United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 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
-------
PRIME RETAIL, INC.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address, or former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of November 7, 1997, the issuer had outstanding 27,294,951 shares of Common
Stock, $.01 par value per share.
<PAGE>
Prime Retail, Inc.
Form 10-Q
INDEX
-----
PAGE
----
PART I: FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 1
Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 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 9
PART II: OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits or Reports on Form 8-K 22
Signatures 23
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<TABLE>
Prime Retail, Inc.
Consolidated Balance Sheets
(in thousands, except share information)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investment in rental property:
Land $ 55,163 $ 44,731
Buildings and improvements 649,733 570,761
Property under development 36,545 20,900
Furniture and equipment 5,215 4,367
-------------- --------------
746,656 640,759
Accumulated depreciation (75,147) (57,674)
-------------- --------------
671,509 583,085
Cash and cash equivalents 23,777 3,924
Restricted cash 41,019 45,127
Accounts receivable, net 8,547 6,096
Deferred charges, net 17,281 20,841
Due from affiliates, net 654 1,549
Investment in partnerships 3,139 5,625
Other assets 2,651 556
-------------- --------------
Total assets $ 768,577 $ 666,803
============== ==============
Liabilities and shareholders' equity
Bonds payable $ 32,900 $ 32,900
Notes payable 395,620 466,623
Accrued interest 3,460 3,640
Real estate taxes payable 6,121 2,138
Construction costs payable 2,786 3,047
Accounts payable and other liabilities 15,864 19,246
-------------- --------------
Total liabilities 456,751 527,594
Minority interests 9,800 -
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, 27,294,951 and 13,404,651
shares issued and outstanding, respectively 273 134
Additional paid-in capital 349,179 165,346
Distributions in excess of net income (47,479) (26,322)
-------------- --------------
Total shareholders' equity 302,026 139,209
-------------- --------------
Total liabilities and shareholders' equity $ 768,577 $ 666,803
============== ==============
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, Inc.
Consolidated Statements of Operations
(in thousands, except per share information)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three months Nine months
ended September 30 ended September 30
-------------------------- ---------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Base rents $ 19,243 $ 12,887 $ 56,315 $ 38,417
Percentage rents 1,008 466 2,398 1,277
Tenant reimbursements 8,731 6,039 26,649 18,073
Income (loss) from investment partnerships (52) 250 (112) 859
Interest and other 2,619 2,189 7,674 4,486
-------- -------- -------- --------
Total revenues 31,549 21,831 92,924 63,112
Expenses
Property operating 6,840 5,121 20,495 14,536
Real estate taxes 2,449 1,369 7,238 3,854
Depreciation and amortization 6,644 4,579 19,515 13,578
Corporate general and administrative 1,464 973 4,083 2,832
Interest 9,079 5,139 27,951 17,343
Other charges 982 475 2,475 7,687
-------- -------- -------- --------
Total expenses 27,458 17,656 81,757 59,830
-------- -------- -------- --------
Income before minority interests and
extraordinary item 4,091 4,175 11,167 3,282
(Income) loss allocated to minority interests (2,540) (1,810) (7,803) 4,660
-------- -------- -------- --------
Income before extraordinary item 1,551 2,365 3,364 7,942
Extraordinary item - loss on early extinguishment of
debt, net of minority interests of $0 in 1997 and
$3,263 in 1996 (2,061) - (2,061) (1,017)
-------- -------- -------- --------
Net income (loss) (510) 2,365 1,303 6,925
Income allocated to preferred shareholders 3,094 3,000 9,280 11,236
-------- -------- -------- --------
Net loss applicable to common shares $ (3,604) $ (635) $ (7,977) $ (4,311)
======== ======== ========= =========
Per common share:
Loss before extraordinary item $ (0.08) $ (0.05) $ (0.36) $ (0.51)
Extraordinary item (0.11) - (0.12) (0.16)
-------- -------- --------- ---------
Net loss $ (0.19) $ (0.05) $ (0.48) $ (0.67)
======== ======== ========= =========
Weighted average common shares outstanding 19,159 13,322 16,458 6,481
======== ======== ========= =========
Distributions declared per common share $ 0.295 $ 0.295 $ 0.885 $ 1.030
======== ======== ========= =========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
--------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 1,303 $ 6,925
Adjustments to reconcile net income to
net cash provided by operating activities:
Income (loss) allocated to minority interests 7,803 (4,660)
Extraordinary loss for early extinguishment of debt 2,061 1,017
Write-off of financing costs related to early extinguishment of debt - 6,131
Gains on sale of outlots (598) -
Depreciation and amortization 19,515 13,578
Amortization of deferred financing costs and
interest rate protection contracts 2,861 3,029
Cash distributions in excess of equity earnings
from joint ventures 613 213
Provision for uncollectible accounts receivable 748 437
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,199) 1,814
(Increase) decrease in due from affiliates, net 895 (766)
(Increase) decrease in other assets 2,219 (1,238)
Decrease in accrued interest (180) (33)
Increase in accounts payable and other liabilities 517 4,856
----------- -----------
Net cash provided by operating activities 34,558 31,303
Investing Activities
Proceeds from sale of outlots 900 -
Purchase of land - (174)
Increase in buildings and improvements (13,607) (11,319)
Increase in property under development (32,659) (36,645)
Deferred leasing commissions (551) (22)
Acquisition of outlet centers (60,819) -
----------- -----------
Net cash used in investing activities (106,736) (48,160)
Financing Activities
Net proceeds from offerings 193,774 38,843
Conversion of convertible preferred stock - (1,342)
Proceeds from notes payable 91,767 140,852
Principal repayments on notes payable (162,770) (132,138)
Deferred financing costs (477) (7,821)
Distributions and dividends paid (22,460) (20,516)
Distributions to minority interests (7,803) (6,346)
----------- -----------
Net cash provided by financing activities 92,031 11,532
----------- -----------
Increase (decrease) in cash and cash equivalents 19,853 (5,325)
Cash and cash equivalents at beginning of period 3,924 14,927
----------- -----------
Cash and cash equivalents at end of period $ 23,777 $ 9,602
=========== ===========
=================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Prime Retail, Inc.
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 -- Interim Financial Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments consisting only of recurring accruals considered
necessary for a fair presentation have been included. Operating results for such
interim periods are not necessarily indicative of the results which may be
expected for a full fiscal year. For further information, refer to the
consolidated financial statements and footnotes included in Prime Retail, Inc.'s
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 of
Financial Accounting Standards ("SFAS") 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 SFAS No. 128 is expected to have no impact on the Company's primary
and fully diluted earnings per share for the three and nine months ended
September 30, 1997 and 1996.
<PAGE>
Note 3 -- Capital Stock Offerings
In February and March 1997, the Company completed a public offering of 2,390,300
shares of its Common Stock at $12.50 per share and 175,800 shares of its Series
B Cumulative Participating Convertible Preferred Stock at $22.75 per share (the
"February Offering"). As a result of the February Offering, the Company received
net proceeds of $31,930 that were used (i) to repay certain outstanding
indebtedness aggregating $26,500, (ii) to fund development and construction
activities, and (iii) for general corporate purposes.
In September 1997, the Company completed a public offering of 11,500,000 shares
(including 1,500,000 shares related to the exercise of the underwriters'
overallotment option) of its Common Stock at $14.00 per share (the "September
Offering"). In addition, on September 8, 1997, the Company issued 727,273 Series
C preferred limited partnership units ("Series C Preferred Units") at $13.75 per
unit pursuant to the initial draw of the Private Placement (as defined below).
See Note 4 - "Private Placement" of the Notes to the Consolidated Financial
Statements for additional information. As a result of the September Offering and
the initial draw on the Private Placement (collectively, the "September Capital
Transactions"), the Company received net proceeds of $162,750 after commissions
and underwriting discounts. A portion of the net proceeds from the September
Capital Transactions were used (i) to repay certain outstanding corporate
indebtedness aggregating $113,410 and (ii) to acquire the 25.0% ownership
interest of Salomon Brothers Realty Corp. ("SBRC") in Buckeye Factory Shops
Limited Partnership ("Buckeye") for $23,148 (including $22,642 of mortgage
indebtedness relating to such property). The remaining net proceeds from the
September Capital Transactions of $26,192 will be used (i) to fund development
and construction activities, (ii) to fund property acquisitions, and (iii) for
general corporate purposes.
Note 4 -- Private Placement
On August 8, 1997, the Company entered into a purchase agreement with an
institutional investor providing for the issuance of a new series of cumulative
convertible non-voting preferred securities (the "Preferred Securities") at
$13.75 per unit, or an aggregate of $60,000 (the "Private Placement") in cash.
The Preferred Securities must be issued no later than December 6, 1997 and will
pay dividends equivalent to the amount being paid on the Company's Common Stock,
with an annual minimum equal to $1.18 per unit. In addition, the Company,
subject to certain conditions, has agreed to waive the ownership limitations
otherwise applicable to the Common Stock to permit the investor to own, at any
one time, the shares of Common Stock issuable upon conversion of the Preferred
Securities. The Company has the right to call the Preferred Securities, at par,
after ten years. Subject to certain conditions, the Preferred Securities may
take the form of shares of preferred stock in the Company or preferred units of
partnership interest in the Operating Partnership that will be exchangeable for
shares of preferred stock or Common Stock on a one-to-one basis. The Preferred
Securities may be converted into shares of Common Stock on a one-to-one basis
commencing August 8, 1998 (or earlier subject to certain conditions).
Note 5 - Investment in Partnerships
On September 2, 1997, the Company acquired the 25.0% ownership interest in
Buckeye from its joint venture partner, SBRC for $23,148 (including $22,642 of
mortgage indebtedness relating to such property), thereby increasing its
ownership percentage in such property to 100.0% (the "Buckeye Acquisition").
Prior to September 2, 1997, the Company accounted for its 75.0% investment in
Buckeye using the equity method of accounting. Commencing September 2, 1997, the
operating results of Buckeye are consolidated. The Company financed the
acquisition with a portion of the
<PAGE>
proceeds from the Offering. See Note 3 - "Capital Stock Offerings" of the Notes
to the Consolidated Financial Statements for additional information.
As a result of the prepayment of the mortgage indebtedness noted above, the
joint venture partnership incurred an extraordinary loss of $851 related to the
write-off of certain unamortized financing costs totaling $624 and a debt
prepayment penalty of $227. The Company's 75.0% share of the extraordinary loss,
or $638, is included in the extraordinary loss in the Consolidated Statements of
Operations.
Note 6 -- 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 allocable to minority
interests of $7,272 and $1,253 incurred during the nine months ended September
30, 1997 and 1996, respectively, were allocated to common shareholders. The
cumulative amount of distributions and losses allocable to minority interests
that were allocated to common shareholders at September 30, 1997 was $10,730.
On September 8, 1997, the Company issued 727,273 Series C Preferred Units at
$13.75 per unit pursuant to the initial $10,000 draw on the Private Placement.
The net proceeds of $9,800 from the issuance of the Series C Preferred Units are
included in minority interests in the Consolidated Balance Sheets.
Note 7 -- Bonds and Notes Payable
In September 1997, the Company completed the September Capital Transactions and
used a portion of the net proceeds to repay certain outstanding corporate
indebtedness aggregating $113,410 as described in the table below. See Note 3
"Capital Stock Offerings" of the Notes to the Consolidated Financial Statements
for additional information concerning the September Capital Transactions. As a
result of the prepayment of such indebtedness, the Company incurred an
extraordinary loss of $1,423 related to the write-off of certain unamortized
financing costs. The Company also incurred an extraordinary loss of $638 related
to the write-off of certain unamortized financing costs in connection with its
purchase of a 25.0% ownership interest in Buckeye. See Note 5 - "Investment in
Partnerships" of the Notes to the Consolidated Financial Statements for
additional information.
<PAGE>
The following table summarizes the debt repaid with net proceeds from the
September Capital Transactions:
- --------------------------------------------------------------------------------
Principal
Description Repayment
- --------------------------------------------------------------------------------
Fixed Rate Debt:
- ----------------
Unsecured term loans, 8.25%,
monthly interest-only payments,
due August 1, 1998 $ 10,500
Unsecured promissory note, 8.50%,
monthly interest-only payments
through August 31, 1997, due
September 30, 1997 4,000
---------
Total Fixed Rate Debt 14,500
Variable Rate Debt:
- -------------------
Term loan, LIBOR plus 1.95%,
monthly interest-only payments
through February 10, 1998;
monthly principal and interest
payments thereafter, due November
11, 1999 53,290
Term loan, LIBOR plus 1.95%,
monthly interest-only payments,
due February 13, 2000 3,000
Mortgage, LIBOR plus 2.25%,
monthly interest-only payments,
due September 10, 1998
19,620
Unsecured term loans, LIBOR plus 3.50%,
monthly interest-only payments,
due November 11, 1997 10,000
Unsecured line of credit, $15,000,
LIBOR plus 2.50%, interest-only
payments, due July 11, 1998 13,000
---------
Total Variable Rate Debt 98,910
---------
Total Fixed and Variable Rate Debt $113,410
=========
================================================================================
As of September 30, 1997, unused commitments were $71,290.
Note 8 -- Distributions
On June 26, 1996, the Company's Board of Directors approved a special cash
distribution on its Common Stock of $0.145 per common share, payable to holders
of record on June 27, 1996. Such distribution is included in the distributions
declared per common share disclosed in the Consolidated Statements of
Operations.
<PAGE>
Note 9 -- Acquisitions
On November 1, 1996, the Company acquired Rocky Mountain Factory Stores and
Kansas City Factory Outlets for an aggregate purchase price of $71,700 (the
"1996 Acquired Properties"). The Company accounted for the acquisition using the
purchase method of accounting. Commencing November 1, 1996, the operating
results of the 1996 Acquired Properties are included in the Company's
consolidated results of operations. Additionally, on November 1, 1996, the
Company purchased its joint venture partner's first mortgage and 50.0% ownership
interest in Grove City Factory Shops Partnership ("Grove City"), the property
partnership which owns Grove City Factory Shops, for $57,094 (the "Grove City
Acquisition") thereby increasing its ownership interest in such property to
100.0%. Prior to November 1, 1996, the Company accounted for its 50.0%
investment in Grove City under the equity method of accounting. Commencing
November 1, 1996, the operating results of Grove City are consolidated.
On February 13, 1997, the Company acquired Oak Creek Factory Stores, Bend
Factory Outlets and Factory Outlets at Post Falls (the "February 1997 Acquired
Properties") 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 which was repaid
with net proceeds from the September Offering. The operating results of the
Company for 1997 include the results of these acquisitions effective with the
closing on February 13, 1997.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company including the 1996 Acquired
Properties, the Grove City Acquisition, the February 1997 Acquired Properties
and the Buckeye Acquisition as if such acquisitions had occurred on January 1,
1996.
- --------------------------------------------------------------------------------
Nine months ended
September 30
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Total revenues $ 96,445 $ 82,771
============ =============
Income before extraordinary item $ 4,349 $ 9,328
============ =============
Net income $ 2,075 $ 8,311
============ =============
Net loss applicable to common shares $ (4,931) $ (2,925)
============ =============
Per common share:
Loss before extraordinary item $ (0.16) $ (0.29)
Extraordinary item (0.14) (0.16)
------------ -------------
Net loss $ (0.30) $ (0.45)
============ =============
================================================================================
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional depreciation expense
based on the purchase price of such assets acquired and interest expense on debt
incurred on financing the acquisitions. These unaudited pro forma results do not
purport to be indicative of the results of operations which actually would have
resulted had the combination been in effect on January 1, 1996 or of future
results of operations of the Company.
On October 29, 1997, the Company acquired Tidewater Outlet Mall, Manufacturer's
Outlet Mall, Kittery Outlet Village, and Latham Factory Outlet Center from an
unrelated third party for an aggregate purchase price of $26,000. The Company
financed the purchase with proceeds from the September Offering and the
Company's unsecured line of credit.
<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 the Notes to the
Consolidated Financial Statements. 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
increases in market interest rates from current levels; risks associated with
the Company's property acquisition activities, such as the uncertainty as to
whether these transactions may be completed and the lack of predictability with
respect to the financial returns; 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 6,313,000 square feet of gross leasable area
("GLA") at September 30, 1997, compared to seventeen factory outlet centers
totaling 4,487,000 square feet of GLA at September 30, 1996.
During 1997, the Company purchased three factory outlet centers totaling 358,000
square feet of GLA in the first quarter and opened two expansions totaling
183,000 square feet of GLA in the third quarter. Additionally, the Company
acquired its joint venture partner's 25.0% ownership interest in Buckeye Factory
Shops Limited Partnership on September 2, 1997 and now owns 100.0% of this
factory outlet center with 205,000 square feet of GLA. In the fourth quarter of
1996, the Company opened two new factory outlet centers and five expansions, and
acquired two factory outlet centers, adding 1,293,000 square feet of GLA in the
aggregate. Furthermore, the Company purchased its joint venture partner's first
mortgage and 50.0% partnership interest in Grove City Factory Shops Partnership
on November 1, 1996 and now owns 100.0% 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 September 30, 1997 compared to the portfolio of
properties at September 30, 1996, is collectively referred to as the "Portfolio
Expansion".
<PAGE>
<TABLE>
TABLE 1 -- Portfolio of Properties as of September 30, 1997
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Center Phase Opening Date (Sq. Ft.) Leased(12)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warehouse Row Factory Shops(1)(2)--Chattanooga, Tennessee I November 1989 95,000 91%
II August 1993 26,000 94
------- ---
121,000 92
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 67,000 100
III August 1993 117,000 100
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
------- ---
416,000 100
The Factory Outlets at Post Falls(3)--Post Falls, Idaho I July 1991 111,000 86
II July 1992 68,000 84
------- ---
179,000 85
Gulf Coast Factory Shops--Ellenton, Florida I October 1991 187,000 100
II August 1993 123,000 100
III October 1996 30,000 100
------- ---
340,000 100
Triangle Factory Shops--Raleigh-Durham, North Carolina I October 1991 181,000 100
II July 1996 6,000 100
------- ---
187,000 100
Coral Isle Factory Shops--Naples/Marco Island, Florida I December 1991 94,000 98
II December 1992 32,000 100
------- ---
126,000 99
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
IV August 1997 110,000 88
------- ---
480,000 97
Bend Factory Outlets(3)--Bend Oregon I December 1992 97,000 100
Ohio Factory Shops--Jeffersonville, Ohio I July 1993 186,000 100
II November 1993 100,000 100
IIB November 1994 13,000 100
IIIA August 1996 35,000 100
IIIB August 1997 73,000 36
------- ---
407,000 89
Gainesville Factory Shops--Gainesville, Texas I August 1993 210,000 95
II November 1994 106,000 89
------- ---
316,000 93
Nebraska Crossing Factory Shops--Gretna, Nebraska I October 1993 192,000 92
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 September 1994 148,000 96
Grove City Factory Shops(6)--Grove City, Pennsylvania I August 1994 235,000 100
II November 1994 95,000 100
III November 1995 85,000 99
IV November 1996 118,000 99
------- ---
533,000 100
</TABLE>
<PAGE>
<TABLE>
TABLE 1 -- Portfolio of Properties as of September 30, 1997 (continued)
<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 91%
II November 1995 90,000 67
------- ---
282,000 84
Florida Keys Factory Shops--Florida City, Florida I September 1994 208,000 94
Indiana Factory Shops--Daleville, Indiana I November 1994 208,000 90
IIA November 1996 26,000 35
------- ---
234,000 84
Kansas City Factory Outlets(4)--Odessa, Missouri I July 1995 191,000 98
II November 1996 105,000 67
------- ---
296,000 87
Magnolia Bluff Factory Shops(7)--Darien, Georgia I July 1995 238,000 90
IIA November 1995 49,000 99
IIB July 1996 20,000 100
------- ---
307,000 92
Arizona Factory Shops(8)--Phoenix, Arizona I September 1995 217,000 98
II September 1996 109,000 81
------- ---
326,000 93
Gulfport Factory Shops(9)--Gulfport, Mississippi I November 1995 228,000 100
IIA November 1996 40,000 82
------- ---
268,000 97
Buckeye Factory Shops(10)--Burbank, Ohio I November 1996 205,000 95
Carolina Factory Shops--Gaffney, South Carolina I November 1996 235,000 93
------- ---
Total Factory Outlet Center Portfolio(11) 6,313,000 94%
========= ===
=============================================================================================================================
<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. An unrelated third
party 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 September 30, 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) On September 2, 1997, the Company purchased its joint venture partner's 25%
partnership interest in Buckeye Factory Shops Limited Partnership and now
owns 100% of this factory outlet center.
(11) The Company also owns three community centers containing 424,000 square
feet of GLA in the aggregate that were 92% leased as of September 30, 1997.
(12) Fully executed leases as of September 30, 1997 as a percent of square feet
of GLA.
</FN>
</TABLE>
<PAGE>
Comparison of the three months ended September 30, 1997 to the three months
ended September 30, 1996
Summary
For the three months ended September 30, 1997, the Company reported a net loss
of $510 on total revenues of $31,549. For the three months ended September 30,
1997, the net loss applicable to common shareholders was $3,604 or $0.19 per
common share. For the three months ended September 30, 1996, the Company
reported net income of $2,365 on total revenues of $21,831. For the three months
ended September 30, 1996, the net loss applicable to common shareholders was
$635 or $0.05 per common share.
Revenues
Total revenues were $31,549 for the three months ended September 30, 1997
compared to $21,831 for the three months ended September 30, 1996, an increase
of $9,718, or 44.5%. Base rents increased $6,356, or 49.3%, in the third quarter
of 1997 compared to the third quarter of 1996. Straight-line rents (included in
base rents) were $140 and $101 for the three months ended September 30, 1997 and
1996, respectively. These increases were primarily due to the Portfolio
Expansion. Percentage rents, which represent rents based on a percentage of
sales volume above a specified threshold, increased $542, or 116.3%, during the
three months ended September 30, 1997 compared to the same period in 1996. This
increase was attributable to higher reported merchant sales in the 1997 period
and the Portfolio Expansion. Tenant reimbursements, which represent the
contractual recovery from tenants of certain operating expenses, increased by
$2,692, or 44.6%, during the three months ended September 30, 1997 over the same
period in 1996. This increase was primarily due to the Portfolio Expansion.
Income (loss) from investment partnerships decreased by $302, or 120.8%, for the
three months ended September 30, 1997 to $(52) from $250 for the same period in
1996. This decrease reflects the Company's purchase of its joint venture
partner's first mortgage and 50.0% ownership interest in Grove City Factory
Shops Partnership on November 1, 1996. As a result of this 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 in
Grove City Factory Shops under the equity method of accounting. The decrease
also reflects the Company's purchase of its joint venture partner's first
mortgage and 25.0% ownership interest in Buckeye Factory Shops Limited
Partnership ("Buckeye") on September 2, 1997. As a result of this acquisition,
the Company owns 100.0% of this factory outlet center and, therefore, commencing
September 2, 1997, its operations are included in the consolidated results of
the Company. Prior to September 2, 1997, the Company accounted for its interest
in Buckeye under the equity method of accounting. The decrease in income (loss)
from investment partnerships was also due to a decrease of $39 in the Company's
share of earnings in its joint ventures.
Interest and other income increased by $430, or 19.6%, to $2,619 during the
three months ended September 30, 1997 as compared to $2,189 for the three months
ended September 30, 1996. The increase reflects increases in municipal
assistance income of $706, interest income of $676, temporary tenant income of
$108, partially offset by reduced property development and construction
management fees and leasing commissions of $892, and lease buyout income of
$168. The increase in interest income was primarily due to interest earnings on
the Company's expansion loan escrow account included in restricted cash.
<PAGE>
Expenses
Property operating expenses increased by $1,719, or 33.6%, to $6,840 for the
three months ended September 30, 1997 compared to $5,121 for the same period in
1996. Real estate taxes increased by $1,080, or 78.9%, to $2,449 for the three
months ended September 30, 1997 from $1,369 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 $2,065, or 45.1%, to $6,644 for the three months ended
September 30, 1997, compared to $4,579 for 1996. This increase results from the
depreciation and amortization of assets comprising the Portfolio Expansion.
TABLE 2 -- Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
Three months ended
September 30
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Buildings and improvements $3,423 $2,289
Land improvements 715 502
Tenant improvements 1,872 1,294
Furniture and fixtures 214 171
Leasing commissions(1) 420 323
------ ------
Total $6,644 $4,579
====== ======
================================================================================
Note:
(1) In accordance with generally accepted accounting principles ("GAAP"),
leasing commissions are classified as intangible assets. Therefore, the
amortization of leasing commissions is reported as a component of
depreciation and amortization expense.
TABLE 3 -- Components of Interest Expense
The components of interest expense are summarized as follows:
- --------------------------------------------------------------------------------
Three months ended
September 30
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Interest incurred $9,288 $5,257
Interest capitalized (1,123) (857)
Interest earned on interest rate protection contracts (23) (40)
Amortization of deferred financing costs 589 316
Amortization of interest rate protection contracts 348 463
------ ------
Total $9,079 $5,139
====== ======
================================================================================
As shown in TABLE 3, interest expense for the three months ended September 30,
1997 increased by $3,940, or 76.7%, to $9,079 compared to $5,139 for the same
period in 1996. This increase reflects higher interest incurred of $4,031, an
increase in amortization of deferred financing costs of $273, an increase in the
amount of interest capitalized in connection with development projects of $266,
an decrease in the amortization of interest rate protection contracts of $115,
and a reduction in interest earned on interest rate protection contracts of $17.
<PAGE>
The increase in interest incurred is primarily attributable to an increase of
approximately $206,749 in the Company's average debt outstanding during the
three months ended September 30, 1997 compared to the same period in 1996. The
weighted average interest rates were 7.28% and 6.98% for the 1997 and 1996
periods, respectively.
Other charges increased by $507, or 106.7%, to $982. The increase is primarily
attributable to higher marketing costs of $199, a higher provision for
uncollectible accounts receivable of $117, a higher provision for potentially
abandoned projects of $100, increased coupon program expenses of $51, and
increased other charges of $40.
In connection with re-leasing space to new merchants, the Company incurred $100
and $54 in capital expenditures during the three months ended September 30, 1997
and 1996, respectively.
Comparison of the nine months ended September 30, 1997 to the nine months ended
September 30, 1996
Summary
For the nine months ended September 30, 1997, the Company reported net income of
$1,303 on total revenues of $92,924. For the nine months ended September 30,
1997, the net loss applicable to common shareholders was $7,977 or $0.48 per
common share.
For the nine months ended September 30, 1996, the Company reported net income of
$6,925 on total revenues of $63,112. These results include a second quarter
nonrecurring charge (the "Nonrecurring Charge") and an extraordinary loss of
$6,131 and $1,017 (net of minority interests in the amount of $3,263),
respectively, related to a binding loan commitment that the Company obtained on
September 5, 1996. For the nine months ended September 30, 1996, the net loss
applicable to common shareholders was $4,311 or $0.67 per common share.
Revenues
Total revenues were $92,924 for the nine months ended September 30, 1997 as
compared to $63,112 for the nine months ended September 30, 1996, an increase of
$29,812, or 47.2%. Base rents increased $17,898, or 46.6%, during the nine
months ended September 30, 1997 compared to the same period in 1996.
Straight-line rents (included in base rents) were $392 and $338 for the nine
months ended September 30, 1997 and 1996, respectively. These increases were
primarily due to the Portfolio Expansion.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, increased $1,121, or 87.8%, during the nine months
ended September 30, 1997 compared to the same period in 1996. This increase was
attributable to higher reported merchant sales in the 1997 period and the
Portfolio Expansion. For the nine months ended September 30, 1997, same-space
sales in centers owned by the Company increased 4.7% compared to the same period
in 1996. "Same-space sales" is defined as the weighted average sales per square
foot reported by merchants for space open since January 1, 1996. The Company's
same-space sales for the year ended December 31, 1996 were $232.45 per square
foot. For the nine months ended September 30, 1997, same-store sales increased
by 3.1% compared to the same period in 1996. "Same-store sales" is defined as
the weighted average sales per square foot reported by merchants for stores
opened since January 1, 1996.
Tenant reimbursements, which represent the contractual recovery from tenants of
certain operating expenses, increased by $8,576, or 47.5%, during the nine
months ended September 30, 1997 over the same period in 1996. This increase was
primarily due to the Portfolio Expansion.
<PAGE>
Income (loss) from investment partnerships decreased by $971, or 113.0%, for the
nine months ended September 30, 1997 to $(112) from $859 for the same period in
1996. This decrease reflects the Company's purchase of its joint venture
partner's first mortgage and 50.0% ownership 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 in
Grove City Factory Shops under the equity method of accounting. The decrease
also reflects the Company's purchase of its joint venture partner's first
mortgage and 25.0% ownership interest in Buckeye on September 2, 1997. As a
result of this acquisition, the Company owns 100.0% of this factory outlet
center and, therefore, commencing September 2, 1997, its operations are included
in the consolidated results of the Company. Prior to September 2, 1997, the
Company accounted for its interest in Buckeye under the equity method of
accounting. The decrease in income (loss) from investment partnerships was also
due to a decrease of $223 in the Company's share of earnings in its joint
ventures.
Interest and other income increased by $3,188, or 71.1%, to $7,674 during the
nine months ended September 30, 1997 as compared to $4,486 for the nine months
ended September 30, 1996. The increase reflects higher interest income of
$2,256, gain on outlot sales of $598, temporary tenant income of $285, municipal
assistance income of $947, customer service income of $88, and ancillary income
of $105. These increases were offset by reduced property development fees and
construction management fees, including lease commissions, of $967, and property
management fees of $124. The increase in interest income was primarily due to
interest earnings on the Company's expansion loan escrow included in restricted
cash.
Expenses
Property operating expenses increased by $5,959, or 41.0%, to $20,495 for the
nine months ended September 30, 1997 compared to $14,536 for the same period in
1996. Real estate taxes increased by $3,384, or 87.8%, to $7,238 for the nine
months ended September 30, 1997 from $3,854 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 4, depreciation and amortization
expense increased by $5,937, or 43.7%, to $19,515 for the nine months ended
September 30, 1997 compared to $13,578 for 1996. This increase results from the
depreciation and amortization of assets comprising the Portfolio Expansion.
TABLE 4 -- Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
Nine months ended
September 30
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Buildings and improvements $10,131 $6,744
Land improvements 2,069 1,455
Tenant improvements 5,348 3,648
Furniture and fixtures 616 486
Leasing commissions(1) 1,351 1,245
------- ------
Total $19,515 $13,578
======= =======
================================================================================
Note:
(1) In accordance with GAAP, leasing commissions are classified as intangible
assets. Therefore, the amortization of leasing commissions is reported as a
component of depreciation and amortization expense.
<PAGE>
TABLE 5 -- Components of Interest Expense
The components of interest expense are summarized as follows:
- --------------------------------------------------------------------------------
Nine months ended
September 30
---------------------------
1997 1996
- --------------------------------------------------------------------------------
Interest incurred $28,118 $16,651
Interest capitalized (2,942) (2,175)
Interest earned on interest rate protection contracts (86) (162)
Amortization of deferred financing costs 1,818 1,928
Amortization of interest rate protection contracts 1,043 1,101
------- -------
Total $27,951 $17,343
======= =======
================================================================================
As shown in TABLE 5, interest expense for the nine months ended September 30,
1997 increased by $10,608, or 61.2%, to $27,951 compared to $17,343 for the same
period in 1996. This increase reflects higher interest incurred of $11,467 and a
reduction in interest earned on interest rate protection contracts of $76,
partially offset by a decrease in amortization of deferred financing costs of
$110, a decrease in amortization of interest rate protection contracts of $58,
and an increase in the amount of interest capitalized in connection with
development projects of $767.
The increase in interest incurred is primarily attributable to an increase of
approximately $207,046 in the Company's average debt outstanding during the nine
months ended September 30, 1997 compared to the same period in 1996. The
weighted average interest rates were 7.24% and 7.12% for the 1997 and 1996
periods, respectively.
Other charges decreased by $5,212, or 67.8%, to $2,475. This decrease is
primarily attributable to the Nonrecurring Charge of $6,131 during the 1996
period partially offset by, increased marketing costs of $410, a higher
provision for uncollectable accounts receivable of $312, a higher provision for
potentially abandoned projects of $100, and increased other miscellaneous
charges of $97.
In connection with re-leasing space to new merchants, the Company incurred $241
and $194 in capital expenditures during the nine months ended September 30, 1997
and 1996, respectively.
Liquidity and Capital Resources
Sources and Uses of Cash -- General
For the nine months ended September 30, 1997, net cash provided by operating
activities was $34,558. Net cash used in investing activities was $106,736 for
the nine months ended September 30, 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 related to the purchase of the Company's joint venture
partner's 25.0% ownership interest in Buckeye, and costs for pre-development
activities associated with future development. Net cash provided by financing
activities was $92,031 for the nine months ended September 30, 1997. The sources
of these funds were primarily the proceeds from new borrowings and the Company's
public and private offerings of certain equity securities of $91,767 and
$193,774, respectively. Such proceeds were offset by principal repayments on
notes payable of $162,770, distributions to minority interests (including
distributions to the limited partner unit holders) of $7,803, and preferred and
common stock distributions of $22,460.
<PAGE>
Sources and Uses of Cash -- 1997 Equity Transactions
On January 10, 1997, the Company filed a Form S-3 Registration Statement (the
"January 1997 Shelf Registration") with the Securities and Exchange Commission
(the "SEC") to register $100,000 of the Company's equity securities. On February
20, 1997, the Company completed a public offering (the "February 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 February 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 February 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 June 17, 1997, the Company filed a Form S-3 Registration Statement (the "June
1997 Shelf Registration") with the SEC to register $300,000 of the Company's
equity securities, including $66,122 of the Company's equity securities that
remained available under the January 1997 Shelf Registration.
In September 1997, the Company completed a public offering of 11,500,000 shares
(including 1,500,000 shares related to exercise of underwriters' overallotment
option) of its Common Stock at $14.00 per share (the "September Offering"). In
addition, on September 8, 1997, the Company issued 727,273 Series C Preferred
Units at $13.75 per unit pursuant to the initial draw of the Private Placement.
See Note 4 - "Private Placement" of the Notes to the Consolidated Financial
Statements for additional information. As a result of the September Offering and
the initial draw on the Private Placement (collectively, the "September Capital
Transactions"), the Company received net proceeds of $162,750 after commissions
and underwriting discounts. A portion of the net proceeds from the September
Capital Transactions were used (i) to repay certain outstanding corporate
indebtedness aggregating $113,410 and (ii) to acquire the 25.0% ownership
interest of Salomon Brothers Realty Corp. ("SBRC") in Buckeye for $23,148
(including $22,642 of mortgage indebtedness relating to such property). The
remaining net proceeds from the September Capital Transactions of $26,192 will
be used (i) to fund development and construction activities, (ii) to fund
property acquisitions, and (iii) for general corporate purposes.
As a result of the September Offering, as of September 30, 1997, the Company had
$139,000 of availability under the June 1997 Shelf Registration. From time to
time, the Company will consider issuing additional equity securities under the
June 1997 Shelf Registration for the development or acquisition of additional
properties, the expansion and improvement of existing properties, repayment of
indebtedness, and for general corporate purposes.
Sources and Uses of Cash -- Property Acquisitions and Investment in Partnerships
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 1997 include the
results of these acquisitions effective with the closing on February 13, 1997.
On September 2, 1997, the Company acquired the 25.0% ownership interest in
Buckeye from its joint venture partner, SBRC, for $23,148 (including $22,642 of
mortgage indebtedness relating to such property), thereby increasing its
ownership percentage in such property to 100.0%. Prior to September 2, 1997, the
Company accounted for its 75.0% investment in Buckeye using the equity method of
accounting. Commencing September 2, 1997, the operating results of Buckeye are
consolidated. The Company financed the acquisition with proceeds from the
September Offering. See
<PAGE>
Note 3 - "Capital Stock Offerings" of the Notes to the Consolidated Financial
Statements for additional information.
On October 29, 1997, the Company acquired Tidewater Outlet Mall, Manufacturer's
Outlet Mall, Kittery Outlet Village (the "Kittery Properties"), and Latham
Factory Outlet Center (the "Latham Property") from an unrelated third party for
an aggregate purchase price of $26,000. The Company financed the purchase with
proceeds from the September Offering and the Company's unsecured line of credit.
The Kittery Properties are located in Kittery, Maine and serve the Boston,
Massachusetts and Portland, Maine markets. The Kittery Properties contain
approximately 121,000 square feet of GLA, and were 100.0% occupied as of October
31, 1997. The Latham Property is located in Latham, New York, north of Albany,
New York and south of Saratoga Springs, New York. The Latham Property contains
approximately 44,000 square feet of GLA and was 100.0% occupied as of October
31, 1997.
During 1997 and 1998, the Company will continue to explore acquisitions of
factory outlet centers in the United States. 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 224,000 square feet of GLA
during 1997 in connection with planned expansions of existing factory outlet
centers. At September 30, 1997, the remaining budgeted capital expenditures for
these expansions aggregated approximately $6,614, 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 $3,815.
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 borrowings under various loan facilities including cash
escrow accounts established for future developments and the proceeds from the
September Capital Transactions. As of September 30, 1997, unused commitments
were $71,290.
The Company plans to open new factory outlet centers and expansions in 1998 that
are expected to contain approximately 700,000 square feet of GLA, in the
aggregate, and have a total expected development cost of approximately $93,227.
The Company expects to fund the development cost of its new factory outlet
centers and expansions from (i) certain line of credit facilities, (ii) retained
cash flow from operations, (iii) construction loans, (iv) proceeds from the
September Capital Transactions, and (v) the sale of equity securities 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. 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.
Debt Repayments and Preferred Stock Distributions and Dividends
The Company's aggregate indebtedness was $428,520 and $499,523 at September 30,
1997 and December 31, 1996, respectively. At September 30, 1997, such
indebtedness had a weighted average maturity of 7.2 years and bore interest at a
weighted average interest rate of 7.0% per annum. At December 31, 1996, such
indebtedness had a weighted average maturity of 6.7 years and bore interest at
<PAGE>
a weighted average interest rate of 7.10% per annum. At September 30, 1997,
$43,547, or 10.2%, of such indebtedness bore interest at fixed rates and
$384,973, or 89.8%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable-rates. Of the variable-rate indebtedness outstanding
at September 30, 1997, approximately $356,723 is scheduled to convert to a fixed
rate of 7.782% in November 1998 for the remaining five years of the note.
At September 30, 1997, the Company held interest rate protection contracts on
$28,250 of floating rate tax-exempt indebtedness and $356,723 of other floating
rate indebtedness (or approximately 100.0% of its total floating rate
indebtedness) and these contracts expire in 1999 and 1998, respectively. In
addition, the Company held additional interest rate protection contracts on
$43,900 of the $356,723 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 September 30, 1997
(defined as total debt divided by the sum of: (i) the aggregate market value of
the outstanding shares of Common Stock, assuming the full exchange of Common
Units and Series C Preferred Units into Common Stock; (ii) the aggregate market
value of the outstanding shares of Convertible Preferred Stock; (iii) the
aggregate liquidation preference of the Series A Senior Cumulative Preferred
Stock ("Senior Preferred Stock") at $25.00 per share; and (iv) the total debt of
the Company) was 38.0%.
The Company is obligated to repay $899 of mortgage indebtedness during the
remainder of 1997 and $5,206 in 1998. Annualized cumulative dividends on the
Company's Senior Preferred Stock, Convertible Preferred Stock and Series C
Preferred Units outstanding as of September 30, 1997 are $6,038, $6,336, and
$858, 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 the potential sale of
equity securities 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 insurance, thereby reducing the
Company's exposure to increased costs and operating expenses resulting from
inflation. At September 30, 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 upscale fashion and national
brand-name manufacturers and retailers 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. In March
1995, the National Association of Real Estate Investment Trusts established
guidelines clarifying the definition of FFO. FFO is defined as net income (loss)
(determined in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization after
adjustments for unconsolidated partnerships and joint ventures.
The 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. The Company's FFO is
<PAGE>
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 7 provides a reconciliation of income before allocations to minority
interests and preferred shareholders to FFO for the three and nine months ended
September 30, 1997 and 1996.
FFO before allocations to preferred shareholders and minority interests
increased $1,725, or 18.4%, to $11,104 for the three months ended September 30,
1997 compared to $9,379 for the three months ended September 30, 1996. FFO
before allocations to preferred shareholders and minority interests was $31,942
and $17,945 for the nine months ended September 30, 1997 and 1996, respectively.
The 1996 results include the Nonrecurring Charge of $6,131. Excluding the
Nonrecurring Charge, FFO before allocations to preferred shareholders and
minority interests increased $7,866, or 32.7%, to $31,942 for the nine months
ended September 30, 1997 compared to $24,076 for the nine months ended September
30, 1996. The increases in the 1997 periods compared to the 1996 periods are
primarily attributable to the Portfolio Expansion.
<TABLE>
TABLE 7 -- Funds from Operations
<CAPTION>
Three months ended Nine months ended
September 30 September 30
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before minority interests and extraordinary item $ 4,091 $ 4,175 $ 11,167 $ 3,282
FFO adjustments:
Real estate depreciation and amortization 6,558 4,410 19,305 13,093
Unconsolidated joint venture adjustments 455 794 1,470 1,570
-------- -------- --------- ---------
FFO before allocations to minority
interests and preferred shareholders $ 11,104 $ 9,379 $ 31,942 $ 17,945
======== ======== ========= =========
===================================================================================================================================
</TABLE>
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On August 18, 1997, the Company entered into a
purchase agreement with an institutional investor
providing for the issuance of a new series of
cumulative convertible non-voting preferred
securities at $13.75 per unit, or an aggregate $60.0
million in cash. Net proceeds of $58.8 million, after
commissions, will be used to fund the Company's
continued acquisition and development programs. An
initial $10.0 million of proceeds was drawn on
September 8, 1997 and the Company issued 727,273
Series C Preferred Units. The balance of the proceeds
may be drawn through December 6, 1997 with the timing
and amount of draws determined, subject to certain
limitations, at the discretion of the Company.
The preferred securities will pay dividends
equivalent to the amount being paid on the Company's
shares of common stock, with an annual minimum equal
to $1.18 per unit. The preferred securities may be
converted into shares of common stock on a one-to-one
basis commencing August 8, 1998 (or earlier under
certain conditions).
In addition, the Company, subject to certain
conditions, has agreed to waive the ownership
limitations otherwise applicable to the common stock
to permit the investor to own, at any one time, the
shares of common stock issuable upon conversion of
the preferred securities. The Company has the right
to call the preferred securities after ten years.
Subject to certain conditions, the preferred
securities may take the form of shares of preferred
stock in the Company or preferred units of
partnership interest in Prime Retail, L.P. that will
be exchangeable for shares of preferred stock or
common stock on a one-to-one basis.
Pursuant to the purchase agreement, as long as the
investor owns more than 9.9 % of the outstanding
shares of common stock of the Company, the investor
will be subject to certain standstill restrictions,
including restrictions relating to the acquisition of
additional shares and various other matters. Pursuant
to a registration rights agreement, the Company has
granted the investor certain registration rights to
facilitate resale of its shares under certain
conditions.
The above-described transaction was effected in
reliance upon an exemption under Section 4(2) of the
Securities Act of 1933, as amended.
<PAGE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits or Reports on Form 8-K
(a) The following exhibits are included in this Form 10-Q:
Exhibit 12 Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends and
Distributions
Exhibit 27 Financial Data Schedule
(EDGAR filing)
(b) Reports on Form 8-K:
On August 8, 1997, the Company filed a Current Report
on Form 8-K, dated August 8, 1997, reporting (i) the
acquisition of Oak Creek Factory Outlets, Bend
Factory Outlets and The Factory Outlets at Posts
Falls (the "Benderson Acquired Properties") for an
aggregate purchase price of $37.3 million.
(previously reported on Form 8-K filed with the
Securities and Exchange Commission on February 13,
1997) and (ii) its intention to purchase the 25.0%
ownership interest of its joint venture partner in
Buckeye Factory Shops Limited Partnership (the
"Buckeye Acquisitions") for $23.1 million (including
the repayment of $22.6 million of mortgage
indebtedness relating to such property). 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.
On August 11, 1997, the Company filed a Current
Report on Form 8-K, dated August 11, 1997, announcing
its $60.0 million private placement of Series C
Preferred Securities.
On August 27, 1997, the Company filed a Current
Report on Form 8-K, dated August 27, 1997, which
included certain documents relating to the Company's
Registration Statement on Form S-3 (File No.
333-29437). No financial statements were included.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME RETAIL, INC.
Registrant
Date: November 12, 1997 /s/ Abraham Rosenthal
------------------ ----------------------
Abraham Rosenthal
Chief Executive Officer
Date: November 12, 1997 /s/ Robert P. Mulreaney
------------------ -----------------------
Robert P. Mulreaney
Executive Vice President,
Chief Financial Officer
and Treasurer
PRIME RETAIL, INC.
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS
(Amounts in thousands, except for ratio information)
Nine Months Ended
September30
------------------------------------
1997 1996
-------------- --------------
Income before minority interest $ 11,167 $ 3,282
Interest incurred 30,155 18,690
Amortization of capitalized interest 235 208
Amortization of debt issuance costs 1,818 1,971
Amortization of interest rate protection
contracts 1,043 1,101
Less interest earned on interest rate
protection contracts (86) (162)
Less capitalized interest (3,176) (2,256)
-------------- --------------
Earnings 41,156 22,834
-------------- --------------
Interest incurred 30,155 18,690
Amortization of debt issuance costs 1,818 1,971
Amortization of interest rate protection
contracts 1,043 1,101
Preferred stock distributions and dividends 9,280 11,236
-------------- --------------
Combined Fixed Charges and
Preferred Stock Distributions
and Dividends 42,296 32,998
-------------- --------------
Excess of Combined Fixed Charges
and Preferred Stock Distributions
and Dividends over Earnings $ (1,140) $ (10,164)
============== ==============
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,777
<SECURITIES> 0
<RECEIVABLES> 8,547
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97,068
<PP&E> 671,509
<DEPRECIATION> 75,147
<TOTAL-ASSETS> 768,577
<CURRENT-LIABILITIES> 28,231
<BONDS> 428,520
0
53
<COMMON> 273
<OTHER-SE> 301,700
<TOTAL-LIABILITY-AND-EQUITY> 768,577
<SALES> 0
<TOTAL-REVENUES> 92,924
<CGS> 0
<TOTAL-COSTS> 81,757
<OTHER-EXPENSES> 2,475
<LOSS-PROVISION> 748
<INTEREST-EXPENSE> 27,951
<INCOME-PRETAX> 3,364
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,364
<DISCONTINUED> 0
<EXTRAORDINARY> (2,061)
<CHANGES> 0
<NET-INCOME> 1,303
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> 0
</TABLE>
