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, 2000
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 001-13301
---------
PRIME RETAIL, INC.
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(Exact name of registrant as specified in its charter)
Maryland 38-2559212
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 East Pratt Street
Nineteenth Floor
Baltimore, Maryland 21202
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(Address of principal executive offices) (Zip Code)
(410) 234-0782
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address,or former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90-days.
Yes ___ No X
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, 2000, the issuer had outstanding 43,577,916 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, 2000 and
December 31, 1999 ............................................................ 1
Consolidated Statements of Operations for the three and
six months ended June 30, 2000 and 1999 ...................................... 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999........................................... 3
Notes to the Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................... 30
Item 2. Changes in Securities............................................... 30
Item 3. Defaults Upon Senior Securities..................................... 30
Item 4. Submission of Matters to a Vote of Security Holders................. 31
Item 5. Other Information................................................... 31
Item 6. Exhibits or Reports on Form 8-K..................................... 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 32
Signatures................................................................... 33
<PAGE>
<TABLE>
Prime Retail, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share information)
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June 30, 2000 December 31, 1999
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<CAPTION>
<S> <C> <C>
Assets
Investment in rental property:
Land........................................................................ $ 177,813 $ 181,854
Buildings and improvements.................................................. 1,557,015 1,560,710
Property under development.................................................. 70,789 66,581
Furniture and equipment..................................................... 16,714 17,406
---------- ----------
1,822,331 1,826,551
Accumulated depreciation.................................................... (213,066) (183,954)
---------- ---------
1,609,265 1,642,597
Cash and cash equivalents...................................................... 6,605 7,343
Restricted cash................................................................ 28,050 28,131
Accounts receivable, net....................................................... 17,396 18,926
Deferred charges, net.......................................................... 12,213 13,503
Assets held for sale........................................................... 65,900 97,639
Due from affiliates, net....................................................... 3,878 4,140
Investment in partnerships..................................................... 22,151 18,941
Other assets................................................................... 34,033 24,838
---------- ----------
Total assets.......................................................... $1,799,491 $1,856,058
========== ==========
Liabilities and Shareholders' Equity
Bonds payable.................................................................. $ 32,900 $ 32,900
Notes payable (See Note 3)..................................................... 1,188,046 1,227,770
Accrued interest............................................................... 8,174 8,033
Real estate taxes payable...................................................... 16,833 10,700
Construction costs payable..................................................... 4,931 5,123
Accounts payable and other liabilities......................................... 77,643 73,340
--------- ----------
Total liabilities..................................................... 1,328,527 1,357,866
Minority interests............................................................. 1,502 1,505
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5%Series A Senior Cumulative Preferred Stock, $.01 par value
(liquidation preference of $61,273), 2,300,000 shares issued and
outstanding........................................................... 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock, $.01
par value (liquidation preference of $206,101), 7,828,125 shares
issued and outstanding................................................ 78 78
Shares of common stock, 150,000,000 shares authorized:
Common stock, $.01 par value, 43,577,916 and 43,368,620 shares issued and
outstanding, respectively............................................. 436 434
Additional paid-in capital.................................................. 709,373 709,122
Distributions in excess of net income....................................... (240,448) (212,970)
--------- ----------
Total shareholders' equity............................................ 469,462 496,687
--------- ----------
Total liabilities and shareholders' equity............................ $1,799,491 $1,856,058
========== ==========
===================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Prime Retail, Inc.
Consolidated Statements of Operations
(in thousands, except per share information)
Three months Six months
ended June 30 ended June 30
----------------------------- ----------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues
Base rents $44,461 $48,356 $88,709 $97,658
Percentage rents 1,106 1,978 2,593 4,040
Tenant reimbursements 20,368 22,609 42,380 46,297
Interest and other 2,649 2,631 7,743 5,922
------- ------- ------- -------
Total revenues 68,584 75,574 141,425 153,917
Expenses
Property operating 15,958 17,200 33,490 36,137
Real estate taxes 5,507 5,726 11,238 11,293
Depreciation and amortization 15,783 18,565 32,020 36,824
Corporate general and administrative 8,019 2,800 13,452 5,587
Interest 23,714 22,463 47,737 43,725
Provision for asset impairment 8,538 - 8,538 -
Loss on eOutlets.com 1,315 - 14,279 -
Loss on Designer Connection 1,006 543 2,085 888
Other charges 4,503 600 6,032 2,488
-------- ------- ------- -------
Total expenses 84,343 67,897 168,871 136,942
-------- ------- ------- -------
Income (loss) before minority interests and
extraordinary loss (15,759) 7,677 (27,446) 16,975
Income allocated to minority interests - (534) (32) (534)
-------- ------- ------- -------
Income (loss) before extraordinary loss (15,759) 7,143 (27,478) 16,441
Extraordinary loss on early extinguishment of debt,
net of minority interests of $534 - (2,106) - (2,106)
-------- ------- ------- -------
Net income (loss) (15,759) 5,037 (27,478) 14,335
(Income) loss allocated to preferred shareholders (5,668) (6,046) (11,336) 1,754
-------- ------- ------- -------
Net income (loss) applicable to common shares $(21,427) $(1,009) $(38,814) $16,089
======== ======= ======== =======
Basic earnings per common share:
Income (loss) before extraordinary loss $ (0.49) $ 0.03 $ (0.89) $ 0.42
Extraordinary loss - (0.05) - (0.05)
-------- ------- -------- -------
Net income (loss) $ (0.49) $ (0.02) $ (0.89) $ 0.37
======== ======= ======== =======
Diluted earnings per common share:
Income (loss) before extraordinary loss $ (0.49) $ 0.03 $ (0.89) $ 0.08
Extraordinary loss - (0.05) - (0.04)
-------- ------- ------- -------
Net income (loss) $ (0.49) $ (0.02) $ (0.89) $ 0.04
======== ======= ======== =======
Weighted-average common shares outstanding:
Basic 43,532 43,186 43,456 43,069
======== ======= ======== =======
Diluted 43,532 43,186 43,456 55,720
======== ======= ======== =======
Distributions declared per common share $ - $ 0.295 $ - $ 1.385
======== ======= ======== ========
====================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Prime Retail, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
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Six months ended June 30, 2000 1999
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<S> <C> <C>
Operating Activities
Net income (loss)............................................................... $(27,478) $ 14,335
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Income allocated to minority interests.................................... 32 -
Depreciation.............................................................. 31,689 36,419
Amortization of deferred financing costs and interest rate
protection contracts.................................................... 1,708 800
Amortization of leasing commissions....................................... 331 405
Provision for uncollectible accounts receivable........................... 3,529 1,249
Provision for asset impairment............................................ 8,538 -
Loss on eOutlets.com...................................................... 14,279 -
Gain on sale of land...................................................... (2,471) -
Changes in operating assets and liabilities:
Increase in accounts receivable.............................................. (1,999) (4,475)
Decrease in other assets..................................................... 1,059 2,143
Increase (decrease) in other liabilities..................................... 4,178 (693)
Increase (decrease) in accrued interest...................................... 141 (104)
-------- -------
Net cash provided by operating activities................................. 33,536 50,079
-------- -------
Investing Activities
Additions to investment in rental property...................................... (17,560) (39,774)
Increase in property under development.......................................... (24,425) (7,078)
Proceeds from sale of land...................................................... 4,622 -
Proceeds from sale of outlet center............................................. 11,063 -
-------- -------
Net cash used in investing activities..................................... (26,300) (46,852)
-------- -------
Financing Activities
Proceeds from notes payable..................................................... 12,734 124,136
Principal repayments on notes payable........................................... (19,958) (85,617)
Deferred financing fees......................................................... (750) -
Series C preferred stock redemption............................................. - (1,038)
Distributions and dividends paid................................................ - (38,381)
Distributions to minority interests............................................. - (6,486)
-------- -------
Financing Activities
Net cash used in financing activities..................................... (7,974) (7,386)
-------- -------
Decrease in cash and cash equivalents........................................... (738) (4,159)
Cash and cash equivalents at beginning of period................................ 7,343 5,765
-------- -------
Cash and cash equivalents at end of period...................................... $ 6,605 $ 1,606
======== =======
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Prime Retail, Inc.
Consolidated Statements of Cash Flows (continued)
(Amounts in thousands)
Supplemental Disclosure of Noncash Investing and Financing Activities:
The following assets and liabilities were sold in connection with the sale of
Prime Outlets at Williamsburg on February 23, 2000:
Book value of assets disposed, net....................... $ 53,563
Cash received............................................ (11,063)
Promissory note received................................. (10,000)
-------
Debt disposed............................................ $ 32,500
========
Redemption of 3,300,000 shares of Series C Preferred Stock
in exchange for issuance of note payable on March 31, 1999.. $ 33,000
========
================================================================================
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, Inc.'s
(the "Company") annual report on Form 10-K for the year ended December 31, 1999.
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 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 period financial information has been reclassified
to conform with the current period presentation.
Note 2 -- Earnings Per Share
Basic earnings per share ("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 were converted into shares of Common Stock,
and (iv) shares of Series B Convertible Preferred Stock were converted into
shares of Common Stock. For the three and six months ended June 30, 2000 and the
three months ended June 30, 1999, the effect of all exercises and conversions
was anti-dilutive and, therefore, dilutive EPS is equivalent to basic EPS. For
the six months ended June 30, 1999, a redemption discount and dividends
aggregating $13,718 related to the Company's repurchase of its Series C
Preferred Stock were excluded from the numerator and incremental shares of
12,651 were included in the denominator, related to the assumed conversion of
Series C Preferred Stock and Common Units, of the computation of diluted EPS.
For the six months ended June 30, 1999, the effect of all other exercises and
conversions was anti-dilutive, and, therefore, was excluded from the computation
of diluted EPS.
Note 3 -- Notes Payable
The maturity of the Company's $25,000 unsecured line of credit was extended from
July 11, 2000 to August 30, 2000, or earlier if the Company terminates its
efforts to close on an anticipated debt financing with Lehman Brothers. The
Company is in discussion with the lender to obtain an additional short-term
extension of the loan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Lehman Brothers Loan Negotiation and Debt
Facility Compliance" for additional information.
The maturity of the Company's $20,000 subordinated loan was extended from June
30, 2000 to August 14, 2000. The Company is in discussion with the lender to
obtain an additional short-term extension of the loan.
The maturity of the Company's $3,559 first mortgage, collateralized by property
in Knoxville, TN, was extended from June 22, 2000 to August 21, 2000. The
Company is in discussion with the lender to obtain an additional extension of
the loan.
Debt Contingencies
As of June 30, 2000, the Company is a guarantor or otherwise obligated with
respect to an aggregate of $12,591 of the indebtedness of Horizon Group
Properties, Inc. and its affiliates ("HGP") including a $10,000 obligation under
HGP's secured credit facility which bears a rate of interest of LIBOR plus
1.90%, matures in July 2001, and is collateralized by seven properties located
throughout the United States.
On April 1, 1998, Horizon Group, Inc. ("Horizon") consummated an agreement with
Castle & Cooke Properties, Inc. which released Horizon from its future
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 any continuing 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, 2000, the Company held 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.
Mortgage indebtedness with an outstanding balance of $28,837 at June 30, 2000,
for which one of the Company's subsidiary partnerships remains legally
responsible, is collateralized by a first mortgage on the Lake Elsinore outlet
center. The joint venture, as a limited partner in such subsidiary partnership,
is obligated to make capital contributions to the partnership to pay debt
financing, operating and other expenses under certain conditions. The subsidiary
partnership will remain legally responsible for such expenses in case of any
shortfalls by the joint venture with respect to such capital contributions.
Castle & Cooke has provided the Company with an unconditional guaranty with
respect to any such shortfalls.
Debt Facility Compliance
Based on the financial results for the second quarter of 2000, the Company is
not in compliance with financial covenants contained in certain of its debt
facilities. Non-compliance with these covenants may have triggered cross-default
provisions with respect to several other Company debt facilities. Certain of the
affected lenders have alleged that non-compliance with the financial covenants
constitutes a default under their loan documents. The Company has taken the
position with these lenders that the nature and extent of the non-compliance
with the financial covenants would not permit any lender to accelerate the
maturity of its loan or pursue other remedies under the loan documents. None of
these loans has been accelerated nor has notice of any lender's intention to
accelerate been received by the Company. The Company is in discussions with the
affected lenders regarding either paying off these loans in their entirety using
proceeds from the anticipated debt financing with Lehman Brothers, or modifying
the terms and financial covenants so that the Company will be in compliance at
the time the anticipated debt financing closes.
If the Company is unable to close the anticipated debt financing with Lehman
Brothers, it will look to obtain alternative financing from other financial
institutions or the potential sale of assets or a joint venture interest in
certain outlet centers as sources of cash to repay the amounts outstanding under
such loans. This condition raises substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustment to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Although the Company continues to maintain its regularly scheduled interest
payments under all of its other indebtedness, there can be no assurance that one
or all of the affected lenders will not attempt to accelerate the maturity of
its indebtedness or pursue other remedies under their respective loan documents.
Additionally, there can be no assurance that the Company will be in compliance
with its financial debt covenants in future periods since the Company's future
financial performance is subject to various risks and uncertainties, including
but not limited to, the effects of increases in market interest rates from
current levels, the risk of potential increases in vacancy rates and the
resulting impact on the Company's revenue, and risks associated with refinancing
the Company's current debt obligations or obtaining new financing under terms as
favorable as the Company has experienced in prior periods.
The Company, through affiliates, holds 50% interests in the owners of an outlet
center in Oxnard, CA and phase one of an outlet center in Bellport, NY. First
mortgage loans on these properties have matured and are currently in default.
The Company is exploring all options to resolve these defaults, including
transferring the outlet centers to the lenders. Such transfers would not be
expected to have a material effect on the Company's results from operations or
its financial condition.
Note 4 - Prime/Estein Joint Venture Transaction
On August 6, 1999, the Company entered into an agreement (the "Prime/Estein
Joint Venture Agreement") to sell three factory outlet centers, including two
future expansions, to a joint venture (the "Venture") between an affiliate of
Estein & Associates USA, Ltd. ("Estein"), a real estate investment company, and
the Company. The Prime/Estein Joint Venture Agreement provided for a total
purchase price of $274,000, including (i) the assumption of approximately
$151,500 of first mortgage indebtedness, (ii) an $8,000 payment to the Company
for a ten-year covenant-not-to-compete and (iii) a $6,000 payment to the Company
for a ten-year licensing agreement with the Venture to continue the use of the
"Prime Outlets" brand name. Additionally, the Company is in discussions with
Estein regarding modification of the terms of the sale of the future expansion
to Prime Outlets at Willliamsburg.
On November 19, 1999, the Company completed the initial installment of the
Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at
Birch Run to the Venture for aggregate consideration of $117,000, including a
$64,500 "wrap-around" first mortgage provided by the Company. In connection with
the sale of Prime Outlets at Birch Run, the Company received cash proceeds of
$33,303, net of transaction costs, and recorded a loss on the sale of real
estate of $9,326. Effective November 19, 1999, the Company commenced accounting
for its 30.0% ownership interest in Prime Outlets at Birch Run in accordance
with the equity method of accounting. The "wrap-around" first mortgage provided
by the Company to the Venture has a ten-year term at a fixed interest rate of
7.75% requiring monthly payments of principal and interest pursuant to a 25-year
amortization schedule. The Company's net investment in the "wrap-around" first
mortgage as of June 30, 2000 and December 31, 1999 was $10,674 and $10,745,
respectively, which is included in other assets in the Consolidated Balance
Sheet. Additionally, the Venture assumed $53,755 of outstanding mortgage
indebtedness. Included in the aggregate consideration is a $5,500 payment
related to the covenant-not-to-compete and a $3,000 payment related to the
licensing agreement. The payments to the Company for the covenant-not-to-compete
and the licensing agreement are included in accounts payable and other
liabilities in the Consolidated Balance Sheet and will be amortized into income
over their ten-year lives.
During the fourth quarter of 1999, the Company recorded a loss on the sale of
real estate of $5,827 related to the write-down of the carrying value of Prime
Outlets at Williamsburg based on the terms of the Prime/Estein Joint Venture
Agreement. On February 23, 2000, the Company completed the second installment of
the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets
at Williamsburg to the Venture for aggregate consideration of $59,000, including
(i) the assumption of mortgage indebtedness of $32,500, (ii) a $1,250 payment
related to the covenant-not-to-compete and (iii) a $1,500 payment related to the
licensing agreement. In connection with the sale of Prime Outlets at
Williamsburg, the Company received (i) cash proceeds of $11,063, net of
transaction costs, and (ii) a promissory note in the amount of $10,000 from the
Venture, such amount to be payable on or before December 15, 2000. The
promissory note requires the monthly payment of interest in arrears at an annual
rate of 7.75%.
The Company now expects to close on the sale of Prime Outlets at Hagerstown for
aggregate consideration of approximately $80,500 during the third quarter of
2000. The Company expects to receive net proceeds of approximately $19,000,
which will be used to repay short-term indebtedness and for general corporate
purposes. Completion of this transaction remains subject to various conditions
and there can be no assurance as to whether or when this transaction will be
consummated. As of June 30, 2000, the Company classified $59,261 representing
the aggregate carrying value of Prime Outlets at Hagerstown as assets held for
sale in its Consolidated Balance Sheet. As of December 31, 1999, the Company
classified $97,639 representing the aggregate carrying value of Prime Outlets at
Williamsburg and Prime Outlets at Hagerstown as assets held for sale in its
Consolidated Balance Sheet.
Note 5 - Shareholders' Equity
The Company is authorized to issue up to (i) 150,000,000 shares of common stock
and (ii) 24,315,000 shares of preferred stock in one or more series. At June 30,
2000, 43,577,916 shares of common stock, 2,300,000 shares of 10.5% Series A
Senior Cumulative Preferred Stock ("Senior Preferred Stock") and 7,828,125
shares of 8.5% Series B Cumulative Participating Convertible Preferred Stock
("Series B Convertible Preferred Stock") were issued and outstanding.
Dividends on the Senior Preferred Stock are payable quarterly in the amount of
$2.625 per share per annum. Dividends on the Series B Convertible Preferred
Stock are payable quarterly at the greater of (i) $2.125 per share per annum or
(ii) the dividends on the number of shares of Common Stock into which a share of
Series B Convertible Preferred Stock will be convertible at the conversion price
of $20.90 per share of Common Stock. At June 30, 2000, there were 9,363,786
shares of Common Stock reserved for future issuance upon conversion of the
Series B Convertible Preferred Stock.
The Senior Preferred Stock and Series B Convertible Preferred Stock have a
liquidation preference equivalent to $25.00 per share plus the amount equal to
any accrued and unpaid dividends thereon. As of June 30, 2000, unpaid dividends
for the period November 16, 1999 through June 30, 2000 on the Senior Preferred
Stock and Series B Convertible Preferred Stock aggregated $3,773 and $10,398,
respectively.
In order to qualify as a Real Estate Investment Trust ("REIT") for federal
income tax purposes, the Company is required to pay distributions to its common
and preferred shareholders of at least 95.0% of its REIT taxable income in
addition to satisfying other requirements. Although the Company intends to make
distributions in accordance with the requirements of the Internal Revenue Code
of 1986, as amended, necessary to remain qualified as a REIT, it also intends to
retain such amounts as it considers necessary from time to time for capital and
liquidity needs of the Company.
The Company's current policy with respect to common stock distributions is to
only make payments to the extent necessary to maintain its status as a REIT for
federal income tax purposes. Based on the Company's current federal income tax
projections, it does not expect to pay any distributions on its common stock or
common units of limited partnership interest in Prime Retail, L.P. during 2000.
With respect to distributions on the Company's Senior Preferred Stock and Series
B Convertible Preferred Stock, the Board of Directors did not declare a
quarterly distribution on such preferred stock due February 15, 2000 and May 15,
2000, respectively. The Board of Directors announced on July 24, 2000 that,
based on the Company's current financial situation and the Company's current
federal income tax projections, the Company does not anticipate paying any
quarterly distributions on the Senior Preferred Stock and the Series B
Convertible Preferred Stock during the remainder of 2000. The Company is in
arrears on its Preferred Stock distributions due February 15, 2000 and May 15,
2000. Non-payment of the quarterly preferred stock distributions due August 15,
2000 will represent the third consecutive quarter that such dividends are in
arrears. The holders of the Senior Preferred Stock and Series B Convertible
Preferred Stock have the right to elect two additional members to the Company's
Board of Directors if the equivalent of six consecutive quarterly dividends on
these series of preferred stock are in arrears. Each of such two directors would
be elected to serve until the earlier of (i) the election and qualification of
such director's successor, or (ii) payment of the dividend arrearage.
The Company is currently prohibited under the terms of more than one of its
credit agreements from paying dividends or distributions as a result of
non-compliance with a financial covenant. In addition, the Company may make no
distributions to its common shareholders unless it is current with respect to
distributions to its preferred shareholders. Annualized dividends on the
Company's Senior Preferred Stock and Series B Convertible Preferred Stock
outstanding as of June 30, 2000 are $6,038 and $16,636, respectively.
Note 6 - Special Charges
On April 12, 2000, the Company announced that it had been unable to conclude an
agreement to transfer ownership of its wholly-owned e-commerce subsidiary,
primeoutlets.com inc., also known as eOutlets.com, to a management-led investor
group comprised of eOutlets.com management and outside investors. Effective
April 12, 2000, eOutlets.com ceased all operations. In connection with the
discontinuance of eOutlets.com, the Company incurred a non-recurring loss of
$14,279 which includes (i) the write-off of $3,497 of costs capitalized during
1999 and (ii) $10,782 of costs incurred during the six months ended June 30,
2000.
During the second quarter of 2000, management established a formal plan to sell
two of its properties and, accordingly, reclassified their respective carrying
values to assets held for sale in the Consolidated Balance Sheet as of June 30,
2000. In accordance with the requirements of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of", the Company incurred a provision for asset
impairment of $8,538 to reduce the carrying value of these properties to their
estimated sales value, less cost to dispose. The aggregate carrying value of
these properties as of June 30, 2000 was $6,639.
The operating results for the Company's Designer Connection outlet stores are
reflected in Loss on Designer Connection in the Consolidated Statements of
Operations for all periods presented. When accounting for the fourth quarter of
1999, the Company decided to discontinue the operations of its Designer
Connection outlet stores. The operations of the Designer Connection outlet
stores ceased during June of 2000.
Note 7 - Commitments and Contingencies
The Company was required, pursuant to a real estate purchase agreement and two
ground leases in which it is the ground lessee, to purchase for $6,809 the
unowned 50% interests in parcels of land underlying Phases III and IV of Prime
Outlets at Gilroy in Gilroy, California. The Company did not close on the
scheduled closing date. The seller has several rights and remedies under the
relevant documents, including amending the base rent under the ground leases,
amending the purchase price, and seeking specific performance. On August 9, 2000
the seller notified the Company that it has exercised its right under the
relevant documents require the Company to close within 180 days. The seller also
reserved its other remedies under the relevant documents. The seller does not
have the right to terminate the ground leases a a remedy.
Note 8 - 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 and its affiliates were defendants in a lawsuit filed on August 10,
1999 in the Circuit Court for Baltimore City and removed to U. S. District Court
for the District of Maryland (the "U.S. District Court") on August 20, 1999. The
plaintiff alleged that the Company and its related entities overcharged tenants
for common area maintenance charges and promotion fund charges. The U.S.
District Court dismissed the lawsuit on June 19, 2000. The plaintiff has filed a
notice of its appeal from the U.S. District Court's decision. The outcome of the
appeal, and the ultimate liability of the Company, if any, if the dismissal is
overturned on appeal, cannot currently be predicted. Management believes that
the Company has acted properly and intends to defend this lawsuit vigorously.
Several entities (the "Plaintiffs") have filed or stated an intention to file
lawsuits (the "Lawsuits") against the Company and its affiliates in which the
Plaintiffs are seeking to hold them responsible under various legal theories for
liabilities incurred by primeoutlets.com, inc., also known as eOutlets.com.
Primeoutlets.com, inc. is also a defendant in some, but not all, of the
Lawsuits. The Company believes that it is not liable to the Plaintiffs as there
was no privity of contract between it and the respective Plaintiffs. The Company
intends to defend all Lawsuits vigorously. In the case captioned Convergys
Customer Management Group, Inc. v. Prime Retail, Inc. and primeoutlets.com,
inc., currently pending in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss Plaintiff's claim that the Company
was liable for primeoutlets.com, inc.'s breach of contract based on the doctrine
of piercing the corporate veil. The outcome of these Lawsuits, and the ultimate
liability of the Company, if any, cannot be predicted.
The New York Stock Exchange and the Securities and Exchange Commission have
notified the Company that they are reviewing transactions in the stock of the
Company prior to the Company's January 18, 2000 press release concerning
financial matters.
<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. These statements are subject to potential risks and uncertainties
and, therefore, actual results may differ materially. Such forward-looking
statements are subject to certain risks and uncertainties, including, but not
limited to, the risk that the Company may be unable to obtain waivers or
amendments to the provisions of its credit agreements that are presently in
default or to refinance the indebtedness outstanding under such agreements in
the event they are accelerated; the effects of future events on the Company's
financial performance; 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 planned
asset sales; 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; 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; risks associated with litigation; and
risks associated with newly arising competition from web-based retailers.
Outlet Portfolio
The Company grew to its present size, a process largely completed by the end of
1999, by developing and acquiring outlet centers and expanding its existing
outlet centers. As summarized in TABLE 1, the Company's outlet portfolio
consisted of 51 outlet centers totaling 14,913,000 square feet of gross leasable
area ("GLA") at June 30, 2000, compared to 50 operating manufacturers' outlet
centers totaling 14,343,000 square feet of GLA at June 30, 1999. The increase in
the number of outlet centers and the GLA in the Company's outlet portfolio are
collectively referred to as the "Portfolio Expansion."
On November 19, 1999, the Company sold Prime Outlets at Birch Run, which
contains 724,000 square feet of GLA, to a joint venture partnership with an
unrelated party, (the "Prime/Estein Venture"). Additionally, on February 23,
2000, the Company sold Prime Outlets at Williamsburg, which contains 274,000
square feet of GLA, to the Prime/Estein Venture. The Company owns a 30% interest
in the Prime/Estein Venture. Commencing on the dates of disposition, the Company
accounts for the operating results of these outlet centers in accordance with
the equity method of accounting. The sales of these outlet centers are
collectively referred to as the "Prime/Estein Transaction."
During 1999, the Company (i) opened two expansions to existing outlet centers
totaling 85,000 square feet of GLA (of which 21,000 square feet and 64,000
square feet opened in the first and third quarters, respectively) and (ii)
acquired from Horizon Group Properties, Inc. ("HGP") ownership interests in the
Bellport Outlet Center(in September 1999) which consists of 292,000 square feet
of GLA. In the first quarter of 2000, the Company opened a 68,000 square foot
expansion at Prime Outlets at Hagerstown relating to the second home furnishing
store operated by The Home Co., in which a 47.6% interest is owned by the
Company. In the second quarter of 2000, the Company opened a 98,000 square foot
expansion at Prime Outlets at Hagerstown and two expansions aggregating 48,000
square feet at Prime Outlets at San Marcos.
Between December 31, 1999 and June 30, 2000, the Company's outlet center
portfolio experienced a decline in occupancy from 93% to 91%. The decline was
primarily attributable to tenant departures subsequent to the holiday shopping
season as well as certain tenant bankruptcies and adbandonments. For comparison,
the Company's outlet center portfolio was 94% occupied on June 30, 1999.
<PAGE>
<TABLE>
Portfolio of Properties
June 30, 2000
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Kittery - Kittery Maine.............................. I April 1984 25,000 100%
II May 1984 78,000 100
III August 1989 18,000 100
IV May 1998 10,000 100
------- ---
131,000 100
Prime Outlets at Fremont - Fremont, Indiana............................ I October 1985 118,000 92
II November 1993 51,000 100
III October 1994 60,000 87
------- ---
229,000 92
Prime Outlets at Birch Run (2) - Birch Run, Michigan................... I-XVI Various 591,000 97
XVII-
XVIII 1997 133,000 96
------- ---
724,000 97
Prime Outlets at Latham - Latham, New York............................. I August 1987 43,000 88
Prime Outlets at Michigan City - Michigan City, Indiana................ I November 1987 199,000 100
II May 1988 130,000 97
III July 1991 36,000 91
IV July 1994 42,000 100
V December 1994 26,000 98
VI May 1995 58,000 96
------- ---
491,000 98
Prime Outlets at Williamsburg (3) - Williamsburg, Virginia............. I April 1988 67,000 96
II November 1988 60,000 100
III October 1990 49,000 95
IV 1995 98,000 100
------- ---
274,000 98
Prime Outlets at Kenosha - Kenosha, Wisconsin.......................... I September 1988 89,000 97
II July 1989 65,000 100
III May 1990 115,000 85
------- ---
269,000 93
Prime Outlets at Silverthorne - Silverthorne, Colorado................. I November 1988 95,000 97
II November 1990 75,000 95
III November 1993 88,000 80
------- ---
258,000 91
Prime Outlets at Edinburgh - Edinburgh, Indiana........................ I 1988 156,000 100
II November 1994 142,000 97
------- ---
298,000 99
Prime Outlets at Burlington - Burlington, Washington .................. I May 1989 89,000 84
II October 1989 36,000 100
III April 1993 49,000 97
------- ---
174,000 91
Prime Outlets at Queenstown - Queenstown, Maryland..................... I June 1989 67,000 97
II June 1990 55,000 100
III January 1991 16,000 97
IV June 1992 14,000 97
V August 1993 69,000 100
------- ---
221,000 99
</TABLE>
<PAGE>
<TABLE>
Portfolio of Properties (continued)
June 30, 2000
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Hillsboro - Hillsboro, Texas.......................... I October 1989 95,000 96%
II January 1992 101,000 95
III May 1995 163,000 92
------- ---
359,000 94
Prime Outlets at Oshkosh - Oshkosh, Wisconsin.......................... I November 1989 215,000 85
II July 1991 45,000 93
------- ---
260,000 86
Prime Outlets at Warehouse Row (4) - Chattanooga, Tennessee............ I November 1989 95,000 84
Prime Outlets at Gilroy - Gilroy, California........................... I January 1990 94,000 98
II August 1991 109,000 97
III October 1992 137,000 96
IV July 1994 170,000 99
V November 1995 69,000 100
------- ---
579,000 98
Prime Outlets at Perryville - Perryville, Maryland..................... I June 1990 148,000 88
Prime Outlets at Sedona - Sedona, Arizona ............................. I August 1990 82,000 100
Prime Outlets at San Marcos - San Marcos, Texas........................ I August 1990 177,000 96
II August 1991 70,000 91
III August 1993 117,000 97
IIIB November 1994 20,000 91
IIIC November 1995 35,000 75
IIID May 1998 18,000 100
VA August 1999 64,000 100
VB May 2000 17,000 100
VC May 2000 31,000 69
------- ---
549,000 96
Prime Outlets at Anderson - Anderson, California....................... I August 1990 165,000 93
Prime Outlets at Post Falls - Post Falls, Idaho ....................... I July 1991 111,000 71
II July 1992 68,000 86
------- ---
179,000 77
Prime Outlets at Ellenton - Ellenton, Florida.......................... I October 1991 187,000 98
II August 1993 123,000 98
III October 1996 30,000 100
IV November 1998 141,000 97
------- ---
481,000 98
Prime Outlets at Morrisville - Raleigh - Durham, North Carolina........ I October 1991 181,000 93
II July 1996 6,000 100
------- ---
187,000 93
Prime Outlets at Naples - Naples/Marco Island, Florida................. I December 1991 94,000 83
II December 1992 32,000 100
III March 1998 20,000 98
------- ---
146,000 89
Prime Outlets at Conroe - Conroe, Texas................................ I January 1992 93,000 91
II June 1994 163,000 90
III October 1994 26,000 79
------- ---
282,000 89
Bellport Outlet Center(5) - Bellport, New York......................... I May 1992 95,000 85
II November 1996 126,000 83
III October 1997 71,000 60
------- ---
292,000 76
</TABLE>
<PAGE>
<TABLE>
Portfolio of Properties (continued)
June 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Niagara Falls USA - Niagara Falls, New York........... I July 1992 300,000 98%
II August 1995 234,000 89
------- ---
534,000 94
Prime Outlets at Woodbury - Woodbury, Minnesota........................ I July 1992 129,000 77
II November 1993 100,000 83
III August 1994 21,000 52
------- ---
250,000 77
Prime Outlets at Calhoun - Calhoun, Georgia............................ I October 1992 123,000 96
II October 1995 131,000 89
------- ---
254,000 93
Prime Outlets at Castle Rock - Castle Rock, Colorado................... I November 1992 181,000 95
II August 1993 94,000 93
III November 1993 95,000 100
IV August 1997 110,000 91
------- ---
480,000 95
Prime Outlets at Bend - Bend, Oregon................................... I December 1992 97,000 100
II September 1998 35,000 99
------- ---
132,000 100
Prime Outlets at Jeffersonville II - Jeffersonville, Ohio.............. I March 1993 126,000 68
II August 1993 123,000 43
III October 1994 65,000 64
------- ---
314,000 57
Prime Outlets at Jeffersonville I - Jeffersonville, Ohio............... I July 1993 186,000 86
II November 1993 100,000 99
IIB November 1994 13,000 64
IIIA August 1996 35,000 97
IIIB March 1997 73,000 100
------- ---
407,000 92
Prime Outlets at Gainesville - Gainesville, Texas...................... I August 1993 210,000 80
II November 1994 106,000 88
------- ---
316,000 82
Prime Outlets at Loveland - Loveland, Colorado......................... I May 1994 139,000 90
II November 1994 50,000 88
III May 1995 114,000 91
IV May 1996 25,000 100
------- ---
328,000 91
Prime Outlets at Oxnard (6) - Oxnard, California....................... I June 1994 148,000 92
Prime Outlets at Grove City - Grove City, Pennsylvania................. I August 1994 235,000 97
II November 1994 95,000 100
III November 1995 85,000 96
IV November 1996 118,000 99
------- ---
533,000 98
Prime Outlets at Huntley - Huntley, Illinois........................... I August 1994 192,000 92
II November 1995 90,000 71
------- ---
282,000 85
Prime Outlets at Florida City - Florida City, Florida.................. I September 1994 208,000 81
</TABLE>
<PAGE>
<TABLE>
Portfolio of Properties (continued)
June 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Outlets at Pismo Beach - Pismo Beach, California................ I November 1994 148,000 88%
Prime Outlets at Tracy - Tracy, California............................ I November 1994 153,000 88
Prime Outlets at Vero Beach - Vero Beach, Florida..................... I November 1994 210,000 92
II August 1995 116,000 85
------- ---
326,000 90
Prime Outlets at Waterloo - Waterloo, New York......................... I March 1995 208,000 97
II September 1996 115,000 95
III April 1997 68,000 94
------- ---
391,000 96
Prime Outlets at Odessa - Odessa, Missouri............................. I July 1995 191,000 87
II November 1996 105,000 56
------- ---
296,000 76
Prime Outlets at Darien (7) - Darien, Georgia.......................... I July 1995 238,000 85
IIA November 1995 49,000 99
IIB July 1996 20,000 100
------- ---
307,000 88
Prime Outlets at New River (6) - Phoenix, Arizona...................... I September 1995 217,000 93
II September 1996 109,000 79
------- ---
326,000 89
Prime Outlets at Gulfport (8) - Gulfport, Mississippi.................. I November 1995 228,000 91
IIA November 1996 40,000 78
IIB November 1997 38,000 84
------- ---
306,000 88
Prime Outlets at Lodi - Burbank, Ohio.................................. I November 1996 205,000 90
IIA May 1998 33,000 92
IIB November 1998 75,000 82
------- ---
313,000 88
Prime Outlets at Gaffney - Gaffney, South Carolina..................... I November 1996 235,000 91
II July 1998 70,000 92
------- ---
305,000 91
Prime Outlets at Lee - Lee, Massachusetts............................. I June 1997 224,000 100
Prime Outlets at Lebanon - Lebanon, Tennessee......................... I April 1998 208,000 94
IIA March 1999 21,000 79
------- ---
229,000 92
Prime Outlets at Hagerstown (9) - Hagerstown, Maryland................. I August 1998 218,000 100
II November 1998 103,000 100
IIIA March 2000 68,000 100
IIIB April 2000 98,000 80
------- ---
487,000 95
------- ---
Total Outlet Centers (10) 14,914,000 90%
========== ===
====================================================================================================================================
</TABLE>
<PAGE>
Notes:
(1) Percentage reflects fully executed leases as of June 30, 2000 as a percent
of square feet of GLA.
(2) On November 19, 1999, the Company sold this outlet center to a joint
venture partnership with an unrelated party in which the Company owns a 30%
interest.
(3) On February 23, 2000, the Company sold this outlet center to a joint
venture partnership with an unrelated party in which the Company owns a 30%
interest.
(4) 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. This mixed-use
development includes 154,000 square feet of office space which was 99%
leased as of June 30, 2000.
(5) On September 1, 1999, the Company acquired from HGP 50% of Phase I and 51%
of Phases II and III of this outlet center which it owns in joint venture
partnerships with unrelated parties.
(6) The Company owns 50% of this outlet center in a joint venture partnership
with an unrelated third party.
(7) The Company operates this outlet center pursuant to a long-term ground
lease under which the Company receives the economic benefit of a 100%
ownership interest.
(8) The real property on which this outlet center is located is subject to a
long-term ground lease.
(9) The Company expects to close on the sale of this outlet center during the
third quarter of 2000 to a joint venture partnership with an unrelated
party in which the Company owns a 30.0% interest.
(10) The Company also owns three community centers not included in this table
containing 424,000 square feet of GLA in the aggregate that were 83% leased
as of June 30, 2000.
<PAGE>
Results of Operations
Comparison of the three months ended June 30, 2000 to the three months ended
June 30, 1999
Summary
The Company reported net income (loss) of $(15,759) and $5,037 for the three
months ended June 30, 2000 and 1999, respectively. During the second quarter of
1999, the Company recorded an extraordinary loss of $2,106 (net of minority
interests of $534) relating to the early extinguishment of certain long-term
debt. For the three months ended June 30, 2000, the net income (loss) applicable
to common shareholders was $(21,427), or $(0.49) per common share on a basic and
diluted basis. For the three months ended June 30, 1999, the net income
applicable to common shareholders was $(1,009), or $(0.02) per common share on a
basic and diluted basis.
Revenues
Total revenues were $68,584 for the three months ended June 30, 2000 compared to
$75,574 for the three months ended June 30, 1999, a decrease of $6,990, or 9.2%.
Base rents decreased $3,895, or 8.1%, in 2000 compared to 1999. Straight-line
rent income (included in base rents) were $28 and $221 for the three months
ended June 30, 2000 and 1999, respectively. These decreases are primarily due to
the Prime/Estein Transaction and the decrease in portfolio occupancy, partially
offset by the Portfolio Expansion.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, decreased $872, or 44.1%, during the three months
ended June 30, 2000 compared to the same period in 1999. This decline was
primarily attributable to the Prime/Estein Transaction. Tenant reimbursements,
which represent the contractual recovery from tenants of certain operating
expenses, decreased by $2,241, or 9.9%, primarily due to the Prime/Estein
Transaction and a decrease in portfolio occupancy, partially offset by the
Portfolio Expansion.
Interest and other income increased by $18, or 0.6%, to $2,649 during the three
months ended June 30, 2000 compared to $2,631 for the three months ended June
30, 1999. The increase reflects (i) an increase in late fee income of $487, (ii)
amortization of deferred fees of $281 related to the payments made to the
Company for covenant-not-to-compete and licensing agreements, (iii) higher
property management fee income of $167, and (iv) higher interest income of $74.
These increases were offset by reductions in equity earnings from investment in
partnerships of $985 and other miscellaneous items of $6.
Expenses
Property operating expenses decreased by $1,242, or 7.2%, to $15,958 for the
three months ended June 30, 2000 compared to $17,200 for the same period in
1999. Real estate taxes decreased by $219, or 3.8%, to $5,507 for the three
months ended June 30, 2000 from $5,726 in the same period in 1999. The decrease
in property operating expenses is primarily due to the Prime/Estein Transaction.
The decrease in real estate taxes is primarily attributable to the Prime/Estein
Transaction, partially offset by increased assessments and the Portfolio
Expansion. As shown in TABLE 2, depreciation and amortization expense decreased
by $2,782, or 15.0%, to $15,783 for the three months ended June 30, 2000
compared to $18,565 for the same period in 1999. This decrease is primarily due
to the Prime/Estein Transaction, partially offset by the Portfolio Expansion.
<PAGE>
TABLE 2 -- Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
--------------------------------------------------------------------------------
Three months ended June 30, 1999 2000
--------------------------------------------------------------------------------
Building and improvements $8,658 $10,127
Land improvements 1,365 1,452
Tenant improvements 5,007 6,398
Furniture and fixtures 589 368
Leasing commissions 164 220
-------- -------
Total $ 15,783 $18,565
======== =======
================================================================================
TABLE 3 -- Components of Interest Expense
The components of interest expense are summarized as follows:
--------------------------------------------------------------------------------
Three months ended June 30, 2000 1999
--------------------------------------------------------------------------------
Interest incurred $24,110 $22,807
Interest capitalized (1,259) (1,144)
Amortization of deferred financing costs 846 797
Amortization of interest rate protection contracts 17 3
------- --------
Total $23,714 $ 22,463
======= ========
================================================================================
As shown in TABLE 3, interest expense for the three months ended June 30, 2000
increased by $1,251, or 5.6%, to $23,714 compared to $22,463 for the same period
in 1999. This increase reflects (i) higher interest incurred of $1,303, (ii) an
increase in amortization of deferred financing costs of $49 and (iii) an
increase in amortization of interest rate protection contracts of $14. Partially
offsetting these items was an increase in the amount of interest capitalized in
connection with development projects of $115.
The increase in interest incurred is primarily attributable to an increase in
the weighted average interest rate for the three months ended June 30, 2000
compared to the same period in 1999. The weighted average interest rates were
7.90% and 7.19% for the 2000 and 1999 periods, respectively. The increase is
partially offset by a decrease of $48,341 in the Company's average debt
outstanding during the three months ended June 30, 2000 compared to the same
period in 1999.
Other charges for the three months ended June 30, 2000 increased by $3,903, or
650.5%, to $4,503 compared to $600 for the same period in 1999. This increase
reflects (i) a higher provision for uncollectible accounts receivable of $2,306
primarily due to certain tenant bankruptcies and abandonments, (ii) increased
pre-development costs of $706, (iii) higher marketing expenses of $415 and (iv)
an increase in all other miscellaneous charges of $476.
On April 12, 2000, the Company announced that it had been unable to conclude an
agreement to transfer ownership of its wholly-owned e-commerce subsidiary,
primeoutlets.com inc., also known as eOutlets.com, to a management-led investor
group comprised of eOutlets.com management and outside investors. Effective
April 12, 2000, eOutlets.com ceased all operations. The Company incurred a
non-recurring loss of $1,315 during the three months ended June 30, 2000 in
respect of this discontinuance of operations.
During the second quarter of 2000, management established a formal plan to sell
two of its properties and, accordingly, reclassified their respective carrying
values to assets held for sale in the Consolidated Balance Sheet as of June 30,
2000. In accordance with the requirements of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of", the Company incurred a provision for asset
impairment of $8,538 to reduce the carrying value of these properties to their
estimated sales value, less cost to dispose. The aggregate carrying value of
these properties as of June 30, 2000 was $6,639.
The operating results for the Company's Designer Connection outlet stores are
reflected in Loss on Designer Connection in the Consolidated Statements of
Operations for all periods presented. When accounting for the fourth quarter of
1999, the Company decided to discontinue the operations of its Designer
Connection outlet stores. The operations of the Designer Connection outlet
stores ceased during June of 2000.
In connection with re-leasing space to new merchants, the Company incurred $285
and $53 in capital expenditures during the three months ended June 30, 2000 and
1999, respectively.
Comparison of the six months ended June 30, 2000 to the six months ended June
30, 1999
Summary
The Company reported net income (loss) of $(27,478) and $14,335 for the six
months ended June 30, 2000 and 1999, respectively. During the second quarter of
1999, the Company recorded an extraordinary loss of $2,106 (net of minority
interests of $534), relating to the early extinguishment of certain long-term
debt. For the six months ended June 30, 2000, the net income (loss) applicable
to common shareholders was $(38,814), or $(0.89) per common share on a basic and
diluted basis. For the six months ended June 30, 1999, the net income applicable
to common shareholders was $16,089, or $0.37 and $0.04 per common share on a
basic and diluted basis, respectively.
Revenues
Total revenues were $141,425 for the six months ended June 30, 2000 compared to
$153,917 for the six months ended June 30, 1999, a decrease of $12,492, or 8.1%.
Base rents decreased $8,949, or 9.2%, in 2000 compared to 1999. Straight-line
rent (expense) income (included in base rents) were $(377) and $430 for the six
months ended June 30, 2000 and 1999, respectively. These decreases are primarily
due to the Prime/Estein Transaction and a decrease in portfolio occupancy,
partially offset by the Portfolio Expansion.
Percentage rents, which represent rents based on a percentage of sales volume
above a specified threshold, decreased $1,447, or 35.8%, during the six months
ended June 30, 2000 compared to the same period in 1999. This decline was
primarily attributable to the Prime/Estein Transaction. Tenant reimbursements,
which represent the contractual recovery from tenants of certain operating
expenses, decreased by $3,917, or 8.5%, primarily due to the Prime/Estein
Transaction and the decrease in portfolio occupancy, partially offset by the
Portfolio Expansion.
Interest and other income increased by $1,821, or 30.7%, to $7,743 during the
six months ended June 30, 2000 compared to $5,922 for the six months ended June
30, 1999. This increase reflects (i) a non-recurring first quarter 2000 gain on
sale of outparcel land in Camarillo, CA. of $2,471 (ii) an increase in lease
buy-out income of $709, and (iii) higher property management fee income of $389.
Partially offsetting these items were reductions in equity earnings from
investment in partnerships of $1,686 and other miscellaneous items of $62.
Expenses
Property operating expenses decreased by $2,647, or 7.3%, to $33,490 for the six
months ended June 30, 2000 compared to $36,137 for the same period in 1999. Real
estate taxes decreased by $55, or 0.5%, to $11,238 for the six months ended June
30, 2000 from $11,293 in the same period in 1999. The decrease in property
operating expenses is primarily due to the Prime/Estein Transaction, partially
offset by the Portfolio Expansion. The decrease in real estate taxes is
primarily attributable to the Prime/Estein Transaction, partially offset by
increased assessments and the Portfolio Expansion. As shown in TABLE 4,
depreciation and amortization expense decreased by $4,804, or 13.0%, to $32,020
for the six months ended June 30, 2000 compared to $36,824 for the same period
in 1999. This decrease is primarily due to the Prime/Estein Transaction and the
reclassification of certain properties to assets held for sale partially offset
by the Portfolio Expansion.
TABLE 4 -- Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
--------------------------------------------------------------------------------
Six months ended June 30, 2000 1999
--------------------------------------------------------------------------------
Building and improvements $17,456 $ 20,237
Land improvements 2,765 2,830
Tenant improvements 10,460 12,582
Furniture and fixtures 1,008 770
Leasing commissions 331 405
------- -------
Total $32,020 $36,824
======= =======
================================================================================
TABLE 5 -- Components of Interest Expense
The components of interest expense are summarized as follows:
--------------------------------------------------------------------------------
Six months ended June 30, 2000 1999
--------------------------------------------------------------------------------
Interest incurred $48,388 $44,493
Interest capitalized (2,359) (2,218)
Amortization of deferred financing costs 1,670 1,390
Amortization of interest rate protection contracts 38 60
------- -------
Total $47,737 $43,725
======= =======
================================================================================
As shown in TABLE 5, interest expense for the six months ended June 30, 2000
increased by $4,012, or 9.2%, to $47,737 compared to $43,725 for the same period
in 1999. This increase reflects higher interest incurred of $3,895 and an
increase in amortization of deferred financing costs of $280. Partially
offsetting these items was an increase in the amount of interest capitalized in
connection with development projects of $141 and a decrease in amortization of
interest rate protection contracts of $22.
The increase in interest incurred is primarily attributable to an increase in
the weighted average interest rate for the six months ended June 30, 2000
compared to the same period in 1999. The weighted average interest rates were
7.87% and 7.18% for the 2000 and 1999 periods, respectively. The increase is
partially offset by a decrease of $9,792 in the Company's average debt
outstanding during the six months ended June 30, 2000 compared to the same
period in 1999.
Other charges for the six months ended June 30, 2000 increased by $3,544, or
142.4%, to $6,032 compared to $2,488 for the same period in 1999. This increase
reflects (i) a higher provision for uncollectible accounts receivable of $2,280
primarily due to certain tenant bankruptcies and abandonments, (ii) increased
pre-development costs of $486, (iii) higher marketing expenses of $316, (iv)
higher ground lease expenses of $182, and (v) an increase in all other
miscellaneous charges of $280.
On April 12, 2000, the Company announced that it had been unable to conclude an
agreement to transfer ownership of its wholly-owned e-commerce subsidiary,
primeoutlets.com inc., also known as eOutlets.com, to a management-led investor
group comprised of eOutlets.com management and outside investors. Effective
April 12, 2000, eOutlets.com ceased all operations. In connection with the
discontinuance of eOutlets.com, the Company incurred a non-recurring loss of
$14,279 which includes (i) the write-off of $3,497 of costs capitalized during
1999 and (ii) $10,782 of costs incurred during the six months ended June 30,
2000.
During the second quarter of 2000, management established a formal plan to sell
two of its properties and, accordingly, reclassified their respective carrying
values to assets held for sale in the Consolidated Balance Sheet as of June 30,
2000. In accordance with the requirements of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of", the Company incurred a provision for asset
impairment of $8,538 to reduce the carrying value of these properties to their
estimated sales value, less cost to dispose. The aggregate carrying value of
these properties as of June 30, 2000 was $6,639.
The operating results for the Company's Designer Connection outlet stores are
reflected in Loss on Designer Connection in the Consolidated Statements of
Operations for all periods presented. When accounting for the fourth quarter of
1999, the Company decided to discontinue the operations of its Designer
Connection outlet stores. The operations of the Designer Connection outlet
stores ceased during June of 2000.
In connection with re-leasing space to new merchants, the Company incurred $509
and $839 in capital expenditures during the six months ended June 30, 2000 and
1999, respectively.
Sales
For the three and six month periods ended June 30, 2000, same-space sales in
centers owned by the Company increased 2% and 3%, respectively, compared to the
same periods in 1999. "Same-space sales" is defined as the weighted average
sales per square foot reported by merchants for space open since January 1,
1999. For the three and six month periods ended June 30, 2000, same-store sales
decreased by 3% and 1%, respectively, compared to the same periods in 1999.
"Same-store sales" is defined as the weighted average sales per square foot
reported by merchants for stores opened and operated by the same merchant since
January 1, 1999. The weighted average sales per square foot reported by all
merchants was $257 for the year ended December 31, 1999.
<PAGE>
Liquidity and Capital Resources
Sources and Uses of Cash
For the six months ended June 30, 2000, net cash provided by operating
activities was $33,536, net cash used in investing activities was $26,300, and
net cash used in financing activities was $7,974.
The uses of cash for investing activities during the six months ended June 30,
2000 of $26,300 included (i) costs associated with development and construction
of Prime Outlets of Puerto Rico which opened July 27, 2000 and four expansions
to existing centers aggregating approximately 389,000 square feet of GLA which
opened during the six months ended June 30, 2000 and (ii) costs related to
eOutlets.com. Partially offsetting these uses were $11,063 of net proceeds from
the sale of Prime Outlets at Williamsburg and $4,622 of net proceeds from the
sale of outparcel land in Camarillo, CA.
The gross uses of cash for financing activities during the six months ended June
30, 2000 included (i) principal repayments on notes payable of $19,958 and (ii)
deferred financing costs of $750. Partially offsetting these items were proceeds
from new borrowings of $12,734.
Although the Company believes that cash flow from (i) operations, (ii) new
borrowings, (iii) refinancing of certain existing debt and (iv) the potential
sale of a joint venture interest in certain outlet centers will be sufficient to
satisfy its scheduled debt service obligations and to sustain its operations for
the next year, there can be no assurance that the Company will be successful in
obtaining the required amount of funds for these items or that the terms of
capital raising activities, if any, will be as favorable as the Company has
experienced in prior periods. At June 30, 2000, unused commitments available for
borrowings under various loan facilities were $812 in the aggregate. See "Lehman
Brothers Loan Negotiations and Debt Facility Compliance" below.
Dividends and Distributions
In order to qualify as a Real Estate Investment Trust ("REIT") for federal
income tax purposes, the Company is required to pay distributions to its common
and preferred shareholders of at least 95.0% of its REIT taxable income in
addition to satisfying other requirements. Although the Company intends to make
distributions in accordance with the requirements of the Internal Revenue Code
of 1986, as amended, necessary to remain qualified as a REIT, it also intends to
retain such amounts as it considers necessary from time to time for capital and
liquidity needs of the Company.
The Company's current policy with respect to common stock distributions is to
only make payments to the extent necessary to maintain its status as a REIT for
federal income tax purposes. Based on the Company's current federal income tax
projections, it does not expect to pay any distributions on its common stock or
common units of limited partnership interest in Prime Retail, L.P. during 2000.
With respect to distributions on the Company's Senior Preferred Stock and Series
B Convertible Preferred Stock, the Board of Directors did not declare a
quarterly distribution on such preferred stock due February 15, 2000 and May 15,
2000, respectively. The Board of Directors announced on July 24, 2000 that,
based on the Company's current financial situation and the Company's current
federal income tax projections, the Company does not anticipate paying any
quarterly distributions on the Senior Preferred Stock and the Series B
Convertible preferred Stock during the remainder of 2000. The Company is in
arrears on its Preferred Stock distributions due February 15, 2000 and May 15,
2000. Non-payment of the quarterly preferred stock distributions due August 15,
2000 will represent the third consecutive quarter that such dividends are in
arrears. The holders of the Senior Preferred Stock and Series B Convertible
Preferred Stock have the right to elect two additional members to the Company's
Board of Directors if the equivalent of six consecutive quarterly dividends on
these series of preferred stock are in arrears. Each of such two directors would
be elected to serve until the earlier of (i) the election and qualification of
such director's successor, or (ii) payment of the dividend arrearage.
The Company is currently prohibited under the terms of more than one of its
credit agreements from paying dividends or distributions as a result of
non-compliance with a financial covenant. In addition, the Company may make no
distributions to its common shareholders unless it is current with respect to
distributions to its preferred shareholders. Annualized dividends on the
Company's Senior Preferred Stock and Series B Convertible Preferred Stock
outstanding as of June 30, 2000 are $6,038 and $16,636, respectively.
Debt Repayments
The Company's aggregate indebtedness was $1,220,946 and $1,260,670 at June 30,
2000 and December 31,1999, respectively. At June 30, 2000, such indebtedness had
a weighted average maturity of 4.5 years and bore interest at a weighted average
interest rate of 7.90% per annum. At June 30, 2000, $931,634, or 76.3%, of such
indebtedness bore interest at fixed rates and $289,312, or 23.7%, of such
indebtedness bore interest at variable rates. The Company is obligated to repay
$80,761 and $227,688 of mortgage indebtedness during the remainder of 2000 and
2001, respectively. See "Lehman Brothers Loan Negotiations and Debt Facility
Compliance" below.
The maturity of the Company's $25,000 unsecured line of credit was extended from
July 11, 2000 to August 30, 2000, or earlier if the Company terminates its
efforts to close on an anticipated debt financing with Lehman Brothers. The
Company is in discussion with the lender to obtain an additional short-term
extension of the loan.
The maturity of the Company's $20,000 subordinated loan was extended from June
30, 2000 to August 14, 2000. The Company is in discussion with the lender to
obtain an additional short-term extension of the loan.
The maturity of the Company's $3,559 first mortgage, collateralized by property
in Knoxville, TN, was extended from June 22, 2000 to August 21, 2000. The
Company is in discussion with the lender to obtain an additional extension of
the loan.
Debt Contingencies
As of June 30, 2000, the Company is a guarantor or otherwise obligated with
respect to an aggregate of $12,591 of the indebtedness of Horizon Group
Properties, Inc. and its affiliates ("HGP") including a $10,000 obligation under
HGP's secured credit facility which bears a rate of interest of LIBOR plus
1.90%, matures in July 2001, and is collateralized by seven properties located
throughout the United States.
On April 1, 1998, Horizon Group, Inc. ("Horizon") consummated an agreement with
Castle & Cooke Properties, Inc. which released Horizon from its future
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 any continuing 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, 2000, the Company held 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.
Mortgage indebtedness with an outstanding balance of $28,837 at June 30, 2000,
for which one of the Company's subsidiary partnerships remains legally
responsible, is collateralized by a first mortgage on the Lake Elsinore outlet
center. The joint venture, as a limited partner in such subsidiary partnership,
is obligated to make capital contributions to the partnership to pay debt
financing, operating and other expenses under certain conditions. The subsidiary
partnership will remain legally responsible for such expenses in case of any
shortfalls by the joint venture with respect to such capital contributions.
Castle & Cooke has provided the Company with an unconditional guaranty with
respect to any such shortfalls.
Lehman Brothers Loan Negotiations and Debt Facility Compliance
As previously announced, the Company expects to close $110,000 of new loans from
Lehman Brothers (the "Lehman Brothers Loans"). The Company now anticipates
closing the Lehman Brothers Loans in two phases. The first phase, a $20,000
first mortgage loan on the recently opened Prime Outlets of Puerto Rico, is
expected to close on or about September 1, 2000. The second phase, a $90,000
mezzanine loan (the "Mezzanine Loan"), is expected to close by the end of the
third quarter. The Mezzanine Loan will be secured by mortgages on, and pledges
of equity interests in, certain outlet centers. The net proceeds from the Lehman
Brothers Loans will be used to repay up to $80,175 of short-term indebtedness
and for general corporate purposes, including the funding of programs to attract
and retain tenants through increased marketing and capital improvements. The
closing of the Lehman Brothers Loans is subject to customary conditions as well
as the agreement by certain existing lenders to modify terms of their loans.
There can be no assurance that the Lehman Brothers Loans will close. In
anticipation of closing the Lehman Brothers Loans, the Company obtained
short-term extensions of its $20,000 subordinated loan to August 14, 2000 and
its $25,000 unsecured line of credit to August 30, 2000, or earlier if the
Company terminates its efforts to close on the Lehman Brothers Loans. The
Company is in discussions with the lenders to obtain additional short-term
extensions of the two loans. The two loans are expected to be retired with the
net proceeds from the Lehman Brothers Loans.
Based on the financial results for the second quarter of 2000, the Company is
not in compliance with financial covenants contained in certain of its debt
facilities. Non-compliance with these covenants may have triggered cross-default
provisions with respect to several other Company debt facilities. Certain of the
affected lenders have alleged that non-compliance with the financial covenants
constitutes a default under their loan documents. The Company has taken the
position with these lenders that the nature and extent of the non-compliance
with the financial covenants would not permit any lender to accelerate the
maturity of its loan or pursue other remedies under the loan documents. None of
these loans has been accelerated nor has notice of any lender's intention to
accelerate been received by the Company. The Company is in discussions with the
affected lenders regarding either paying off these loans in their entirety using
proceeds from the Lehman Brothers Loans or modifying the terms and financial
covenants so that the Company will be in compliance at the time the Lehman
Brothers Loans close.
If the Company is unable to close the Lehman Brothers Loans, it will look to
obtain alternative financing from other financial institutions or the potential
sale of assets or a joint venture interest in certain outlet centers as sources
of cash to repay the amounts outstanding under such loans. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustment to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Although the Company continues to maintain its regularly scheduled interest
payments under all of its other indebtedness, there can be no assurance that one
or all of the affected lenders will not attempt to accelerate the maturity of
its indebtedness or pursue other remedies under their respective loan documents.
Additionally, there can be no assurance that the Company will be in compliance
with its financial debt covenants in future periods since the Company's future
financial performance is subject to various risks and uncertainties, including
but not limited to, the effects of increases in market interest rates from
current levels; the risk of potential increases in vacancy rates and the
resulting impact on the Company's revenue' and risks associated with refinancing
the Company's current debt obligations or obtaining new financing under terms as
favorable as the Company has experienced in prior periods.
The Company, through affiliates, holds 50% interests in the owners of an outlet
center in Oxnard, CA and phase one of an outlet center in Bellport, NY. First
mortgage loans on these properties have matured and are currently in default.
The Company is exploring all options to resolve these defaults, including
transferring the outlet centers to the lenders. Such transfers would not be
expected to have a material effect on the Company's results from operations or
its financial condition.
Prime/Estein Joint Venture Transaction
On August 6, 1999, the Company entered into an agreement (the "Prime/Estein
Joint Venture Agreement") to sell three factory outlet centers, including two
future expansions, to a joint venture (the "Venture") between an affiliate of
Estein & Associates USA, Ltd. ("Estein"), a real estate investment company, and
the Company. The Prime/Estein Joint Venture Agreement provided for a total
purchase price of $274,000, including (i) the assumption of approximately
$151,500 of first mortgage indebtedness, (ii) an $8,000 payment to the Company
for a ten-year covenant-not-to-compete and (iii) a $6,000 payment to the Company
for a ten-year licensing agreement with the Venture to continue the use of the
"Prime Outlets" brand name. Additionally, the Company is in discussions with
Estein regarding modification of the terms of the sale of the future expansion
to Prime Outlets at Williamsburg.
On November 19, 1999, the Company completed the initial installment of the
Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at
Birch Run to the Venture for aggregate consideration of $117,000, including a
$64,500 "wrap-around" first mortgage provided by the Company. In connection with
the sale of Prime Outlets at Birch Run, the Company received cash proceeds of
$33,303, net of transaction costs, and recorded a loss on the sale of real
estate of $9,326. Effective November 19, 1999, the Company commenced accounting
for its 30.0% ownership interest in Prime Outlets at Birch Run in accordance
with the equity method of accounting. The "wrap-around" first mortgage provided
by the Company to the Venture has a ten-year term at a fixed interest rate of
7.75% requiring monthly payments of principal and interest pursuant to a 25-year
amortization schedule. The Company's net investment in the "wrap-around" first
mortgage as of June 30, 2000 and December 31, 1999 was $10,674 and $10,745,
respectively, which is included in other assets in the Consolidated Balance
Sheet. Additionally, the Venture assumed $53,755 of outstanding mortgage
indebtedness. Included in the aggregate consideration is a $5,500 payment
related to the covenant-not-to-compete and a $3,000 payment related to the
licensing agreement. The payments to the Company for the covenant-not-to-compete
and the licensing agreement are included in accounts payable and other
liabilities in the Consolidated Balance Sheet and will be amortized into income
over their ten-year lives.
During the fourth quarter of 1999, the Company recorded a loss on the sale of
real estate of $5,827 related to the write-down of the carrying value of Prime
Outlets at Williamsburg based on the terms of the Prime/Estein Joint Venture
Agreement. On February 23, 2000, the Company completed the second installment of
the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets
at Williamsburg to the Venture for aggregate consideration of $59,000, including
(i) the assumption of mortgage indebtedness of $32,500, (ii) a $1,250 payment
related to the covenant-not-to-compete and (iii) a $1,500 payment related to the
licensing agreement. In connection with the sale of Prime Outlets at
Williamsburg, the Company received (i) cash proceeds of $11,063, net of
transaction costs, and (ii) a promissory note in the amount of $10,000 from the
Venture, such amount to be payable on or before December 15, 2000. The
promissory note requires the monthly payment of interest in arrears at an annual
rate of 7.75%.
The Company now expects to close on the sale of Prime Outlets at Hagerstown for
aggregate consideration of approximately $80,500 during the third quarter of
2000. The Company expects to receive net proceeds of approximately $19,000,
which will be used to repay short-term indebtedness and for general corporate
purposes. Completion of this transaction remains subject to various conditions
and there can be no assurance as to whether or when this transaction will be
consummated. As of June 30, 2000, the Company classified $59,261 representing
the aggregate carrying value of Prime Outlets at Hagerstown as assets held for
sale in its Consolidated Balance Sheet. As of December 31, 1999, the Company
classified $97,639 representing the aggregate carrying value of Prime Outlets at
Williamsburg and Prime Outlets at Hagerstown as assets held for sale in its
Consolidated Balance Sheet.
The Venture has agreed to retain the Company as its sole and exclusive managing
and leasing agent for a property management fee equal to 4.0% of gross rental
receipts. The Venture also will pay a monthly asset management and partnership
administration fee to an affiliate of Estein equal to 3.0% of the monthly net
operating income from the centers.
Commitments and Contingencies
The Company was required, pursuant to a real estate purchase agreement and two
ground leases in which it is the ground lessee, to purchase for $6,809 the
unowned 50% interests in parcels of land underlying Phases III and IV of Prime
Outlets at Gilroy in Gilroy, California. The Company did not close on the
scheduled closing date. The seller has several rights and remedies under the
relevant documents, including amending the base rent under the ground leases,
amending the purchase price, and seeking specific performance. On August 9, 2000
the seller notified the Company that it has exercised its right under the
relevant documents to require the Company to close within 180 days. The seller
also reserved its other remedies under the relevant documents. The seller does
not have the right to terminate the ground leases as a remedy.
Development
Prime Outlets of Puerto Rico, the first outlet center in Puerto Rico, which
contains 175,000 square feet of GLA, opened on July 27, 2000. Additionally, the
Company opened two expansions aggregating 166,000 square feet of GLA at Prime
Outlets at Hagerstown in March and April 2000. Furthermore, the Company opened
two expansions aggregating 48,000 square feet at Prime Outlets at San Marcos in
May of 2000. At June 30, 2000, the remaining budgeted capital expenditures for
these projects aggregated approximately $9,017.
Although the Company expects to fund the remaining development cost of these
projects from (i) retained cash flow from operations, (ii) construction loans,
(iii) the Lehman Brothers Loans, and (iv) the potential sale of a joint venture
interest in certain outlet centers, there can be no assurance that the Company
will be successful in obtaining the required amount of money to fund the
remaining development costs.
Economic Conditions
Most 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. Most of the 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.
Funds from Operations
Industry analysts generally consider Funds from Operations, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), an alternative
measure of performance of an equity REIT. In October 1999, NAREIT issued a new
white paper statement and redefined how funds from operations is calculated,
effective January 1, 2000. Funds from Operations is now defined by NAREIT as net
income (loss) determined in accordance with GAAP, excluding gains (or losses)
from sales of depreciable operating property, plus depreciation and amortization
(other than amortization of deferred financing costs and depreciation of
non-real estate assets) and after adjustment for unconsolidated partnership and
joint ventures.
Management believes that FFO is an important and widely-used measure of the
operating performance of REITs which provides a relevant basis for comparison to
other REITs. Therefore, FFO is presented to assist investors in analyzing the
performance of the Company. The Company's FFO is not comparable to FFO reported
by other REITs that do not define the term using the current NAREIT definition
or that interpret the current NAREIT definition differently than does the
Company. Therefore, the Company cautions that the calculation of FFO may vary
from entity to entity and as such the presentation of FFO by the Company may not
be comparable to other similarly titled measures of other reporting companies.
The Company believes that in order to facilitate a clear understanding of its
operating results, FFO should be examined in conjunction with net income
determined in accordance with GAAP. FFO does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or to
cash flows as a measure of liquidity or ability to make distributions.
TABLE 6 provides a reconciliation of income before allocations to minority
interests and preferred shareholders to FFO for the three and six months ended
June 30, 2000 and 1999. FFO decreased $23,739, or 88.5%, to $3,090 for the three
months ended June 30, 2000 from $26,829 for the three months ended June 30,
1999. FFO decreased $32,754, or 59.7%, to $22,085 for the six months ended June
30, 2000 from $54,839 for the six months ended June 30, 1999.
The 2000 FFO results include the following non-recurring items: (i) a second
quarter provision for asset impairment of $8,538 for two of the Company's
properties in accordance with the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", (ii) severance and other
compensation costs aggregating $2,421 ($671 in the second quarter), (iii) second
quarter professional fees of $1,455, and (iv) a first quarter gain on the sale
of outparcel land in Camarillo, CA. of $2,471. Excluding these non-recurring
items, FFO was $13,754 for the three months ended June 30, 2000, and $32,028 for
the six months ended June 30, 2000.
The change in FFO for the three and six months ended June 30, 2000 compared to
the same periods in 1999 is primarily attributable to the following factors:
o the loss of net operating income offset by decreased interest expense due
to the sale of a 70% joint venture interest in Prime Outlets at Birch Run
in November 1999 and Prime Outlets at Williamsburg in February 2000;
o reduced occupancy in the outlet center portfolio (91.0% and 90.7% at June
30, 2000 and March 31, 2000, respectively, compared to 92.7% and 93.6% at
June 30, 1999 and March 31, 1999, respectively);
o higher interest expense resulting from increased short-term indebtedness
and higher financing costs;
o increased corporate general and administrative expenses primarily the
result of (i) non-recurring severance and other compensation costs, (ii)
non-recurring professional fees relating to refinancing activities and
(iii) lower capitalization of overhead costs due to reduced development
activities;
o the provision for asset impairment for two of the Company's properties; and
o an increase in the provision for uncollectible accounts receivable
primarily due to certain tenant bankruptcies and abandonments.
<PAGE>
<TABLE>
TABLE 6 -- Funds from Operations
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three months ended Six months ended
June 30 June 30
---------------------- -----------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before minority interests $(15,759) $7,677 $ (27,446) $ 16,975
FFO adjustments:
Depreciation and amortization 15,783 18,565 32,020 36,824
Amortization of deferred financing costs
and interest rate protection contracts 865 800 1,709 1,450
Unconsolidated joint venture adjustments 1,128 174 1,714 429
Non-real estate depreciation and amortization (1,248) (930) (2,276) (1,727)
------- ------ ------ ------
FFO before discontinued operations 769 26,286 5,721 53,951
Discontinued operations - eOutlets.com 1,315 - 14,279 -
Discontinued operations - Designer Connection 1,006 543 2,085 888
-------- ------ ------- -------
FFO before allocations to minority interests and
preferred shareholders $ 3,090 $26,829 $22,085 $54,839
======== ====== ======= =======
====================================================================================================================================
</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 and its affiliates were defendants in a lawsuit filed on August 10,
1999 in the Circuit Court for Baltimore City and removed to U. S. District Court
for the District of Maryland (the "U.S. District Court") on August 20, 1999. The
plaintiff alleged that the Company and its related entities overcharged tenants
for common area maintenance charges and promotion fund charges. The U.S.
District Court dismissed the lawsuit on June 19, 2000. The plaintiff has filed a
notice of its appeal from the U.S. District Court's decision. The outcome of the
appeal, and the ultimate liability of the Company, if any, if the dismissal is
overturned on appeal, cannot currently be predicted. Management believes that
the Company has acted properly and intends to defend this lawsuit vigorously.
Several entities (the "Plaintiffs") have filed or stated an intention to file
lawsuits (the "Lawsuits") against the Company and its affiliates in which the
Plaintiffs are seeking to hold them responsible under various legal theories for
liabilities incurred by primeoutlets.com, inc., also known as eOutlets.com.
Primeoutlets.com, inc. is also a defendant in some, but not all, of the
Lawsuits. The Company believes that it is not liable to the Plaintiffs as there
was no privity of contract between it and the respective Plaintiffs. The Company
intends to defend all Lawsuits vigorously. In the case captioned Convergys
Customer Management Group, Inc. v. Prime Retail, Inc. and primeoutlets.com,
inc., currently pending in the Court of Common Pleas for Hamilton County (Ohio),
the Company prevailed in a motion to dismiss Plaintiff's claim that the Company
was liable for primeoutlets.com, inc.'s breach of contract based on the doctrine
of piercing the corporate veil. The outcome of these Lawsuits, and the ultimate
liability of the Company, if any, cannot be predicted.
The New York Stock Exchange and the Securities and Exchange Commission have
notified the Company that they are reviewing transactions in the stock of the
Company prior to the Company's January 18, 2000 press release concerning
financial matters.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
As a result of its financial results for the quarters ended December 31, 1999,
March 31, 2000 and June 30, 2000, the Company is not in compliance with
financial covenants contained in certain credit facilities. The Company is
currently in arrears in the payment of distributions on its 10.5% Series A
Senior Cumulative Preferred Stock ("Senior Preferred Stock") and 8.5% Series B
Cumulative Participating Convertible Preferred Stock ("Series B Convertible
Preferred Stock"). As of June 30, 2000, the aggregate arrearage on the Senior
Preferred Stock and the Series B Convertible Preferred Stock was $3,773 and
$10,398, respectively.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Shareholders Meeting held on June 21, 2000, 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 nominees for director proposed by the Company were elected. The votes
cast for these nominees were as set forth below:
Name For Against
Michael W. Reschke 35,214,774 4,365,243
Glenn D. Reschke 35,963,060 3,616,957
William P. Dickey 35,963,179 3,616,838
(b) The proposal to ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the year ending December 31, 2000 was approved. The
votes cast with respect to the proposal were as set forth below:
For Against Abstain
38,982,420 452,795 144,802
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 (EDGAR filing only)
(b) Reports on Form 8-K:
On May 31, 2000, the Company filed a Current Report on Form 8-K, dated May 23,
2000 containing the annual letter to the shareholders from Glenn D. Reschke, the
President and Chief Executive Officer of the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitivity
Interest Rate Risk
In the ordinary course of business, the Company is exposed to the impact of
interest rate changes. The Company employs established policies and procedures
to manage its exposure to interest rate changes. The Company uses a mix of fixed
and variable rate debt to (i) limit the impact of interest rate changes on its
results from operations and cash flows and (ii) to lower its overall borrowing
costs. The following table provides a summary of principal cash flows and
related interest rates by fiscal year of maturity, excluding acceleration
provisions. Variable interest rates are based on the weighted average rates of
the portfolio at June 30, 2000.
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year of Maturity
------------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 Thereafter Total
------------------------------ ------------ ----------- ----------- ----------- ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate:
Principal.................... $ 30,699 $ 36,688 $46,529 $348,761 $17,049 $56,402 $395,506 $931,634
Average interest rate........ 12.33% 7.44% 7.04% 7.76% 7.75% 6.98% 7.11% 7.54%
Variable rate:
Principal.................... $ 50,062 $191,0000 $ 637 $ 1,152 $46,461 - - $289,312
Average interest rate........ 9.68% 9.11% 8.15% 8.15% 8.15% - - 9.05%
====================================================================================================================================
</TABLE>
<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 14, 2000 /s/ Robert A. Brvenik
---------------------------
Robert A. Brvenik
Executive Vice President,
Chief Financial Officer and
Treasurer
