<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period From
to .
---------------------- ----------------------
Commission file number 0-23616
--------------------------
PRIME RETAIL, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1836258
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 234-0782
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address, or former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of May 10, 1996, the issuer had outstanding 2,875,000 shares of Common Stock,
$.01 par value per share.
<PAGE>
PRIME RETAIL, INC.
FORM 10-Q
INDEX
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PART I: FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets of Prime Retail, Inc. as of
March 31, 1996 and December 31, 1995. 1
Consolidated Statements of Operations of Prime Retail, Inc.
for the three months ended March 31, 1996 and 1995. 2
Consolidated Statements of Cash Flows of Prime Retail, Inc.
for the three months ended March 31, 1996 and 1995. 3
Notes to the Consolidated Financial Statements of Prime
Retail, Inc. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS OR REPORTS ON FORM 8-K 18
SIGNATURES 19
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PRIME RETAIL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
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MARCH 31, 1996 DECEMBER 31, 1995
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<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
--------- ---------
--------- ---------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED MARCH 31
---------------------------------
1996 1995
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<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
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Total expenses 18,074 14,132
------- -------
INCOME BEFORE MINORITY INTERESTS 3,057 3,142
Loss allocated to minority interests 1,477 1,466
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NET INCOME 4,534 4,608
Income allocated to preferred shareholders 5,236 5,236
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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
------- -------
------- -------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-2-
<PAGE>
PRIME RETAIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED MARCH 31
---------------------------------
1996 1995
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<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 recievable 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
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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
-------- --------
-------- --------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
-3-
<PAGE>
PRIME RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND UNIT INFORMATION)
NOTE 1 - INTERIM FINANCIAL PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments consisting only of recurring accruals considered
necessary for a fair presentation have been included. Operating results for
such interim periods are not necessarily indicative of the results which may be
expected for a full fiscal year. For further information, refer to the
consolidated financial statements and footnotes included in Prime Retail's (the
"Company") annual report on Form 10-K/A-1 for the year ended December 31, 1995.
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.
-4-
<PAGE>
NOTE 3 - BONDS AND NOTES PAYABLE
On December 18, 1995, the Company obtained from a financial institution a
commitment for a ten-year $233,000 first mortgage loan (the "First Mortgage
Loan"). The First Mortgage Loan will bear a fixed rate of interest at a spread
over 10-year Treasury notes, depending on the level of proceeds drawn on the
facility, and will require monthly principal and interest payments pursuant to a
25-year amortization schedule. Management can elect to fix the interest rate on
the loan facility at any time prior to the expected loan closing in July 1996.
The First Mortgage Loan will be cross-collateralized by mortgages encumbering
nine existing factory outlet centers. Approximately $91,000 of the net proceeds
from the First Mortgage Loan will be used to pay down the Revolving Loan. In
addition, approximately $97,000 will be used to repay the six-year variable-rate
loan facility closed in June 1994 that had an outstanding principal balance of
$97,309 at March 31, 1996.
On December 18, 1995, the Company also obtained from a financial institution a
$35,000 interim loan (the "Interim Loan") collateralized by second mortgages on
two existing factory outlet centers. The principal balance outstanding at
March 31, 1996 was $10,000. The Interim Loan will be repaid from proceeds of
the First Mortgage Loan. In addition, on December 18, 1995, the Company
obtained a commitment for a five-year $22,500 term loan (the "Term Loan") which
is expected to close simultaneously with the First Mortgage Loan. The Term Loan
will bear interest at LIBOR plus 5.00% and requires interest-only payments
during the first twelve months and then will be fully amortizing over the
balance of the term. The Term Loan will be collateralized by a pledge of the
excess cash flow from the nine existing factory outlet centers collateralizing
the First Mortgage Loan.
Upon closing of the First Mortgage Loan and the Term Loan, the Company will
incur a loss of approximately $6,149. Management intends to redesignate
approximately $70,000 of the total notional amount of the interest rate
protection contracts in July 1996 to hedge other long-term variable-rate
indebtedness. The remaining notional balance of the interest rate protection
contracts will be terminated. The estimated loss of approximately $6,149
includes the estimated unamortized cost of the interest rate protection
contracts of $3,695 as of July 31, 1996, including debt prepayment penalties of
$822 and other deferred financing costs of $3,088, less the fair value of the
interest rate protection contracts of $1,456 based on their fair value at
March 31, 1996. The future fair 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. In the event the First
Mortgage Loan and Term Loan do not close prior to August 1, 1996, the Company
will incur a charge to earnings of $3,250 relating to non-refundable financing
fees paid to the financial institution in connection with the proposed
financings.
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.
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<PAGE>
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.
-6-
<PAGE>
ITEM 2. 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 Prime Retail, Inc. (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. As summarized in TABLE 1, the
Company's factory outlet portfolio consisted of seventeen operating factory
outlet centers totaling 4,331,000 square feet of gross leasable area ("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".
-7-
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 - PORTFOLIO OF PROPERTIES AS OF MARCH 31, 1996
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OWNERSHIP GRAND OPENING GLA PERCENTAGE
FACTORY OUTLET CENTER INTEREST(1) PHASE DATE (SQ. FT.) LEASED(8)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Warehouse Row Factory 99% I November 1989 95,000 92%
Shops(2)(3)-Chattanooga, 65% II August 1993 26,000 94
Tennessee --------- ---
121,000 93
San Marcos Factory Shops- 100% I August 1990 177,000 99
San Marcos, Texas II August 1991 67,000 93
III August 1993 117,000 100
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
--------- ---
416,000 98
Gulf Coast Factory Shops- 100% I October 1991 181,000 99
Ellenton, Florida 100% II August 1993 123,000 99
--------- ---
310,000 99
Triangle Factory Shops- 100% I October 1991 181,000 100
Raleigh-Durham, North
Carolina
Coral Isle Factory Shops- 100% I December 1991 94,000 100
Naples/Marco Island, Florida II December 1992 32,000 100
--------- ---
126,000 100
Castle Rock Factory Shops- 100% I November 1992 181,000 100
Castle Rock, Colorado II August 1993 94,000 99
III November 1994 95,000 100
--------- ---
370,000 100
Ohio Factory Shops- 100% I July 1993 186,000 98
Jeffersonville, Ohio II November 1993 100,000 98
IIB November 1994 13,000 100
--------- ---
299,000 98
Gainesville Factory Shops- 100% I August 1993 210,000 92
Gainesville, Texas II November 1994 106,000 92
--------- ---
316,000 92
Nebraska Crossing Factory 100% I October 1993 192,000 96
Shops-Gretna, Nebraska
Oxnard Factory Outlet(4)- 30% I June 1994 148,000 94
Oxnard, California
Grove City Factory Shops(5)- 50% I August 1994 235,000 100
Grove City, Pennsylvania II November 1994 95,000 100
III November 1995 85,000 100
--------- ---
415,000 100
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 - PORTFOLIO OF PROPERTIES AS OF MARCH 31, 1996 (continued)
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OWNERSHIP GRAND OPENING GLA PERCENTAGE
FACTORY OUTLET CENTER INTEREST(1) PHASE DATE (SQ. FT.) LEASED(8)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Huntley Factory Shops- 100% I August 1994 192,000 98%
Huntley, Illinois II November 1995 90,000 57
--------- ---
282,000 85
Florida Keys Factory Shops- 100% I September 1994 208,000 89
Florida City, Florida
Indiana Factory Shops- 100% I November 1994 208,000 87
Daleville, Indiana
Magnolia Bluff Factory 100% I July 1995 238,000 91
Shops(6)-Darien Georgia IIA November 1995 56,000 50
--------- ---
294,000 83
Arizona Factory Shops(5)- 100% I September 1995 217,000 94
Phoenix, Arizona
Gulfport Factory Shops(7)- 100% I November 1995 228,000 92
Gulfport, Mississippi --------- ---
TOTAL FACTORY OUTLET CENTERS(9) 4,331,000 94%
--------- ---
--------- ---
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</TABLE>
NOTES:
(1) This percentage represents the Company's ownership interest in the Property
Partnership that directly owns or leases the property indicated.
(2) The Company owns a 2% partnership interest as the sole general partner in
Phase I of this property but is entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. With regard to
Phase II, Ford Motor Credit Company holds a 35% limited partnership
interest and the Company holds a 65% general partnership interest in the
partnership that owns Phase II of this property.
(3) Phase I of this mixed-use development includes 154,000 square feet of
office space and Phase II includes 5,000 square feet of office space. The
total office space of 159,000 square feet of GLA is not included in this
table and such space was 100% leased as of March 31, 1996.
(4) The Company owns 30% of this factory outlet center in a joint venture
partnership with unrelated third parties.
(5) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(6) The property partnership operates this property pursuant to a long-term
lease under which the property partnership receives the economic benefit of
a 100% ownership interest.
(7) The real property on which this outlet center is located is subject to a
long-term ground lease. The property partnership receives the economic
benefit of a 100% ownership interest.
(8) Fully executed leases as of March 31, 1996 as a percent of square feet of
GLA.
(9) The Company also owns three community centers containing 424,000 square
feet of GLA in the aggregate that were 96% leased as of March 31, 1996.
-9-
<PAGE>
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.
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. Tenants 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 2, 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.
-10-
<PAGE>
TABLE 2 - COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE
The components of depreciation and amortization expense are summarized as
follows:
<TABLE>
<CAPTION>
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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
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Total $4,387 $3,605
------ ------
------ ------
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</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.
TABLE 3 - COMPONENTS OF INTEREST EXPENSE
The components of interest expense are summarized as follows:
<TABLE>
<CAPTION>
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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
------ ------
------ ------
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</TABLE>
As shown in TABLE 3, 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.
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<PAGE>
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 Capital Asset 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 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 $27,408 from an
anticipated common stock offering (the "Common Stock Offering") to repay
outstanding borrowings under the Revolving Loan.
On July 11, 1995, the Company obtained a $10,000 unsecured corporate line of
credit (the "Corporate Line") from a financial institution. 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, 1996. No amounts
were outstanding at March 31, 1996 under the Corporate Line.
-12-
<PAGE>
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 First Mortgage Loan (as defined
below).
On December 18, 1995, the Company also obtained from Nomura a commitment for a
ten-year $233,000 first mortgage loan (the "First Mortgage Loan"). The First
Mortgage Loan will bear a fixed rate of interest that is expected to approximate
8.90%, depending on the level of proceeds drawn on the facility, and will
require monthly principal and interest payments pursuant to a 25-year
amortization schedule. The Company shall have the option of extending the First
Mortgage Loan for an additional 15 years beyond the ten-year term, though during
such 15-year period the rate of interest shall be approximately 13.90% and 100%
of the cash flow from the properties collateralizing such loan shall be applied
to the prepayment of principal. The Company can elect to fix the interest rate
on the loan facility at any time prior to the expected closing of the facility
in July 1996. The First Mortgage Loan will be cross-collateralized by mortgages
encumbering nine existing factory outlet centers, including three factory outlet
centers collateralizing the Revolving Loan at March 31, 1996. Approximately
$91,000 of the net proceeds from the First Mortgage Loan will be used to repay
the Revolving Loan. In addition, approximately $97,000 will be used to repay
outstanding borrowings and pay related prepayment fees under the Company's
six-year variable-rate loan facility. The variable-rate loan facility was
closed in June 1994 and may not be prepaid on or prior to July 1, 1996. As of
March 31, 1996, a principal balance of $97,309 was outstanding under the
variable-rate loan facility.
On December 18, 1995, the Company also obtained from Nomura a commitment for a
five-year $22,500 term loan (the "Term Loan") which is expected to close
simultaneously with the First Mortgage Loan. The Term Loan will bear interest
at 30-day LIBOR plus 5.00% and requires interest-only payments during the first
twelve months and then will be fully amortizing over the balance of the term.
The Term Loan will be collateralized by a pledge of the excess cash flow from
the nine existing factory outlet centers collateralizing the First Mortgage
Loan.
After loan repayments and transaction costs, the First Mortgage Loan and the
Term Loan are expected to provide approximately $52,000 of net proceeds. Under
the terms of the First Mortgage Loan, approximately $25,000 of such excess
proceeds may only be used to fund expansion of the nine factory outlet centers
collateralizing such facility. The balance of such excess proceeds will be used
for general corporate purposes and to fund, in part, the expected development
costs for new factory outlet centers and additional expansions which the Company
expects to construct and open in 1996 and 1997. Upon closing on the First
Mortgage Loan and the Term Loan, the Company will incur a loss of approximately
$6,149. Management intends to redesignate approximately $70,000 of the total
notional amount of the interest rate protection contracts in July 1996 to hedge
other long-term variable-rate indebtedness. The remaining notional balance of
the interest rate protection contracts will be terminated. The estimated loss
of approximately $6,149 includes the estimated unamortized cost of the interest
rate protection contracts of $3,695 as of July 31, 1996, debt prepayment
penalties of $822 and other deferred financing costs of $3,088, less the fair
value of the remaining interest rate protection contracts of $1,456 based on
their fair value at March 31, 1996. The future fair 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. In
the event the First Mortgage Loan and Term Loan do not close prior to August 1,
1996, the Company will incur a charge to earnings of approximately $3,250
relating to non-refundable financing fees paid in connection with such
proposed financings.
-13-
<PAGE>
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 First Mortgage Loan.
PLANNED DEVELOPMENT
Management believes that there is sufficient demand for continued development of
new factory outlet centers and expansions of certain existing factory outlet
centers. The 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.
TABLE 4 - FACTORY OUTLET CENTERS AND EXPANSIONS UNDER CONSTRUCTION(1)
TABLE 4 summarizes the projected opening dates and total GLA of the factory
outlet centers and expansions of existing centers under construction as of
April 30, 1996. The total estimated construction cost for such projects is
approximately $67,400.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PROJECTED
PROJECT LOCATION PHASE OPENING DATE GLA
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Buckeye Factory Shops Medina County, OH I November 1996 205,000
Carolina Factory Shops Gaffney, SC I November 1996 235,000
Total New Centers under -------
Construction 440,000
Arizona Factory Shops Phoenix, AZ II 4th Quarter 95,000
Ohio Factory Shops Jeffersonville, OH IIIA 3rd Quarter 35,000
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 164,000
-------
Total New Centers and
Expansions under Construction 604,000
-------
-------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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.
-14-
<PAGE>
Management believes that the Company has sufficient capital and capital
commitments to fund the remaining development costs associated with the
1995 openings and the openings planned for 1996. These funding requirements are
expected to be met, in large part, with the proceeds of the First Mortgage Loan,
the Revolving Loan, the Term Loan, the Corporate Line, the Common Stock Offering
and funding commitments from two development joint ventures with an unrelated
third party. There can be no assurance that the Company will be successful in
consummating the First Mortgage Loan and the Term Loan. If adequate financing
for such development and expansion is not available, the Company may not be able
to develop new centers or expand existing centers at currently planned levels.
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.
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.
-15-
<PAGE>
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.
-16-
<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 now reports 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 5 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 5 - 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.
-17-
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits or Reports on Form 8-K
(a) The following exhibits are included in this Form 10-Q:
None
(b) Reports on Form 8-K:
On January 11, 1996, the Company filed a Current Report on Form
8-K, dated December 18, 1995, reporting that the Company obtained
loan commitments totaling $255.5 million from Nomura Asset
Capital Corporation.
On February 26, 1996, the Company filed a Current Report on Form
8-K reporting that the Company filed a registration statement to
raise $25 million of common stock.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME RETAIL, INC.
Registrant
Date: May 10, 1996 /s/ Abraham Rosenthal
---------------------------- ------------------------------
Abraham Rosenthal
Chief Executive Officer
Date: May 10, 1996 /s/ Robert P. Mulreaney
---------------------------- ------------------------------
Robert P. Mulreaney
Executive Vice President,
Chief Financial Officer
and Treasurer
-19-
