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 June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the Transition Period From _______ to _______
Commission file number 0-23616
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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
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(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 August 12, 1998, the issuer had outstanding 42,142,880 shares of Common
Stock, $.01 par value per share
<PAGE>
Prime Retail, Inc.
Form 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 1
Consolidated Statements of Operations for the three and
six months ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 3
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits or Reports on Form 8-K 26
Signatures 27
<PAGE>
<TABLE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Prime Retail, Inc.
Consolidated Balance Sheets
(in thousands, except share information)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investment in rental property:
Land $ 199,357 $ 66,277
Buildings and improvements 1,660,909 779,191
Property under development 65,505 53,139
Furniture and equipment 7,318 6,175
------------- -------------
1,933,089 904,782
Accumulated depreciation (93,797) (82,033)
------------- -------------
1,839,292 822,749
Cash and cash equivalents 18,737 6,373
Restricted cash 38,690 41,736
Accounts receivable, net 14,480 9,745
Deferred charges, net 13,991 16,206
Due from affiliates, net 460 1,052
Investment in partnerships 4,674 3,278
Other assets 3,538 3,044
------------ -------------
Total assets $ 1,933,862 $ 904,183
============ =============
Liabilities and shareholders'equity
Bonds payable $ 32,900 $ 32,900
Notes payable 1,119,233 482,365
Accrued interest 5,559 3,767
Real estate taxes payable 11,304 4,639
Construction costs payable 5,631 5,849
Accounts payable and other liabilities 67,910 20,210
----------- --------------
Total liabilities 1,242,537 549,730
Minority interests
54,412 9,925
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 $195,703
and $74,545, respectively), 7,828,125
and 2,981,000 shares issued and
outstanding, respectively 78 30
Series C Cumulative Participating
Convertible redeemable Preferred
Stock, $.01 par value (liquidation
preference $50,000), 3,636,363
shares issued and outstanding 36 36
Shares of common stock, 150,000,000
shares authorized:
Common stock, $0.01 par value,
41,992,880 and 27,294,951 shares
issued and outstanding, respectively 420 273
Additional paid-in capital 734,442 398,188
Distributions in excess of net income (98,086) (54,022)
------------ --------------
Total shareholders' equity 636,913 344,528
------------ --------------
Total liabilities and shareholders' equity $ 1,933,862 $ 904,183
=========== ==============
====================================================================================================================================
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 Six months
ended June 30 ended June 30
----------------------- ----------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Base rents $ 28,047 $ 19,006 $ 51,130 $ 37,072
Percentage rents 1,174 721 2,039 1,390
Tenant reimbursements 13,234 8,969 23,977 17,918
Interest and other 2,309 2,517 5,126 4,995
------- ------- ------- -------
Total revenues 44,764 31,213 82,272 61,375
Expenses
Property operating 10,272 7,022 18,625 13,655
Real estate taxes 3,364 2,399 6,220 4,789
Depreciation and amortization 9,935 6,543 17,758 12,871
Corporate general and administrative 1,756 1,269 3,448 2,619
Interest 10,939 9,703 19,313 18,872
Other charges 1,339 694 2,298 1,493
------- ------- ------- -------
Total expenses 37,605 27,630 67,662 54,299
------- ------- ------- -------
Income before loss on sale of
real estate and allocation to
minority interest 7,159 3,583 14,610 7,076
Loss on sale of real estate (15,461) - (15,461) -
------- ------- ------- -------
Income (loss) before allocation to minority interest (8,302) 3,583 (851) 7,076
(Income) loss allocated to minority interests 3,219 (2,672) (2,242) (5,263)
------- ------- ------- -------
Net income (loss) (5,083) 911 (3,093) 1,813
Income allocated to preferred shareholders 6,741 3,093 10,907 6,186
------- ------- ------- -------
Net loss applicable to common shares $ (11,824) $(2,182) $ (14,000) $ (4,373)
======= ======= ======= =======
Net loss per common shares - basic and diluted $ (0.40) $ (0.14) $ (0.49) $ (0.29)
======= ======= ======= =======
Weighted average common shares outstanding 29,859 15,795 28,584 15,073
======= ======= ======= =======
Distributions declared per common share $ 0.795 $ 0.295 $ 1.090 $ 0.590
======= ======= ======= =======
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Prime Retail, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Six months ended
June 30
----------------
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ (3,093) $ 1,813
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Income allocated to minority interests 2,242 5,263
Loss on sale of real estate 15,461 -
Depreciation 17,120 11,940
Amortization of deferred financing costs and
interest rate protection contracts 1,329 1,925
Amortization of leasing commissions 638 931
Provision for uncollectible accounts receivable 530 475
Changes in operating assets and liabilities:
Increase in accounts receivable (6,032) (1,803)
Decrease in due from affiliates, net 698 236
(Increase) decrease in other assets 3,090 (3,537)
Decrease in accrued interest 570 (56)
Decrease in accounts payable and other liabilities (14,382) (1,410)
--------- --------
Net cash provided by operating activities 18,171 15,777
Investing Activities
Proceeds from sale of Prime Transferred Properties 26,015 -
Acquisition of Horizon, net of cash acquired
and spin-off of HGP (35,124) -
Purchase of buildings and improvements (23,820) (7,744)
Increase in property under development (45,448) (19,157)
Acquisition of outlet centers - (37,658)
--------- --------
Net cash used in investing activities (78,377) (64,559)
Financing Activities
Net proceeds from issuance of common and preferred stock - 31,754
Proceeds from notes payable 368,128 66,633
Principal repayments on notes payable (241,512) (31,717)
Deferred financing fees (2,730) (857)
Distributions and dividends paid (40,970) (14,707)
Distributions to minority interests (10,346) (5,263)
--------- --------
Net cash provided by financing activities 72,570 45,843
--------- --------
Increase (decrease) in cash and cash equivalents 12,364 (2,939)
Cash and cash equivalents at beginning of period 6,373 3,924
--------- --------
Cash and cash equivalents at end of period $ 18,737 $ 985
========= ========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Prime Retail, Inc.
Consolidated Statements of Cash Flows (continued)
(in thousands)
- --------------------------------------------------------------------------------
Six months
ended June 30
1998
-------------
Supplemental Disclosure of Noncash Investing and Financing Activities:
Conversion of Common units to common stock $ 3,431
===========
The following assets and liabilities were acquired and sold in connection with
the consummation of the Merger Transactions on June 15, 1998:
Acquisition of Horizon, net of spin-off of HGP:
Fair value of assets acquired $1,007,329
Cash paid, net of cash and cash equivalents acquired (35,124)
Common stock issued (214,282
Series B convertible preferred stock issued (118,735)
Common units issued (56,023)
-----------
Fair value of liabilities assumed $ 583,165
===========
Disposition of Prime Transferred Properties:
Book value of assets disposed $ 42,201
Cash received (26,015)
Loss on sale (15,461)
-----------
Liabilities disposed $ 725
===========
================================================================================
See accompanying notes to financial statements.
<PAGE>
Prime Retail, Inc.
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 - Interim Financial Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments consisting only of recurring accruals considered
necessary for a fair presentation have been included. Operating results for
such interim periods are not necessarily indicative of the results which may be
expected for a full fiscal year. For further information, refer to the
consolidated financial statements and footnotes included in Prime Retail's (the
"Company") annual report on Form 10-K for the year ended December 31, 1997.
Unless the context requires otherwise, all references to the 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 - Earnings Per Share
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" which specifies the method of
computation, presentation, and disclosure for earnings per share ("EPS"). SFAS
No. 128 requires the presentation of basic EPS and diluted EPS. Basic EPS is
calculated by dividing net income available to common shareholders by the
weighted average number of shares outstanding during the period. Diluted EPS
includes the potentially dilutive effect, if any, which would occur if
outstanding (i) options to purchase Common Stock were exercised, (ii) Common
Units were converted into shares of Common Stock, (iii) shares of Series C
Preferred Stock and Units were converted into shares of Common Stock, and (iv)
Series B Convertible Preferred Stock were converted into shares of Common
Stock. For all periods presented, the effect of these exercises and conversions
was anti-dilutive and, therefore, diluted EPS is equivalent to basic EPS.
<PAGE>
Note 3 - Minority Interests
In prior periods, cash distributions and losses allocated to minority interests
reduced the minority interests balance to zero. After reducing the minority
interests balance to zero, additional distributions and losses of $4,342 and
$4,674 incurred during the six months ended June 30, 1998 and 1997,
respectively, 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
June 30, 1998 was $16,538.
As of June 30, 1998 and 1997, loans to certain limited partners, who also are
executive officers of the Company, aggregating $2,375 and $4,750, respectively,
were reported as a reduction in minority interests in the Consolidated Balance
Sheets.
Note 4 - Business Combination
On June 15, 1998, the merger and other transactions (collectively, the "Merger
Transactions") as set forth in the agreement and plan of merger (the "Merger
Agreement") between the Company and Horizon Group, Inc. ("Horizon") were
consummated for an aggregate consideration of approximately $1,083,100,
including liabilities assumed and related transaction costs.
Pursuant to the terms of the Merger Agreement, the Company acquired (i) all of
the outstanding shares of common stock of Horizon at an exchange ratio of 0.20
of a share of the Company's Series B Convertible Preferred Stock and 0.597 of a
share of the Company's Common Stock for each share of common stock of Horizon,
and (ii) all of the outstanding limited partnership units of Horizon/Glen
Outlet Centers Limited Partnership ("Horizon Partnership") at an exchange ratio
of 0.9193 of a unit of the Operating Partnership's Common Units. A total of
4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329 shares
of Common Stock were issued by the Company to the shareholders of Horizon and
3,782,121 Common Units were issued by the Operating Partnership to the limited
partners of Horizon Partnership.
Immediately prior to the merger, Horizon Partnership contributed 13 of its 35
centers to Horizon Group Properties, L.P., of which Horizon Group Properties,
Inc. ("HGP"), a subsidiary of Horizon, is the sole general partner. HGP was
spun-off from the Company on June 15, 1998. The remaining 22 outlet centers of
Horizon were integrated into the Company's existing portfolio. On June 19, 1998,
all of the common equity of HGP was distributed to the convertible preferred and
common shareholders and unitholders of the Company and its Operating Partnership
and the shareholders and limited partners of Horizon and Horizon Partnership
based on their ownership in the Company immediately following consummation of
the merger. One share of common stock of HGP was distributed for every 20 shares
of Common Stock and Series C Convertible Preferred Stock of the Company and for
every 20 Common Units of the Operating Partnership. Additionally, approximately
1.196 shares of the common stock of HGP were distributed for every 20 shares of
Series B Convertible Preferred Stock of the Company.
In connection with the Merger Transactions, the Company sold Indiana Factory
Shops and Nebraska Crossing Factory Shops (collectively, the "Prime Transferred
Properties") to HGP for an aggregate consideration of $26,015, resulting in a
loss of $15,461. Proceeds from the sale of the Prime Transferred Properties
were used to repay indebtedness associated with the Horizon properties.
Concurrent with the closing of the merger, a special cash distribution was made
aggregating $21,871 consisting of $0.50 per share/unit to holders of Common
Stock, Series C Preferred Securities and Common Units and $0.60 per share to
holders of Series B Convertible Preferred Stock. Shareholders of Horizon and
limited partners of Horizon Partnership did not participate in these
distributions.
<PAGE>
The merger has been accounted for using the purchase method of accounting and
the purchase price of $1,083,100 was allocated to the assets acquired and the
liabilities assumed based on estimates of their respective fair values. Certain
assumptions were made which management of the Company believes are reasonable.
The Company expects to finalize the purchase price allocation before the end of
1998. The final allocation is not expected to differ materially from the
allocation made at June 30, 1998.
The operating results of those properties acquired have been included in the
Company's consolidated results of operations commencing on the date of
acquisition. The operating results of the Prime Transferred Properties have
been included in the Company's consolidated results of operations through the
date of disposition.
The following unaudited pro forma summary financial information gives effect to
the Merger Transactions as if they had occurred on January 1, 1997.
- --------------------------------------------------------------- ----------------
Six months ended June 30
1998 1997
- --------------------------------------------------------------------------------
Total revenues $ 135,620 $ 129,657
========= ==========
Net income from continuing operations $ 17,182 $ 15,287
========= ==========
Net income applicable to common shares $ 3,701 $ 3,951
========= ==========
Earnings per common share:
Basic $ 0.09 $ 0.13
========= ==========
Diluted $ 0.09 $ 0.13
========= ==========
Weighted average shares outstanding:
Basic 41,772 29,551
========= ==========
Diluted 41,943 29,623
========= ==========
================================================================================
These unaudited pro forma results are presented for comparative purposes only
and are not necessarily indicative of what the Company's actual consolidated
results of operations would have been for the periods presented if the
Transactions had been completed at January 1, 1997, nor do they purport to
represent the Company's future consolidated results of operations.
Note 5 - Notes Payable
On June 15, 1998, the Company closed on $292,000 of loan facilities with Nomura
Asset Capital Corporation. The transaction provided (i) a $180,000 nonrecourse
permanent loan (the "Permanent Loan") and (ii) a $112,000 full recourse bridge
loan of which $95,000 was funded (the "Bridge Loan"). The Permanent Loan is (i)
collateralized by first mortgages on four factory outlet centers, (ii) bears a
fixed rate of interest of 6.99%, (iii) requires monthly principal and interest
payments pursuant to an approximate 26-year amortization schedule, and (iv)
matures on June 15, 2008. The Bridge Loan is (i) collateralized by first
mortgages on six factory outlet centers, (ii) bears a variable rate of interest
equal to 30-day LIBOR plus 1.35%, (iii) requires monthly interest-only payments,
and (iv) matures on June 15, 2001.
<PAGE>
As of June 30, 1998, the Company is a guarantor or otherwise obligated with
respect to $41,857 of HGP's indebtedness, including $12,200 of obligations under
HGP's $108,205 three-year secured credit facility. The Company and HGP are
continuing to seek the consent of certain parties to the assumption by HGP or
its affiliates of $13,864 of indebtedness in connection with the spin-off.
On April 1, 1998, Horizon consummated an agreement with Castle & Cooke
Properties, Inc. which released Horizon from its forward obligations under its
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in
connection with the formation of a joint venture with certain affiliates of
Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the
terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from all forward
obligations under the lease, which expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations under such lease.
The agreement also provided that Horizon transfer to such joint venture
substantially all of Horizon's economic interest in its outlet center in Lake
Elsinore, California together with legal title to vacant property located
adjacent to the center. As of June 30, 1998, the Partnership holds a small
minority interest in the joint venture but has no obligation or commitment with
respect to the post-closing operations of the Dole Cannery project. However, the
Partnership is legally obligated for $30,906 of mortgage indebtedness
outstanding at June 30, 1998 which is secured by a first mortgage on the Lake
Elsinore outlet center. In addition, Castle & Cooke has provided the Partnership
a guaranty, without limitation, of the obligations under the $30,906 mortgage
note.
Note 6 - Legal Proceedings
In the ordinary course of business the Company is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Company.
The Company is defendant in a lawsuit filed on July 27, 1998 in the U.S.
District Court for the Central District of California whereby the plaintiff
alleges that the Company and its related entities overcharged tenants for common
area maintenance expenditures. The outcome of, and the ultimate liability of the
Company, if any, from, this lawsuit cannot currently be predicted. Management
believes that the Company has acted properly and intends to defend this lawsuit
vigorously.
<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.
The Company's operations are conducted through Prime Retail, L.P. (the
"Operating Partnership"). The Company controls the Operating Partnership as its
sole general partner and is dependent upon the distributions or other payments
from the Operating Partnership to meet its financial obligations. 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 acquisition and development activities;
risks related to the retail industry in which the Company's outlet centers
compete, including the potential adverse impact of external factors, such as
inflation, consumer confidence, unemployment rates and consumer tastes and
preferences; risks associated with the Company's property acquisitions, such as
the lack of predictability with respect to financial returns; 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.
Merger with Horizon Group, Inc.
On June 15, 1998, the merger and other transactions (collectively, the "Merger
Transactions") between the Company and Horizon Group, Inc. ("Horizon") were
consummated for an aggregate consideration of approximately $1,083,100,
including liabilities assumed and related transaction costs. The merger has been
accounted for using the purchase method of accounting and the purchase price of
$1,083,100 was allocated to the assets acquired and the liabilities assumed
based on estimates of their respective fair values. Accordingly, the operating
results of the 22 properties acquired from Horizon have been included in the
Company's consolidated results of operations commencing on June 15, 1998. See
"Liquidity and Capital Resources - Business Combination" for further
information.
Portfolio Growth
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 49 operating
factory outlet centers totaling 13,706,000 square feet of gross leasable area
("GLA") at June 30, 1998, compared to 24 operating factory outlet centers
totaling 6,138,000 square feet of GLA at June 30, 1997.
<PAGE>
During the six months ended June 30, 1998, the Company opened one new factory
outlet center and four expansions to existing factory outlet centers totaling
289,000 square feet of GLA in the aggregate. In connection with the Merger
Transactions, the Company acquired and integrated 22 of Horizon's factory
outlet centers into its existing portfolio adding 6,626,000 square feet of GLA
in the aggregate. Additionally, in connection with the Merger Transactions, the
Company sold two factory outlet centers to Horizon Group Properties, Inc.
("HGP") totaling 426,000 square feet of GLA. During the period July 1, 1997
through December 31, 1997, the Company purchased four factory outlet centers
totaling 863,000 square feet of GLA and opened expansions to existing factory
outlet centers totaling 224,000 square feet of GLA. Additionally, the Company
acquired its joint venture partner's 25% ownership interest in Buckeye Factory
Shops Limited Partnership ("Buckeye") on September 2, 1997, and now owns 100%
of this factory outlet center with 205,000 square feet of GLA.
The significant increase in the number of the Company's operating properties
and total GLA since June 30, 1997 are collectively referred to as the
"Portfolio Expansion and the Horizon Merger".
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of June 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Niagara Falls USA (2) - Niagara Falls, New York....... I July 1992 300,000 98%
II August 1995 234,000 87
------- ---
534,000 93
Prime Outlets at Kittery (3) - Kittery Maine........................... I April 1984 25,000 100
II May 1984 78,000 99
III August 1989 18,000 99
IV May 1998 10,000 100
------- ---
131,000 99
Prime Outlets at Fremont (4) - Fremont, Indiana........................ I October 1985 118,000 100
II November 1993 51,000 100
III October 1994 60,000 96
------- ---
229,000 99
Prime Outlets at Birch Run (4) - Birch Run, Michigan................... I-XIV Various 583,000 99
XV June 1996 6,000 100
XVII June 1996 2,000 100
XVII 1997 15,000 99
XVIII 1997 118,000 100
------- ---
724,000 99
Prime Outlets at Latham (3) - Latham, New York......................... I August 1987 43,000 100
Prime Outlets at Michigan City (4) - Michigan City, Michigan........... I November 1987 199,000 98
II May 1988 130,000 100
III July 1991 36,000 85
IV July 1994 42,000 100
V December 1994 26,000 98
VI May 1995 58,000 99
------- ---
491,000 98
Prime Outlets at Williamsburg (4) - Williamsburg, Virginia............. I April 1988 67,000 99
II November 1988 60,000 100
III October 1990 49,000 100
IV 1995 98,000 100
------- ---
274,000 100
Prime Outlets at Kenosha (4) - Kenosha, Wisconsin...................... I September 1988 89,000 100
II July 1989 65,000 97
III May 1990 115,000 99
------- ---
269,000 99
Prime Outlets at Silverthorne (4) - Silverthorne, Colorado............. I November 1988 95,000 96
II November 1990 75,000 98
III November 1993 88,000 91
------- ---
258,000 95
Prime Outlets at Edinburgh (4) - Edinburgh, Indiana.................... I 1988 156,000 99
II November 1994 142,000 100
------- ---
298,000 99
Prime Outlets at Burlington (4) - Burlington, Washington .............. I May 1989 89,000 96
II October 1989 36,000 94
III April 1993 49,000 100
------- ---
174,000 97
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of June 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Queenstown (4) - Queenstown, Maryland................. I June 1989 67,000 100%
II June 1990 55,000 99
III January 1991 16,000 97
IV June 1992 14,000 97
V August 1993 69,000 100
------- ---
221,000 99
Prime Outlets at Hillsboro (4) - Hillsboro, Texas...................... I October 1989 95,000 92
II January 1992 101,000 100
III May 1995 163,000 98
------- ---
359,000 97
Prime Outlets at Oshkosh (4) - Oshkosh, Wisconsin...................... I November 1989 215,000 95
II July 1991 45,000 99
------- ---
260,000 95
Prime Outlets at Warehouse Row - Chattanooga, Tennessee............. I November 1989 95,000 95
II August 1993 26,000 94
------- ---
121,000 95
Prime Outlets at Gilroy (4) - Gilroy, California....................... I January 1990 94,000 95
II August 1991 109,000 100
III October 1992 137,000 97
IV July 1994 170,000 97
V November 1995 69,000 100
------- ---
579,000 97
Prime Outlets at Perryville (4) - Perryville, Maryland................. I June 1990 148,000 95
Prime Outlets at Sedona (6) - Sedona, Arizona ......................... I August 1990 82,000 100
Prime Outlets at San Marcos - San Marcos, Texas........................ I August 1990 177,000 98
II August 1991 70,000 100
III August 1993 117,000 100
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
IIID May 1998 18,000 100
------- ---
437,000 99
Prime Outlets at Anderson (2) - Anderson, California................... I August 1990 165,000 97
Prime Outlets at Post Falls (6) - Post Falls, Idaho ................... I July 1991 111,000 93
II July 1992 68,000 84
------- ---
179,000 89
Prime Outlets at Ellenton - Ellenton, Florida.......................... I October 1991 187,000 99
II August 1993 123,000 99
III October 1996 30,000 100
------- ---
340,000 99
Prime Outlets at Morrisville - Raleigh - Durham, North Carolina........ I October 1991 181,000 100
II July 1996 6,000 100
------- ---
187,000 100
Prime Outlets at Naples - Naples/Marco Island, Florida................. I December 1991 94,000 91
II December 1992 32,000 100
III March 1998 20,000 98
------- ---
146,000 94
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of June 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Conroe (4) - Conroe, Texas............................ I January 1992 93,000 88%
II June 1994 163,000 96
III October 1994 26,000 99
------- ---
282,000 93
Prime Outlets at Woodbury (4) - Woodbury, Minnesota.................... I July 1992 129,000 87
II November 1993 100,000 93
III August 1994 21,000 100
------- ---
250,000 90
Prime Outlets at Calhoun (4) - Calhoun, Tennessee...................... I October 1992 123,000 100
II October 1995 131,000 98
------- ---
254,000 99
Prime Outlets at Castle Rock - Castle Rock, Colorado................... I November 1992 181,000 100
II August 1993 94,000 98
III November 1993 95,000 94
IV August 1997 110,000 100
------- ---
480,000 98
Prime Outlets at Bend (6) - Bend, Oregon............................... I December 1992 97,000 94
Prime Outlets at Jeffersonville II (4) - Jeffersonville, Ohio.......... I March 1993 126,000 84
II August 1993 123,000 70
III October 1994 65,000 77
------- ---
314,000 77
Prime Outlets at Jeffersonville I - Jeffersonville, Ohio................ I July 1993 186,000 97
II November 1993 100,000 100
IIB November 1994 13,000 75
IIIA August 1996 35,000 100
IIIB March 1997 73,000 88
------- ---
407,000 96
Prime Outlets at Gainesville - Gainesville, Texas...................... I August 1993 210,000 85
II November 1994 106,000 95
------- ---
316,000 88
Prime Outlets at Loveland - Loveland, Colorado......................... I May 1994 139,000 100
II November 1994 50,000 100
III May 1995 114,000 100
IV May 1996 25,000 100
------- ---
328,000 100
Prime Outlets at Oxnard (7) - Oxnard, California....................... I June 1994 148,000 91
Prime Outlets at Grove City - Grove City, Pennsylvania................. I August 1994 235,000 100
II November 1994 95,000 100
III November 1995 85,000 99
IV November 1996 118,000 99
------- ---
533,000 100
Prime Outlets at Huntley - Huntley, Illinois........................... I August 1994 192,000 96
II November 1995 90,000 88
------- ---
282,000 94
Prime Outlets at Florida City - Florida City, Florida.................. I September 1994 208,000 93
Prime Outlets at Pismo Beach (4) - Pismo Beach, California.............. I November 1994 148,000 98
</TABLE>
<PAGE>
<TABLE>
TABLE 1 - Portfolio of Properties as of June 30, 1998
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Tracy (4) - Tracy, California........................ I November 1994 153,000 97%
Prime Outlets at Vero Beach (4) - Vero Beach, Florida.................. I November 1994 210,000 93
II August 1995 116,000 96
------- ---
326,000 94
Prime Outlets at Waterloo (4) - Waterloo, New York..................... I March 1995 208,000 99
II September 1996 115,000 100
III April 1997 68,000 90
------- ---
391,000 98
Prime Outlets at Odessa - Odessa, Missouri............................. I July 1995 191,000 100
II November 1996 105,000 56
------- ---
296,000 84
Prime Outlets at Darien (8) - Darien, Georgia.......................... I July 1995 238,000 88
IIA November 1995 49,000 99
IIB July 1996 20,000 100
------- ---
307,000 91
Prime Outlets at New River (9) - Phoenix, Arizona...................... I September 1995 217,000 95
II September 1996 109,000 93
------- ---
326,000 95
Prime Outlets at Gulfport (10) - Gulfport, Mississippi................. I November 1995 228,000 100
IIA November 1996 40,000 91
IIB November 1997 38,000 83
------- ---
306,000 97
Prime Outlets at Lodi (11) - Burbank, Ohio............................. I November 1996 205,000 95
IIA May 1998 33,000 93
------- ---
238,000 95
Prime Outlets at Gaffney - Gaffney, South Carolina..................... I November 1996 235,000 95
Prime Outlets at Lee (4) - Lee, Massachusetts.......................... I June 1997 224,000 99
Prime Outlets at Lebanon - Lebanon, Tennessee......................... I April 1998 208,000 89
------- ---
Total Factory Outlet Centers (12) 13,706,000 95%
========== ====
====================================================================================================================================
</TABLE>
Notes:
(1) Percentage reflects fully executed leases as of June 30, 1998 as a percent
of square feet of GLA.
(2) The Company acquired this factory outlet center on December 2, 1997 from
an unrelated third party.
(3) The Company acquired this factory outlet center on October 29, 1997 from
an unrelated third party.
(4) The Company acquired this factory outlet center on June 15, 1998 as a result
of its merger with Horizon.
(5) 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. Phase I of this mixed-use development includes 154,000 square
feet of office space and Phase II includes 5,000 square feet of office
space. The total office space of 159,000 square feet is not included in this
table and such space was 69% leased as of June 30, 1998.
(6) The Company acquired this factory outlet center on February 13, 1997 from
an unrelated third party.
(7) On February 7, 1997, the Company purchased an additional 20% interest
from a joint venture partner, increasing the Company's ownership
interest in this property to 50%.
(8) The Company operates this property pursuant to a long-term ground
lease under which the Company receives the economic benefit of a 100%
ownership interest.
(9) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(10) The real property on which this outlet center is located is subject to
a long-term ground lease. The Company receives the economic benefit
of a 100% ownership interest.
(11) 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.
(12) The Company also owns three community centers not included in this table
containing 424,000 square feet of GLA in the aggregate that were 88%
leased as of June 30, 1998.
<PAGE>
Results of Operations
Comparison of the three months ended June 30, 1998 to the three months ended
June 30, 1997
Summary
The Company reported net income (loss) of $(5,083) and $911 for the three
months ended June 30, 1998 and 1997, respectively. The 1998 results include a
second quarter loss on the sale of real estate of $15,461 in connection with
the Merger Transactions. For the three months ended June 30, 1998, the net loss
applicable to common shareholders was $11,824, or $0.40 per common share on a
basic and diluted basis. For the three months ended June 30, 1997, the net loss
applicable to common shareholders was $2,182, or $0.14 per common share on a
basic and diluted basis.
Revenues
Total revenues were $44,764 for the three months ended June 30, 1998 compared
to $31,213 for the three months ended June 30, 1997, an increase of $13,551, or
43.4%. Base rents increased $9,041, or 47.6%, in 1998 compared to 1997.
Straight-line rents (included in base rents) were $286 and $127 for the three
months ended June 30, 1998 and 1997, respectively. These increases are
primarily due to the Portfolio Expansion and the Horizon Merger.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, increased $453, or 62.8%, during the three months
ended June 30, 1998 compared to the same period in 1997. This increase was
attributable to the Portfolio Expansion and the Horizon Merger. For the three
months ended June 30, 1998, same-space sales in centers owned by the Company
increased 1.0% compared to the same period in 1997. "Same-space sales" is
defined as the weighted average sales per square foot reported by merchants for
space open since January 1, 1997. The Company's pro forma same-space sales for
the year ended December 31, 1997 were $255.00 per square foot. For the three
months ended June 30, 1998, same-store sales increased 2.0% compared to the same
period in 1997. "Same-store sales" is defined as the weighted average sales per
square foot reported by merchants for stores opened since January 1, 1997.
Tenant reimbursements, which represent the contractual recovery from tenants of
certain operating expenses, increased by $4,265, or 47.6%, during the three
months ended June 30, 1998 over the same period in 1997. These increases were
primarily due to the Portfolio Expansion and the Horizon Merger.
Interest and other income decreased by $208, or 8.3%, to $2,309 during the
three months ended June 30, 1998 as compared to $2,517 for the three months
ended June 30, 1997. The decrease reflects reductions in (i) interest income
of $474 and (ii) gains on outlot sales of $456. Partially offsetting these
reductions were higher (i) lease termination income of $315, (ii) income from
unconsolidated investment partnerships of $175, (iii) push cart, temporary
tenant and late fee income of $158, and (iv) other ancillary income of $74. The
reduction in interest income was primarily the result of the use of a portion
of the Company's expansion loan escrow account to fund certain of its
development activities during 1997 and 1998. The expansion loan escrow account
is included in restricted cash in the Consolidated Balance Sheets.
Expenses
Property operating expenses increased by $3,250, or 46.3%, to $10,272 for the
three months ended June 30, 1998 compared to $7,022 for the same period in 1997.
Real estate taxes increased by $965, or 40.2%, to $3,364 for the three months
ended June 30, 1998, from $2,399 in the same period for 1997. The increases in
property operating expenses and real estate taxes are primarily due to the
Portfolio Expansion and the Horizon Merger. As shown in TABLE 2, depreciation
and amortization expense increased by $3,392, or
<PAGE>
51.8%, to $9,935 for the three months ended June 30, 1998, compared to $6,543
for 1997. This increase results from the depreciation and amortization of assets
associated with the Portfolio Expansion and the Horizon Merger.
TABLE 2 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
Three months ended
June 30
---------------------------
1998 1997
- --------------------------------------------------------------------------------
Building and improvements $5,669 $3,450
Land improvements 889 727
Tenant improvements 2,743 1,649
Furniture and fixtures 308 200
Leasing commissions(1) 326 517
------ ------
Total $9,935 $6,543
======== ======
================================================================================
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
June 30
---------------------------
1998 1997
- --------------------------------------------------------------------------------
Interest incurred $11,508 $9,721
Interest capitalized (1,389) (975)
Interest earned on interest rate protection contracts - (24)
Amortization of deferred financing costs 481 622
Amortization of interest rate protection contracts 339 359
------ ------
Total $10,939 $9,703
======== ======
================================================================================
As shown in TABLE 3, interest expense for the three months ended June 30, 1998
increased by $1,236, or 12.7%, to $10,939 compared to $9,703 for the same
period in 1997. This increase reflects (i) higher interest incurred of $1,787
and (ii) a reduction in interest earned on interest rate protection contracts
of $24. Partially offsetting these items were (i) an increase in the amount of
interest capitalized in connection with development projects of $414 and (ii) a
decrease in amortization of deferred financing costs and interest rate
protection contracts of $161.
The increase in interest incurred is primarily attributable to an increase of
approximately $104,463 in the Company's average debt outstanding during the
three months ended June 30, 1998 compared to the same period in 1997 partially
offset by a slight decrease in the weighted average interest rate for the three
months ended June 30, 1998 compared to the same period in 1997. The weighted
average interest rates were 7.25% and 7.32% for the 1998 and 1997 periods,
respectively.
<PAGE>
Other charges increased by $645, or 92.9%, to $1,339. This increase reflects
selling and marketing expenses of $448 associated with the Company's operation
of an outlet store known as the Designer Connection, ground lease expense of
$29, marketing costs of $69 and other ancillary charges of $99.
In connection with re-leasing space to new merchants, the Company incurred $245
and $89 in capital expenditures during the three months ended June 30, 1998 and
1997, respectively.
Loss on Sale of Real Estate
In connection with the closing of its merger with Horizon, the Company sold
Indiana Factory Shops and Nebraska Crossing Factory Shops (collectively, the
"Prime Transferred Properties") to Horizon Group Properties, Inc. ("HGP") on
June 15, 1998 for an aggregate consideration of $26,015 resulting in a loss of
$15,461.
Comparison of six months ended June 30, 1998 to six months ended June 30, 1997
Summary
The Company reported net income (loss) of $(3,093) and $1,813 for the six
months ended June 30, 1998 and 1997, respectively. The 1998 results include a
second quarter loss on the sale of real estate of $15,461 in connection with
the Company's sale of the Prime Transferred Properties to HGP. For the six
months ended June 30, 1998, the net loss applicable to common shareholders was
$14,000, or $0.49 per common share on a basic and diluted basis. For the six
months ended June 30, 1997, the net loss applicable to common shareholders was
$4,373, or $0.29 per common share on a basic and diluted basis.
Revenues
Total revenues were $82,272 for the six months ended June 30, 1998 compared to
$61,375 for the six months ended June 30, 1997, an increase of $20,897, or
34.0%. Base rents increased $14,058, or 37.9%, in 1998 compared to 1997.
Straight-line rents (included in base rents) were $261 and $252 for the six
months ended June 30, 1998 and 1997, respectively. These increases are
primarily due to the Portfolio Expansion and the Horizon Merger.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, increased $649, or 46.7%, during the six months
ended June 30, 1998 compared to the same period in 1997. This increase was
attributable to the Portfolio Expansion and the Horizon Merger. For the six
months ended June 30, 1998, same-space sales in centers owned by the Company
increased by 0.5% compared to the same period in 1997. For the six months ended
June 30, 1998, same-store sales were flat compared to the same period in 1997.
Tenant reimbursements, which represent the contractual recovery from tenants of
certain operating expenses, increased by $6,059, or 33.8%, during the six
months ended June 30, 1998 over the same period in 1997. These increases were
primarily due to the Portfolio Expansion and the Horizon Merger.
Interest and other income increased by $131, or 2.6%, to $5,126 during the six
months ended June 30, 1998 as compared to $4,995 for the six months ended June
30, 1997. The increase reflects higher (i) push cart, temporary tenant, and
late fee income of $640, (ii) lease termination income of $407, and (iii)
income from unconsolidated investment partnerships of $158. Partially
offsetting these increases were reductions in (i) interest income of $877 and
(ii) all other ancillary income of $197. The reduction in interest income was
primarily the result of the use of a portion of the Company's expansion loan
escrow account to fund certain of its development activities during 1997 and
1998. The expansion loan escrow account is included in restricted cash in the
Consolidated Balance Sheets.
<PAGE>
Expenses
Property operating expenses increased by $4,970, or 36.4%, to $18,625 for the
six months ended June 30, 1998 compared to $13,655 for the same period in 1997.
Real estate taxes increased by $1,431, or 29.9%, to $6,220 for the six months
ended June 30, 1998, from $4,789 in the same period for 1997. The increases in
property operating expenses and real estate taxes are primarily due to the
Portfolio Expansion and the Horizon Merger. As shown in TABLE 2, depreciation
and amortization expense increased by $4,887, or 38.0%, to $17,758 for the six
months ended June 30, 1998, compared to $12,871 for 1997. This increase results
from the depreciation and amortization of assets associated with the Portfolio
Expansion and the Horizon Merger.
TABLE 4 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
Six months ended
June 30
---------------------------
1998 1997
- --------------------------------------------------------------- ----------------
Building and improvements $9,993 $ 6,708
Land improvements 1,719 1,354
Tenant improvements 4,818 3,476
Furniture and fixtures 590 402
Leasing commissions(1) 638 931
------ -------
Total $17,758 $12,871
======= =======
================================================================================
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 5 - Components of Interest Expense
The components of interest expense are summarized as follows:
- --------------------------------------------------------------------------------
Six months ended
June 30
---------------------------
1998 1997
- --------------------------------------------------------------------------------
Interest incurred $20,784 $18,830
Interest capitalized (2,777) (1,820)
Interest earned on interest rate protection contracts (23) (63)
Amortization of deferred financing costs 648 1,230
Amortization of interest rate protection contracts 681 695
------ -------
Total $19,313 $18,872
======= =======
================================================================================
As shown in TABLE 5, interest expense for the six months ended June 30, 1998
increased by $441, or 2.3%, to $19,313 compared to $18,872 for the same period
in 1997. This increase reflects (i) higher interest incurred of $1,954 and (ii)
a reduction in interest earned on interest rate protection contracts of
<PAGE>
$40. Partially offsetting these items were (i) an increase in the amount of
interest capitalized in connection with development projects of $957 and (ii) a
decrease in amortization of deferred financing costs and interest rate
protection contracts of $596.
The increase in interest incurred is primarily attributable to (i) an increase
of approximately $54,483 in the Company's average debt outstanding during the
six months ended June 30, 1998 compared to the same period in 1997 and (ii) a
slight increase in the weighted average interest rate for the six months ended
June 30, 1998 compared to the same period in 1997. The weighted average
interest rates were 7.22% and 7.18% for the 1998 and 1997 periods,
respectively.
Other charges increased by $805, or 53.9%, to $2,298. This increase reflects
higher ground lease expense of $149, marketing costs of $210, bad debt expense
of $55, and selling and marketing expenses of $391 primarily relating to the
operation of Designer Connection.
In connection with re-leasing space to new merchants, the Company incurred $441
and $140 in capital expenditures during the six months ended June 30, 1998 and
1997, respectively.
Loss on Sale of Real Estate
In connection with the closing of its merger with Horizon on June 15, 1998, the
Company sold the Prime Transferred Properties to HGP for an aggregate
consideration of $26,015 resulting in a loss of $15,461.
Liquidity and Capital Resources
Sources and Uses of Cash
For the six months ended June 30, 1998, net cash provided by operating
activities was $18,171, cash used in investing activities was $78,377, and net
cash provided by financing activities was $72,570.
The primary uses of cash for investing activities during the six months ended
June 30, 1998 included: (i) costs associated with the development and
construction of new factory outlet centers and expansions to existing factory
outlet centers aggregating 928,000 square feet of GLA which are expected to
open during 1998, (ii) costs associated with the completion of expansions to
existing factory outlet centers aggregating 224,000 square feet of GLA which
opened during 1997, and (iii) costs for pre-development activities associated
with future developments.
The primary source of cash from financing activities during the six months
ended June 30, 1998 was proceeds from new borrowings of $368,128. Such proceeds
were partially offset by (i) principal repayments on notes payable of $241,512,
(ii) Preferred and Common Stock distributions of $40,970, (iii) distributions
to minority interests (including distributions to limited partners of the
Operating Partnership) of $10,346, and (iv) deferred financing costs of $2,730.
Shelf Registration
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 June 30, 1998, 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.
<PAGE>
Property Acquisitions
During 1998, the Company will explore acquisitions of factory outlet centers in
the United States and Europe as well as consider possible strategic
acquisitions of other assets in the retail sector. The Company has evaluated
and is evaluating such opportunities and prospects and will continue to do so
throughout 1998. The Company cannot predict if any transaction will be
consummated, nor the terms or form of consideration required.
Business Combination
The Merger Transactions as set forth in the agreement and plan of merger (the
"Merger Agreement") between the Company and Horizon were consummated for an
aggregate consideration of approximately $1,083,100, including liabilities
assumed and related transaction costs.
Pursuant to the terms of the Merger Agreement, the Company acquired (i) all of
the outstanding shares of common stock of Horizon at an exchange ratio of 0.20
of a share of the Company's Series B Convertible Preferred Stock and 0.597 of a
share of the Company's Common Stock for each share of common stock of Horizon,
and (ii) all of the outstanding limited partnership units of Horizon/Glen
Outlet Centers Limited Partnership ("Horizon Partnership") at an exchange ratio
of 0.9193 of a unit of the Operating Partnership's Common Units. A total of
4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329 shares
of Common Stock were issued by the Company to the shareholders of Horizon and
3,782,121 Common Units were issued by the Operating Partnership to the limited
partners of Horizon Partnership.
Immediately prior to the merger, Horizon Partnership contributed 13 of its 35
centers to Horizon Group Properties, L.P., of which HGP, a subsidiary of
Horizon, is the sole general partner. HGP was spun-off from the Company on June
15, 1998. The remaining 22 outlet centers of Horizon were integrated into the
Company's existing portfolio. On June 19, 1998, all of the common equity of HGP
was distributed to the convertible preferred and common shareholders and
unitholders of the Company and its Operating Partnership and the shareholders
and limited partners of Horizon and Horizon Partnership based on their ownership
in the Company immediately following consummation of the merger. One share of
common stock of HGP was distributed for every 20 shares of Common Stock and
Series C Convertible Preferred Stock of the Company and for every 20 Common
Units of the Operating Partnership. Additionally, approximately 1.196 shares of
the common stock of HGP were distributed for every 20 shares of Series B
Convertible Preferred Stock of the Company.
In connection with the Merger Transactions, the Company sold the Prime
Transferred Properties to HGP for an aggregate consideration of $26,015,
resulting in a loss of $15,461. Proceeds from the sale of the Prime Transferred
Properties were used to repay indebtedness associated with the Horizon
properties.
Concurrent with the closing of the merger, a special cash distribution was made
aggregating $21,871 consisting of $0.50 per share/unit to holders of Common
Stock, Series C Preferred Securities and Common Units and $0.60 per share to
holders of Series B Convertible Preferred Stock. Shareholders of Horizon and
limited partners of Horizon Partnership did not participate in these
distributions.
The merger has been accounted for using the purchase method of accounting and
the purchase price of $1,083,100 was allocated to the assets acquired and the
liabilities assumed based on estimates of their respective fair values. Certain
assumptions were made which management of the Company believes are reasonable.
The Company expects to finalize the purchase price allocation before the end of
1998. The final allocation is not expected to differ materially from the
allocation made at June 30, 1998.
<PAGE>
The operating results of those properties acquired have been included in the
Company's consolidated results of operations commencing on the date of
acquisition. The operating results of the Prime Transferred Properties have
been included in the Company's consolidated results of operations through the
date of disposition.
Legal Proceedings
In the ordinary course of business the Company is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Company.
The Company is defendant in a lawsuit filed on July 27, 1998 in the U.S.
District Court for the Central District of California whereby the plaintiff
alleges that the Company and its related entities overcharged tenants for common
area maintenance expenditures. The outcome of, and the ultimate liability of the
Company, if any, from, this lawsuit cannot currently be predicted. Management
believes that the Company has acted properly and intends to defend this lawsuit
vigorously.
Debt Transactions
On June 15, 1998, the Company closed on $292,000 of loan facilities with Nomura
Asset Capital Corporation. The transaction provided (i) a $180,000 nonrecourse
permanent loan (the "Permanent Loan") and (ii) a $112,000 full recourse bridge
loan of which $95,000 was funded (the "Bridge Loan"). The Permanent Loan is (i)
collateralized by first mortgages on four factory outlet centers, (ii) bears a
fixed rate of interest of 6.99%, (iii) requires monthly principal and interest
payments pursuant to an approximate 26-year amortization schedule, and (iv)
matures on June 15, 2008. The Bridge Loan is (i) collateralized by first
mortgages on six factory outlet centers, (ii) bears a variable rate of interest
equal to 30-day LIBOR plus 1.35%, (iii) requires monthly interest-only payments,
and (iv) matures on June 15, 2001.
As of June 30, 1998, the Company is a guarantor or otherwise obligated with
respect to $41,857 of HGP's indebtedness, including $12,200 of obligations
under HGP's $108,205 three-year secured credit facility. Prime Retail and HGP
are continuing to seek the consent of certain parties to the assumption by HGP
or its affiliates of $13,864 of indebtedness in connection with the spin-off.
On April 1, 1998, Horizon consummated an agreement with Castle & Cooke
Properties, Inc. which released Horizon from its forward obligations under its
long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in
connection with the formation of a joint venture with certain affiliates of
Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the
terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the
project and an affiliate of Castle & Cooke, released Horizon from all forward
obligations under the lease, which expires in 2045, in exchange for Horizon's
conveyance to the joint venture of its rights and obligations under such lease.
The agreement also provided that Horizon transfer to such joint venture
substantially all of Horizon's economic interest in its outlet center in Lake
Elsinore, California together with legal title to vacant property located
adjacent to the center. As of June 30, 1998, the Company holds a small minority
interest in the joint venture but has no obligation or commitment with respect
to the post-closing operations of the Dole Cannery project. However, the Company
is legally obligated for $30,906 of mortgage indebtedness outstanding at June
30, 1998 which is secured by a first mortgage on the Lake Elsinore outlet
center. In addition, Castle & Cooke has provided the Company a guaranty, without
limitation, of the obligations under the $30,906 mortgage note.
<PAGE>
Planned Development
Management believes that there is sufficient demand for continued development of
new factory outlet centers and expansions of certain existing factory outlet
centers. The Company now expects to open 928,000 square feet of GLA during 1998
including the Prime Outlets at Lebanon which opened on April 17, 1998 and Prime
Outlets at Hagerstown which opened on August 7, 1998. Prime Outlets at Lebanon
is located in Lebanon, Tennessee, approximately 25 miles east of Nashville, and
contains 208,000 square feet of GLA. Prime Outlets at Lebanon was approximately
89% occupied at June 30, 1998. Prime Outlets at Hagerstown is located in
Hagerstown, Maryland, west of Baltimore and northwest of Washington, D.C. Prime
Outlets at Hagerstown was approximately 95% occupied on its grand opening. At
June 30, 1998, the remaining budgeted capital expenditures for 1998 planned
developments aggregated approximately $57,900, while anticipated capital
expenditures related to the completion of expansions of existing factory outlet
centers opened during 1997 (aggregating 224,000 square feet of GLA) approximated
$2,265.
Management believes that the Company has sufficient capital and capital
commitments to fund the remaining capital expenditures associated with its 1997
and 1998 development activities. These funding requirements are expected to be
met, in large part, with the proceeds from various loan facilities including
the financing of certain unencumbered properties. 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 currently plans to open one new factory outlet center and several
expansions in 1999 that are expected to contain approximately 700,000 square
feet of GLA, in the aggregate, and have a total expected development cost of
approximately $95,000. The Company expects to fund the development cost of these
projects from (i) certain line of credit facilities, (ii) retained cash flow
from operations, (iii) construction loans, and (iv) the potential sale of common
or preferred equity in the public or private capital markets. As of June 30,
1998, the Company had committed $11,241 with regard to the construction of the
new factory outlet center and expansions scheduled to open in 1999. There can be
no assurance that the Company will be successful in obtaining the required
amount of equity capital or debt financing for the 1999 planned openings or that
the terms of such capital raising activities will be as favorable as the Company
has experienced in prior periods.
Debt Repayments and Preferred Stock Distributions and Dividends
The Company's aggregate indebtedness was $1,152,133 and $515,265 at June 30,
1998 and December 31, 1997, respectively. At June 30, 1998, such indebtedness
had a weighted average maturity of 6.3 years and bore interest at a weighted
average interest rate of 7.02% per annum. At June 30, 1998, $592,704, or 51.4%,
of such indebtedness bore interest at fixed rates and $559,429, or 48.6%, of
such indebtedness, including $28,250 of tax-exempt bonds, bore interest at
variable-rates. Of the variable rate indebtedness outstanding at June 30, 1998,
$354,498 is scheduled to convert to a fixed rate of 7.782% in November 1998 for
the remaining five year term of such indebtedness.
At June 30, 1998, the Company held interest rate protection contracts on all
$28,250 of its floating rate tax-exempt indebtedness which expire in 1999 and
approximately $354,498 of other floating rate indebtedness which expire in
November 1998 (or approximately 68.4% of its total floating rate indebtedness).
In addition, the Company held additional interest rate protection contracts on
$43,900 (of which $22,000 expired in July 1998 and $21,900 expires in April
1999) of the $354,498 floating rate indebtedness to further reduce the
Company's exposure to increases in interest rates.
<PAGE>
The Company's ratio of debt to total market capitalization at June 30, 1998
(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 and Series C Preferred Securities into Common Stock; (b) the aggregate
market value of the outstanding shares of Series B 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 55.7%.
The Company is obligated to repay $11,025 of mortgage indebtedness during the
remainder of 1998 and $76,887 in 1999. Annualized cumulative dividends on the
Company's Senior Preferred Stock, Series B Convertible Preferred Stock and
Series C Preferred Securities outstanding June 30, 1998 are $6,038, $16,635,
and $5,149, 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, 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 June 30, 1998, 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.
Year 2000
Recognizing the need to ensure that the Company's operations will not be
adversely impacted by year 2000 software failures, management has assessed the
potential impact of the year 2000 on the processing of date-sensitive
information by the Company's computerized information systems. Based on this
assessment, management believes that the Company's primary computerized
information systems are year 2000 compliant and the Company's operations will
not be adversely impacted by year 2000 software failures.
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 ("NAREIT")
established guidelines clarifying the definition of FFO. FFO is defined as net
income (loss) (determined in accordance with GAAP) excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization after adjustments for unconsolidated partnerships and joint
ventures.
The 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 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
<PAGE>
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 6 provides a reconciliation of income before allocation to minority
interests to FFO for the three and six months ended June 30, 1998 and 1997. FFO
increased $6,667, or 63.0%, to $17,253 for the three months ended June 30, 1998
from $10,586 for the three months ended June 30, 1997. FFO increased $11,870,
or 57.0%, to $32,708 for the six months ended June 30, 1998 from $20,838 for
the six months ended June 30, 1997. These increases are primarily attributable
to the Portfolio Expansion and the Horizon Merger.
<TABLE>
TABLE 6 - Funds from Operations
<CAPTION>
- --------------------------------------------------------------- ------------------------------ -------------------------------
Three months ended Six months ended
June 30 June 30
-------------------------------- --------------------------
1998 1997 1998 1997
- --------------------------------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before allocation to minority interests $(8,302) $ 3,583 $ (851) $ 7,076
FFO adjustments:
Loss on sale of real estate 15,461 - 15,461 -
Real estate depreciation and amortization 9,792 6,473 17,493 12,747
Unconsolidated joint venture adjustments 302 530 605 1,015
------- -------- -------- ---------
FFO before allocation to minority interests $17,253 $10,586 $32,708 $20,838
======= ======== ======= =========
====================================================================================================================================
</TABLE>
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business the Company is subject to certain legal
actions. While any litigation contains an element of uncertainty, management
believes the losses, if any, resulting from such matters, including the matter
described below, will not have a material adverse effect on the consolidated
financial statements of the Company.
The Company is defendant in a lawsuit filed on July 27, 1998 in the U.S.
District Court for the Central District of California whereby the plaintiff
alleges that the Company and its related entities overcharged tenants for common
area maintenance expenditures. The outcome of, and the ultimate liability of the
Company, if any, from, this lawsuit cannot currently be predicted. Management
believes that the Company has acted properly and intends to defend this lawsuit
vigorously.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Shareholders Meeting held on June 12, 1998, certain
matters were submitted to the vote of the Company's security holders. The
following summarizes these matters and the results of the voting.
(a) The proposed merger of the Company and Horizon and
other transactions contemplated by the Merger
Agreement were approved. The votes cast for these
items were as set forth below:
For Against Abstain
--------------- ---------------------- ----------------------
18,693,361 127,598 65,823
(b) The nominees for director proposed by the Company were
elected. The votes cast for these nominees were as set
forth below:
For Withheld
----------- --------------
William H. Carpenter, Jr. 23,032,209 39,219
Kenneth A. Randall 23,032,209 39,219
Sharon J. Sharp 23,032,009 39,419
<PAGE>
(c) The proposal to ratify the adoption of the Prime Retail,
Inc. Nonemployee Director Stock Plan was approved. The
votes cast with respect to such proposal were as set forth
below:
Broker
For Against Non-Votes Abstain
--- ------- --------- -------
17,320,842 1,460,064 4,184,646 105,876
(d) The proposal for ratify the adoption of the Prime Retail,
Inc. 1998 Long-term Stock Incentive Plan was approved. The
votes cast with respect to such proposal were as set forth
below:
Broker
For Against Non-Votes Abstain
--- ------- --------- -------
14,488,686 4,293,281 4,184,646 104,815
(e) The proposal to ratify the selection of the firm of Ernst
Young LLP as the Company's independent auditors for the
year ending December 31, 1998 was approved. The vote
cast with respect to that proposal were as set forth below:
For Against Abstain
--- ------- ---------
22,978,819 33,086 59,523
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 12.1 - Ratio of Earnings to Fixed Charges
and Preferred Stock Distributions and Dividends
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
On June 25, 1998, the Company filed a Current
Report on Form 8-K, dated June 23, 1998,
reporting (i) the merger and other transactions
(collectively, the "Transactions") as set forth
in the agreement and plan of merger between the
Company and Horizon Group, Inc. was consummated
on June 15, 1998 and (ii) the Company completed a
$292.0 million debt financing with Nomura
Asset Capital Corporation in connection with the
Transactions. 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: August 13, 1998 /s/ Abraham Rosenthal
--------------- ---------------------
Abraham Rosenthal
Chief Executive Officer
Date: August 13, 1998 /s/ Robert P. Mulreaney
--------------- -----------------------
Robert P. Mulreaney
Executive Vice President,
Chief Financial Officer
and Treasurer
<TABLE>
PRIME RETAIL, INC.
EXHIBIT 12.1: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS
(AMOUNT IN THOUSANDS, EXCEPT FOR RATIO INFORMATION)
<CAPTION>
Six Months Ended June 30
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Income (loss) before minority interests $ (851) $ 7,076
Loss on sale of real estate 15,461 -
Interest incurred 21,621 20,215
Amortization of capitalized interest 208 157
Amortization of debt issuance costs 648 1,230
Amortization of interest rate protection contracts 681 695
Less interest earned on interest rate
protection contracts (23) (63)
Less capitalization interest (2,778) (2,003)
--------- -------
Earnings 34,967 27,307
--------- -------
Interest incurred 21,621 20,215
Amortization of debt issuance costs 648 1,230
Amortization of interest rate protection
contracts 681 695
Preferred stock distributions 10,906 6,186
--------- -------
Combined Fixed Charges and
Preferred Stock Distributions and Dividends 33,856 28,326
--------- -------
Excess of Combined Fixed Charges
and Preferred Stock Distributions
and Dividends over Earnings $ (1,019)
=======
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Distributions and Dividends 1.03 x
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 18,737
<SECURITIES> 0
<RECEIVABLES> 14,480
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 94,570
<PP&E> 1,933,089
<DEPRECIATION> 93,797
<TOTAL-ASSETS> 1,933,862
<CURRENT-LIABILITIES> 90,404
<BONDS> 1,152,133
0
137
<COMMON> 420
<OTHER-SE> 636,356
<TOTAL-LIABILITY-AND-EQUITY> 1,933,862
<SALES> 0
<TOTAL-REVENUES> 82,272
<CGS> 0
<TOTAL-COSTS> 67,662
<OTHER-EXPENSES> 2,298
<LOSS-PROVISION> 530
<INTEREST-EXPENSE> 19,313
<INCOME-PRETAX> (3,093)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,093)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
