<PAGE>
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT FILED PURSUANT TO RULE 424(B)(3)
(TO PROSPECTUS DATED APRIL 25, 1996) REGISTRATION STATEMENT NO. 333-1784
</TABLE>
June 10, 1996
Dear Stockholder:
Prime Retail, Inc. (the "Company") has extended its offer to exchange (the
"Offer") its Common Stock for up to 4,209,000 shares, or 60%, of its outstanding
8.5% Series B Cumulative Participating Convertible Preferred Stock ("Convertible
Preferred Stock") from 5:00 p.m., New York City time, on June 6, 1996 to 5:00
p.m., New York City time, on June 24, 1996. The Company's Offer provides for an
exchange on a basis of 1.6 shares of Common Stock for each share of Convertible
Preferred Stock validly tendered and accepted for exchange in the Offer.
The principal purposes of the Offer are to (i) increase the size of the
public market for the Company's Common Stock and (ii) increase the portion of
the Company's shareholders' equity represented by Common Stock in order to
provide for a more traditional capital structure for a real estate investment
trust. The purpose of the enclosed Prospectus Supplement is to provide certain
information regarding (i) the Company's proposed financing with Nomura Asset
Capital Corporation, (ii) the agreement to purchase of the Company's joint
venture partner's interest in Grove City Factory Shops, (iii) the increase in
the Company's proposed Common Stock offering to 3,705,000 shares, (iv) certain
additional recent developments and (v) financial information concerning the
Company for the three months ended March 31, 1996.
The Board of Directors of the Company has determined that the Offer is in
the best interest of the Company and has unanimously approved the Offer but has
made no recommendation as to whether you should participate in the Offer. I
encourage you to read the enclosed Prospectus Supplement dated June 10, 1996
before making any decisions concerning the Offer. If you decide to participate
in the Offer, please follow the instructions in the enclosed materials.
If you have any questions regarding the Offer, please call the Information
Agent at the phone number on the back cover of the enclosed Prospectus
Supplement.
Very truly yours,
Michael W. Reschke
CHAIRMAN OF THE BOARD
cc: Wilmington Trust Company, as Exchange Agent
<PAGE>
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT FILED PURSUANT TO RULE 424(B)(3)
(TO PROSPECTUS DATED APRIL 25, 1996) REGISTRATION STATEMENT NO. 333-1784
</TABLE>
PRIME RETAIL, INC.
SUPPLEMENT DATED JUNE 10, 1996
IMPORTANT NOTICE TO SHAREHOLDERS
WITH REGARD TO THE
OFFER TO EXCHANGE ITS
COMMON STOCK FOR UP TO
4,209,000 SHARES OF ITS OUTSTANDING
8.5% SERIES B CUMULATIVE PARTICIPATING
CONVERTIBLE PREFERRED STOCK
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JUNE 24, 1996, UNLESS THE OFFER IS FURTHER EXTENDED.
TO TENDER SHARES PURSUANT TO THE OFFER, A PROPERLY COMPLETED AND DULY
EXECUTED LETTER OF TRANSMITTAL MUST BE RECEIVED BY THE EXCHANGE AGENT AT THE
ADDRESS SET FORTH ON THE LAST PAGE OF THIS SUPPLEMENT, ALL AS MORE FULLY SET
FORTH IN THE PROSPECTUS AND LETTER OF TRANSMITTAL.
FOR PURPOSES OF THE PREVIOUSLY FURNISHED LETTER OF TRANSMITTAL AND NOTICE OF
GUARANTEED DELIVERY, AND ANY OTHER DOCUMENTS PREVIOUSLY FURNISHED TO
STOCKHOLDERS IN CONNECTION WITH THE OFFER, ALL REFERENCES THEREIN TO THE
PROSPECTUS, THE OFFER OR THE COMMON STOCK OFFERING SHALL BE DEEMED TO REFER TO
THE PROSPECTUS AND THE OFFER, EACH AS AMENDED AND SUPPLEMENTED BY THIS
SUPPLEMENT, AND THE COMMON STOCK OFFERING AS DESCRIBED IN THIS SUPPLEMENT.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE
PROSPECTUS, THIS SUPPLEMENT AND THE LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE
SOLICITATION AND INFORMATION AGENT OR THE EXCHANGE AGENT, AS SET FORTH ON THE
LAST PAGE OF THIS SUPPLEMENT.
THE SOLICITATION AGENT FOR THE OFFER IS:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus Supplement is June 10, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PURPOSE OF SUPPLEMENT...................................................................................... 1
1996 NOMURA LOAN COMMITMENT................................................................................ 1
GROVE CITY PURCHASE AGREEMENT.............................................................................. 3
INCREASE IN SIZE OF COMMON STOCK OFFERING.................................................................. 4
CERTAIN RECENT DEVELOPMENTS................................................................................ 5
SUPPLEMENTAL FINANCIAL INFORMATION......................................................................... 6
CAPITALIZATION........................................................................................... 6
SELECTED FINANCIAL DATA.................................................................................. 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 14
INDEX TO FINANCIAL STATEMENTS............................................................................ F-1
</TABLE>
<PAGE>
PROSPECTUS SUPPLEMENT
THE FOLLOWING INFORMATION IS FURNISHED AS A SUPPLEMENT (THE "SUPPLEMENT") TO
THE PROSPECTUS DATED APRIL 25, 1996 (THE "PROSPECTUS") OF PRIME RETAIL, INC.
(THE "COMPANY"), IN CONNECTION WITH THE OFFER BY THE COMPANY TO EXCHANGE ITS
COMMON STOCK FOR UP TO 4,209,000 SHARES OF ITS OUTSTANDING 8.5% SERIES B
CUMULATIVE PARTICIPATING CONVERTIBLE PREFERRED STOCK. ALL CAPITALIZED TERMS NOT
OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANING ASCRIBED TO THEM IN THE
PROSPECTUS. THE TERMS AND CONDITIONS SET FORTH IN THE PROSPECTUS AND THE LETTER
OF TRANSMITTAL REMAIN APPLICABLE IN ALL RESPECTS TO THE OFFER. THE INFORMATION
SET FORTH HEREIN SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
PURPOSE OF THE SUPPLEMENT
The purpose of this Supplement is to disclose (i) the Company's execution of
a binding loan commitment with Nomura Asset Capital Corporation (the "1996
Nomura Loan Commitment") to provide certain mortgage loans and other financing
for the Company, (ii) an agreement by the Company to purchase (the "Grove City
Purchase") the remaining 50% ownership interest in Grove City Factory Shops
Partnership owned by the Company's joint venture partner (the "Grove City
Partner"), (iii) an increase in the number of shares of Common Stock expected to
be sold by the Company in the Common Stock Offering to 3,705,000 shares
(4,260,750 shares of Common Stock if the over-allotment option granted to the
Underwriters is exercised in full), (iv) certain additional recent developments
including, among other things, the extension of the Expiration Date of the Offer
to June 24, 1996, satisfaction of the Dividend Record Date Condition to the
Offer, and the adoption of the Amended Convertible Preferred Ownership Limit and
(v) financial information of the Company as of and for the three months ended
March 31, 1996, including as adjusted financial data which gives effect to the
increased size of the Common Stock Offering and a loss associated with the
expected prepayment of certain debt obligations and the termination of certain
loan commitments obtained by the Company on December 18, 1995.
1996 NOMURA LOAN COMMITMENT
The Company has accepted the 1996 Nomura Loan Commitment with Nomura Asset
Capital Corporation ("Nomura") which provides for, among other things, (i) a
variable-rate seven-year cross-collateralized first mortgage loan (the "1996
Mortgage Loan") in the principal amount of $226.5 million and (ii) a
variable-rate seven-year cross-collateralized second mortgage loan (the
"Mezzanine Mortgage Loan") in the principal amount of $33.5 million. The Company
expects to close the 1996 Mortgage Loan and the Mezzanine Mortgage Loan in July
1996. The 1996 Nomura Loan Commitment is subject to Nomura's customary real
estate due diligence review of the thirteen factory outlet centers comprising
the collateral and the completion of appropriate documentation. In connection
with the 1996 Nomura Loan Commitment, the Company will pay Nomura a commitment
fee at closing in the amount of $3.5 million. There can be no assurance that the
Company will be successful in consummating such refinancing.
The 1996 Mortgage Loan will bear a variable rate of interest equal to the
London Interbank offered rate for thirty (30) day deposits in U.S. dollars
("30-day LIBOR") plus 1.24% (plus trustee and servicing fees, which are expected
to be 0.07% in the aggregate). The Mezzanine Mortgage Loan will bear a variable
rate of interest equal to 30-day LIBOR plus 3.25%. The 1996 Mortgage Loan and
the Mezzanine Mortgage Loan are expected to be securitized by Nomura on or
before September 30, 1996 (the "Securitization Closing Date"). In the event the
Securitization Closing Date does not occur by September 30, 1996, or in the
event the Company elects to terminate the securitization and repay the loans
because the terms of the securitization are unacceptable to the Company, the
interest rate on the Mezzanine Mortgage Loan will increase to a variable rate
per annum equal to 30-day LIBOR plus 5.20%. Until the Securitization Closing
Date, no payments of principal will be required under the 1996 Mortgage Loan and
the Mezzanine Mortgage Loan. After the Securitization Closing Date, the 1996
Mortgage Loan will require monthly payments of principal and interest based on a
thirty-year
1
<PAGE>
amortization of principal and the Mezzanine Mortgage Loan will require monthly
payments of principal and interest based on the full amortization of principal
within seven years. The 1996 Mortgage Loan and the Mezzanine Mortgage Loan will
be cross-collateralized by senior and junior mortgages, respectively,
encumbering thirteen of the Company's existing factory outlet centers. The
proceeds from the closing of the 1996 Mortgage Loan and the Mezzanine Mortgage
Loan will be used to repay outstanding borrowings under the Revolving Loan, the
1994 Mortgage Loan (which may not be prepaid prior to July 1, 1996), the Interim
Loan and a portion of the Company's $16.0 million fixed rate mortgage loan. The
remaining proceeds will be used for the purchase of interest rate protection
contracts, the costs and expenses of the refinancing and for working capital
purposes.
In connection with the commitment to provide the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan, the Company and Nomura have agreed that, subject to
certain conditions, the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the securitization of the 1996 Mortgage Loan. If
the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the
Senior Certificates (as defined below), the appropriate party will make a
payment to the other based on the present value of such deviation applied
against the principal balance of the Senior Certificates. If the Securitization
Closing Date does not occur within six months of the closing of the 1996
Mortgage Loan and the Mezzanine Mortgage Loan, Nomura may demand payment of such
loans in full six months after delivery of such demand notice. It is anticipated
that the 1996 Mortgage Loan will be securitized at investment grade levels
through the issuance of Real Estate Mortgage Investment Company ("REMIC")
certificates (the "Senior Certificates") and the Mezzanine Mortgage Loan will be
securitized through the issuance of REMIC certificates or another acceptable
securitization vehicle (the "Junior Certificates"). In addition, the 1996 Nomura
Loan Commitment requires that, prior to the securitization, the Company purchase
interest rate protection contracts with regard to the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan when and if 30-day LIBOR exceeds 6.50%. After
securitization, the Company will be required to purchase interest rate
protection contracts for the seven-year term of such loans and for the principal
amount of the Senior Certificates. It is estimated that the proceeds from the
sale of the Senior Certificates and the Junior Certificates and the proceeds
from the cash flow loan (described below) will approximate $260.0 million. In
the event that loan proceeds available from the Senior Certificates and the
Junior Certificates are less than $260.0 million, Nomura has agreed to provide,
subject to certain conditions (including the consent of the applicable rating
agencies), a loan based on the cash flow of the Property Partnerships which own
the thirteen factory outlet centers in the principal amount of the difference
between $260.0 million and such loan proceeds. In the event that the net cash
flow from the thirteen outlet centers is less than a mutually agreed upon amount
and the securitization results in less than $260.0 million in proceeds, the
Company will be required to pay to Nomura such difference at the closing of the
securitization. The Company intends to purchase the Junior Certificates with the
proceeds of a financing from Nomura (the "Repo Financing"). The Repo Financing
will require monthly payments of interest only and will be for a term of two
years and will be recourse to the Operating Partnership. The Repo Financing will
be subject to daily mark-to-market and margin calls. Interest will be payable
for 75% of the par value of the Junior Certificates at the rate of 30-day LIBOR
plus 1.95% and for the balance of the par value of the Junior Certificates at
the rate of 30-day LIBOR plus 7.0%. The weighted average annual interest rate
(including the estimated annual amortization of interest rate protection
contracts) on the $260.0 million of securitized loans is initially expected to
be approximately 7.66%. There can be no assurance that the securitization will
be completed on such terms.
The existing Revolving Loan with Nomura will not be terminated as a result
of the transactions contemplated by the 1996 Nomura Loan Commitment; however,
the collateral currently pledged thereunder will be released and pledged to
Nomura under the 1996 Mortgage Loan and the Mezzanine Mortgage Loan. The
Revolving Loan will be available, subject to sufficient collateral being pledged
to Nomura, for acquisitions, expansions and new outlet centers.
2
<PAGE>
Upon terms acceptable to the Company and the rating agencies involved in the
securitization, an amount between $25.0 million to $50.0 million in addition to
the $260.0 million of securitized loans may be raised by the securitization and,
if so, will be held in escrow by Nomura. These funds may be drawn upon by the
Company, subject to the satisfaction of certain objective standards acceptable
to the Company and such rating agencies, for the cost of construction of
expansions at the thirteen mortgaged outlet centers.
In connection with the execution of the 1996 Nomura Loan Commitment, the
Company expects to incur a non-recurring loss of approximately $10.1 million
that will be recorded during the three months ending June 30, 1996. This loss
results from the expected prepayment of the Revolving Loan, the 1994 Mortgage
Loan, the anticipated termination of previously obtained financing commitments
with respect to the proposed First Mortgage Loan and the proposed Term Loan
(together, the "1995 Nomura Loan Commitments") for which the Company paid $3.3
million in nonrefundable financing fees, and the repayment in full of the
Interim Loan. The loss includes the estimated unamortized cost of certain
interest rate protection contracts of $3.7 million as of July 31, 1996 that will
be terminated upon repayment of the debt underlying the contracts, debt
prepayment penalties of $0.8 million and other deferred financing costs of $4.5
million, less the estimated fair market value of the interest rate protection
contracts of approximately $2.2 million based on their fair market value at May
30, 1996. Upon termination and sale of the interest rate protection contracts,
the Company will receive proceeds based on the then fair market value of such
contracts. The future fair market value of interest rate protection contracts is
susceptible to valuation fluctuations based on market changes in interest rates
and the maturity date of the underlying contracts.
The Company believes that the loan facilities to be provided by Nomura
pursuant to the 1996 Nomura Loan Commitment will provide annual interest savings
in excess of $4.0 million based on interest rates as of June 4, 1996 when
compared to the terms provided by the 1995 Nomura Loan Commitments. In addition
to a more attractive interest rate, other benefits include no lock-out period
with respect to prepayment, no prepayment penalties after two years, collateral
substitution provisions and a larger escrow of funds for the expansion of the
mortgaged outlet centers.
GROVE CITY PURCHASE AGREEMENT
The Company and the Grove City Partner have entered into an agreement dated
as of May 6, 1996 (the "Grove City Purchase Agreement") in which the Company has
agreed, subject to certain conditions, to purchase on or before February 28,
1997 all of the Grove City Partner's ownership interest in Grove City Factory
Shops Partnership, the Property Partnership which owns the Grove City Factory
Shops. Following the completion of such transaction, the Company will own 100%
of Grove City Factory Shops Partnership. As consideration for the Grove City
Partner's partnership interest, the Company has agreed under the Grove City
Purchase Agreement, at closing, to pay $8.0 million in cash to the Grove City
Partner and to repay all of the then outstanding indebtedness secured by Grove
City Factory Shops, which indebtedness is owed to the Grove City Partner by the
Grove City Factory Shops Partnership. At March 31, 1996, the outstanding
indebtedness relating to the construction of Phases I, II and III of Grove City
Factory Shops was $43.5 million.
The Grove City Purchase Agreement also provides for the Grove City Partner
and the Company to finance, develop and construct a fourth phase of the center
which will contain approximately 118,000 square feet of GLA. Under the Grove
City Purchase Agreement, an affiliate of the Grove City Partner will make a
construction loan to the Company in the aggregate principal amount of $11.0
million for the construction of Phase IV. Construction of Phase IV commenced in
May 1996 and is expected to be completed during the fourth quarter of 1996 at an
expected cost of completion of $13.5 million. The Company is obligated to fund
any construction costs in excess of $11.0 million. No assurance can be given
that this expansion will be completed on schedule, with the indicated GLA, or
that the total estimated construction cost will not be exceeded.
3
<PAGE>
Under the Grove City Purchase Agreement, if the Company breaches any
material representation, warranty, covenant or agreement or if the Company
defaults under the Grove City Purchase Agreement, the Company is obligated to
pay liquidated damages to the Grove City Partner in the amount of $2.0 million.
In the event the Grove City Purchase Agreement is terminated for any reason
other than by reason of the Grove City Partner's default thereunder or a
condemnation of or casualty to this property, the Grove City Partner will be
entitled to an $8.0 million preferred distribution (after payment of outstanding
indebtedness and return of capital contributions with respect to Phase IV) from
the proceeds of any subsequent sale of the property. No assurance can be given,
however, that conditions to the Grove City Purchase will be met or that such
transaction will be completed.
INCREASE IN SIZE OF COMMON STOCK OFFERING
The Company has increased the number of shares of Common Stock it intends to
offer in the Common Stock Offering. The Company intends to offer 3,705,000
shares of Common Stock in the Common Stock Offering (4,260,750 shares of Common
Stock if the over-allotment option granted to the Underwriters is exercised in
full) and expects that the net proceeds from the Common Stock Offering will be
approximately $40.2 million (assuming a public offering price of $11.75 and that
the Underwriters' over-allotment option is not exercised). In addition, 90,328
shares of Common Stock will be offered by KILICO Realty Corporation (the
"Selling Stockholder"), the proceeds of which will not be received by the
Company. Following consummation of the Common Stock Offering and the Offer
(assuming the exchange of the minimum number of outstanding shares of
Convertible Preferred Stock permitted to be exchanged), 11,159,928 shares of
Common Stock will be outstanding and 4,209,000 shares of Convertible Preferred
Stock will be outstanding (and assuming the exchange of the maximum number of
outstanding shares of Convertible Preferred Stock permitted to be exchanged,
13,404,728 shares of Common Stock will be outstanding and 2,806,000 shares of
Convertible Preferred Stock will be outstanding). The net proceeds of the Common
Stock Offering will be used by the Company to acquire additional Common Units in
the Operating Partnership, all of which will be entitled to the Preferential
Distribution. Immediately following the consummation of the Common Stock
Offering, the Company will own 56.8% of the Common Units (61.2% assuming the
exchange of the maximum number of outstanding shares of Convertible Preferred
Stock permitted to be exchanged).
Following the Common Stock Offering and assuming the exchange of the
proposed minimum number of shares of Convertible Preferred Stock permitted to be
exchanged pursuant to the Offer, Funds from Operations must equal at least
$10,439,735 (the "FFO Threshold Amount") per quarter for four successive
quarters for the Preferential Distribution to terminate (and assuming the
maximum number of shares of Convertible Preferred Stock permitted to be
exchanged pursuant to the Offer, the FFO Threshold Amount would equal
$10,347,371). After giving pro forma effect to the Common Stock Offering and the
Offer (regardless of the number of shares of Convertible Preferred Stock
tendered), the Company's Funds from Operations for each of the four quarters in
the year ended December 31, 1995 were $8,803,129, $8,656,539, $9,079,315, and
$9,672,726, respectively.
Following the consummation of the Common Stock Offering, the percentage
ownership of the Company, by PGI, Messrs. Rosenthal and Carpenter and the public
holders of Common Stock would be 2.2%, 0.1% and 97.7%, respectively (1.9%, less
than 0.1% and 98.1%, respectively, assuming the exchange of the maximum number
of outstanding shares of Convertible Preferred Stock permitted to be exchanged).
Following the consummation of the Common Stock Offering and the Offer and after
giving effect to the conversion of all of the Common Units, the percentage
ownership of Prime Retail, Inc., by PGI, Messrs. Rosenthal and Carpenter and the
public holders of Common Stock would be 40.7%, 3.8% and 55.5%, respectively
(36.6%, 3.4% and 60.0%, respectively, assuming the exchange of the maximum
number of outstanding shares of Convertible Preferred Stock permitted to be
exchanged).
Following the consummation of the Common Stock Offering and the Offer, the
percentage ownership of the Operating Partnership by the Company, PGI and
Messrs. Rosenthal and Carpenter
4
<PAGE>
would be 56.8%, 39.5% and 3.8%, respectively (61.2%, 35.4%, and 3.4%,
respectively, assuming the exchange of the maximum number of outstanding shares
of Convertible Preferred Stock permitted to be exchanged).
CERTAIN ADDITIONAL RECENT DEVELOPMENTS
EXTENSION OF THE EXPIRATION DATE. The Company has extended the Expiration
Date of the Offer to 5:00 p.m., New York City time, on June 24, 1996.
SATISFACTION OF DIVIDEND RECORD DATE CONDITION. On May 15, 1996, a cash
distribution of $0.53125 per share was paid to Holders of Convertible Preferred
Stock as of May 1, 1996, thereby satisfying the Dividend Record Date Condition
to the Offer.
INCREASE IN THE CORPORATE LINE. On May 7, 1996, the Corporate Line was
renewed and increased to $15 million. The maturity date of the Corporate Line is
July 11, 1997.
ADOPTION OF AMENDED CONVERTIBLE PREFERRED OWNERSHIP LIMIT. At the Company's
annual meeting on May 29, 1996, the Company's stockholders approved the Amended
Convertible Preferred Ownership Limit, thereby permitting holders to own or
acquire Convertible Preferred Stock which, together with other shares of the
Company's capital stock, represent up to 9.9% of the total value of all of the
Company's outstanding capital stock.
5
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 (i) on a historical basis, (ii) as adjusted to reflect the completion
of the Common Stock Offering, completion of the Common Unit Contribution, and
consummation of the Offer and Special Distribution, assuming the minimum number
of shares of Convertible Preferred Stock are exchanged pursuant to the Offer and
the estimated loss of approximately $10.1 million relating to the expected
prepayment of certain loan facilities and the termination of the 1995 Nomura
Loan Commitments in connection with the Company's execution of the 1996 Nomura
Loan Commitment, and (iii) as adjusted to reflect the completion of the Common
Stock Offering, completion of the Common Unit Contribution, and consummation of
the Offer and Special Distribution, assuming the maximum number of shares of
Convertible Preferred Stock are exchanged pursuant to the Offer and the
estimated loss of approximately $10.1 million relating to the expected
prepayment of certain loan facilities and the termination of the 1995 Nomura
Loan Commitments in connection with the Company's execution of the 1996 Nomura
Loan Commitment. See the historical financial information relating to the
Company set forth elsewhere in this Supplement and in the Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
(IN 000S, EXCEPT SHARE INFORMATION)
-------------------------------------------
AS ADJUSTED
------------------------------
COMMON STOCK COMMON STOCK
OFFERING AND OFFERING AND
MINIMUM MAXIMUM
HISTORICAL OFFER (1) OFFER (2)
----------- -------------- --------------
<S> <C> <C> <C>
Long-term debt:
Bonds payable...................................................... $ 32,900 $ 32,900 $ 32,900
Notes payable (3).................................................. 273,120 232,872 232,872
----------- -------------- --------------
Total long-term debt............................................. 306,020 265,772 265,772
Minority interests (4)............................................... 10,867 10,867 10,867
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock, $.01 par value,
liquidation preference of $25 per share (5)....................... 23 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock,
$.01 par value, liquidation preference of $25 per share (5)(6).... 70 42 28
Common Stock, 75,000,000 shares authorized, $.01 par value
(5)(7)(8)........................................................... 29 112 134
Additional paid-in capital (9)....................................... 128,275 168,468 168,460
Distributions in excess of net income (10)........................... (8,463) (19,590) (19,915)
----------- -------------- --------------
Total shareholders' equity....................................... 119,934 149,055 148,730
----------- -------------- --------------
Total capitalization............................................. $ 436,821 $ 425,694 $ 425,369
----------- -------------- --------------
----------- -------------- --------------
</TABLE>
- ------------------------
(1) Reflects the completion of the Common Stock Offering, including the use of
net proceeds from the Common Stock Offering as described in this Supplement
under the caption "Increase in Size of the Common Stock Offering,"
completion of the Common Unit Contribution, and consummation of the Offer
and Special Distribution, assuming the minimum number of shares of
Convertible Preferred Stock are exchanged pursuant to the Offer. Also
reflects the estimated loss of $10.1 million relating to the expected
prepayment of certain loan facilities and the termination of the 1995 Nomura
Loan Commitments in connection with the Company's execution of the 1996
Nomura Loan Commitment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Sources and Uses of Cash."
6
<PAGE>
(2) Reflects the completion of the Common Stock Offering, including the use of
net proceeds from the Common Stock Offering as described in this Supplement
under the caption "Increase in Size of the Common Stock Offering,"
completion of the Common Unit Contribution, and consummation of the Offer
and Special Distribution, assuming the maximum number of shares of
Convertible Preferred Stock are exchanged pursuant to the Offer. Also
reflects the estimated loss of $10.1 million relating to the expected
prepayment of certain loan facilities and the termination of the 1995 Nomura
Loan Commitments in connection with the Company's execution of the 1996
Nomura Loan Commitment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Sources and Uses of Cash."
(3) The as adjusted amounts reflect the paydown of notes payable with the
estimated net proceeds of $40,248 from the Common Stock Offering.
(4) Immediately following the consummation of the Common Stock Offering, the
Common Unit Contribution and assuming the exchange of the proposed minimum
and maximum number of shares of Convertible Preferred Stock permitted to be
exchanged pursuant to the Offer, the Limited Partners will own 43.3% and
38.8%, respectively, of the Common Units of partnership interest in the
Operating Partnership.
(5) Shares issued and outstanding as of March 31, 1996 on a historical basis, as
adjusted to reflect (i) the completion of the Common Stock Offering,
completion of the Common Unit Contribution and consummation of the Offer,
assuming the minimum number of shares of Convertible Preferred Stock are
exchanged pursuant to the Offer, and (ii) the completion of the Common Stock
Offering, completion of the Common Unit Contribution and consummation of the
Offer assuming the maximum number of shares of Convertible Preferred Stock
are exchanged pursuant to the Offer, were as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------------------------
AS ADJUSTED
---------------------------------------------
COMMON STOCK COMMON STOCK
OFFERING AND OFFERING AND
MINIMUM MAXIMUM
HISTORICAL OFFER OFFER
------------- -------------- --------------
<S> <C> <C> <C>
Senior Preferred Stock....................................... 2,300,000 2,300,000 2,300,000
Convertible Preferred Stock.................................. 7,015,000 4,209,000 2,806,000
Common Stock................................................. 2,875,000 11,159,928 13,404,728
</TABLE>
The following summary provides a reconciliation of Common Stock outstanding
on a historical basis to Common Stock outstanding on an as adjusted basis:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------------
AS ADJUSTED
------------------------------
COMMON STOCK COMMON STOCK
OFFERING AND OFFERING AND
MINIMUM MAXIMUM
OFFER OFFER
-------------- --------------
<S> <C> <C>
Historical shares issued and outstanding..................................... 2,875,000 2,875,000
Shares issued upon consummation of the Offer................................. 4,489,600 6,734,400
Shares issued upon completion of the Common Stock Offering................... 3,705,000 3,705,000
Shares issued upon exchange of Common Units for Common Stock by the Selling
Stockholder................................................................. 90,328 90,328
-------------- --------------
As adjusted shares of Common Stock issued and outstanding.................... 11,159,928 13,404,728
-------------- --------------
-------------- --------------
</TABLE>
7
<PAGE>
(6) The as adjusted amounts were calculated as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
------------------------------------
COMMON STOCK COMMON STOCK
OFFERING AND OFFERING AND
MINIMUM MAXIMUM
OFFER OFFER
----------------- -----------------
<S> <C> <C>
Convertible Preferred Stock, historical...................................... $ 70 $ 70
Exchange of Convertible Preferred Stock into Common Stock (2,806,000 and
4,209,000 shares assuming the minimum and maximum exchange, respectively, at
$0.01 par value)............................................................ (28) (42)
--- ---
As adjusted Convertible Preferred Stock...................................... $ 42 $ 28
--- ---
--- ---
</TABLE>
(7) The as adjusted amounts were calculated as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
--------------------------------
COMMON STOCK COMMON STOCK
OFFERING AND OFFERING AND
MINIMUM MAXIMUM
OFFER OFFER
--------------- ---------------
<S> <C> <C>
Common Stock, historical..................................................... $ 29 $ 29
Exchange of Convertible Preferred Stock into Common Stock (4,489,600 and
6,734,400 shares of Common Stock assuming the minimum and maximum exchange,
respectively, at $0.01 par value)........................................... 45 67
Issuance of 3,705,000 shares of Common Stock assuming consummation of the
Offering at $0.01 par value................................................. 37 37
Exchange of Common Units for Common Stock by the Selling Stockholder, at
$0.01 par value............................................................. 1 1
----- -----
As adjusted Common Stock..................................................... $ 112 $ 134
----- -----
----- -----
</TABLE>
(8) Does not include shares of Common Stock reserved for issuance as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------------------
AS ADJUSTED
------------------------------
COMMON STOCK COMMON STOCK
OFFERING AND OFFERING AND
MINIMUM MAXIMUM
HISTORICAL OFFER OFFER
----------- -------------- --------------
<S> <C> <C> <C>
Common Stock reserved for issuance upon exchange of issued and
outstanding Common Units held by the Limited Partners......... 9,220,800 8,505,472 8,505,472
Common Stock reserved for issuance upon conversion of
Convertible Preferred Stock................................... 8,391,148 5,034,689 3,356,459
Common Stock reserved for issuance under the Stock Incentive
Plan.......................................................... 1,185,000 1,185,000 1,185,000
</TABLE>
8
<PAGE>
(9) The adjusted amounts were calculated as follows:
<TABLE>
<CAPTION>
AS ADJUSTED
------------------------------
COMMON STOCK COMMON STOCK
OFFERING AND OFFERING AND
MINIMUM MAXIMUM
OFFER OFFER
-------------- --------------
<S> <C> <C>
Additional paid-in capital, historical....................................... $ 128,275 $ 128,275
Offering proceeds, net....................................................... 40,248 40,248
Par value of Common Stock.................................................... (38) (38)
Exchange of Convertible Preferred Stock...................................... (17) (25)
-------------- --------------
As adjusted additional paid-in capital....................................... $ 168,468 $ 168,460
-------------- --------------
-------------- --------------
</TABLE>
(10) Includes the effects of the Special Distribution of $1,068 and $1,393 based
on the minimum and maximum number of shares of Convertible Preferred Stock
exchanged pursuant to the Offer, respectively.
9
<PAGE>
SELECTED FINANCIAL DATA
The following summary selected financial data for the three months ended
March 31, 1996 and 1995 and the year ended December 31, 1995 are derived from
the consolidated financial statements of the Company included elsewhere in this
Prospectus Supplement and the Prospectus. Results for interim periods may not be
indicative of results for a full year. The following financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements,
notes thereto and other financial information included elsewhere in this
Prospectus Supplement. In addition, the Operating Partnership believes that the
book value of the Properties, which reflects the historical cost of such real
estate assets less accumulated depreciation, is not indicative of the fair value
of the Properties.
SELECTED FINANCIAL DATA
PRIME RETAIL, INC.
(AMOUNTS IN 000S, EXCEPT PER SHARE AND RATIO AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
-------------------- DECEMBER 31,
1996 1995 1995
--------- --------- ------------
<S> <C> <C> <C>
REVENUES
Base rents.................................................................. $ 12,744 $ 10,672 $ 46,368
Percentage rents............................................................ 443 401 1,520
Tenant reimbursements....................................................... 6,139 4,873 22,283
Income from investment partnerships......................................... 441 130 1,729
Interest and other.......................................................... 1,364 1,198 5,498
--------- --------- ------------
Total revenues.......................................................... 21,131 17,274 77,398
EXPENSES
Property operating.......................................................... 4,619 3,770 17,389
Real estate taxes........................................................... 1,473 1,234 4,977
Depreciation and amortization............................................... 4,387 3,605 15,438
Corporate general and administrative........................................ 893 844 3,878
Interest.................................................................... 6,056 4,456 20,821
Other charges............................................................... 646 223 2,089
--------- --------- ------------
Total expenses.......................................................... 18,074 14,132 64,592
--------- --------- ------------
Income before minority interests............................................ 3,057 3,142 12,806
Loss allocated to minority interests........................................ 1,477 1,466 5,364
--------- --------- ------------
Net income.................................................................. 4,534 4,608 18,170
Income allocated to preferred shareholders.................................. 5,236 5,236 20,944
--------- --------- ------------
Net loss applicable to common shareholders.................................. $ (702) $ (628) $ (2,744)
--------- --------- ------------
--------- --------- ------------
Net loss per common share outstanding (1)................................... $ (0.24) $ (0.22) $ (0.96)
--------- --------- ------------
--------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT MARCH 31, BALANCE AT
-------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Rental property (before accumulated depreciation)...................... $ 463,458 $ 389,019 $ 454,480
Net investment in rental property...................................... 419,319 359,174 414,290
Total assets........................................................... 455,706 396,629 463,724
Bonds and notes payable................................................ 306,020 233,479 305,954
Total liabilities...................................................... 324,905 247,905 327,784
Shareholders' equity................................................... 119,934 126,175 121,484
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED
-------------------------- DECEMBER 31,
1996 1995 1995
------------ ------------ ------------
SUPPLEMENTAL DATA:
<S> <C> <C> <C>
Funds from Operations (2).............................................. $ 8,916 $ 8,033 $ 33,133
Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends (3)......................................................... -- -- --
Excess of Combined Fixed Charges and Preferred Stock Dividends over
Earnings (3).......................................................... $ (2,813) $ (2,862) $ (11,312)
Ratio of Funds from Operations to Combined Fixed Charges and Preferred
Stock Dividends (4)................................................... 1.24x 1.19x 1.20x
Excess of Combined Fixed Charges and Preferred Stock Dividends over
Funds from Operations (4)............................................. -- -- --
Book value per common share (5)........................................ $ (9.34) $ (8.82) $ (9.21)
Net cash provided by operating activities.............................. $ 9,219 $ 7,733 $ 36,399
Net cash used in investing activities.................................. $ (11,748) $ (20,234) $ (81,978)
Net cash (used in) provided by financing activities.................... $ (9,809) $ 11,501 $ 57,547
Distributions declared per common share................................ $ 0.295 $ 0.295 $ 1.18
Factory outlet leasable area (sq. ft.) at end of period (6)............ 4,331 3,382 4,331
Number of factory outlet centers at end of period (6).................. 17 14 17
AS ADJUSTED SUPPLEMENTAL DATA (7):
Funds from Operations (2).............................................. $ 9,686 $ 36,212
Ratio of Funds from Operations to Combined Fixed Charges and Preferred
Stock Dividends (4)................................................... 1.51x 1.48x
Net income (loss) applicable to common shareholders:
Assuming minimum Offer............................................... $ (68) $ (36)
Assuming maximum Offer............................................... 400 1,867
Net income (loss) per common share outstanding:
Assuming minimum Offer............................................... $ (0.01) $ --
Assuming maximum Offer............................................... 0.03 0.14
Book value per common share (5):
Assuming minimum Offer............................................... $ (0.70) $ (0.62)
Assuming maximum Offer............................................... 0.96 1.03
</TABLE>
- ------------------------
NOTES:
(1) Net loss per common share is based on 2,875 shares outstanding for the three
months ended March 31, 1996 and 1995 and for the year ended December 31,
1995.
(2) Management believes that to facilitate a clear understanding of the
consolidated historical operating results of the Company, Funds from
Operations should be considered in conjunction with net income (loss) as
presented in the financial statements included in this Prospectus.
Management generally considers FFO to be an appropriate measure of the
performance of an equity real estate investment trust. FFO represents net
income (loss) (computed in accordance with GAAP), excluding gains or losses
from debt restructuring and sales of property, plus depreciation and
amortization and after adjustments for unconsolidated investment
partnerships and joint ventures. In March 1995, the NAREIT issued a
clarification of its definition of FFO. Although the Company reports FFO
under both the old definition and the clarified definition, FFO presented in
this table does not give effect to the clarification. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Funds from Operations." The Company
cautions that the calculation of FFO may vary from entity to entity and as
such the presentation of FFO by the Company may not be comparable to other
similarly titled measures of other reporting companies. FFO does not
represent cash flow from operating
11
<PAGE>
activities in accordance with GAAP and is not indicative of cash available
to fund all of the Company's cash needs. FFO should not be considered as an
alternative to net income or any other GAAP measure as an indicator of
performance and should not be considered as an alternative to cash flow as a
measure of liquidity or the ability to service debt or to pay dividends. A
reconciliation of income before allocation to minority interests and
preferred shareholders to FFO is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED
-------------------- DECEMBER 31,
1996 1995 1995
--------- --------- ------------
<S> <C> <C> <C>
Income before allocations to minority interests and preferred
shareholders............................................................. $ 3,057 $ 3,142 $ 12,806
FFO ADJUSTMENTS:
Depreciation and amortization............................................. 4,387 3,605 15,438
Amortization of deferred financing costs and interest rate protection
contracts................................................................ 1,112 1,068 4,524
Unconsolidated joint venture adjustments (i).............................. 360 218 365
--------- --------- ------------
FFO before allocation to minority interests and preferred shareholders.... $ 8,916 $ 8,033 $ 33,133
--------- --------- ------------
--------- --------- ------------
</TABLE>
- ------------------------
NOTE:
(i) Amounts include net preferential partner distributions from a joint
venture partnership of $81 and $162 for the three months ended March 31,
1995 and for the year ended December 31, 1995, respectively.
(3) For purposes of these computations, earnings consist of income less income
from unconsolidated investment partnerships, plus fixed charges (excluding
capitalized interest). Combined fixed charges and preferred stock dividends
consist of interest costs whether expensed or capitalized and amortization
of debt issuance costs and preferred stock dividends.
(4) Management believes that to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be
considered in conjunction with net income (loss) as presented in the
financial statements included in this Prospectus. Management generally
considers FFO to be an appropriate measure of the performance of an equity
real estate investment trust. For purposes of these computations, FFO
consists of FFO adjusted for interest incurred, amortization of capitalized
interest, amortization of debt issuance costs, amortization of interest rate
protection contracts and capitalized interest plus combined fixed charges
and preferred stock dividends (as defined in note 3 above).
12
<PAGE>
(5) Calculated as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------------------------------
COMMON STOCK COMMON STOCK
OFFERING, SPECIAL OFFERING, SPECIAL
DISTRIBUTION, COMMON DISTRIBUTION, COMMON AS OF MARCH
UNIT CONTRIBUTION UNIT CONTRIBUTION 31, 1995
AND AND -----------
HISTORICAL MINIMUM OFFER MAXIMUM OFFER HISTORICAL
--------- -------------------- -------------------- -----------
<S> <C> <C> <C> <C>
Total shareholders' equity............... $ 119,934 $ 149,055 $ 148,730 $ 126,175
Liquidation preference:
Senior Preferred Stock................. (57,500) (57,500) (57,500) (57,500)
Convertible Preferred Stock............ (175,375) (105,225) (70,150) (175,375)
--------- ---------- ---------- -----------
Common shareholders' equity.............. $(112,941) $ (13,670) $ 21,080 $(106,700)
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Common Stock............................. 2,875 11,160 13,405 2,875
Common units............................. 9,221 8,505 8,505 9,221
--------- ---------- ---------- -----------
12,096 19,665 21,910 12,096
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Book value per common share.............. $ (9.34) $ (0.70) $ 0.96 $ (8.82)
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------------------------------------
COMMON STOCK COMMON STOCK
OFFERING, SPECIAL OFFERING, SPECIAL
DISTRIBUTION, COMMON DISTRIBUTION, COMMON
UNIT CONTRIBUTION UNIT CONTRIBUTION
AND AND
HISTORICAL MINIMUM OFFER MAXIMUM OFFER
--------- -------------------- --------------------
<S> <C> <C> <C>
Total shareholders' equity........................... $ 121,484 $ 150,605 $ 150,280
Liquidation preference:
Senior Preferred Stock............................. (57,500) (57,500) (57,500)
Convertible Preferred Stock........................ (175,375) (105,225) (70,150)
--------- ---------- ----------
Common shareholders' equity.......................... $(111,391) $ (12,120) $ 22,630
--------- ---------- ----------
--------- ---------- ----------
Common Stock......................................... 2,875 11,160 13,405
Common units......................................... 9,221 8,505 8,505
--------- ---------- ----------
12,096 19,665 21,910
--------- ---------- ----------
--------- ---------- ----------
Book value per common share.......................... $ (9.21) $ (0.62) $ 1.03
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
(6) Includes four factory outlet centers with an aggregate GLA of 901 square
feet operated under joint venture partnerships with unrelated third parties.
See "Business and Properties."
(7) Amounts include the effect of the Common Stock Offering, the Special
Distribution, the Common Unit Contribution and the application of the net
proceeds therefrom and the consummation of the Offer (assuming the exchange
of the minimum number of shares of Convertible Preferred Stock permitted to
be exchanged pursuant to the Offer) on January 1, 1995, after giving effect
to such transaction and consummation of the Offer (assuming the exchange of
the maximum number of shares of Convertible Preferred Stock permitted to be
exchanged pursuant to the Offer) on January 1, 1995, FFO and the ratio of
FFO to combined fixed charges and preferred stock dividends would have been
$36,212 and 1.61x, respectively. Amounts include the effect of the Common
Stock Offering, the Special Distribution, the Common Unit Contribution and
the application of the net proceeds therefrom and the consummation of the
Offer (assuming the exchange of the maximum number of shares of Convertible
Preferred Stock permitted to be exchanged pursuant to the Offer) on January
1, 1996, FFO for the three months ended March 31, 1996 and the ratio of FFO
to combined fixed charges and preferred stock dividends would have been
$9,686 and 1.63x, respectively.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE, UNIT INFORMATION AND GLA)
INTRODUCTION
The following discussion and analysis of the consolidated financial
condition and results of operations of the Company 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 Company's financial performance; the risk that the Company may be
unable to finance its planned development activities; risks related to the
retail industry in which the Company's factory outlet centers compete, including
the potential adverse impact of external factors, such as inflation, consumer
confidence, unemployment rates and consumer tastes and preferences; risks
associated with the Company's property development activities, such as the
potential for cost overruns, delays and the lack of predictability with respect
to the financial returns associated with these development activities; the risk
of 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 Company's
properties.
RESULTS OF OPERATIONS
GENERAL
The Company has grown by developing and acquiring factory outlet centers and
expanding its existing factory outlet centers. The Company's factory outlet
portfolio consisted of seventeen operating factory outlet centers totaling
4,331,000 square feet of GLA at March 31, 1996, compared to fourteen factory
outlet centers totaling 3,382,000 square feet of GLA at March 31, 1995. The
Company opened three new factory outlet centers and four expansions of existing
factory outlet centers during the third and fourth quarters of 1995, adding
949,000 square feet of GLA in the aggregate. The significant increase in the
number of operating properties and total GLA at March 31, 1996 compared to the
portfolio of properties at March 31, 1995, is collectively referred to as the
"Portfolio Expansion."
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 TO THE THREE MONTHS ENDED
MARCH 31, 1995
SUMMARY
For the three months ended March 31, 1996, the Company reported net income
of $4,534 on total revenues of $21,131. For the same period in 1995, the Company
reported net income of $4,608 on total revenues of $17,274. For the three months
ended March 31, 1996 and 1995, the loss allocated to common shareholders was
$702, or $0.24 per common share, and $628, or $0.22 per common share,
respectively.
REVENUES
Total revenues were $21,131 for the three months ended March 31, 1996, as
compared to $17,274 for the three months ended March 31, 1995, an increase of
$3,857, or 22.3%. Base rents increased $2,072, or 19.4%, in 1996 compared to
1995. These increases are primarily due to the Portfolio Expansion.
Straight-line rents (included in base rents) were $156 and $182 for the months
ended March 31, 1996 and 1995, respectively.
14
<PAGE>
Tenant reimbursements, which represent the contractual recovery from tenants
of certain operating expenses, increased by $1,266, or 26.0%, during the three
months ended March 31, 1996 over the same period in 1995. These increases are
primarily due to the Portfolio Expansion. Tenant reimbursements as a percentage
of recoverable operating expenses, which include property operating expenses and
real estate taxes, increased to 100.8% from 97.4% during the three months ended
March 31, 1996 and 1995, respectively. This positive trend reflects the
Company's continued efforts to contain operating expenses at its properties
while requiring merchants to pay their pro-rata share of these expenses.
Income from investment partnerships increased by $311 for the three months
ended March 31, 1996 over the same period in 1995. This increase is primarily
due to the openings of Grove City Factory Shops (Phase III --November 1995) and
Arizona Factory Shops (Phase I -- September 1995). Interest and other income
increased by $166, or 13.9%, to $1,364 during the three months ended March 31,
1996 as compared to $1,198 for the three months ended March 31, 1995. The
increase is attributable to higher lease termination income, late fee income,
property management fees, interest income and ancillary income of $380, $60,
$46, $39 and $31, respectively, offset by lower leasing commissions and
construction management fees of $390.
EXPENSES
Property operating expenses increased by $849, or 22.5%, to $4,619 for the
three months ended March 31, 1996 compared to $3,770 for the same period in
1995. Real estate taxes increased by $239, or 19.4%, to $1,473 for the three
months ended March 31, 1996, from $1,234 in the same period for 1995. The
increases in property operating expenses and real estate taxes are primarily due
to the Portfolio Expansion. As shown in TABLE 1, depreciation and amortization
expense increased by $782, or 21.7%, to $4,387 for the three months ended March
31, 1996, compared to $3,605 for 1995. This increase results from the
depreciation and amortization of assets associated with the Portfolio Expansion.
TABLE 1 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE
The components of depreciation and amortization expense are summarized as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Building and improvements.......................................................... $ 2,228 $ 1,918
Land improvements.................................................................. 479 335
Tenant improvements................................................................ 1,106 833
Furniture and fixtures............................................................. 156 108
Leasing commissions(1)............................................................. 418 411
--------- ---------
Total.......................................................................... $ 4,387 $ 3,605
--------- ---------
--------- ---------
</TABLE>
- ------------------------
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.
15
<PAGE>
TABLE 2 -- COMPONENTS OF INTEREST EXPENSE
The components of interest expense are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Interest incurred.................................................................. $ 5,641 $ 4,212
Interest capitalized............................................................... (613) (581)
Interest earned on interest rate protection contracts.............................. (84) (243)
Amortization of deferred financing costs........................................... 793 749
Amortization of interest rate protection contracts................................. 319 319
--------- ---------
Total.......................................................................... $ 6,056 $ 4,456
--------- ---------
--------- ---------
</TABLE>
As shown in TABLE 2, interest expense for the three months ended March 31,
1996, increased by $1,600, or 35.9%, to $6,056 compared to $4,456 for the same
period in 1995. This increase is primarily the result of an increase of $72,541
in total debt outstanding at March 31, 1996 compared to total debt outstanding
at March 31, 1995. Also reflected in the increase was increased amortization of
deferred financing costs of $44; a decrease in interest earned from interest
rate protection contracts of $159; and an increase in the amount of interest
capitalized in connection with new development projects of $32. The weighted
average interest rate for bonds and notes payable at March 31, 1996 and 1995 was
7.15% and 7.78%, respectively.
Other charges increased by $423, or 189.7%, to $646 for the three months
ended March 31, 1996 compared to $223 for the same period in 1995. This increase
reflects higher provisions for uncollectible accounts receivable and potentially
unsuccessful pre-development efforts of $167 and $65, respectively, as well as
increases in marketing costs and miscellaneous operating expenses of $111 and
$80, respectively.
In connection with re-leasing space to new merchants, the Company incurred
$19 and $162 in capital expenditures during the three months ended March 31,
1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
For the three months ended March 31, 1996, net cash provided by operating
activities was $9,219. Cash used in investing activities was $11,748 for the
three months ended March 31, 1996. The primary use of these funds was for costs
associated with the development and construction of two new factory outlet
centers and seven expansions of existing factory outlet centers scheduled to
open during the remainder of 1996; costs associated with the completion of two
factory outlet centers and three expansions opened during 1995; and costs for
pre-development activities associated with future developments. Net cash used in
financing activities was $9,809 for the three months ended March 31, 1996. The
principal uses of these funds were the payment of certain deferred financing
costs of $1,679, including $1,277 to a financial institution in connection with
proposed financing activities; distributions to minority interests (including
distributions to the limited partner unit holders) of $2,112; and preferred and
common stock distributions of $6,084.
On March 2, 1995, the Company closed on a $160,000 revolving loan (the
"Revolving Loan") with Nomura Asset Capital Corporation ("Nomura"). The
Revolving Loan bears interest at 30-day LIBOR plus 2.25%, requires monthly
interest-only payments and matures on December 31, 1996. The Company can extend
the maturity of the Revolving Loan for a period of one year subject to its
satisfaction of certain financial loan covenants. The Revolving Loan is
guaranteed by the Operating Partnership and seven property partnerships, and is
cross-collateralized by first mortgages on seven factory outlet centers and
certain related assets. The Revolving Loan prohibits additional collateralized
indebtedness on these properties and requires compliance with certain monetary
and non-monetary covenants. The Revolving Loan agreement contains certain
covenants regarding the payment of
16
<PAGE>
distributions and dividends if at any date the debt service coverage ratio, as
defined, falls below a minimum threshold. As of March 31, 1996, the Company was
in compliance with monetary, non-monetary and debt service coverage covenants.
The principal balance outstanding under the Revolving Loan at March 31, 1996 was
$145,478 and the interest rate was 7.56%.
The amount available to be drawn by the Company under the Revolving Loan at
any time during the term of the facility is calculated based upon the net cash
flow from the collateral, as defined. The collateral pool of the Revolving Loan
can be expanded, subject to lender approval, by adding properties, including
properties under development, that satisfy certain criteria relating to, among
other things, the level of executed leases and the amount of projected net cash
flow. At March 31, 1996, the Revolving Loan was fully drawn based on executed
leases and projected net cash flow of the collateral, as defined. Management
intends to use a portion of the net proceeds of approximately $40,248 from an
anticipated common stock offering (the "Common Stock Offering") to repay
outstanding borrowings under the Revolving Loan.
Effective December 31, 1995, the Company's $16,000 fixed rate mortgage loan
that was scheduled to mature on that date was modified to extend the maturity
date to July 31, 1996 at a fixed rate of interest at 8.00%. On January 30, 1996,
the Company obtained from a commercial mortgage company a commitment for a
mortgage loan in an amount not to exceed $7,000 for an eight-year term (the
"Refinancing Loan"). The Refinancing Loan will bear a fixed interest rate based
on eight-year Treasury notes plus 2.60% and requires monthly principal and
interest payments based on a 16-year amortization schedule. The Company intends
to close on the Refinancing Loan by July 31, 1996 with approximately $9,000 of
the net proceeds from the 1996 Mortgage Loan.
On May 7, 1996, the Company renewed and increased to $15,000 its unsecured
corporate line of credit (the "Corporate Line"). The purpose of the Corporate
Line is to provide working capital to facilitate the funding of short-term
operating cash needs of the Company. The Corporate Line bears interest at 30-day
LIBOR plus 2.50% and matures on July 11, 1997. No amounts were outstanding at
March 31, 1996 under the Corporate Line.
On December 18, 1995, the Company obtained from Nomura a $35,000 interim
loan (the "Interim Loan") collateralized by second mortgages on two existing
factory outlet centers. The Interim Loan bears interest at 30-day LIBOR plus
2.25%, matures on July 31, 1996, and requires monthly interest-only payments
prior to maturity. The principal balance outstanding at March 31, 1996 was
$10,000. The Interim Loan will be repaid from proceeds of the 1996 Mortgage
Loan.
On December 18, 1995, the Company also obtained from Nomura a commitment for
a ten-year $233,000 first mortgage loan and a commitment for a five-year $22,500
term loan (the "1995 Nomura Loan Commitments").
The Company has accepted the 1996 Nomura Loan Commitment which provides for,
among other things, (i) the 1996 Mortgage Loan in the principal amount of $226.5
million and (ii) the Mezzanine Mortgage Loan in the principal amount of $33.5
million. The Company expects to close the 1996 Mortgage Loan and the Mezzanine
Mortgage Loan in July 1996. The 1996 Nomura Loan Commitment is subject to
Nomura's customary real estate due diligence review of the thirteen factory
outlet centers comprising the collateral and the completion of appropriate
documentation. In connection with the 1996 Nomura Loan Commitment, the Company
will pay Nomura a commitment fee at closing in the amount of $3.5 million. There
can be no assurance that the Company will be successful in consummating such
refinancing.
The 1996 Mortgage Loan will bear a variable rate of interest equal to 30-day
LIBOR plus 1.24% (plus trustee and servicing fees, which are expected to be
0.07% in the aggregate). The Mezzanine Mortgage Loan will bear a variable rate
of interest equal to 30-day LIBOR plus 3.25%. The 1996 Mortgage Loan and the
Mezzanine Mortgage Loan are expected to be securitized by Nomura on or before
the Securitization Closing Date. In the event the Securitization Closing Date
does not occur by September 30, 1996, or in the event the Company elects to
terminate the securitization and repay the
17
<PAGE>
loans because the terms of the securitization are unacceptable to the Company,
the interest rate on the Mezzanine Mortgage Loan will increase to a variable
rate per annum equal to 30-day LIBOR plus 5.20%. Until the Securitization
Closing Date, no payments of principal will be required under the 1996 Mortgage
Loan and the Mezzanine Mortgage Loan. After the Securitization Closing Date, the
1996 Mortgage Loan will require monthly payments of principal and interest based
on a thirty-year amortization of principal and the Mezzanine Mortgage Loan will
require monthly payments of principal and interest based on the full
amortization of principal within seven years. The 1996 Mortgage Loan and the
Mezzanine Mortgage Loan will be cross-collateralized by senior and junior
mortgages, respectively, encumbering thirteen of the Company's existing factory
outlet centers. The proceeds from the closing of the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan will be used to repay outstanding borrowings under the
Revolving Loan, the 1994 Mortgage Loan (which may not be prepaid prior to July
1, 1996), the Interim Loan and a portion of the Company's $16.0 million fixed
rate mortgage loan. The remaining proceeds will be used for the purchase of
interest rate protection contracts, the costs and expenses of the refinancing
and for working capital purposes.
In connection with the commitment to provide the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan, the Company and Nomura have agreed that, subject to
certain conditions, the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the securitization of the 1996 Mortgage Loan. If
the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the
Senior Certificates, the appropriate party will make a payment to the other
based on the present value of such deviation applied against the principal
balance of the Senior Certificates. If the Securitization Closing Date does not
occur within six months of the closing of the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan, Nomura may demand payment of such loans in full six
months after delivery of such demand notice. It is anticipated that the 1996
Mortgage Loan will be securitized at investment grade levels through the
issuance of the Senior Certificates and the Mezzanine Mortgage Loan will be
securitized through the issuance of the Junior Certificates. In addition, the
1996 Nomura Loan Commitment requires that, prior to the securitization, the
Company purchase interest rate protection contracts with regard to the 1996
Mortgage Loan and the Mezzanine Mortgage Loan when and if 30-day LIBOR exceeds
6.50%. After securitization, the Company will be required to purchase interest
rate protection contracts for the seven-year term of such loans and for the
principal amount of the Senior Certificates. It is estimated that the proceeds
from the sale of the Senior Certificates and the Junior Certificates and the
proceeds from the cash flow loan (described below) will approximate $260.0
million. In the event that loan proceeds available from the Senior Certificates
and the Junior Certificates are less than $260.0 million, Nomura has agreed to
provide, subject to certain conditions (including the consent of the applicable
rating agencies), a loan based on the cash flow of the Property Partnerships
which own the thirteen factory outlet centers in the principal amount of the
difference between $260.0 million and such loan proceeds. In the event that the
net cash flow from the thirteen outlet centers is less than a mutually agreed
upon amount and the securitization results in less than $260.0 million in
proceeds, the Company will be required to pay to Nomura such difference at the
closing of the securitization. The Company intends to purchase the Junior
Certificates with the proceeds of the Repo Financing. The Repo Financing will
require monthly payments of interest only and will be for a term of two years
and will be recourse to the Operating Partnership. The Repo Financing will be
subject to daily mark-to-market and margin calls. Interest will be payable for
75% of the par value of the Junior Certificates at the rate of 30-day LIBOR plus
1.95% and for the balance of the par value of the Junior Certificates at the
rate of 30-day LIBOR plus 7.0%. The weighted average annual interest rate
(including the estimated annual amortization of interest rate protection
contracts) on the $260.0 million of securitized loans is initially expected to
be approximately 7.66%. There can be no assurance that the securitization will
be completed on such terms.
The existing Revolving Loan with Nomura will not be terminated as a result
of the transactions contemplated by the 1996 Nomura Loan Commitment; however,
the collateral currently pledged
18
<PAGE>
thereunder will be released and pledged to Nomura under the 1996 Mortgage Loan
and the Mezzanine Mortgage Loan. The Revolving Loan will be available, subject
to sufficient collateral being pledged to Nomura, for acquisitions, expansions
and new outlet centers.
Upon terms acceptable to the Company and the rating agencies involved in the
securitization, an amount between $25.0 million to $50.0 million in addition to
the $260.0 million of securitized loans may be raised by the securitization and,
if so, will be held in escrow by Nomura. These funds may be drawn upon by the
Company, subject to the satisfaction of certain objective standards acceptable
to the Company and such rating agencies, for the cost of construction of
expansions at the thirteen mortgaged outlet centers.
In connection with the execution of the 1996 Nomura Loan Commitment, the
Company expects to incur a non-recurring loss of approximately $10.1 million
that will be recorded during the three months ending June 30, 1996. This loss
results from the expected prepayment of the Revolving Loan, the 1994 Mortgage
Loan, the anticipated termination of the 1995 Nomura Loan Commitments for which
the Company paid $3.3 million in nonrefundable financing fees, and the repayment
in full of the Interim Loan. The loss includes the estimated unamortized cost of
certain interest rate protection contracts of $3.7 million as of July 31, 1996
that will be terminated upon repayment of the debt underlying the contracts,
debt prepayment penalties of $0.8 million and other deferred financing costs of
$4.5 million, less the estimated fair market value of the interest rate
protection contracts of approximately $2.2 million based on their fair market
value at May 30, 1996. Upon termination and sale of the interest rate protection
contracts, the Company will receive proceeds based on the then fair market value
of such contracts. The future fair market value of interest rate protection
contracts is susceptible to valuation fluctuations based on market changes in
interest rates and the maturity date of the underlying contracts.
The Company believes that the loan facilities to be provided by Nomura
pursuant to the 1996 Nomura Loan Commitment will provide annual interest savings
in excess of $4.0 million based on interest rates as of June 4, 1996 when
compared to the terms provided by the 1995 Nomura Loan Commitments. In addition
to a more attractive interest rate, other benefits include no lock-out period
with respect to prepayment, no prepayment penalties after two years, collateral
substitution provisions and a larger escrow of funds for the expansion of the
mortgaged outlet centers.
PLANNED DEVELOPMENT
Management believes that there is sufficient demand for continued
development of new factory outlet centers and expansions of certain existing
factory outlet centers. The Company expects to open between approximately
700,000 and 900,000 square feet of GLA during 1996. Of this amount,
approximately 440,000 square feet relates to the development of two new factory
outlet centers and the balance relates to planned expansions of existing factory
outlet centers. At March 31, 1996, the aggregate remaining capital expenditures
for the new factory outlet centers and expansions expected to open in 1996
ranged between approximately $75,000 and $95,000. The aggregate remaining
capital expenditures for new factory outlet centers and expansions opened during
the year ended December 31, 1995 (aggregating 949,000 square feet of GLA)
approximated $7,000.
19
<PAGE>
TABLE 3 -- FACTORY OUTLET CENTERS AND EXPANSIONS UNDER CONSTRUCTION (1)
TABLE 3 summarizes the projected opening dates and total GLA of the factory
outlet centers and expansions of existing centers under construction as of May
31, 1996. The total estimated construction cost for such projects is
approximately $89,000.
<TABLE>
<CAPTION>
PROJECTED 1996
PROJECT LOCATION PHASE OPENING DATES GLA
- ------------------------------------------------ -------------------------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
Buckeye Factory Shops........................... Medina County, OH I November 205,000
Carolina Factory Shops.......................... Gaffney, SC I November 235,000
---------
Total New Centers under Construction........ 440,000
Grove City Factory Shops........................ Grove City, PA IV 4th Quarter 118,000
Arizona Factory Shops........................... Phoenix, AZ II 4th Quarter 95,000
Ohio Factory Shops.............................. Jeffersonville, OH IIIA 3rd Quarter 35,000
Gulfport Factory Shops.......................... Gulfport, MS IIA 4th Quarter 35,000
Gulf Coast Factory Shops........................ Ellenton, FL III 4th Quarter 30,000
Indiana Factory Shops........................... Daleville, IN IIA 4th Quarter 28,000
Triangle Factory Shops.......................... Raleigh-Durham, NC IIA 3rd Quarter 6,000
---------
Total Expansions under Construction......... 347,000
---------
Total New Centers and Expansions under
Construction............................... 787,000
---------
---------
</TABLE>
- ------------------------
NOTE:
(1) No assurance can be given that these factory outlet centers will be opened
on schedule with the indicated GLA. Additionally, no assurance can be given
that the estimated construction costs will not be exceeded.
With regard to planned new factory outlet centers and expansions scheduled
to open in 1997, which are expected to contain approximately 800,000 square feet
of GLA in the aggregate, at a total development cost of approximately $88,000,
the Company expects to fund approximately 37% of these new projects through
joint ventures with an unrelated third party. The Company expects to fund the
development cost for the balance of its new 1997 projects from: (a)
approximately 70% to 75% of cost from proceeds available on line of credit
facilities, and (b) the balance of cost (25% to 30%) from a variety of potential
sources, including excess proceeds from securitized loan transactions, retained
cash flow from operations, and the potential sale of common or preferred equity
in the public or private capital markets. As of March 31, 1996, there were no
material commitments with regard to the 1997 planned development activity.
DEBT REPAYMENTS AND PREFERRED STOCK DIVIDENDS
The Company's aggregate indebtedness was $306,020 and $305,954 at March 31,
1996 and December 31, 1995, respectively. At March 31, 1996, such indebtedness
had a weighted average maturity of 3.8 years and bore interest at a weighted
average interest rate of 7.15% per annum. At March 31, 1996, $24,984, or 8.2%,
of such indebtedness bore interest at fixed rates and $281,036, or 91.8%, of
such indebtedness, including $28,250 of tax-exempt bonds, bore interest at
variable rates.
At March 31, 1996, the Company held interest rate protection contracts on
$28,250 of floating rate tax-exempt indebtedness and $97,309 of other floating
rate indebtedness (or approximately 44.7% of its total floating rate
indebtedness). These contracts expire in 1999 and 2000, respectively. In
addition, the Company held additional interest rate protection contracts on
$43,900 of the $97,309 floating rate indebtedness to further reduce the
Company's exposure to increases in interest rates.
20
<PAGE>
The Company's ratio of debt to total market capitalization (defined as total
long term debt divided by the sum of: (a) the aggregate market value of the
outstanding shares of Common Stock, assuming the full exchange of Common Units
into Common Stock; (b) the aggregate market value of the outstanding shares of
Convertible Preferred Stock; (c) the aggregate liquidation preference of the
Senior Preferred Stock at $25.00 per share; and (d) the total long-term debt of
the Company) was 49.3% at March 31, 1996.
The Company is obligated to repay $172,834 of mortgage indebtedness during
the remainder of 1996. The Company may extend for one year the term of its
Revolving Loan which is currently scheduled to expire on December 31, 1996.
Annualized cumulative dividends on the Company's Senior Preferred Stock and
Convertible Preferred Stock are $6,037 and $14,907, respectively. These
dividends are payable quarterly, in arrears.
The Company anticipates that cash flow from operations, together with cash
available from borrowings and other sources, including proceeds from debt
refinancing, will be sufficient to satisfy its debt service obligations,
expected dividend 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 Company to receive percentage
rentals based on merchants' gross sales. Substantially all leases require
merchants to pay their proportionate share of operating expenses, including
common area maintenance, real estate taxes and promotion, thereby reducing the
Company's exposure to increased costs and operating expenses resulting from
inflation. At March 31, 1996, the Company maintained interest rate protection
contracts to protect against increases in interest rates on certain floating
rate indebtedness (see "Debt Repayments and Preferred Stock Dividends").
The Company intends to reduce operating and leasing risks by managing its
existing portfolio of properties with the goal of improving its tenant mix,
rental rates and lease terms and attracting high fashion, upscale manufacturers
and national brand-name manufacturers as merchants.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. SFAS No. 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company adopted SFAS No. 121 in the first
quarter of 1996 and had no effect on the consolidated financial statements of
the Company.
FUNDS FROM OPERATIONS
Management believes that to facilitate a clear understanding of the
Company's operating results, Funds from Operations ("FFO") should be considered
in conjunction with net income (loss) presented in accordance with GAAP. FFO is
defined as net income (loss) (determined in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization after adjustments for unconsolidated partnerships
and joint ventures.
The Company generally considers FFO an appropriate measure of performance of
an equity real estate investment trust. Historical FFO may or may not be
indicative of future FFO. FFO does not represent cash generated from operating
activities in accordance with GAAP (which, unlike FFO, generally reflects all
cash effects of transactions and other events that enter into the determination
of net income), is not necessarily indicative of cash flow available to fund
cash needs and should not be considered an alternative to net income or other
GAAP measures as an indication of the Company's performance or an alternative to
cash flow as a measure of liquidity or the ability to service debt or pay
dividends.
21
<PAGE>
The Company cautions that the calculation of FFO may vary from entity to
entity and as such the presentation of FFO by the Company may not be comparable
to other similarly titled measures of other reporting companies.
In March 1995, the National Association of Real Estate Investment Trusts
established guidelines clarifying the definition of FFO (as modified, the "New
Definition"). The Company reports FFO under both the old definition and the New
Definition. For the Company, the primary impact of adopting the New Definition
will be a reduction in FFO since the amortization of capitalized debt costs and
depreciation of non-real estate assets are not added back to income before
allocations to minority interests and preferred shareholders. TABLE 4 provides a
reconciliation of income before allocations to minority interests and preferred
shareholders to FFO, under both the old definition and the New Definition, for
the three months ended March 31, 1996 and 1995. FFO (old definition) increased
$883, or 11.0%, to $8,916 for the three months ended March 31, 1996 from $8,033
for the three months ended March 31, 1995. This increase is primarily
attributable to the Portfolio Expansion.
TABLE 4 -- FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(OLD DEFINITION) (NEW DEFINITION)
<S> <C> <C> <C> <C>
Income before allocations to minority interests and preferred
shareholders........................................................ $ 3,057 $ 3,142 $ 3,057 $ 3,142
FFO ADJUSTMENTS:
Depreciation and amortization........................................ 4,387 3,605 4,231 3,497
Amortization of deferred financing costs and interest rate protection
contracts........................................................... 1,112 1,068 -- --
Unconsolidated joint venture adjustments(1).......................... 360 218 327 210
--------- --------- --------- ---------
FFO before allocations to minority interests and preferred
shareholders........................................................ $ 8,916 $ 8,033 $ 7,615 $ 6,849
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
NOTE:
(1) Includes net preferential partner distributions received from a joint
venture partnership of $81 for the three months ended March 31, 1995.
22
<PAGE>
PRIME RETAIL, INC.
INDEX TO UNAUDITED INTERIM FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
-------------
<S> <C>
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets of the Company as of March 31, 1996 and December 31, 1995.................. F-2
Consolidated Statements of Operations of the Company for the three months ended March 31, 1996 and
1995.................................................................................................. F-3
Consolidated Statements of Cash Flows of the Company for the three months ended March 31, 1996 and
1995.................................................................................................. F-4
Notes to Consolidated Financial Statements of the Company.............................................. F-5
</TABLE>
F-1
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
ASSETS:
Investment in rental property:
Land........................................................................ $ 35,370 $ 35,370
Buildings and improvements.................................................. 405,252 403,542
Property under development.................................................. 19,384 12,165
Furniture and equipment..................................................... 3,452 3,403
-------------- -----------------
463,458 454,480
Accumulated depreciation.................................................... (44,139) (40,190)
-------------- -----------------
419,319 414,290
Cash and cash equivalents..................................................... 2,589 14,927
Restricted cash............................................................... 2,358 2,230
Accounts receivable, net...................................................... 8,772 10,070
Deferred charges, net......................................................... 18,302 18,136
Due from affiliates, net...................................................... 1,150 1,194
Investment in partnerships.................................................... 2,572 2,258
Other assets.................................................................. 644 619
-------------- -----------------
Total assets.............................................................. $ 455,706 $ 463,724
-------------- -----------------
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Bonds payable................................................................. $ 32,900 $ 32,900
Notes payable................................................................. 273,120 273,054
Accrued interest.............................................................. 3,121 3,034
Real estate taxes payable..................................................... 3,191 3,142
Construction costs payable.................................................... 3,153 5,796
Accounts payable and other liabilities........................................ 9,420 9,858
-------------- -----------------
Total liabilities......................................................... 324,905 327,784
Minority interests............................................................ 10,867 14,456
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
2,300,000 shares of 10.5% Series A Senior Cumulative Preferred Stock,
$0.01 par value (liquidation preference of $57,500), issued and
outstanding.............................................................. 23 23
7,015,000 shares of 8.5% Series B Cumulative Participating Convertible
Preferred Stock, $0.01 par value (liquidation preference of $175,375),
issued and outstanding................................................... 70 70
Shares of common stock, 75,000,000 shares authorized:
2,875,000 shares of common stock, $0.01 par value, issued and
outstanding.............................................................. 29 29
Additional paid-in capital.................................................. 128,275 128,275
Distributions in excess of net income....................................... (8,463) (6,913)
-------------- -----------------
Total shareholders' equity................................................ 119,934 121,484
-------------- -----------------
Total liabilities and shareholders' equity................................ $ 455,706 $ 463,724
-------------- -----------------
-------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
REVENUES:
Base rents................................................................................. $ 12,744 $ 10,672
Percentage rents........................................................................... 443 401
Tenant reimbursements...................................................................... 6,139 4,873
Income from investment partnerships........................................................ 441 130
Interest and other......................................................................... 1,364 1,198
--------- ---------
Total revenues......................................................................... 21,131 17,274
EXPENSES:
Property operating......................................................................... 4,619 3,770
Real estate taxes.......................................................................... 1,473 1,234
Depreciation and amortization.............................................................. 4,387 3,605
Corporate general and administrative....................................................... 893 844
Interest................................................................................... 6,056 4,456
Other charges.............................................................................. 646 223
--------- ---------
Total expenses......................................................................... 18,074 14,132
--------- ---------
INCOME BEFORE MINORITY INTERESTS........................................................... 3,057 3,142
Loss allocated to minority interests....................................................... 1,477 1,466
--------- ---------
NET INCOME................................................................................. 4,534 4,608
Income allocated to preferred shareholders................................................. 5,236 5,236
--------- ---------
NET LOSS APPLICABLE TO COMMON SHARES....................................................... $ (702) $ (628)
--------- ---------
--------- ---------
NET LOSS PER COMMON SHARE OUTSTANDING...................................................... $ (0.24) $ (0.22)
--------- ---------
--------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING........................................................ 2,875 2,875
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................................. $ 4,534 $ 4,608
Adjustments to reconcile net income to net cash provided by operating activities:
Loss allocated to minority interests..................................................... (1,477) (1,466)
Depreciation and amortization............................................................ 4,387 3,605
Amortization of deferred financing costs and interest rate protection contracts.......... 1,112 1,068
Equity earnings in excess of cash distributions from joint ventures...................... (282) (26)
Provision for uncollectible accounts receivable.......................................... 224 57
Changes in operating assets and liabilities:
Decrease in accounts receivable.......................................................... 1,074 206
(Increase) decrease in other assets...................................................... (224) 20
Increase (decrease) in accounts payable and other liabilities............................ (260) 267
Increase in accrued interest............................................................. 87 203
Increase (decrease) in due to affiliates, net............................................ 44 (809)
--------- ---------
Net cash provided by operating activities.............................................. 9,219 7,733
--------- ---------
INVESTING ACTIVITIES:
Purchase of buildings and improvements..................................................... (1,779) (1,263)
Increase in property under development..................................................... (9,952) (18,956)
Deferred leasing commissions............................................................... (17) (15)
--------- ---------
Cash used in investing activities...................................................... (11,748) (20,234)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable................................................................ 500 41,850
Principal repayments on notes payable...................................................... (434) (22,396)
Deferred financing fees.................................................................... (1,679) (843)
Distributions and dividends paid........................................................... (6,084) (6,084)
Distributions to minority interests........................................................ (2,112) (1,026)
--------- ---------
Net cash (used in) provided by financing activities.................................... (9,809) 11,501
--------- ---------
Decrease in cash and cash equivalents...................................................... (12,338) (1,000)
Cash and cash equivalents at beginning of period........................................... 14,927 2,959
--------- ---------
Cash and cash equivalents at end of period................................................. $ 2,589 $ 1,959
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
PRIME RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
(UNAUDITED)
NOTE 1 -- INTERIM FINANCIAL PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
consisting only of recurring accruals considered necessary for a fair
presentation have been included. Operating results for such interim periods are
not necessarily indicative of the results which may be expected for a full
fiscal year. For further information, refer to the consolidated financial
statements for the year ended December 31, 1995 and notes thereto included
elsewhere in this Prospectus.
Unless the context requires otherwise, all references to the Company herein
mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail,
Inc., including Prime Retail, L.P. (the "Operating Partnership"). The
consolidated financial statements include the accounts of the Company, the
Operating Partnership and the partnerships in which the Company has majority
interest or control. Profits and losses are allocated in accordance with the
terms of the agreement of limited partnership of the Operating Partnership.
Investments in partnerships in which the Company does not have operational
control or a majority interest are accounted for under the equity method of
accounting. Income (loss) applicable to minority interests and common shares as
presented in the consolidated statements of operations is allocated based on
income (loss) before minority interests after income allocated to preferred
shareholders.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant intercompany accounts and transactions have been
eliminated in consolidation. Certain financial statement amounts and related
footnote information have been reclassified to conform with the current
presentation. These reclassifications have not changed previously reported
results or shareholders' equity.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF", which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS No. 121 in
the first quarter of 1996 and the adoption had no effect on the consolidated
financial statements of the Company.
NOTE 3 -- BONDS AND NOTES PAYABLE
On January 30, 1996, the Company obtained from a commercial mortgage company
a commitment for a mortgage loan in an amount not to exceed $7,000 for an
eight-year term (the "Refinancing Loan"). The Refinancing Loan will bear a fixed
interest rate based on eight-year Treasury notes plus 2.60%, requires monthly
principal and interest payments based on a 16-year amortization schedule and
will be collateralized by property in Lombard, IL. The commitment for the
Refinancing Loan expires on August 1, 1996.
F-5
<PAGE>
PRIME RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BONDS AND NOTES PAYABLE (CONTINUED)
The Company has accepted a loan commitment (the "1996 Nomura Loan
Commitment") with Nomura Asset Capital Corporation ("Nomura") which provides
for, among other things, (i) a variable-rate seven-year cross-collateralized
first mortgage loan (the "1996 Mortgage Loan") in the principal amount of $226.5
million and (ii) a variable-rate seven-year cross-collateralized second mortgage
loan (the "Mezzanine Mortgage Loan") in the principal amount of $33.5 million.
The Company expects to close the 1996 Mortgage Loan and the Mezzanine Mortgage
Loan in July 1996. The 1996 Nomura Loan Commitment is subject to Nomura's
customary real estate due diligence review of the thirteen factory outlet
centers comprising the collateral and the completion of appropriate
documentation. In connection with the 1996 Nomura Loan Commitment, the Company
will pay Nomura a commitment fee at closing in the amount of $3.5 million. There
can be no assurance that the Company will be successful in consummating such
refinancing.
The 1996 Mortgage Loan will bear a variable rate of interest equal to the
London Interbank offered rate for thirty (30) day deposits in U.S. dollars
("30-day LIBOR") plus 1.24% (plus trustee and servicing fees, which are expected
to be 0.07% in the aggregate). The Mezzanine Mortgage Loan will bear a variable
rate of interest equal to 30-day LIBOR plus 3.25%. The 1996 Mortgage Loan and
the Mezzanine Mortgage Loan are expected to be securitized by Nomura on or
before September 30, 1996 (the "Securitization Closing Date"). In the event the
Securitization Closing Date does not occur by September 30, 1996 or in the event
the Company elects to terminate the securitization and repay the loans because
the terms of the securitization are unacceptable to the Company, the interest
rate on the Mezzanine Mortgage Loan will increase to a variable rate per annum
equal to 30-day LIBOR plus 5.20%. Until the Securitization Closing Date, no
payments of principal will be required under the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan. After the Securitization Closing Date, the 1996
Mortgage Loan will require monthly payments of principal and interest based on a
thirty-year amortization of principal and the Mezzanine Mortgage Loan will
require monthly payments of principal and interest based on the full
amortization of principal within seven years. The 1996 Mortgage Loan and the
Mezzanine Mortgage Loan will be cross-collateralized by senior and junior
mortgages, respectively, encumbering thirteen of the Company's existing factory
outlet centers. The proceeds from the closing of the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan will be used to repay outstanding borrowings under the
Agreement dated March 2, 1995 relating to a loan in the aggregate principal
amount of $160.0 million (the "Revolving Loan"), the Open-End Mortgage Agreement
Assignment of Rents and Fixture Filing dated June 30, 1994 relating to a loan in
the principal amount of $100.0 million (which may not be prepaid prior to July
1, 1996) (the "1994 Mortgage Loan"), the Interim Loan entered into on December
18, 1995 in the principal amount of $35.0 million (the "Interim Loan") and a
portion of the Company's $16.0 million fixed rate mortage loan. The remaining
proceeds will be used for the purchase of interest rate protection contracts,
the costs and expenses of the refinancing and for working capital purposes.
In connection with the commitment to provide the 1996 Mortgage Loan and the
Mezzanine Mortgage Loan, the Company and Nomura have agreed that, subject to
certain conditions, the Company and Nomura will share the risks or rewards, as
the case may be, with regard to the securitization of the 1996 Mortgage Loan. If
the actual interest rate spread over 30-day LIBOR deviates from 1.24% for the
Senior Certificates (as defined below), the appropriate party will make a
payment to the other based on the present value of such deviation applied
against the principal balance of the Senior Certificates. If the Securitization
Closing Date does not occur within six months of the closing of the 1996
Mortgage Loan and the Mezzanine Mortgage Loan, Nomura may demand payment of such
loans in full six months after delivery of such demand notice. It is anticipated
that the 1996 Mortgage Loan will be securitized at investment grade levels
through the issuance of Real Estate
F-6
<PAGE>
PRIME RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BONDS AND NOTES PAYABLE (CONTINUED)
Mortgage Investment Company ("REMIC") certificates (the "Senior Certificates")
and the Mezzanine Mortgage Loan will be securitized through the issuance of
REMIC certificates or another acceptable securitization vehicle (the "Junior
Certificates"). In addition, the 1996 Nomura Loan Commitment requires that,
prior to the securitization, the Company purchase interest rate protection
contracts with regard to the 1996 Mortgage Loan and the Mezzanine Mortgage Loan
when and if 30-day LIBOR exceeds 6.50%. After securitization, the Company will
be required to purchase interest rate protection contracts for the seven-year
term of such loans and for the principal amount of the Senior Certificates. It
is estimated that the proceeds from the sale of the Senior Certificates and the
Junior Certificates and the proceeds from the cash flow loan (described below)
will approximate $260.0 million. In the event that loan proceeds available from
the Senior Certificates and the Junior Certificates are less than $260.0
million, Nomura has agreed to provide, subject to certain conditions (including
the consent of the applicable rating agencies), a loan based on the cash flow of
the Property Partnerships which own the thirteen factory outlet centers in the
principal amount of the difference between $260.0 million and such loan
proceeds. In the event that the net cash flow from the thirteen outlet centers
is less than a mutually agreed upon amount and the securitization results in
less than $260.0 million in proceeds, the Company will be required to pay to
Nomura such difference at the closing of the securitization. The Company intends
to purchase the Junior Certificates with the proceeds of a financing from Nomura
(the "Repo Financing"). The Repo Financing will require monthly payments of
interest only and will be for a term of two years and will be recourse to the
Operating Partnership. The Repo Financing will be subject to daily
mark-to-market and margin calls. Interest will be payable for 75% of the par
value of the Junior Certificates at the rate of 30-day LIBOR plus 1.95% and for
the balance of the par value of the Junior Certificates at the rate of 30-day
LIBOR plus 7.0%. The weighted average annual interest rate (including the
estimated annual amortization of interest rate protection contracts) on the
$260.0 million of securitized loans is initially expected to be approximately
7.66%. There can be no assurance that the securitization will be completed on
such terms.
The existing Revolving Loan with Nomura will not be terminated as a result
of the transactions contemplated by the 1996 Nomura Loan Commitment; however,
the collateral currently pledged thereunder will be released and pledged to
Nomura under the 1996 Mortgage Loan and the Mezzanine Mortgage Loan. The
Revolving Loan will be available, subject to sufficient collateral being pledged
to Nomura, for acquisitions, expansions and new outlet centers.
Upon terms acceptable to the Company and the rating agencies involved in the
securitization, an amount between $25.0 million to $50.0 million in addition to
the $260.0 million of securitized loans may be raised by the securitization and,
if so, will be held in escrow by Nomura. These funds may be drawn upon by the
Company, subject to the satisfaction of certain objective standards acceptable
to the Company and such rating agencies, for the cost of construction of
expansions at the thirteen mortgaged outlet centers.
In connection with the execution of the 1996 Nomura Loan Commitment, the
Company expects to incur a non-recurring loss of approximately $10.1 million
that will be recorded during the three months ending June 30, 1996. This loss
results from the expected prepayment of the Revolving Loan, the 1994 Mortgage
Loan, the anticipated termination of previously obtained financing commitments
from Nomura for which the Company paid $3.3 million in nonrefundable financing
fees and the repayment in full of the Interim Loan. The loss includes the
estimated unamortized cost of certain interest rate protection contracts of $3.7
million as of July 31, 1996 that will be terminated upon repayment of the debt
underlying the contracts, debt prepayment penalties of $0.8 million and other
deferred financing costs of $4.5 million, less the estimated fair market value
of the interest rate
F-7
<PAGE>
PRIME RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BONDS AND NOTES PAYABLE (CONTINUED)
protection contracts of approximately $2.2 million based on their fair market
value at May 30, 1996. Upon termination and sale of the interest rate protection
contracts, the Company will receive proceeds based on the then fair market value
of such contracts. The future fair market value of interest rate protection
contracts is susceptible to valuation fluctuations based on market changes in
interest rates and the maturity date of the underlying contracts.
NOTE 4 -- LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes that losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Company.
The Company is a defendant in a lawsuit filed on June 14, 1995 in the U.S.
District Court for the Northern District of West Virginia whereby the plaintiffs
allege that the Company breached a confidentiality agreement entered into by the
Predecessor and the plaintiffs in connection with the proposed purchase of a
factory outlet center in Martinsburg, West Virginia. The outcome and the
ultimate liability of the Company, if any, of this lawsuit cannot currently be
predicted. Management believes, however, that it has acted properly and intends
to defend this lawsuit vigorously.
F-8
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted. Letters of
Transmittal, certificates representing shares of Convertible Preferred Stock and
any other required documents should be sent by each Holder of Convertible
Preferred Stock or his broker, dealer, commercial bank, trust company or other
nominee to the Exchange Agent at one of the addresses as set forth below:
THE EXCHANGE AGENT IS:
WILMINGTON TRUST COMPANY
<TABLE>
<CAPTION>
BY HAND: BY MAIL OR OVERNIGHT COURIER:
<S> <C>
Attention: Corporate Trust Operations Attention: Corporate Trust Operations
1105 North Market Street 1100 North Market Street
First Floor Rodney Square North
Wilmington, DE 19890 Wilmington, DE 19890
</TABLE>
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
(302) 651-1079
TO CONFIRM RECEIPT OF NOTICE OF GUARANTEED DELIVERY
BY TELEPHONE:
(302) 651-1424
THE INFORMATION AGENT IS:
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
1-703-312-9500 (Call Collect) or
1-800-846-5050 (Toll Free)
Any questions or requests for assistance or additional copies of this
Prospectus Supplement, the Prospectus, the Letter of Transmittal or for copies
of the Notice of Guaranteed Delivery may be directed to the Information Agent at
its telephone number and location set forth above. You may also contact your
broker, dealer, commercial bank or trust company or other nominee for assistance
concerning the Offer.
THE SOLICITATION AGENT FOR THE OFFER IS:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 312-9500 (Call Collect)
