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, 1997
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
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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 14, 1997, the issuer had outstanding 15,794,951 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 as of March 31, 1997 and
December 31, 1996. 1
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996. 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996. 3
Notes to the Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS OR REPORTS ON FORM 8-K 15
SIGNATURES 16
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PRIME RETAIL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in rental property:
Land $ 52,317 $ 44,731
Buildings and improvements 604,729 570,761
Property under development 25,562 20,900
Furniture and equipment 4,466 4,367
-------- --------
687,074 640,759
Accumulated depreciation (63,196) (57,674)
-------- --------
623,878 583,085
Cash and cash equivalents 20,082 3,924
Restricted cash 46,419 45,127
Accounts receivable, net 7,043 6,096
Deferred charges, net 20,069 20,841
Due from affiliates, net 1,386 1,549
Investment in partnerships 6,076 5,625
Other assets 857 556
-------- --------
Total assets $725,810 $666,803
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bonds payable $ 32,900 $ 32,900
Notes payable 501,509 466,623
Accrued interest 3,701 3,640
Real estate taxes payable 3,068 2,138
Construction costs payable 2,602 3,047
Accounts payable and other liabilities 16,943 19,246
-------- --------
Total liabilities 560,723 527,594
-------- --------
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock, $0.01
par value (liquidation preference of $57,500), 2,300,000
shares issued and outstanding 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock, $0.01
par value (liquidation preference of $74,545 and $70,150, respectively),
2,981,800 and 2,806,000 shares
issued and outstanding, respectively 30 28
Shares of common stock, 75,000,000 shares authorized:
Common stock, $0.01 par value, 15,794,951 and 13,404,651
shares issued and outstanding, respectively 158 134
Additional paid-in capital 197,250 165,346
Distributions in excess of net income (32,374) (26,322)
-------- ---------
Total shareholders' equity 165,087 139,209
-------- --------
Total liabilities and shareholders' equity $725,810 $666,803
======== ========
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
-1-
<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
--------------------------------------
1997 1996
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<S> <C> <C>
REVENUES
Base rents $18,066 $12,744
Percentage rents 669 443
Tenant reimbursements 8,949 6,139
Income from investment partnerships 38 441
Interest and other 2,440 1,364
------- -------
Total revenues 30,162 21,131
EXPENSES
Property operating 6,633 4,619
Real estate taxes 2,390 1,473
Depreciation and amortization 6,328 4,387
Corporate general and administrative 1,350 893
Interest 9,169 6,056
Other charges 799 646
------- -------
Total expenses 26,669 18,074
------- -------
INCOME BEFORE MINORITY INTERESTS 3,493 3,057
(Income) loss allocated to minority interests (2,591) 1,477
------- -------
NET INCOME 902 4,534
Income allocated to preferred shareholders 3,093 5,236
------- -------
NET LOSS APPLICABLE TO COMMON SHARES $ (2,191) $ (702)
======== =======
NET LOSS PER COMMON SHARE $ (0.15) $ (0.24)
======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,344 2,875
======== =======
DISTRIBUTIONS DECLARED PER COMMON SHARE $ 0.295 $ 0.295
======== =======
=============================================================================================================================
</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
-------------------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 902 $ 4,534
Adjustments to reconcile net income to
net cash provided by operating activities:
Income (loss) allocated to minority interests 2,591 (1,477)
Depreciation and amortization 6,328 4,387
Amortization of deferred financing costs and
interest rate protection contracts 944 1,112
Equity earnings in excess of cash distributions
from joint ventures (38) (282)
Provision for uncollectible accounts receivable 253 224
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,200) 1,074
Decrease in due from affiliates, net 163 44
Increase in other assets (1,675) (224)
Increase in accrued interest 61 87
Decrease in accounts payable and other liabilities (1,373) (260)
--------- -------
Net cash provided by operating activities 6,956 9,219
INVESTING ACTIVITIES
Purchase of buildings and improvements (4,782) (1,779)
Increase in property under development (5,107) (9,969)
Acquisition of outlet centers (37,658) -
-------- -------
Cash used in investing activities (47,547) (11,748)
FINANCING ACTIVITIES
Net proceeds from issuance of common and preferred stock 31,930 -
Proceeds from notes payable 58,215 500
Principal repayments on notes payable (23,329) (434)
Deferred financing fees (522) (1,679)
Distributions and dividends paid (6,954) (6,084)
Distributions to minority interests (2,591) (2,112)
-------- -------
Net cash provided by (used in) financing activities 56,749 (9,809)
-------- --------
Increase (decrease) in cash and cash equivalents 16,158 (12,338)
Cash and cash equivalents at beginning of period 3,924 14,927
-------- -------
Cash and cash equivalents at end of period $20,082 $ 2,589
======== =======
====================================================================================================================================
</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 for the year ended December 31, 1996.
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 operational control.
Profits and losses are allocated in accordance with the terms of the agreement
of limited partnership of the Operating Partnership. Investments in partnerships
in which the Company does not have operational control 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 prior year financial statement amounts and
related footnote information have been reclassified to conform with the current
year presentation.
NOTE 2 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. The adoption of Statement No. 128 is expected to
have no impact on the Company's primary and fully diluted earnings per share for
the three months ended March 31, 1997 and 1996.
-4-
<PAGE>
NOTE 3 -- MINORITY INTERESTS
Cash distributions and losses allocated to minority interests have reduced the
minority interests balance to zero. After reducing the minority interests
balance to zero, additional distributions and losses of $2,335 incurred during
the three months ended March 31, 1997 that were allocable to minority interests
were allocated to common shareholders. The cumulative amount of distributions
and losses that were allocable to minority interests that were allocated to
common shareholders at March 31, 1997 was $5,792. There were no distributions
and losses allocable to minority interests which were allocated to common
shareholders during the three months ended March 31, 1996.
NOTE 4 -- ACQUISITIONS
On February 7, 1997, the Company purchased an additional 20.0% partnership
interest in Oxnard Factory Outlet from an unrelated third party for $334. As a
result of this purchase, the Company owns a 50.0% equity interest in Oxnard
Factory Outlet. The remaining 50.0% equity interest is owned by an affiliate of
Fru-Con Projects, Inc.
On February 13, 1997, the Company acquired Oak Creek Factory Stores, Bend
Factory Outlets and Factory Outlets at Post Falls from an unrelated third party
for an aggregate purchase price of $37,250. The Company financed the purchase
with loan proceeds from a financial institution and a $4,000 promissory note
issued to the seller. The operating results of the Company for the three months
ended March 31, 1997 include the results of these acquisitions effective with
the closing on February 13, 1997.
NOTE 5 -- PUBLIC STOCK OFFERINGS
On February 20, 1997, the Company completed a public offering of its Common
Stock and Series B Cumulative Participating Convertible Preferred Stock by
issuing 2,080,000 shares at $12.50 per share and 175,800 shares at $22.75 per
share, respectively (the "1997 Stock Offering"). In addition, on March 10, 1997,
the underwriter of the 1997 Stock Offering exercised its overallotment option to
purchase 310,300 shares of the Company's Common Stock at $12.50 per share. As a
result of the 1997 Stock Offering, the Company received net proceeds of $31,930
that were used to (i) repay certain outstanding indebtedness aggregating
$26,500, (ii) to fund development and construction activities, and (iii) for
general corporate purposes.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except share, unit and square foot information)
INTRODUCTION
The following discussion and analysis of the consolidated financial condition
and results of operations of Prime Retail, 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 certain of its existing factory outlet centers. As summarized in TABLE
1, the Company's factory outlet portfolio consisted of twenty-four operating
factory outlet centers totaling 6,138,000 square feet of gross leasable area
("GLA") at March 31, 1997, compared to seventeen operating factory outlet
centers totaling 4,331,000 square feet of GLA at March 31, 1996.
The Company purchased three factory outlet centers during the first quarter of
1997, adding 358,000 square feet of GLA in the aggregate. During 1996, the
Company opened two new factory outlet centers and nine expansions, and acquired
two factory outlet centers, adding 1,449,000 square feet of GLA in the
aggregate. Additionally, the Company purchased its joint venture partner's first
mortgage and 50% partnership interest in Grove City Factory Shops Partnership on
November 1, 1996 and now owns 100% of this factory outlet center with 533,000
square feet of GLA. The significant increase in the number of operating
properties and total GLA at March 31, 1997 compared to the portfolio of
properties at March 31, 1996, is collectively referred to as the "Portfolio
Expansion".
-6-
<PAGE>
TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
GRAND GLA PERCENTAGE
FACTORY OUTLET CENTER PHASE OPENING DATE (SQ. FT.) LEASED(12)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Warehouse Row Factory Shops(1)(2)--Chattanooga, Tennessee I November 1989 95,000 94%
II August 1993 26,000 94
--------- ----
121,000 94
Oak Creek Factory Outlets(3)--Sedona, Arizona I August 1990 82,000 99
San Marcos Factory Shops--San Marcos, Texas I August 1990 177,000 100
II August 1991 67,000 96
III August 1993 117,000 98
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
--------- ----
416,000 98
The Factory Outlets at Post Falls(3)--Post Falls, Idaho I July 1991 111,000 84
II July 1992 68,000 95
--------- ----
179,000 88
Gulf Coast Factory Shops--Ellenton, Florida I October 1991 187,000 98
II August 1993 123,000 100
III October 1996 30,000 100
--------- ----
340,000 99
Triangle Factory Shops--Raleigh-Durham, North Carolina I October 1991 181,000 95
II July 1996 6,000 100
--------- ----
187,000 95
Coral Isle Factory Shops--Naples/Marco Island, Florida I December 1991 94,000 100
II December 1992 32,000 100
--------- ----
126,000 100
Castle Rock Factory Shops--Castle Rock, Colorado I November 1992 181,000 100
II August 1993 94,000 99
III November 1993 95,000 100
--------- ----
370,000 100
Bend Factory Outlets(3)--Bend Oregon I December 1992 97,000 100
Ohio Factory Shops--Jeffersonville, Ohio I July 1993 186,000 99
II November 1993 100,000 100
IIB November 1994 13,000 100
IIIA August 1996 35,000 77
--------- ----
334,000 97
Gainesville Factory Shops--Gainesville, Texas I August 1993 210,000 87
II November 1994 106,000 89
--------- ----
316,000 88
Nebraska Crossing Factory Shops--Gretna, Nebraska I October 1993 192,000 90
Rocky Mountain Factory Stores(4)--Loveland, Colorado I May 1994 139,000 100
II November 1994 50,000 100
III May 1995 114,000 100
IV May 1996 25,000 100
--------- ----
328,000 100
Oxnard Factory Outlet(5)--Oxnard, California I June 1994 148,000 89
Grove City Factory Shops(6)--Grove City, Pennsylvania I August 1994 235,000 100
II November 1994 95,000 99
III November 1995 85,000 99
IV November 1996 118,000 89
--------- ----
533,000 97
</TABLE>
-7-
<PAGE>
TABLE 1 -- PORTFOLIO OF PROPERTIES AS OF MARCH 31, 1997 (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
GRAND GLA PERCENTAGE
FACTORY OUTLET CENTER PHASE OPENING DATE (SQ. FT.) LEASED(12)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Huntley Factory Shops--Huntley, Illinois I August 1994 192,000 87%
II November 1995 90,000 64
--------- ----
282,000 80
Florida Keys Factory Shops--Florida City, Florida I September 1994 208,000 92
Indiana Factory Shops--Daleville, Indiana I November 1994 208,000 94
IIA November 1996 26,000 35
--------- ----
234,000 87
Kansas City Factory Outlets(4)--Odessa, Missouri I July 1995 191,000 99
II November 1996 105,000 50
--------- ----
296,000 81
Magnolia Bluff Factory Shops(7)--Darien, Georgia I July 1995 238,000 89
IIA November 1995 56,000 69
IIB July 1996 21,000 66
--------- ----
315,000 84
Arizona Factory Shops(8)--Phoenix, Arizona I September 1995 217,000 98
II September 1996 109,000 75
--------- ----
326,000 91
Gulfport Factory Shops(9)--Gulfport, Mississippi I November 1995 228,000 98
IIA November 1996 40,000 64
--------- ----
268,000 93
Buckeye Factory Shops(10)--Burbank, Ohio I November 1996 205,000 89
Carolina Factory Shops--Gaffney, South Carolina I November 1996 235,000 77
--------- ----
TOTAL FACTORY OUTLET CENTERS(11) 6,138,000 92%
========= ====
=============================================================================================================================
<FN>
Notes:
(1) 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. 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.
(2) 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, 1997.
(3) The Company acquired this factory outlet center on February 13, 1997 from
an unrelated third party.
(4) The Company acquired this factory outlet center on November 1, 1996 from
an unrelated third party.
(5) On February 7, 1997, the Company purchased an additional 20% partnership
interest from a joint venture partner which increased the Company's
ownership interest to 50%.
(6) On November 1, 1996, the Company purchased its joint venture partner's
50% partnership interest in Grove City Factory Shops Partnership and now
owns 100% of this factory outlet center.
(7) The Company operates this property pursuant to a long-term lease under
which it receives the economic benefit of a 100% ownership interest.
(8) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(9) The real property on which this outlet center is located is subject
to a long-term ground lease. The Company receives the economic benefit
of a 100% ownership interest.
(10) The Company owns 75% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(11) The Company also owns three community centers containing 424,000 square
feet of GLA in the aggregate that were 95% leased as of March 31, 1997.
(12) Fully executed leases as of March 31, 1997 as a percent of square feet
of GLA.
</FN>
</TABLE>
-8-
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997
TO THE THREE MONTHS ENDED MARCH 31, 1996
Summary
For the three months ended March 31, 1997, the Company reported net income of
$902 on total revenues of $30,162. For the three months ended March 31, 1997,
the net loss applicable to common shareholders was $2,191 or $0.15 per common
share. 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, the net loss
applicable to common shareholders was $702, or $0.24 per common share.
Revenues
Total revenues were $30,162 for the three months ended March 31, 1997 compared
to $21,131 for the three months ended March 31, 1996, an increase of $9,031, or
42.7%. Base rents increased $5,322, or 41.8%, in 1997 compared to 1996. These
increases are primarily due to the Portfolio Expansion. Straight-line rents
(included in base rents) were $125 and $156 for the three months ended March 31,
1997 and 1996, respectively. Tenant reimbursements, which represent the
contractual recovery from tenants of certain operating expenses, increased by
$2,810, or 45.8%, during the three months ended March 31, 1997 over the same
period in 1996. These increases were primarily due to the Portfolio Expansion.
Income from investment partnerships decreased by $403 for the three months ended
March 31, 1997, or 91.4%, to $38 compared to $441 for the same period in 1996.
This decrease reflects the Company's purchase of its joint venture partner's
first mortgage and 50% partnership interest in Grove City Factory Shops
Partnership on November 1, 1996. As a result of its acquisition, the Company
owns 100.0% of this factory outlet center and, therefore, commencing November 1,
1996, its operations are included in the consolidated results of the Company.
Prior to November 1, 1996, the Company accounted for its interest under the
equity method of accounting. The decrease in income from investment partnerships
in 1997 compared to 1996 was offset, in part, by the openings of Arizona Factory
Shops (Phase II--September 1996) and Buckeye Factory Shops (Phase I--November
1996).
Interest and other income increased by $1,076, or 78.9%, to $2,440 during the
three months ended March 31, 1997 as compared to $1,364 for the three months
ended March 31, 1996. The increase reflects higher interest income, temporary
tenant income, municipal assistance income, property development and
construction management fees and ancillary income of $828, $143, $101, $90 and
$5, respectively, partially offset by reduced lease termination income of $91.
Expenses
Property operating expenses increased by $2,014, or 43.6%, to $6,633 for the
three months ended March 31, 1997 compared to $4,619 for the same period in
1996. Real estate taxes increased by $917, or 62.3%, to $2,390 for the three
months ended March 31, 1997, from $1,473 in the same period for 1996. The
increases in property operating expenses and real estate taxes are primarily due
to the Portfolio Expansion. As shown in TABLE 2, depreciation and amortization
expense increased by $1,941, or 44.2%, to $6,328 for the three months ended
March 31, 1997, compared to $4,387 for 1996. This increase results from the
depreciation and amortization of assets associated with the Portfolio Expansion.
-9-
<PAGE>
TABLE 2 -- COMPONENTS OF DEPRECIATION AND AMORTIZATION EXPENSE
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Building and improvements $3,258 $2,228
Land improvements 627 479
Tenant improvements 1,827 1,106
Furniture and fixtures 202 156
Leasing commissions(1) 414 418
------ ------
Total $6,328 $4,387
====== ======
================================================================================
Note:
(1) In accordance with generally accepted accounting principles ("GAAP"),
leasing commissions are classified as intangible assets. Therefore, the
amortization of leasing commissions is reported as a component of
depreciation and amortization expense.
TABLE 3 -- COMPONENTS OF INTEREST EXPENSE
The components of interest expense are summarized as follows:
- --------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Interest incurred $9,109 $5,641
Interest capitalized (845) (613)
Interest earned on interest
rate protection contracts (39) (84)
Amortization of deferred financing costs 608 793
Amortization of interest rate protection contracts 336 319
------ ------
Total $9,169 $6,056
====== ======
================================================================================
As shown in TABLE 3, interest expense for the three months ended March 31, 1997
increased by $3,113, or 51.4%, to $9,169 compared to $6,056 for the same period
in 1996. This increase reflects higher interest incurred of $3,468, an increase
in amortization of interest rate protection contracts of $17 and a reduction in
interest earned on interest rate protection contracts of $45, partially offset
by a decrease in amortization of deferred financing costs of $185 and an
increase in the amount of interest capitalized in connection with development
projects of $232.
The increase in interest incurred is primarily attributable to an increase of
approximately $213,379 in the Company's average debt outstanding during the
three months ended March 31, 1997 compared to the same period in 1996. The
weighted average interest rates were 7.12% and 7.97% for the 1997 and 1996
periods, respectively.
Other charges increased by $153, or 23.7%, to $799. This increase reflects
higher marketing costs of $84, a higher provision for uncollectible accounts
receivable of $30 and other miscellaneous charges of $39.
In connection with re-leasing space to new merchants, the Company incurred $235
and $19 in capital expenditures during the three months ended March 31, 1997 and
1996, respectively.
-10-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
For the three months ended March 31, 1997, net cash provided by operating
activities was $6,956. Cash used in investing activities was $47,547 for the
three months ended March 31, 1997. The primary use of these funds was for costs
associated with the completion of factory outlet centers and expansions opened
during 1996, costs associated with the acquisition of three factory outlet
centers, costs incurred for the purchase of an additional 20% equity interest in
a factory outlet center, and costs for pre-development activities associated
with future development. Net cash provided by financing activities was $56,749
for the three months ended March 31, 1997. The principal sources of these funds
were the proceeds from new borrowings and the Company's public offering of
certain stock. Such proceeds were offset by principal repayments on notes
payable of $23,329, distributions to minority interests (including distributions
to the limited partner unit holders) of $2,591, and preferred and common stock
distributions of $6,954.
SOURCES AND USES OF CASH -- 1997 PUBLIC OFFERING OF COMMON
STOCK AND CONVERTIBLE PREFERRED STOCK
On February 20, 1997, the Company completed a public offering (the "1997 Stock
Offering") by issuing 2,080,000 shares of its Common Stock at $12.50 per share
and 175,800 shares of its Convertible Preferred Stock at $22.75 per share. In
addition, on March 10, 1997, the underwriter of the 1997 Stock Offering
exercised its overallotment option to purchase 310,300 shares of the Company's
Common Stock at $12.50 per share. As a result of the 1997 Stock Offering, the
Company received net proceeds of $31,930 that were used to (i) repay certain
outstanding indebtedness aggregating $26,500, (ii) to fund development and
construction activities, and (iii) for general corporate purposes.
On January 10, 1997, the Company filed a Form S-3 Registration Statement (the
"Shelf Registration") with the Securities and Exchange Commission to register
$100,000 of the Company's equity securities. As a result of the 1997 Stock
Offering, as of March 31, 1997, the Company had $66,122 of availability under
the Shelf Registration. From time to time, the Company will consider issuing
additional securities under such Shelf Registration for the development or
acquisition of additional properties, the expansion and improvement of existing
properties, and for general corporate purposes.
SOURCES AND USES OF CASH -- PROPERTY ACQUISITIONS
On February 7, 1997, the Company purchased an additional 20.0% partnership
interest in Oxnard Factory Outlet from an unrelated third party for $334. As a
result of this purchase, the Company owns a 50.0% equity interest in Oxnard
Factory Outlet. The remaining 50.0% equity interest is owned by an affiliate of
Fru-Con Projects, Inc.
On February 13, 1997, the Company acquired Oak Creek Factory Stores, Bend
Factory Outlets and Factory Outlets at Post Falls from an unrelated third party
for an aggregate purchase price of $37,250. The Company financed the purchase
with loan proceeds from a financial institution and a $4,000 promissory note
issued to the seller. The operating results of the Company for the three months
ended March 31, 1997 include the results of these acquisitions effective with
the closing on February 13, 1997.
-11-
<PAGE>
Oak Creek Factory Outlets is located in Sedona, Arizona, which is north of
Phoenix and south of the Grand Canyon. Oak Creek Factory Outlets contains
approximately 82,000 square feet of GLA and was 92.8% occupied at March 31,
1997. Bend Factory Outlets is located in Bend, Oregon, which is east of Eugene,
Oregon and southeast of Portland. Bend Factory Outlets contains approximately
97,000 square feet of GLA and was 100.0% occupied at March 31, 1997. Factory
Outlets at Post Falls is located in Post Falls, Idaho, which is 30 miles east of
Spokane, Washington. Factory Outlets at Post Falls contains approximately
179,000 square feet of GLA and was 88.0% occupied at March 31, 1997.
During 1997, the Company will continue to explore acquisitions of factory outlet
centers in the United States as well as consider possible strategic acquisitions
of other assets in the retail sector. The Company cannot predict if any
transaction will be consummated, nor the terms or form of consideration
required.
PLANNED DEVELOPMENT
Management believes that there is sufficient demand for continued development of
new factory outlet centers and the expansion of certain existing factory outlet
centers. The Company expects to open approximately 250,000 square feet of GLA
during 1997 in connection with planned expansions of existing factory outlet
centers. At March 31, 1997, the remaining budgeted capital expenditures for
these expansions aggregated approximately $27,000, while anticipated capital
expenditures related to the completion of new factory outlet centers and
expansions opened during the year ended December 31, 1996 (aggregating 930,000
square feet of GLA) approximated $10,200.
Management believes that the Company has sufficient capital and capital
commitments to fund the remaining capital expenditures associated with its 1996
and 1997 development activities. These funding requirements are expected to be
met, in large part, with the proceeds from the 1997 Stock Offering, various loan
facilities, and joint venture partners. If adequate financing for such
development and expansion is not available, the Company may not be able to
develop new centers or expand existing centers at currently planned levels.
The Company plans to open new factory outlet centers and expansions in 1998 that
are expected to contain between approximately 600,000 and 700,000 square feet of
GLA, in the aggregate, and have a total expected development cost ranging
between approximately $78,000 and $91,000, respectively. The Company expects to
fund the development cost of its new factory outlet centers and expansions from
(i) certain line of credit facilities, (ii) joint venture partners, (iii)
retained cash flow from operations, (iv) construction loans, and (v) the
potential sale of common or preferred equity in the public or private capital
markets. There can be no assurance that the Company will be successful in
obtaining the required amount of equity capital or debt financing for the 1998
planned openings or that the terms of such capital raising activities will be as
favorable as the Company has experienced in prior periods.
DEBT REPAYMENTS AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS
The Company's aggregate indebtedness was $534,409 and $499,523 at March 31, 1997
and December 31, 1996, respectively. At March 31, 1997, such indebtedness had a
weighted average maturity of 6.8 years and bore interest at a weighted average
interest rate of 7.02% per annum. At March 31, 1997, $58,317, or 10.9%, of such
indebtedness bore interest at fixed rates and $476,092, or 89.1%, of such
indebtedness, including $28,250 of tax-exempt bonds, bore interest at
variable-rates.
-12-
<PAGE>
At March 31, 1997, the Company held interest rate protection contracts on
$28,250 of floating rate tax-exempt indebtedness and $357,985 of other floating
rate indebtedness (or approximately 81.1% of its total floating rate
indebtedness). These contracts expire in 1999 and 1998, respectively. In
addition, the Company held additional interest rate protection contracts on
$43,900 of the $357,985 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 at March 31, 1997
(defined as total 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 Series A Senior Cumulative Preferred Stock ("Senior Preferred Stock") at
$25.00 per share; and (d) the total debt of the Company) was 54.7%.
The Company is obligated to repay $25,433 of mortgage indebtedness during the
remainder of 1997 and $38,655 in 1998. Annualized cumulative dividends on the
Company's Senior Preferred Stock and Convertible Preferred Stock after the 1997
Stock Offering are $6,037 and $6,336, 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 the 1997
Stock Offering and the potential sale of common or preferred equity in the
public or private capital markets, will be sufficient to satisfy its debt
service obligations, expected distribution and 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 all 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, 1997, the Company maintained interest rate protection
contracts to protect against significant increases in interest rates on certain
floating rate indebtedness (see "Debt Repayments and Preferred Stock
Distributions and Dividends").
The 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.
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.
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
was 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.
-13-
<PAGE>
The Company generally considers FFO an appropriate measure of liquidity of an
equity REIT because industry analysts have accepted it as a performance measure
of equity REITs. FFO as defined by NAREIT means net income (computed in
accordance with GAAP) excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization on real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures. The
Company's FFO is not comparable to FFO reported by other REITs that do not
define the term using the current NAREIT definition or that interpret the
current NAREIT definition differently than does the Company. Therefore, 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. The Company believes
that in order to facilitate a clear understanding of its operating results, FFO
should be examined in conjunction with net income determined in accordance with
GAAP. FFO does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions.
TABLE 4 provides a reconciliation of income before allocations to minority
interests and preferred shareholders to FFO as calculated under the New
Definition and the Old Definition for the three months ended March 31, 1997 and
1996. FFO (New Definition) increased $2,638, or 34.6%, to $10,252 for the three
months ended March 31, 1997 from $7,614 for the three months ended March 31,
1996. FFO (Old Definition) increased $2,341, or 26.3%, to $11,255 for the three
months ended March 31, 1997 from $8,914 for the three months ended March 31,
1996. These increases are primarily attributable to the Portfolio Expansion,
including the effect of the acquisition of certain properties in November 1996
and February 1997.
TABLE 4 -- FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
------------------------------------------------------------
(Old Definition) (New Definition)
<S> <C> <C> <C> <C>
Income before allocations to minority interests and
preferred shareholders $ 3,493 $3,057 $ 3,493 $3,057
FFO adjustments:
Depreciation and amortization 6,328 4,387 6,274 4,231
Amortization of deferred financing costs and
interest rate protection contracts 944 1,112 - -
Unconsolidated joint venture adjustments 490 358 485 326
------- ------- ------- -------
FFO before allocations to minority interests and
preferred shareholders $11,255 $8,914 $10,252 $7,614
======= ====== ======= ======
==============================================================================================================================
</TABLE>
-14-
<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 exhibit is included in this Form 10-Q:
Exhibit 12.1 -- Ratio of Earnings to Fixed Charges
and Preferred Stock Distributions and Dividends
(b) Reports on Form 8-K:
On January 30, 1997, the Company filed a Current
Report on Form 8-K/A-2, dated November 1, 1996,
reporting that the Company closed a $428.3 million
loan refinancing, purchased two factory outlet
centers and purchased the remaining interest in Grove
City Factory Shops. Pro forma consolidated financial
statements of the Company and audited statements of
revenue and certain expenses of the acquired
properties were filed with this Form 8-K/A-2.
On January 30, 1997, the Company filed a Current
Report on Form 8-K, dated January 30, 1997, reporting
its operating results for the fourth quarter and
year ended December 31, 1996. No financial statements
were included.
On February 13, 1997, the Company filed a Current
Report on Form 8-K, dated February 13, 1997,
reporting that the Company purchased three factory
outlet centers and an additional 20.0% interest in
Oxnard Factory Outlet. No financial statements were
included.
On February 14, 1997, the Company filed a Current
Report on Form 8-K, dated February 14, 1997, which
included certain documents relating to the Company's
Registration Statement on Form S-3 (File No.
333-19505). No financial statements were included.
-15-
<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 14, 1997 /s/ Abraham Rosenthal
-------------------------------- ----------------------
Abraham Rosenthal
Chief Executive Officer
Date: May 14, 1997 /s/ Robert P. Mulreaney
-------------------------------- ----------------------
Robert P. Mulreaney
Executive Vice President,
Chief Financial Officer
and Treasurer
-16-
PRIME RETAIL, INC.
EXHIBIT 12.1: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIO INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
Income (loss) before minority interests $ 3,493 $ 3,057
Interest incurred 9,600 6,387
Amortization of capitalized interest 79 63
Amortization of debt issuance costs 608 823
Amortization of interest rate protection
contracts 336 319
Less interest earned on interest rate
protection contracts (39) (84)
Less capitalized interest (915) (613)
-------- --------
Earnings 13,162 9,952
-------- --------
Interest incurred 9,600 6,387
Amortization of debt issuance costs 608 823
Amortization of interest rate protection
contracts 336 319
Preferred stock distributions and dividends 3,093 5,236
-------- --------
Combined Fixed Charges and
Preferred Stock Distributions and Dividends 13,637 12,765
-------- --------
Excess of Combined Fixed Charges
and Preferred Stock Distributions
and Dividends over Earnings $ (475) $ (2,813)
======= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,082
<SECURITIES> 0
<RECEIVABLES> 7,043
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 101,932
<PP&E> 687,074
<DEPRECIATION> 63,196
<TOTAL-ASSETS> 725,810
<CURRENT-LIABILITIES> 26,314
<BONDS> 534,409
0
53
<COMMON> 158
<OTHER-SE> 164,876
<TOTAL-LIABILITY-AND-EQUITY> 725,810
<SALES> 0
<TOTAL-REVENUES> 30,162
<CGS> 0
<TOTAL-COSTS> 26,669
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,169
<INCOME-PRETAX> 902
<INCOME-TAX> 0
<INCOME-CONTINUING> 902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 902
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
