units, 4,363,636 units issued and outstanding 60,000 60,000
--------- --------
Total redeemable equity 324,688 199,474
Partners' capital (deficit):
General partner 424,821 269,239
Limited partners (86,581) (109,332)
--------- --------
Total partners' capital (deficit) 338,240 159,907
--------- --------
Total liabilities, minority interests, redeemable equity and
partners' capital (deficit) $1,963,086 $911,834
========== ========
==================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, L.P.
Consolidated Statements of Operations
(in thousands, except per unit information)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30 ended September 30
---------------------------- ---------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Base rents $47,595 $19,243 $ 98,776 $56,315
Percentage rents 1,960 1,008 3,999 2,398
Tenant reimbursements 21,338 8,731 45,315 26,649
Interest and other 2,059 2,567 6,902 7,562
------- -------- ------- --------
Total revenues 72,952 31,549 154,992 92,924
Expenses
Property operating 16,836 6,840 35,461 20,495
Real estate taxes 5,380 2,449 11,600 7,238
Depreciation and amortization 16,441 6,641 34,126 19,508
Corporate general and administrative 1,748 1,184 4,601 3,203
Interest 20,086 9,079 39,399 27,951
Other charges 1,129 982 2,634 2,474
------- -------- ------- --------
Total expenses 61,620 27,175 127,821 80,869
Income before loss on sale of real estate,
minority interests and extraordinary item 11,332 4,374 27,171 12,055
Loss on sale of real estate - - 15,461 -
------- -------- ------- --------
Income before minority interests and
extraordinary item 11,332 4,374 11,710 12,055
Income allocated to minority interests (29) (63) (69) (145)
------- -------- ------- --------
Income before extraordinary item 11,303 4,311 11,641 11,910
Extraordinary item, loss on early
extinguishment of debt - (2,061) - (2,061)
------- -------- ------- --------
Net income 11,303 2,250 11,641 9,849
Income allocated to preferred unitholders 13,910 3,383 21,952 9,676
Adjustment to reflect redeemable equity at redemption value 4,603 586 6,479 1,716
------- -------- ------- --------
Loss applicable to common units $(7,210) $(1,719) $(16,790) $(1,543)
======= ======== ======= ========
Loss per common unit:
General partner $ (0.13) $ (0.06) $ (0.39) $ (0.06)
======= ======== ======= ========
Limited partners $ (0.13) $ (0.06) $ (0.39) $ (0.06)
======= ======== ======= ========
Net loss applicable to common units:
General partner $(5,645) $(1,191) $(12,962) $(1,017)
Limited partners (1,565) (528) (3,828) (526)
------- -------- ------- --------
Total $(7,210) $(1,719) $(16,790) $(1,543)
Weighted average common units outstanding: ======= ======== ======= ========
General partner 42,314 19,159 33,211 16,458
Limited partners 11,735 8,505 9,809 8,505
------- -------- ------- --------
Total 54,049 27,664 43,020 24,963
Distributions declared per common unit: ======= ======== ======= ========
General partner $ 0.295 $ 0.295 $ 1.385 $0.885
======= ======== ======= ========
Limited partners $ 0.295 $ 0.295 $ 1.385 $0.885
======= ======== ======= ========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, L.P.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
---------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 11,641 $ 9,849
Adjustments to reconcile net income to
net cash provided by operating activities:
Income allocated to minority interests 69 145
Extraordinary item, loss on early extinguishment of debt - 2,061
Loss on sale or real estate 15,461 -
Depreciation 33,272 18,157
Amortization of deferred financing costs and
interest rate protection contracts 2,199 2,861
Amortization of leasing commissions 854 1,351
Provision for uncollectible accounts receivable 788 748
Changes in operating assets and liabilities:
Increase in accounts receivable (1,653) (3,199)
Increase in due from affiliates, net (6,010) (1,961)
(Increase) decrease in other assets (1,224) 2,486
Increase in accrued interest 2,553 67
Increase (decrease) in accounts payable and other liabilities (9,189) 345
------- -------
Net cash provided by operating activities 48,761 32,910
Investing Activities
Proceeds from sale of Prime Transferred Properties 26,015 -
Acquisition of Horizon, net of cash acquired and spin-off of HGP (35,124) -
Purchase of buildings and improvements (39,296) (13,227)
Increase in property under development (70,821) (32,659)
Acquisition of outlet centers - (60,819)
-------- -------
Net cash used in investing activities (119,226) (106,705)
Financing Activities
Contributions from general partner:
Common units - 180,174
Series B preferred units - 3,800
Series C preferred units - 9,710
Proceeds from notes payable 421,970 91,767
Principal repayments on notes payable (266,722) (162,770)
Deferred financing fees (3,247) (477)
Distributions paid (74,235) (28,290)
Distributions to minority interests (207) (264)
------- -------
Net cash provided by financing activities 77,559 93,650
------- -------
Increase (decrease) in cash and cash equivalents 7,094 19,855
Cash and cash equivalents at beginning of period 6,277 3,918
========= =======
Cash and cash equivalents at end of period $ 13,371 $ 23,773
========= =======
==================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, L.P.
Consolidated Statements of Cash Flows (continued)
(in thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Supplemental Disclosure of Noncash Investing and Financing Activities:
The following assets and liabilities were acquired and sold in connection with the consummation of the Merger
Transactions on June 15, 1998:
Acquisition of Horizon Partnership, net of spin-off of HGP:
Fair value of assets acquired $1,007,329
Cash paid, net of cash and cash equivalents acquired (35,124)
Common units of partnership interest issued (270,305)
Series B convertible preferred units issued (118,735)
----------
Fair value of liabilities assumed $ 583,165
==========
Disposition of Prime Transferred Properties:
Book value of assets disposed $ 42,201
Cash received (26,015)
Loss on sale (15,461)
----------
Liabilities disposed $ 725
==========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Prime Retail, Inc.
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's (the
"Company") annual report on Form 10-K 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 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 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 -- Business Combination
On June 15, 1998, the merger and other transactions (collectively, the "Merger
Transactions") as set forth in the agreement and plan of merger (the "Merger
Agreement") between Prime Retail, Inc. (the Partnership's "General Partner") and
Horizon Group, L.P. ("Horizon") were consummated for an aggregate consideration
of approximately $1,083,100, including liabilities assumed and related
transaction costs.
Pursuant to the terms of the Merger Agreement, the General Partner acquired (i)
all of the outstanding shares of common stock of Horizon at an exchange ratio of
0.20 of a share of the General Partner's Series B Convertible Preferred Stock
and 0.597 of a share of the Partnership's Common Stock for each share of common
stock of Horizon, and (ii) all of the outstanding limited partnership units of
Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership") at an
exchange ratio of 0.9193 of a unit of the Partnership's Common Units. A total of
4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329 shares
of Common Stock were issued by the General Partner to the shareholders of
Horizon and 3,782,121 Common Units were issued by the Partnership to the limited
partners of Horizon Partnership.
<PAGE>
Immediately prior to the merger, Horizon Partnership contributed 13 of its 35
centers to Horizon Group Properties, L.P., of which Horizon Group Properties
L.P. ("HGP"), a subsidiary of Horizon, is the sole general partner. HGP was
spun-off from the Partnership on June 15, 1998. The remaining 22 outlet centers
of Horizon were integrated into the Partnership's existing portfolio. On June
19, 1998, all of the common equity of HGP was distributed to the convertible
preferred and common shareholders and unitholders of the General Partner and the
Partnership and the shareholders and limited partners of Horizon and Horizon
Partnership based on their ownership in the General Partner immediately
following consummation of the merger. One share of common stock of HGP was
distributed for every 20 shares of Common Stock and Series C Convertible
Preferred Stock of the General Partner and for every 20 Common Units of the
Partnership. Additionally, approximately 1.196 shares of the common stock of HGP
were distributed for every 20 shares of Series B Convertible Preferred Stock of
the General Partner.
In connection with the Merger Transactions, the Partnership sold Indiana Factory
Shops and Nebraska Crossing Factory Shops (collectively, the "Prime Transferred
Properties") to HGP for an aggregate consideration of $26,015, resulting in a
loss of $15,461. Proceeds from the sale of the Prime Transferred Properties were
used to repay indebtedness associated with the Horizon properties.
Concurrent with the closing of the merger, a special cash distribution was made
aggregating $21,871 consisting of $0.50 per unit to holders of Common Units and
Series C Preferred Units and $0.60 per unit to holders of Series B Convertible
Preferred Units. Shareholders of Horizon and limited partners of Horizon
Partnership did not participate in these distributions.
The merger has been accounted for using the purchase method of accounting and
the purchase price of $1,083,100 was allocated to the assets acquired and the
liabilities assumed based on estimates of their respective fair values. Certain
assumptions were made which management of the Partnership believes are
reasonable. The Partnership expects to finalize the preliminary purchase price
allocation before the end of 1998. The final allocation is not expected to
differ materially from the allocation made at September 30, 1998.
The operating results of those properties acquired have been included in the
Partnership's consolidated results of operations commencing on the date of
acquisition. The operating results of the Prime Transferred Properties have been
included in the Partnership's consolidated results of operations through the
date of disposition.
The following unaudited pro forma summary financial information gives effect to
the Merger Transactions as if they had occurred on January 1, 1997.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $208,340 $195,505
======== ========
Net income from continuing operations $ 31,593 $ 22,465
======== ========
Net loss applicable to common units:
General partner $ (5,234) $(2,571)
Limited partners (1,509) (1,014)
-------- --------
Total $ (6,734) $(3,585)
======== ========
Loss per common unit:
General partner $ (0.12) $ (0.08)
======== ========
Limited partners $ (0.12) $ (0.08)
======== ========
Weighted average common units outstanding:
General partner 41,954 30,924
Limited partners 12,095 12,203
-------- --------
Total 54,049 43,127
======== ========
====================================================================================================================================
</TABLE>
These unaudited pro forma results are presented for comparative purposes only
and are not necessarily indicative of what the Partnership's actual consolidated
results of operations would have been for the periods presented if the
Transactions had been completed at January 1, 1997, nor do they purport to
represent the Partnership's future consolidated results of operations.
Note 3 - Notes Payable
On September 25, 1998 the Partnership closed on an unsecured $40,000 revolving
loan (the "Revolving Loan") with a financial institution. The Revolving Loan (i)
bears interest equal to 30-day LIBOR plus 1.75%, (ii) requires monthly
interest-only payments, and (iii) matures on September 11, 2001. At September
30, 1998, the Revolving Loan had an outstanding principal balance of $28,300.
The Revolving Loan requires compliance with certain financial loan covenants
including those relating to the Partnership's (i) total outstanding variable
indebtedness, (ii) total outstanding indebtedness to market value, as defined,
(iii) consolidated net worth, as defined, and (iv) debt service coverage ratio.
On June 15, 1998, the Partnership closed on $292,000 of loan facilities with
Nomura Asset Capital Corporation. The transaction provided (i) a $180,000
nonrecourse permanent loan (the "Permanent Loan") and (ii) a $112,000 full
recourse bridge loan of which $95,000 was funded (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%, (iii) requires monthly
principal and interest payments pursuant to an approximate 26-year amortization
schedule, and (iv) matures on June 15, 2008. 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) requires
monthly interest-only payments, and (iv) matures on June 15, 2001.
<PAGE>
As of November 11, 1998, the Partnership is a guarantor or otherwise obligated
with respect to $39,570 of the indebtedness of HGP and its affiliates, including
$10,000 of obligations under HGP's $108,205 three-year secured credit facility.
On April 1, 1998, Horizon consummated an agreement with Castle & Cooke
Properties, Inc. which released Horizon from its forward obligations under its
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in
connection with the formation of a joint venture with certain affiliates of
Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the
terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations under the lease, which expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations under such lease.
The agreement also provided that Horizon transfer to such joint venture
substantially all of Horizon's economic interest in its outlet center in Lake
Elsinore, California together with legal title to vacant property located
adjacent to the center. As of September 30, 1998, the Partnership holds a small
minority interest in the joint venture but has no obligation or commitment with
respect to the post-closing operations of the Dole Cannery project. However, the
Partnership is legally obligated for $30,864 of mortgage indebtedness
outstanding at September 30, 1998 which is secured by a first mortgage on the
Lake Elsinore outlet center. In addition, Castle & Cooke has provided the
Partnership a guaranty, without limitation, of the obligations relating to such
mortgage indebtedness.
On March 18, 1998, the Partnership obtained from a financial institution a
commitment for a construction mortgage loan (the "Construction Mortgage
Loan")relating to Phase I of Prime Outlets at Hagerstown ("Hagerstown") in an
amount not to exceed $21,600 which was subsequently increased to $32,860 on
October 2, 1998 as a result of obtaining a commitment for construction financing
on Phase II. The Construction Mortgage Loan (i) bears a variable interest rate
at 30-day LIBOR plus 1.50%, (ii) matures on June 1, 2004, and (iii) requires
monthly interest-only payments. The Construction Mortgage Loan is collateralized
by a first mortgage on Hagerstown. At September 30, 1998, $15,969 was
outstanding on the Construction Mortgage Loan.
Note 4 - Legal Proceedings
In the ordinary course of business the Partnership is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Partnership.
The Partnership is defendant in a lawsuit filed on July 27, 1998 in the U.S.
District Court for the Central District of California whereby the plaintiff
alleges that the Partnership and its related entities overcharged tenants for
common area maintenance expenditures. The outcome of, and the ultimate liability
of the Partnership, if any, from, this lawsuit cannot currently be predicted.
Management believes that the Partnership has acted properly and intends to
defend this lawsuit vigorously.
In the Partnership's previously filed Form 10-Q for the quarter ended March 31,
1998, it reported that on December 10, 1997 in the Circuit Court for Muskegon
County, Michigan (the "Court"), a shareholder of Horizon filed a purported class
action lawsuit against Horizon, 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 Partnership and that the consideration to be paid
to Horizon's shareholders in connection with the merger was unfair and
inadequate.
On September 8, 1998, a hearing was held before Judge James M. Graves of the
Court. At the hearing, the defendants, including the Partnership, continued to
deny any wrongdoing and liability. The Court approved the settlement set forth
in the Stipulation of Settlement (the "Stipulation") previously executed by the
parties to the lawsuit on July 21, 1998 and found that the settlement was, in
all respects, fair, reasonable, and adequate, and dismissed with prejudice the
litigation against the defendants. The settlement required that the Partnership
pay legal expenses of $325.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Amounts in thousands, except 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. Actual results may differ materially from those reflected in such
forward-looking statements because of various 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.
Merger with Horizon Group, Inc.
On June 15, 1998, the merger and other transactions (collectively, the "Merger
Transaction") between Prime Retail, Inc. (the Partnership's "General Partner")
and Horizon Group, Inc. ("Horizon") were consummated for an aggregate
consideration of approximately $1,083,100, including liabilities assumed and
related transaction costs. The merger has been accounted for using the purchase
method of accounting and the purchase price of $1,083,100 was allocated to the
assets acquired and the liabilities assumed based on estimates of their
respective fair values. Accordingly, the operating results of the 22 properties
acquired from Horizon have been included in the Partnership's consolidated
results of operations commencing on June 15, 1998. See "Liquidity and Capital
Resources - Business Combination" for further information.
Portfolio Growth
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 50 operating
factory outlet centers totaling 14,029,000 square feet of gross leasable area
("GLA") at September 30, 1998, compared to 24 operating factory outlet centers
totaling 6,316,000 square feet of GLA at September 30, 1997.
<PAGE>
During the nine months ended September 30, 1998, the Partnership opened two new
factory outlet centers and six expansions to existing factory outlet centers
totaling 612,000 square feet of GLA in the aggregate. In connection with the
Merger Transactions, the Partnership acquired and integrated 22 of Horizon's
factory outlet centers into its existing portfolio adding 6,626,000 square feet
of GLA in the aggregate. Additionally, in connection with the Merger
Transactions, the Company sold two factory outlet centers to Horizon Group
Properties, Inc. ("HGP") totaling 426,000 square feet of GLA. During the period
October 1, 1997 through December 31, 1997, the Partnership purchased four
factory outlet centers totaling 863,000 square feet of GLA and opened an
expansion to an existing factory outlet center totaling 38,000 square feet of
GLA.
The significant increase in the number of the Partnership's operating properties
and total GLA since September 30, 1997 are collectively referred to as the
"Portfolio Expansion and the Horizon Merger."
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Niagara Falls USA (2) - Niagara Falls, New York....... I July 1992 300,000 100%
II August 1995 234,000 89
------- ----
534,000 95
Prime Outlets at Kittery (3) - Kittery Maine........................... I April 1984 25,000 100
II May 1984 78,000 99
III August 1989 18,000 99
IV May 1998 10,000 100
------- ----
131,000 99
Prime Outlets at Fremont (4) - Fremont, Indiana........................ I October 1985 118,000 100
II November 1993 51,000 92
III October 1994 60,000 100
------- ----
229,000 98
Prime Outlets at Birch Run (4) - Birch Run, Michigan................... I-XIV Various 583,000 99
XV June 1996 6,000 100
XVII June 1996 2,000 100
XVII 1997 15,000 99
XVIII 1997 118,000 100
------- ----
724,000 99
Prime Outlets at Latham (3) - Latham, New York......................... I August 1987 43,000 100
Prime Outlets at Michigan City (4) - Michigan City, Michigan........... I November 1987 199,000 100
II May 1988 130,000 97
III July 1991 36,000 85
IV July 1994 42,000 100
V December 1994 26,000 98
VI May 1995 58,000 99
------- ----
491,000 98
Prime Outlets at Williamsburg (4) - Williamsburg, Virginia............. I April 1988 67,000 99
II November 1988 60,000 100
III October 1990 49,000 100
IV 1995 98,000 100
------- ----
274,000 100
Prime Outlets at Kenosha (4) - Kenosha, Wisconsin...................... I September 1988 89,000 100
II July 1989 65,000 97
III May 1990 115,000 99
------- ----
269,000 99
Prime Outlets at Silverthorne (4) - Silverthorne, Colorado............. I November 1988 95,000 92
II November 1990 75,000 98
III November 1993 88,000 93
------- ----
258,000 94
Prime Outlets at Edinburgh (4) - Edinburgh, Indiana.................... I 1988 156,000 100
II November 1994 142,000 100
------- ----
298,000 100
Prime Outlets at Burlington (4) - Burlington, Washington .............. I May 1989 89,000 100
II October 1989 36,000 100
III April 1993 49,000 100
------- ----
174,000 100
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Queenstown (4) - Queenstown, Maryland................. I June 1989 67,000 100%
II June 1990 55,000 99
III January 1991 16,000 97
IV June 1992 14,000 97
V August 1993 69,000 100
------- ----
221,000 99
Prime Outlets at Hillsboro (4) - Hillsboro, Texas...................... I October 1989 95,000 90
II January 1992 101,000 100
III May 1995 163,000 100
------- ----
359,000 97
Prime Outlets at Oshkosh (4) - Oshkosh, Wisconsin...................... I November 1989 215,000 95
II July 1991 45,000 99
------- ----
260,000 96
Prime Outlets at Warehouse Row (5)- Chattanooga, Tennessee............. I November 1989 95,000 98
II August 1993 26,000 94
------- ----
121,000 95
Prime Outlets at Gilroy (4) - Gilroy, California....................... I January 1990 94,000 100
II August 1991 109,000 100
III October 1992 137,000 95
IV July 1994 170,000 99
V November 1995 69,000 100
------- ----
579,000 99
Prime Outlets at Perryville (4) - Perryville, Maryland................. I June 1990 148,000 98
Prime Outlets at Sedona (6) - Sedona, Arizona ......................... I August 1990 82,000 99
Prime Outlets at San Marcos - San Marcos, Texas........................ I August 1990 177,000 98
II August 1991 70,000 100
III August 1993 117,000 97
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
IIID May 1998 18,000 100
------- ----
437,000 98
Prime Outlets at Anderson (2) - Anderson, California................... I August 1990 165,000 98
Prime Outlets at Post Falls (6) - Post Falls, Idaho ................... I July 1991 111,000 85
II July 1992 68,000 86
------- ----
179,000 85
Prime Outlets at Ellenton - Ellenton, Florida.......................... I October 1991 187,000 100
II August 1993 123,000 100
III October 1996 30,000 100
------- ----
340,000 100
Prime Outlets at Morrisville - Raleigh - Durham, North Carolina........ I October 1991 181,000 100
II July 1996 6,000 100
------- ----
187,000 100
Prime Outlets at Naples - Naples/Marco Island, Florida................. I December 1991 94,000 95
II December 1992 32,000 100
III March 1998 20,000 98
------- ----
146,000 96
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Conroe (4) - Conroe, Texas............................ I January 1992 93,000 92%
II June 1994 163,000 96
III October 1994 26,000 87
------- ----
282,000 93
Prime Outlets at Woodbury (4) - Woodbury, Minnesota.................... I July 1992 129,000 93
II November 1993 100,000 93
III August 1994 21,000 100
------- ----
250,000 94
Prime Outlets at Calhoun (4) - Calhoun, Tennessee...................... I October 1992 123,000 100
II October 1995 131,000 100
------- ----
254,000 100
Prime Outlets at Castle Rock - Castle Rock, Colorado................... I November 1992 181,000 100
II August 1993 94,000 97
III November 1993 95,000 96
IV August 1997 110,000 97
------- ----
480,000 99
Prime Outlets at Bend (6) - Bend, Oregon............................... I December 1992 97,000 97
II September 1998 35,000 93
------- ----
132,000 96
Prime Outlets at Jeffersonville II (4) - Jeffersonville, Ohio.......... I March 1993 126,000 76
II August 1993 123,000 70
III October 1994 65,000 100
------- ----
314,000 79
Prime Outlets at Jeffersonville I - Jeffersonville, Ohio................ I July 1993 186,000 96
II November 1993 100,000 100
IIB November 1994 13,000 64
IIIA August 1996 35,000 100
IIIB March 1997 73,000 94
------- ----
407,000 96
Prime Outlets at Gainesville - Gainesville, Texas...................... I August 1993 210,000 88
II November 1994 106,000 100
------- ----
316,000 92
Prime Outlets at Loveland - 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
Prime Outlets at Oxnard (7) - Oxnard, California....................... I June 1994 148,000 95
Prime Outlets at Grove City - Grove City, Pennsylvania................. I August 1994 235,000 100
II November 1994 95,000 100
III November 1995 85,000 99
IV November 1996 18,000 99
------- ----
533,000 100
Prime Outlets at Huntley - Huntley, Illinois........................... I August 1994 192,000 95
II November 1995 90,000 99
------- ----
282,000 96
Prime Outlets at Florida City - Florida City, Florida.................. I September 1994 208,000 95
Prime Outlets at Pismo Beach (4) - Pismo Beach, California............. I November 1994 148,000 98
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of September 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Tracy (4) - Tracy, California........................ I November 1994 153,000 100%
Prime Outlets at Vero Beach (4) - Vero Beach, Florida.................. I November 1994 210,000 99
II August 1995 116,000 92
------- -----
326,000 96
Prime Outlets at Waterloo (4) - Waterloo, New York..................... I March 1995 208,000 100
II September 1996 115,000 100
III April 1997 68,000 90
------- -----
391,000 98
Prime Outlets at Odessa - Odessa, Missouri............................. I July 1995 191,000 100
II November 1996 105,000 61
------- -----
296,000 86
Prime Outlets at Darien (8) - Darien, Georgia.......................... I July 1995 238,000 85
IIA November 1995 49,000 99
IIB July 1996 20,000 100
------- -----
307,000 88
Prime Outlets at New River (9) - Phoenix, Arizona...................... I September 1995 217,000 96
II September 1996 109,000 93
------- -----
326,000 95
Prime Outlets at Gulfport (10) - Gulfport, Mississippi................. I November 1995 228,000 99
IIA November 1996 40,000 93
IIB November 1997 38,000 100
------- -----
306,000 98
Prime Outlets at Lodi (11) - Burbank, Ohio............................. I November 1996 205,000 97
IIA May 1998 33,000 78
------- -----
238,000 94
Prime Outlets at Gaffney - Gaffney, South Carolina..................... I November 1996 235,000 99
II July 1998 70,000 81
------- -----
305,000 95
Prime Outlets at Lee (4) - Lee, Massachusetts.......................... I June 1997 224,000 99
Prime Outlets at Lebanon - Lebanon, Tennessee......................... I April 1998 208,000 92
Prime Outlets at Hagerstown - Hagerstown, Maryland..................... I August 1998 218,000 96
---------- -----
Total Factory Outlet Centers (12) 14,029,000 96%
========== =====
====================================================================================================================================
</TABLE>
<PAGE>
Notes:
(1) Percentage reflects fully executed leases as of September 30, 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 acquired this factory outlet center on June 15, 1998 as a
result of its merger with Horizon.
(5) 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 74%
leased as of September 30, 1998.
(6) The Partnership acquired this factory outlet center on February 13,
1997 from an unrelated third party.
(7) On February 7, 1997, the Partnership purchased an additional 20% interest
from a joint venture partner, increasing the Partnership's 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 joint venture
partnership with an unrelated third party.
(10)The real property on which this outlet center is located is subject to a
long-term ground lease. The 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 88%
leased as of September 30, 1998.
<PAGE>
Results of Operations
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997
Summary
The Partnership reported net income of $11,303 and $4,311 for the three months
ended September 30, 1998 and 1997, respectively. The 1997 results include a
third quarter extraordinary loss on the early extinguishment of debt of $2,061.
For the three months ended September 30, 1998, the net loss applicable to common
unitholders was $7,210, or $0.13 per common unit. For the three months ended
September 30, 1997, the net loss applicable to common unitholders was $1,719, or
$0.06 per common unit.
Revenues
Total revenues were $72,592 for the three months ended September 30, 1998
compared to $31,549 for the three months ended September 30, 1997, an increase
of $41,043, or 130.1%. Base rents increased $28,352, or 147.3%, in 1998 compared
to 1997. Straight-line rents (included in base rents) were $713 and $140 for the
three months ended September 30, 1998 and 1997, respectively. These increases
are primarily due to the Portfolio Expansion and the Horizon Merger.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, increased $952, or 94.4%, during the three months
ended September 30, 1998 compared to the same period in 1997. This increase was
attributable to the Portfolio Expansion and the Horizon Merger. Tenant
reimbursements, which represent the contractual recovery from tenants of certain
operating expenses, increased by $12,607, or 144. 4%, during the three months
ended September 30, 1998 over the same period in 1997. This increase was
primarily due to the Portfolio Expansion and the Horizon Merger.
Interest and other income decreased by $508, or 19.8%, to $2,059 during the
three months ended September 30, 1998 as compared to $2,567 for the three months
ended September 30, 1997. The decrease reflects reductions in (i) interest
income of $254 and (ii) other ancillary income of $254. The reduction in
interest income was primarily the result of the use of a portion of the
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.
<PAGE>
Expenses
Property operating expenses increased by $9,996, or 146.1%, to $16,836 for the
three months ended September 30, 1998 compared to $6,840 for the same period
in 1997. Real estate taxes increased by $2,931, or 119.7%, to $5,830 for the
three months ended September 30, 1998, from $2,899 in the same period for 1997.
The increases in property operating expenses and real estate taxes were
primarily due to the Portfolio Expansion and the Horizon Merger. As shown in
TABLE 2, depreciation and amortization expense increased by $9,800, or 147.6%,
to $16,441 for the three months ended September 30, 1998, compared to $6,641
for 1997. This increase results from the depreciation and amortization of assets
associated with the Portfolio Expansion and the Horizon Merger.
TABLE 2 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
Three months ended
September 30
----------------------
1998 1997
- --------------------------------------------------------------------------------
Buildings and improvements $ 9,440 $3,423
Land improvements 899 715
Tenant improvements 5,611 1,872
Furniture and fixtures 275 211
Leasing commissions(1) 216 420
--------- -------
Total $16,441 $6,641
========= =======
================================================================================
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
September 30
--------------------------
1998 1997
- --------------------------------------------------------------------------------
Interest incurred $20,950 $9,265
Interest capitalized (1,734) (1,123)
Amortization of deferred financing costs 545 589
Amortization of interest rate protection contracts 325 348
------- ------
Total $20,086 $9,079
======= ======
================================================================================
As shown in TABLE 3, interest expense for the three months ended September 30,
1998 increased by $11,007, or 121.2%, to $20,086 compared to $9,079 for the same
period in 1997. This increase reflects higher interest incurred of $11,685
partially offset by (i) an increase in the amount of interest capitalized in
connection with development projects of $611 and (ii) a decrease in amortization
of deferred financing costs of $67.
<PAGE>
The increase in interest incurred is primarily attributable to an increase of
approximately $656,098 in the Partnership's average debt outstanding during the
three months ended September 30, 1998 compared to the same period in 1997
partially offset by a slight decrease in the weighted average interest rate for
the three months ended September 30, 1998 compared to the same period in 1997.
The weighted average interest rates were 7.15% and 7.28% for the 1998 and 1997
periods, respectively.
Other charges increased by $147, or 15.0%, to $1,129. This increase reflects
higher ground lease expense of $80 and other ancillary charges of $67.
In connection with re-leasing space to new merchants, the Partnership incurred
$1,055 and $100 in capital expenditures during the three months ended September
30, 1998 and 1997, respectively.
Comparison of nine months ended September 30, 1998 to nine months ended
September 30, 1997.
Summary
The Partnership reported net income of $11,641 and $11,910 for the nine months
ended September 30, 1998 and 1997, respectively. The 1998 results include a
second quarter loss on the sale of real estate of $15,461 in connection with the
Merger Transactions. The 1997 results include a third quarter extraordinary loss
on the early extinguishment of debt of $2,061. For the nine months ended
September 30, 1998, the net loss applicable to common unitholders was $16,790,
or $0.39 per common unit. For the nine months ended September 30, 1997, the net
loss applicable to common unitholders was $1,543, or $0.06 per common unit.
Revenues
Total revenues were $154,992 for the nine months ended September 30, 1998
compared to $92,924 for the nine months ended September 30, 1997, an increase of
$62,068, or 66.8%. Base rents increased $42,461, or 75.4%, in 1998 compared
to 1997. Straight-line rents (included in base rents) were $974 and $392 for the
nine months ended September 30, 1998 and 1997, respectively. These increases are
primarily due to the Portfolio Expansion and the Horizon Merger.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, increased $1,601, or 66.8%, during the nine months
ended September 30, 1998 compared to the same period in 1997. This increase was
attributable to the Portfolio Expansion and the Horizon Merger. For the nine
months ended September 30, 1998, same-space sales in centers owned by the
Partnership decreased by 0.8% compared to the same period in 1997. For the nine
months ended September 30, 1998, same-store sales decreased 2.0% compared to the
same period in 1997. Tenant reimbursements, which represent the contractual
recovery from tenants of certain operating expenses, increased by $18,666, or
70.0%, during the nine months ended September 30, 1998 over the same period in
1997. This increase was primarily due to the Portfolio Expansion and the Horizon
Merger.
Interest and other income decreased by $660, or 8.7%, to $6,902 during the nine
months ended September 30, 1998 as compared to $7,562 for the nine months ended
September 30, 1997. The decrease reflects reductions in (i) interest income of
$1,131 and (ii) gains on sales of outlots of $456. Partially offsetting these
decreases were higher (i) push cart, temporary tenant, and late fee income of
$816 and (ii) other ancillary income of $111. 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.
<PAGE>
Expenses
Property operating expenses increased by $14,966, or 73.0%, to $35,461 for the
nine months ended September 30, 1998 compared to $20,495 for the same period
in 1997. Real estate taxes increased by $4,362, or 60.3%, to $11,600 for the
nine months ended September 30, 1998, from $7,238 in the same period for 1997.
The increases in property operating expenses and real estate taxes are primarily
due to the Portfolio Expansion and the Horizon Merger. As shown in TABLE 4,
depreciation and amortization expense increased by $14,618, or 74.9%, to $34,126
for the nine months ended September 30, 1998, compared to $12,871 for 1997. This
increase results from the depreciation and amortization of assets associated
with the Portfolio Expansion and the Horizon Merger.
TABLE 4 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
Nine months ended
September 30
-------------------------
1998 1997
- --------------------------------------------------------------------------------
Buildings and improvements $19,433 $10,131
Land improvements 2,618 2,069
Tenant improvements 10,429 5,348
Furniture and fixtures 792 609
Leasing commissions(1) 854 1,351
-------- -------
Total $34,126 $19,508
======== =======
================================================================================
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.
<PAGE>
TABLE 5 - Components of Interest Expense
The components of interest expense are summarized as follows:
- --------------------------------------------------------------------------------
Nine months ended
September 30
-----------------------
1998 1997
- --------------------------------------------------------------------------------
Interest incurred $41,711 $28,032
Interest capitalized (4,511) (2,942)
Amortization of deferred financing costs 1,193 1,818
Amortization of interest rate protection contracts 1,006 1,043
------- ------
Total $39,399 $27,951
======= =======
================================================================================
As shown in TABLE 5, interest expense for the nine months ended September 30,
1998 increased by $11,448, or 41.0%, to $39,399 compared to $27,951 for the same
period in 1997. This increase reflects higher interest incurred of $13,679
partially offset by (i) an increase in the amount of interest capitalized in
connection with development projects of $1,569 and (ii) a decrease in
amortization of deferred financing costs of $662.
The increase in interest incurred is primarily attributable to an increase of
approximately $257,025 in the Partnership's average debt outstanding during the
nine months ended September 30, 1998 compared to the same period in 1997
partially offset by a slight decrease in the weighted average interest rate for
the nine months ended September 30, 1998 compared to the same period in 1997.
The weighted average interest rates were 7.19% and 7.24% for the 1998 and 1997
periods, respectively.
In connection with re-leasing space to new merchants, the Partnership incurred
$1,496 and $241 in capital expenditures during the nine months ended September
30, 1998 and 1997, respectively.
Loss on Sale of Real Estate
In connection with the closing of its merger with Horizon on June 15, 1998, the
Partnership sold Indiana Factory Shops and Nebraska Crossing Factory Shops
(collectively "the Prime Transferred Properties") to HGP for an aggregate
consideration of $26,015 resulting in a loss of $15,461.
Liquidity and Capital Resources
Sources and Uses of Cash
For the nine months ended September 30, 1998, net cash provided by operating
activities was $48761, net cash used in investing activities was $119,226, and
net cash provided by financing activities was $77,559.
The primary uses of cash for investing activities during the nine months ended
September 30, 1998 included: (i) costs associated with the development and
construction of new factory outlet centers and expansions to existing factory
outlet centers aggregating 928,000 square feet of GLA which are expected to open
during 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, (iii) costs for pre-development activities associated with future
developments, and (iv) costs associated with the Partnership's merger with
Horizon. Such uses were partially offset by proceeds from the Partnership's sale
of the Prime Transferred Properties.
<PAGE>
The primary source of cash from financing activities during the nine months
ended September 30, 1998 was proceeds from new borrowings of $421,970. Such
proceeds were partially offset by (i) principal repayments on notes payable of
$266,722, (ii) distributions of $74,442, and (iii) deferred financing costs of
$3,247.
Property Acquisitions
During 1998 and 1999, 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 and 1999. The Partnership cannot predict if any
transaction will be consummated, nor the terms or form of consideration
required.
Business Combination
On June 15, 1998, the merger and other transactions (collectively, the "Merger
Transactions") as set forth in the agreement and plan of merger (the "Merger
Agreement") between the Partnership's General Partner and Horizon were
consummated for an aggregate consideration of approximately $1,083,100,
including liabilities assumed and related transaction costs.
Pursuant to the terms of the Merger Agreement, the General Partner acquired (i)
all of the outstanding shares of common stock of Horizon at an exchange ratio of
0.20 of a share of the General Partner's Series B Convertible Preferred Stock
and 0.597 of a share of the General Partner's Common Stock for each share of
common stock of Horizon, and (ii) all of the outstanding limited partnership
units of Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership")
at an exchange ratio of 0.9193 of a unit of the Partnership's Common Units. A
total of 4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329
shares of Common Stock were issued by the General Partner to the shareholders of
Horizon and 3,782,121 Common Units were issued by the Partnership to the limited
partners of Horizon Partnership.
Immediately prior to the merger, Horizon Partnership contributed 13 of its 35
centers to Horizon Group Properties, L.P., of which HGP, a subsidiary of
Horizon, is the sole general partner. HGP was spun-off from the Partnership on
June 15, 1998. The remaining 22 outlet centers of Horizon were integrated into
the Partnership's existing portfolio. On June 19, 1998, all of the common equity
of HGP was distributed to the convertible preferred and common shareholders and
unitholders of the General Partner and the Partnership and the shareholders and
limited partners of Horizon and Horizon Partnership based on their ownership in
the General Partner immediately following consummation of the merger. One share
of common stock of HGP was distributed for every 20 shares of Common Stock and
Series C Convertible Preferred Stock of the General Partner and for every 20
Common Units of the Partnership. Additionally, approximately 1.196 shares of the
common stock of HGP were distributed for every 20 shares of Series B Convertible
Preferred Stock of the General Partner.
In connection with the Merger Transactions, the Partnership sold the Prime
Transferred Properties to HGP for an aggregate consideration of $26,015,
resulting in a loss of $15,461. Proceeds from the sale of the Prime Transferred
Properties were used to repay indebtedness associated with the Horizon
properties.
Concurrent with the closing of the merger, a special cash distribution was made
aggregating $21,871 consisting of $0.50 per unit to holders of Common Units and
Series C Preferred Units and $0.60 per unit to holders of Series B Convertible
Preferred Units. Shareholders of Horizon and limited partners of Horizon
Partnership did not participate in these distributions.
<PAGE>
The merger has been accounted for using the purchase method of accounting and
the purchase price of $1,083,100 was allocated to the assets acquired and the
liabilities assumed based on estimates of their respective fair values. Certain
assumptions were made which management of the Partnership believes are
reasonable. The Partnership expects to finalize the purchase price allocation
before the end of 1998. The final allocation is not expected to differ
materially from the allocation made at September 30, 1998.
The operating results of those properties acquired have been included in the
Partnership's consolidated results of operations commencing on the date of
acquisition. The operating results of the Prime Transferred Properties have been
included in the Partnership's consolidated results of operations through the
date of disposition.
Legal Proceedings
In the ordinary course of business the Partnership is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Partnership.
The Partnership is defendant in a lawsuit filed on July 27, 1998 in the U.S.
District Court for the Central District of California whereby the plaintiff
alleges that the Partnership and its related entities overcharged tenants for
common area maintenance expenditures. The outcome of, and the ultimate liability
of the Partnership, if any, from, this lawsuit cannot currently be predicted.
Management believes that the Partnership has acted properly and intends to
defend this lawsuit vigorously.
Debt Transactions
On September 25, 1998, the Partnership closed on an unsecured $40,000 revolving
loan (the "Revolving Loan") with a financial institution. The Revolving Loan (i)
bears interest equal to 30-day LIBOR plus 1.75%, (ii) requires monthly
interest-only payments, and (iii) matures on September 11, 2001. At September
30, 1998, the Revolving Loan had an outstanding principal balance of $28,300.
The Revolving Loan requires compliance with certain financial loan covenants
including those relating to the Partnership's (i) total outstanding variable
indebtedness, (ii) total outstanding indebtedness to market value, as defined,
(iii) consolidated net worth, as defined, and (iv) debt service coverage ratio.
On June 15, 1998, the Partnership closed on $292,000 of loan facilities with
Nomura Asset Capital Corporation. The transaction provided (i) a $180,000
nonrecourse permanent loan (the "Permanent Loan") and (ii) a $112,000 full
recourse bridge loan of which $95,000 was funded (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%, (iii) requires monthly
principal and interest payments pursuant to an approximate 26-year amortization
schedule, and (iv) matures on June 15, 2008. 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) requires
monthly interest-only payments, and (iv) matures on June 15, 2001.
As of November 11, 1998, the Partnership is a guarantor or otherwise obligated
with respect to $39,570 of the indebtedness of HGP and its affiliates, including
$10,000 of obligations under HGP's $108,205 three-year secured credit facility.
<PAGE>
On April 1, 1998, Horizon consummated an agreement with Castle & Cooke
Properties, Inc. which released Horizon from its forward obligations under its
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in
connection with the formation of a joint venture with certain affiliates of
Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the
terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from any continuing
obligations under the lease, which expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations under such lease.
The agreement also provided that Horizon transfer to such joint venture
substantially all of Horizon's economic interest in its outlet center in Lake
Elsinore, California together with legal title to vacant property located
adjacent to the center. As of September 30, 1998, the Partnership holds a small
minority interest in the joint venture but has no obligation or commitment with
respect to the post-closing operations of the Dole Cannery project. However, the
Partnership is legally obligated for $30,864 of mortgage indebtedness
outstanding at September 30, 1998 which is secured by a first mortgage on the
Lake Elsinore outlet center. In addition, Castle & Cooke has provided the
Partnership a guaranty, without limitation, of the obligations relating to such
mortgage indebtedness.
On March 18, 1998, the Partnership obtained from a financial institution a
commitment for a construction mortgage loan (the "Construction Mortgage Loan")
relating to Phase I of Prime Outlets at Hagerstown ("Hagerstown") in an amount
not to exceed $21,600 which was subsequently increased to $32,860 on October 2,
1998 as a result of obtaining a commitment for construction financing on Phase
II. The Construction Mortgage Loan (i) bears a variable interest rate at 30-day
LIBOR plus 1.50%, (ii) matures on June 1, 2004, and (iii) requires monthly
interest-only payments. The Construction Mortgage Loan is collateralized by a
first mortgage on Hagerstown. At September 30, 1998, $15,969 was outstanding on
the Construction Mortgage Loan.
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 928,000 square feet of GLA during 1998
including the Prime Outlets at Lebanon which opened on April 17, 1998 and Prime
Outlets at Hagerstown which opened on August 7, 1998. Prime Outlets at Lebanon
is located in Lebanon, Tennessee, approximately 25 miles east of Nashville, and
contains 208,000 square feet of GLA. Prime Outlets at Lebanon was approximately
92% leased at September 30, 1998. Prime Outlets at Hagerstown is located in
Hagerstown, Maryland, west of Baltimore and northwest of Washington, D.C. Prime
Outlets at Hagerstown was approximately 96% leased at September 30, 1998. At
September 30, 1998, the remaining budgeted capital expenditures for 1998 planned
developments aggregated approximately $32,736.
Management believes that the Partnership has sufficient capital and capital
commitments to fund the remaining capital expenditures associated with its 1998
development activities. These funding requirements are expected to be met, in
large part, with the proceeds from various loan facilities.
The Partnership currently plans to open one new factory outlet center and
several expansions in 1999 that are expected to contain approximately 700,000
square feet of GLA, in the aggregate, and have a total expected development cost
of approximately $95,000. The Partnership expects to fund the development cost
of these projects from (i) certain line of credit facilities, (ii) retained cash
flow from operations, (iii) construction loans, (iv) the potential sale of a
joint venture interest in certain factory outlet centers, and (v)contributions
from the General Partner. As of September 30, 1998, the Partnership had
committed $13,757 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 $1,179,777 and $515,265 at
September 30, 1998 and December 31, 1997, respectively. At September 30, 1998,
such indebtedness had a weighted average maturity of 6.0 years and bore interest
at a weighted average interest rate of 7.01% per annum. At September 30, 1998,
$588,457, or 49.9%, of such indebtedness bore interest at fixed rates and
$591,320, or 50.1%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable-rates. Of the variable rate indebtedness outstanding
at September 30, 1998, $353,803 converted to a fixed rate of 7.782% on November
11, 1998 for the remaining five-year term of such indebtedness.
At September 30, 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 $353,803 of other floating rate indebtedness which expired on
November 11, 1998 (or approximately 64.6% of its total floating rate
indebtedness). In addition, the Partnership held additional interest rate
protection contracts on $21,900 (expires in April 1999) of the $353,803 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 September 30,
1998 (defined as total debt divided by the sum of: (a) the aggregate market
value of the outstanding shares of Common Units, assuming the full exchange of
Partnership Series C Preferred Units into Common Units; (b) the aggregate market
value of the outstanding units of Series B Convertible Preferred Units; (c) the
aggregate liquidation preference of the Series A Senior Cumulative Preferred
Units ("Senior Preferred Units") at $25.00 per unit; and (d) the total debt of
the Partnership) was 60.7%.
The Partnership is obligated to repay $4,962 of mortgage indebtedness during the
remainder of 1998 and $77,498 in 1999. Annualized cumulative distributions on
the Partnership's Senior Preferred Units, Series B Convertible Preferred Units
and Series C Preferred Units outstanding September 30, 1998 are $6,038, $16,635,
and $5,149, respectively. These distributions are payable quarterly, in arrears.
The Partnership anticipates that cash flow from (i) certain line of credit
facilities, (ii) operations, (iii) new borrowings, (iv) refinancings of certain
existing debt, (v) the potential sale of a joint venture interest in certain
factory outlet centers, and (vi) contributions from the General Partner will be
sufficient to satisfy its debt service obligations, expected distribution
requirements and operating cash needs for the next year. There can be no
assurance that the Partnership will be successful in obtaining the required
amount of funds for these items or that the terms of capital raising activities,
if any, will be as favorable as the Partnership has experienced in prior
periods.
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 September 30, 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 Unit Distributions").
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. Additionally, the Partnership is in
the process of querying its significant vendors and tenants about their Year
2000 compliance status. To date, the Partnership is not aware of any vendors or
tenants with a Year 2000 issue that would have a material impact on the
Partnership's results of operations, liquidity, or capital resources. However,
the Partnership has no means of ensuring that its vendors or tenants will be
Year 2000 ready. The inability of these vendors or tenants to complete their
Year 2000 resolution process in a timely fashion could materially impact the
Partnership. The effect of non-compliance by significant vendors and tenants is
not determinable. However, the Partnership will continue to monitor the Year
2000 status of its significant vendors and tenants.
<PAGE>
Funds from Operations
Management believes that to facilitate a clear understanding of the
Partnership's operating results, funds from operations ("FFO") should be
considered in conjunction with net income (loss) presented in accordance with
GAAP. In March 1995, the National Association of Real Estate Investment Trusts
("NAREIT") established guidelines clarifying the definition of FFO. FFO is
defined as net income (loss) (determined in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization after adjustments for unconsolidated partnerships
and joint ventures.
The Partnership 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. The Partnership's FFO is not comparable to FFO 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
Partnership. Therefore, 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. The Partnership believes that in order to facilitate a
clear understanding of its operating results, FFO should be examined in
conjunction with net income determined in accordance with GAAP. FFO does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income as an indication of the
Partnership's performance or to cash flows as a measure of liquidity or ability
to make distributions.
TABLE 6 provides a reconciliation of income before allocation to minority
interests to FFO for the three and nine months ended September 30, 1998 and
1997. FFO increased $16,575, or 145.6%, to $27,962 for the three months ended
September 30, 1998 from $11,387 for the three months ended September 30, 1997.
FFO increased $28,766, or 87.6%, to $61,596 for the nine months ended September
30, 1998 from $32,830 for the nine months ended September 30, 1997. These
increases are primarily attributable to the Portfolio Expansion and the Horizon
Merger.
<TABLE>
TABLE 6 - Funds from Operations
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
------------------------- --------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before allocation to minority
interests $11,332 $ 4,374 $11,710 $12,055
FFO adjustments:
Loss on sale of real estate - - 15,461 -
Real estate depreciation and amortization 16,327 6,553 33,820 19,289
Unconsolidated joint venture adjustments 303 460 605 1,486
------- -------- ------- -------
FFO before allocation to minority interests $27,962 $ 11,387 $61,596 $32,830
======= ======== ======= =======
====================================================================================================================================
</TABLE>
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business the Partnership is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Partnership.
The Partnership is defendant in a lawsuit filed on July 27, 1998 in the U.S.
District Court for the Central District of California whereby the plaintiff
alleges that the Partnership and its related entities overcharged tenants for
common area maintenance expenditures. The outcome of, and the ultimate liability
of the Partnership, if any, from, this lawsuit cannot currently be predicted.
Management believes that the Partnership has acted properly and intends to
defend this lawsuit vigorously.
In the Partnership's previously filed Form 10-Q for the quarter ended March 31,
1998, it reported that on December 10, 1997 in the Circuit Court for Muskegon
County, Michigan (the "Court"), a shareholder of Horizon filed a purported class
action lawsuit against Horizon, 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 Partnership and that the consideration to be paid
to Horizon's shareholders in connection with the merger was unfair and
inadequate.
On September 8, 1998, a hearing was held before Judge James M. Graves of the
Court. At the hearing, the defendants, including the Partnership, continued to
deny any wrongdoing and liability. The Court approved the settlement set forth
in the Stipulation of Settlement (the "Stipulation") previously executed by the
parties to the lawsuit on July 21, 1998 and found that the settlement was, in
all respects, fair, reasonable, and adequate, and dismissed with prejudice the
litigation against the defendants. The settlement required that the Partnership
pay legal expenses of $325.
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
<PAGE>
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 and Dividends
Exhibit 27.1 - Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K:
On August 27, 1998, the Partnership filed a Current Report on
Form 8-K/A, dated June 15, 1998, reporting (i) the merger an
other transactions (collectively, the "Transactions") as set
forth in the agreement and plan of merger between the General
Partner and Horizon Group, L.P. was consummated on June 15,
1998 and (ii) the General Partner completed a $292.0 million debt
financing with Nomura Asset Capital Corporation in connection
with the Transactions. Unaudited pro forma consolidated financial
statements of the Partnership and unaudited statements of revenue
and certain expense of (i) the Prime Transferred Properties and
(ii)Horizon Group Properties, L.P. were included.
<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.
BY: PRIME RETAIL, L.P.
Registrant
BY: PRIME RETAIL, INC.
its general partner
Date: November 12, 1998 /s/ Abraham Rosenthal
----------------- -----------------------
Abraham Rosenthal
Chief Executive Officer
Date: November 12, 1998 /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 UNIT DISTRIBUTIONS
(Amounts in thousands, except for ratio information)
Nine Months Ended September 30
--------------------------------------------
1998 1997
------------ -----------
Income before minority interests $11,710 $ 12,055
Loss on sale of real estate 15,461 -
Interest incurred 42,984 30,155
Amortization of capitalized interest 341 235
Amortization of debt issuance costs 1,193 1,818
Amortization of interest rate protection
contracts 1,006 1,043
Less interest earned on interest rate
protection contracts (23) (86)
Less capitalized interest (4,511) (3,176)
------- ------
Earnings 68,161 42,044
------- ------
Interest incurred 42,984 30,155
Amortization of debt issuance costs 1,193 1,818
Amortization of interest rate protection
contracts 1,006 1,043
Preferred unit distributions 18,077 9,280
Combined Fixed Charges and ------- ------
Preferred Unit Distributions 63,260 42,296
------- ------
Excess of Combined Fixed Charges
and Preferred Unit Distributions
over Earnings $ (252)
========
Ratio of Earnings to Combined Fixed
Charges and Preferred Unit
Distributions 1.08 x
==========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 13,371
<SECURITIES> 0
<RECEIVABLES> 9,843
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 108,675
<PP&E> 1,860,535
<DEPRECIATION> 110,011
<TOTAL-ASSETS> 1,963,086
<CURRENT-LIABILITIES> 116,608
<BONDS> 1,179,777
324,688
0
<COMMON> 0
<OTHER-SE> 610,485
<TOTAL-LIABILITY-AND-EQUITY> 1,963,086
<SALES> 0
<TOTAL-REVENUES> 154,992
<CGS> 0
<TOTAL-COSTS> 127,821
<OTHER-EXPENSES> 2,634
<LOSS-PROVISION> 788
<INTEREST-EXPENSE> 39,399
<INCOME-PRETAX> 11,641
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,641
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,641
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
