United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 31, 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
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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 May 12, 2000, the issuer had outstanding 43,397,916 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 March 31, 2000 and
December 31, 1999 ............................................... 1
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999.................................... 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 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.......................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 23
Item 2. Changes in Securities.......................................... 23
Item 3. Defaults Upon Senior Securities................................ 23
Item 4. Submission of Matters to a Vote of Security Holders............ 23
Item 5. Other Information.............................................. 23
Item 6. Exhibits or Reports on Form 8-K................................ 23
Signatures.............................................................. 24
<PAGE>
Prime Retail, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share information)
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March 31, 2000 December 31, 1999
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Assets
Investment in rental property:
Land............................. $ 181,916 $ 181,854
Buildings and improvements....... 1,564,780 1,560,710
Property under development....... 81,682 66,581
Furniture and equipment.......... 14,696 17,406
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1,843,074 1,826,551
Accumulated depreciation......... (199,823) (183,954)
---------- ----------
1,643,251 1,642,597
Cash and cash equivalents........... 776 7,343
Restricted cash..................... 28,755 28,131
Accounts receivable, net............ 18,220 18,926
Deferred charges, net............... 12,566 13,503
Assets held for sale................ 41,389 97,639
Due from affiliates, net............ 5,434 4,140
Investment in partnerships.......... 23,234 18,941
Other assets........................ 34,868 24,838
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Total assets............... $1,808,493 $1,856,058
========== ==========
Liabilities and Shareholders' Equity
Bonds payable....................... $ 32,900 $ 32,900
Notes payable (See Note 3).......... 1,192,051 1,227,770
Accrued interest.................... 8,633 8,033
Real estate taxes payable........... 12,690 10,700
Construction costs payable.......... 4,738 5,123
Accounts payable and other liabilities 71,011 73,340
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Total liabilities.......... 1,322,023 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 $59,764), 2,300,000 shares
issued and outstanding......... 23 23
8.5% Series B Cumulative Participating
Convertible Preferred Stock, $.01 par
value (liquidation preference of
$201,941), 7,828,125 shares issued and
outstanding..................... 78 78
Shares of common stock, 150,000,000 shares
authorized:
Common stock, $.01 par value,
43,397,916 and 43,368,620 shares issued
and outstanding, respectively... 434 434
Additional paid-in capital........ 709,122 709,122
Distributions in excess of
net income...................... (224,689) (212,970)
----------- ----------
Total shareholders' equity..... 484,968 496,687
----------- ----------
Total liabilities and
shareholders' equity.......... $ 1,808,493 $1,856,058
=========== ==========
===============================================================================
See accompanying notes to financial statements.
<PAGE>
Prime Retail, Inc.
Consolidated Statements of Operations
(in thousands, except share information)
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Three months ended March 31, 2000 1999
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Revenues
Base rents.................................. $ 44,248 $ 49,302
Percentage rents............................ 1,487 2,062
Tenant reimbursements....................... 22,012 23,688
Interest and other.......................... 5,094 3,291
-------- --------
Total revenues............................ 72,841 78,343
Expenses
Property operating.......................... 17,532 18,937
Real estate taxes........................... 5,731 5,567
Depreciation and amortization............... 16,237 18,259
Corporate general and administrative........ 5,433 2,787
Interest.................................... 24,023 21,262
Loss on eOutlets.com........................ 12,964 -
Loss on Designer Connection................. 1,079 345
Other charges............................... 1,529 1,888
-------- --------
Total expenses........................... 84,528 69,045
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Income (loss) before minority interests..... (11,687) 9,298
Income allocated to minority interests...... (32) -
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Net income (loss)........................... (11,719) 9,298
(Income) loss allocated to preferred
shareholders............................... (5,668) 7,800
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Net income (loss) applicable to common shares $ (17,387) $ 17,098
========= ========
Earnings (loss) per common share (2):
Basic .................................. $ (0.40) $ 0.40
========= ========
Diluted................................. $ (0.40) $ 0.06
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Weighted average common shares outstanding
Basic................................... 43,379 42,951
========= ========
Diluted................................. 43,379 58,376
========= ========
Distributions declared per common share..... $ - $ 0.295
========= ========
================================================================================
See accompanying notes to financial statements.
<PAGE>
Prime Retail, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
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Three months ended March 31, 2000 1999
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Operating Activities
Net income (loss)................................ $(11,719) $ 9,298
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Income allocated to minority interests......... 32 -
Depreciation.................................. 16,070 18,074
Amortization of deferred financing costs
and interest rate protection contracts.... 845 650
Amortization of leasing commissions........ 167 185
Provision for uncollectible accounts
receivable................................ 1,028 1,054
Loss on eOutlets.com....................... 12,964 -
Gain on sale of land....................... (2,471) -
Changes in operating assets and liabilities:
Increase in accounts receivable.............. (322) (4,579)
(Increase) decrease in other assets........... (2,149) 204
Increase (decrease) in other liabilities...... (5,283) 262
Increase (decrease) in accrued interest....... 600 (2,567)
-------- -------
Net cash provided by operating activities.. 9,762 22,581
Investing Activities
Additions to investment in rental property....... (11,083) (10,462)
Increase in property under development........... (17,637) (9,197)
Proceeds from sale of land....................... 4,622 -
Proceeds from sale of outlet center.............. 11,063 -
-------- -------
Net cash used in investing activities...... (13,035) (19,659)
Financing Activities
Proceeds from notes payable...................... 9,066 34,587
Principal repayments on notes payable............ (12,285) (19,600)
Deferred financing fees.......................... (75) (444)
Distributions and dividends paid................. - (19,650)
Distributions to minority interests.............. - (3,250)
-------- -------
Net cash used in financing activities...... (3,294) (8,357)
-------- -------
Decrease in cash and cash equivalents............ (6,567) (5,435)
Cash and cash equivalents at beginning of period. 7,343 5,765
-------- -------
Cash and cash equivalents at end of period....... $ 776 $ 330
======== =======
================================================================================
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
=========
================================================================================
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 months ended March 31,
2000, the effect of all exercises and conversions was anti-dilutive and,
therefore, dilutive EPS is equivalent to basic EPS. For the three months ended
March 31, 1999, a redemption discount and dividends aggregating $13,782 related
to the Company's repurchase of its Series C Preferred Stock were excluded from
the numerator and incremental shares of 15,413 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 three months ended March 31, 1999,
the effect of all other exercises and conversions was anti-dilutive and,
therefore, was excluded from the computation of diluted EPS.
<PAGE>
At March 31, 2000 and 1999, loans to certain limited partners, aggregating
$594 and $1,188, respectively, were reported as a reduction in minority
interests in the Consolidated Balance Sheets.
Note 3 - Notes Payable
As of March 31, 2000, the Company is a guarantor or otherwise obligated
with respect to an aggregate of $12,651 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 March 31, 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 $28,885 at March
31, 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.
Certain of the Company's debt obligations require compliance with various
financial loan covenants including, but not limited to, those relating to the
Company's (i) total outstanding variable interest rate indebtedness, (ii) ratio
of total outstanding indebtedness to total market value, as defined, (iii)
consolidated net worth, as defined, and (iv) debt service and fixed charge
coverage ratios, as defined.
As a result of its financial results for the quarter ended March 31, 2000,
the Company is not in compliance with financial covenants contained in three of
its credit facilities. The loans have not been accelerated nor has notice of the
respective lender's intention to accelerate been received by the Company. The
Company has received a waiver and amendment to one of its facilities enabling
the Company to maintain continued compliance under such indebtedness. The
Company is currently in discussions with the other lenders to receive a waiver
and/or amend the loans; however, there can be no assurance as to whether and
when the Company will receive any such waiver or amendment.
In addition, noncompliance with the covenants described above triggered
certain cross-default provisions with respect to several of the Company's other
debt instruments, including a $20,000 subordinated loan and $28,250 of fixed
rate tax-exempt revenue bonds. None of these loans has been accelerated nor has
a notice of the respective lender's intent to accelerate been received by the
Company. Management is currently in discussion with the affected
<PAGE>
lenders to obtain a resolution of the cross-default provisions; however, there
can be no assurance as to whether and when the Company will obtain a resolution.
If the Company is unable to obtain such waiver or amendment to the
Unsecured Revolving Loan and reach resolution with certain other lenders, the
Company will look to (i) obtain alternative financing from other financial
institutions, or (ii) 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 payments
under all of its indebtedness, there can be no assurance that one or all of the
affected lenders will not declare a default and accelerate the maturity of such
indebtedness. 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.
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 in four phases 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.
On November 19, 1999, the Company successfully 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 December 31, 1999 was $10,745 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
<PAGE>
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 the earlier of the closing
of the proposed sale of an expansion of the Williamsburg center or December 15,
2000. The promissory note requires the monthly payment of interest in arrears at
an annual rate of 7.75%. Although the Company expects to close on the sale of
Prime Outlets at Hagerstown, including the expansion which opened during the
second quarter of 2000, for aggregate consideration of approximately $80,500
during the second quarter of 2000, 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 March 31, 2000, the Company
classified $41,389 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
March 31, 2000, 43,397,916 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 March 31, 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 March 31, 2000, unpaid dividends
for the period November 16, 1999 through March 31, 2000 on the Senior Preferred
Stock and Series B Convertible Preferred Stock aggregated $2,264 and $6,238,
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, 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
<PAGE>
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. Therefore, the Company is in arrears on its Preferred Stock distributions
due February 15, 2000 and May 15, 2000. The Board of Directors will continue to
evaluate the payment of preferred stock distributions on a quarterly basis. The
holders of the Senior Preferred Stock and Series B Convertible Preferred Stock,
each series voting separately as a class, 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 March 31, 2000 are $6,038 and $16,636, respectively.
Note 6 - eOutlets.com
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 $12,964 in the first quarter of 2000. The non-recurring
loss includes (i) the write-off of $3,497 of costs capitalized during 1999 and
(ii) $9,467 of costs incurred during the three months ended March 31, 2000,
including costs associated with discontinuing the operations of eOutlets.com.
Note 7 - 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 are 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 on August 20, 1999. The lawsuit alleges that
the Company and its related entities overcharged tenants for common area
maintenance charges and promotional fund charges. The outcome of, and the
ultimate liability of the Company, if any, from, this lawsuit cannot currently
be predicted. Management believes that the Company has acted properly and
intends to defend this lawsuit vigorously.
The New York Stock Exchange has notified the Company that it is 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 14,767,000 square feet of
gross leasable area ("GLA") at March 31, 2000, compared to 50 operating
manufacturers' outlet centers totaling 14,369,000 square feet of GLA at
March 31, 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 and (ii) acquired from Horizon Group
Properties, Inc. ("HGP") ownership interests in the Bellport Outlet Center 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 its second home furnishing store operated by The Home Co., in which
a 47.6% interest is owned by the Company.
Between December 31, 1999 and March 31, 2000, the Company's outlet center
portfolio experienced a decline in occupancy from 93% to 90%. The decline was
primarily attributable to tenant departures subsequent to the holiday shopping
season. For comparison, the Company's outlet center portfolio was 95% occupied
on March 31, 1999.
<PAGE>
<TABLE>
Portfolio of Properties
March 31, 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)
March 31, 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
V August 1999 64,000 100
------- ---
501,000 95
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
Prime Outlets at Bellport (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)
March 31, 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)
March 31, 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
------- ---
389,000 100
------- ---
Total Outlet Centers (10) 14,767,000 90%
========== ===
====================================================================================================================================
</TABLE>
Notes:
(1) Percentage reflects fully executed leases as of March 31, 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 98% leased as
of March 31, 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 second 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 81%
leased as of March 31, 2000.
<PAGE>
Results of Operations
Comparison of the three months ended March 31, 2000 to the three months
ended March 31, 1999.
Summary
The Company reported net income (loss) of $(11,719) and $9,298 for the
three months ended March 31, 2000 and 1999, respectively. For the three months
ended March 31, 2000, the net income (loss) applicable to common shareholders
was $(17,387), or $(0.40) per common share on a basic and diluted basis. For the
three months ended March 31, 1999, the net income applicable to common
shareholders was $17,098, or $0.40 and $0.06 per common share on a basic and
diluted basis, respectively.
Revenues
Total revenues were $72,841 for the three months ended March 31, 2000
compared to $78,343 for the three months ended March 31, 1999, a decrease of
$5,502, or 7.0%. Base rents decreased $5,054, or 10.3%, in 2000 compared to
1999. Straight-line rent (expense) income (included in base rents) were $(406)
and $209 for the three months ended March 31, 2000 and 1999, respectively. These
decreases are primarily due to the Prime/Estein Transactions, a decrease in
portfolio occupancy and partially offset by the Portfolio Expansion.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, decreased $575, or 27.9%, during the three
months ended March 31, 2000 compared to the same period in 1999. This decline
was primarily attributable to Prime/Estein Transactions. For the three months
ended March 31, 2000, same-space sales in centers owned by the Company increased
5.2% compared to the same period 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 months ended March 31, 2000, same-store
sales increased by 0.8% compared to the same period in 1999. "Same-store sales"
is defined as the weighted average sales per square foot reported by merchants
for stores opened since January 1, 1999. The weighted average sales per square
foot reported by all merchants was $257 for the year ended December 31, 1999.
Tenant reimbursements, which represent the contractual recovery from tenants of
certain operating expenses, decreased by $1,676, or 7.1%, primarily due to the
decrease in portfolio occupancy.
Interest and other income increased by $1,803, or 54.8%, to $5,094 during
the three months ended March 31, 2000 compared to $3,291 for the three months
ended March 31, 1999. The increase reflects (i) a $2,472 gain on the sale of
outparcel land in Camarillo, CA, (ii) amortization of deferred fees of $283
related to payments made to the Company for a covenant-not-to-compete and
licensing agreement, (iii) higher property management fee income of $221 and
(iv) an increase in lease buy-out income of $221. Partially offsetting these
items were reductions in (i) equity earnings from investment in partnerships of
$701, (ii) temporary tenant income of $588 and (iii) all other ancillary income
of $105.
Expenses
Property operating expenses decreased by $1,405, or 7.4%, to $17,532 for
the three months ended March 31, 2000 compared to $18,937 for the same period in
1999. Real estate taxes increased by $164, or 2.9%, to $5,731 for the three
months ended March 31, 2000 from $5,567 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 increase in real estate taxes
is primarily attributable to increased assessments and the Portfolio Expansion,
<PAGE>
partially offset by the Prime/Estein Transaction. As shown in TABLE 2,
depreciation and amortization expense decreased by $2,022, or 11.1%, to $16,237
for the three months ended March 31, 2000 compared to $18,259 for the same
period in 1999. This decrease is primarily due to the Prime/Estein Transaction,
partially offset by the Portfolio Expansion.
TABLE 2 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
- --------------------------------------------------------------------------------
Three months ended March 31, 1999 2000
- --------------------------------------------------------------------------------
Building and improvements $ 8,798 $10,110
Land improvements 1,400 1,378
Tenant improvements 5,453 6,184
Furniture and fixtures 419 402
Leasing commissions 167 185
------- -------
Total $16,237 $18,259
======= =======
================================================================================
TABLE 3 - Components of Interest Expense
The components of interest expense are summarized as follows:
- --------------------------------------------------------------------------------
Three months ended March 31, 1999 2000
- --------------------------------------------------------------------------------
Interest incurred $24,278 $21,686
Interest capitalized (1,100) (1,074)
Amortization of deferred financing costs 824 593
Amortization of interest rate protection
contracts 21 57
------- -------
Total $24,023 $21,262
======= =======
================================================================================
As shown in TABLE 3, interest expense for the three months ended March 31,
2000 increased by $2,761, or 13.0%, to $24,023 compared to $21,262 for the same
period in 1999. This increase reflects (i) higher interest incurred of $2,592
and (ii) an increase in amortization of deferred financing costs of $231.
Partially offsetting these items was (i) a decrease in amortization of interest
rate protection contracts of $36 and (ii) an increase in the amount of interest
capitalized in connection with development projects of $26.
The increase in interest incurred is primarily attributable to (i) an
increase of $29,009 in the Company's average debt outstanding during the three
months ended March 31, 2000 compared to the same period in 1999 and (ii) an
increase in the weighted average interest rate for the three months ended March
31, 2000 compared to the same period in 1999. The weighted average interest
rates were 7.84% and 7.17% for the 2000 and 1999 periods, respectively.
Other charges decreased by $359, or 19.0%, to $1,529. This decrease
reflects (i) reduced marketing expenses of $99, (ii) lower ground lease expense
of $83, (iii) a lower provision for potentially abandoned projects of $50, (iv)
a lower provision for uncollectible accounts receivable of $26 and (v) a
decrease in all other miscellaneous charges of $101.
<PAGE>
In connection with re-leasing space to new merchants, the Company incurred
$224 and $786 in capital expenditures during the three months ended March 31,
2000 and 1999, respectively.
Liquidity and Capital Resources
Sources and Uses of Cash
For the three months ended March 31, 2000, net cash provided by operating
activities was $9,762, net cash used in investing activities was $13,035, and
net cash used in financing activities was $3,294.
The uses of cash for investing activities during the three months ended
March 31, 2000 of $28,720 included (i) costs associated with development and
construction of a new center (Prime Outlets of Puerto Rico) and four expansions
to existing centers aggregating approximately 449,000 square feet of GLA which
are expected to open during 2000 (including two expansions aggregating 165,000
square feet of GLA at Prime Outlets at Hagerstown which opened in March and
April 2000), (ii) costs for pre-development activities related to future
development opportunities and (iii) costs related to eOutlets.com. Partially
offsetting these uses were $11,083 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 three months
ended March 31, 2000 included (i) principal repayments on notes payable of
$12,285 and (ii) deferred financing costs of $75. Partially offsetting these
items were proceeds from new borrowings of $9,066.
Although the Company believes that cash flow from (i) operations, (ii) new
borrowings, (iii) refinancing of certain existing debt, (iv) the potential sale
of a joint venture interest in certain outlet centers, and (v) the potential
sale of equity or debt securities in the public or private capital markets 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 March 31, 2000, unused
commitments available for borrowings under various loan facilities were $4,480
in the aggregate. See "Noncompliance with Certain Debt Covenants" 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, 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 10.5% Series A Senior
Cumulative Preferred Stock ("Senior Preferred Stock") and 8.5% Cumulative
Convertible Preferred Stock ("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. Therefore, the Company is in arrears on
its Preferred Stock distributions due February 15, 2000 and May 15, 2000. The
Board of Directors will continue to evaluate the payment of such preferred stock
distributions on a quarterly basis.
<PAGE>
The holders of the Senior Preferred Stock and Series B Convertible Preferred
Stock, each series voting separately as a class, 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 will be elected to serve until the earlier
of (i) the election and qualification of such directors' 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 cumulative dividends on
the Company's Senior Preferred Stock and Series B Convertible Preferred Stock
outstanding as of March 31, 2000 are $6,038 and $16,636, respectively.
Debt Repayments
The Company's aggregate indebtedness was $1,224,951 and $1,260,670 at March
31, 2000 and December 31, 1999, respectively. At March 31, 2000, such
indebtedness had a weighted average maturity of 4.8 years and bore interest at a
weighted average interest rate of 7.84% per annum. At March 31, 2000, $935,052,
or 76.3%, of such indebtedness bore interest at fixed rates and $289,899, or
23.7%, of such indebtedness bore interest at variable rates. The Company is
obligated to repay $88,514 and $227,609 of mortgage indebtedness during the
remainder of 2000 and 2001, respectively. See "Noncompliance with Certain Debt
Covenants."
As of March 31, 2000, the Company is a guarantor or otherwise obligated
with respect to an aggregate of $12,651 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 March 31, 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 $28,885 at March
31, 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.
<PAGE>
Noncompliance with Certain Debt Covenants
Certain of the Company's debt obligations require compliance with various
financial loan covenants including, but not limited to, those relating to the
Company's (i) total outstanding variable interest rate indebtedness, (ii) ratio
of total outstanding indebtedness to total market value, as defined, (iii)
consolidated net worth, as defined, and (iv) debt service and fixed charge
coverage ratios, as defined.
As a result of its financial results for the quarter ended March 31, 2000,
the Company is not in compliance with financial covenants contained in three of
its credit facilities. The loans have not been accelerated nor has notice of the
respective lender's intention to accelerate been received by the Company. The
Company has received a waiver and amendment to one of its facilities enabling
the Company to maintain continued compliance under such indebtedness. The
Company is currently in discussions with the other lenders to receive a waiver
and/or amend the loans; however, there can be no assurance as to whether and
when the Company will receive any such waiver or amendment.
In addition, noncompliance with the covenants described above triggered
certain cross-default provisions with respect to several of the Company's other
debt instruments, including a $20,000 subordinated loan and $28,250 of fixed
rate tax-exempt revenue bonds. None of these loans has been accelerated nor has
a notice of the respective lender's intent to accelerate been received by the
Company. Management is currently in discussion with the affected lenders to
obtain a resolution of the cross-default provisions; however, there can be no
assurance as to whether and when the Company will obtain a resolution.
If the Company is unable to obtain such waiver or amendment to the
Unsecured Revolving Loan and reach resolution with certain other lenders, the
Company will look to (i) obtain alternative financing from other financial
institutions, or (ii) 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 payments
under all of its indebtedness, there can be no assurance that one or all of the
affected lenders will not declare a default and accelerate the maturity of such
indebtedness. 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 obtain new financing
under terms as favorable as the Company has experienced in prior periods.
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 in four phases 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
<PAGE>
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.
On November 19, 1999, the Company successfully 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 December 31, 1999 was $10,745 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 $11,083, 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 the earlier of the closing
of the proposed sale of an expansion of the Williamsburg center or December 15,
2000. The promissory note requires the monthly payment of interest in arrears at
an annual rate of 7.75%. Although the Company expects to close on the sale of
Prime Outlets at Hagerstown, including the expansion which opened during the
second quarter of 2000, for aggregate consideration of approximately $80,500
during the second quarter of 2000, 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 March 31, 2000, the Company
classified $41,389 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.
Planned Development
Construction continues at Prime Outlets of Puerto Rico, the first outlet
center in Puerto Rico, which will contain 175,000 square feet of GLA, and is
expected to open in the second quarter of 2000. Additionally, the Company opened
two expansions aggregating 165,000 square feet of GLA at Prime Outlets at
<PAGE>
Hagerstown in March and April 2000. Furthermore, the Company continues
construction of a 58,000 square foot expansion at Prime Outlets at San Marcos
which is scheduled to open during the second quarter of 2000. At March 31, 2000,
the remaining budgeted capital expenditures for projects scheduled to open in
2000 aggregated approximately $8,540, while anticipated capital expenditures
related to the completion of expansions of existing outlet centers opened during
1999 (aggregating 102,000 square feet of GLA) approximated $3,777.
Although the Company expects to fund the development cost of these projects
from (i) retained cash flow from operations, (ii) construction loans, (iii) the
potential sale of equity or debt securities in the public or private capital
markets, 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 equity capital or debt financing for the
planned development projects or that the terms of such capital raising
activities will be as favorable as the Company has experienced in prior periods.
If adequate financing for such development and expansion is not available, the
Company may not be able to develop new centers or expand existing centers at
currently planned levels.
eOutlets.com
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 $12,964 in the first quarter of 2000. The non-recurring
loss includes (i) the write-off of $3,497 of costs capitalized during 1999 and
(ii) $9,467 of costs incurred during 2000, including costs associated with
discontinuing of eOutlets.com.
Economic Conditions
Substantially all of the merchants' leases contain provisions that somewhat
mitigate the impact of inflation. Such provisions include clauses providing for
increases in base rent and clauses enabling the Company to receive percentage
rentals based on merchants' gross sales. Substantially all leases require
merchants to pay their proportionate share of all operating expenses, including
common area maintenance, real estate taxes and promotion, thereby reducing the
Company's exposure to increased costs and operating expenses resulting from
inflation.
Impact of Year 2000
In prior periods, the Company discussed the nature and progress of its plan
to become Year 2000 ready. As a result of testing and remediation efforts, the
Company experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. The Company is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties with which
the Company does business. The Company will continue to monitor its mission
critical computer application and those of its suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
<PAGE>
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
partnerships 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 4 provides a reconciliation of income before allocations to minority
interests and preferred shareholders to FFO for the three months ended March 31,
2000 and 1999. FFO decreased $9,015, or 32.2% to $18,995 for the three months
ended March 31, 2000 from $28,010 for the three months ended March 31, 1999.
TABLE 4 - Funds from Operations
- --------------------------------------------------------------------------------
Three months ended March 31, 2000 1999
- --------------------------------------------------------------------------------
Income (loss) before minority interests $ (11,687) $ 9,298
FFO adjustments:
Depreciation and amortization 16,237 18,259
Amortization of deferred financing costs
and interest rate protection contracts 844 650
Unconsolidated joint venture adjustments 586 255
Non-real estate depreciation and amortization (1,028) (797)
------- -------
FFO before discontinued operations 4,952 27,665
Discontinued operations - eOutlets.com 12,964 -
Discontinued operations - Designer Connection 1,079 345
-------- -------
FFO before allocations to minority interests and
preferred shareholders $ 18,995 $28,010
======== =======
================================================================================
<PAGE>
Item 3. 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 March 31, 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.................... $34,196 $ 36,609 $46,529 $348,761 $17,049 $56,402 $395,506 $935,052
Average interest rate........ 11.81% 7.44% 7.04% 7.76% 7.75% 6.98% 7.11% 7.54%
Variable rate:
- --------------
Principal.................... $54,317 $191,000 $ 637 $ 1,152 $42,793 - - $289,899
Average interest rate........ 9.17% 8.57% 7.42% 7.42% 7.42% - - 8.51%
====================================================================================================================================
</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 are 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 on August 20, 1999. The lawsuit alleges that
the Company and its related entities overcharged tenants for common area
maintenance charges and promotional fund charges. The outcome of, and the
ultimate liability of the Company, if any, from, this lawsuit cannot currently
be predicted. Management believes that the Company has acted properly and
intends to defend this lawsuit vigorously.
The New York Stock Exchange has notified the Company that it is 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 quarter ended December 31,
1999 and March 31, 2000, the Company is not in compliance with financial
covenants contained in its 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 May 15, 2000, the aggregate arrearage on the Senior Preferred
Stock and the Series B Convertible Preferred Stock was $3,019 and $8,317,
respectively.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits or Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIME RETAIL, INC.
Registrant
Date: May 15, 2000 /s/ Glenn D. Reschke
Glenn D. Reschke
President and
Chief Executive Officer
<TABLE>
PRIME RETAIL, INC.
EXHIBIT 12: COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DISTRIBUTIONS AND DIVIDENDS
(Amounts in thousands, except for ratio information)
<CAPTION>
Three months ended March 31
-------------------------------------------
2000 1999
<S> <C> <C>
------------------- -------------------
Income (loss) before minority interests $ (11,687) $ 9,298
Loss on sale of real estate - -
Interest incurred 24,848 22,008
Amortization of capitalized interest 119 121
Amortization of debt issuance costs 842 593
Amortization of interest rate protection contracts 21 57
Less interest earned on interest rate protection contracts - -
Less capitalized interest (1,100) (1,074)
-------- --------
Earnings 13,043 31,003
-------- --------
Interest incurred 24,848 22,008
Amortization of debt issuance costs 842 593
Amortization of interest rate protection contracts 21 57
Preferred stock distributions and dividends 5,667 6,955
-------- --------
Combined Fixed Charges and
Preferred Stock Distributions and Dividends 31,378 29,613
-------- --------
Excess of Combined Fixed Charges
and Preferred Stock Distributions
and Dividends over Earnings $ (18,335) $ -
========= =========
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Distributions and Dividends - x 1.05 x
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 766
<SECURITIES> 0
<RECEIVABLES> 28,755
<ALLOWANCES> 8,023
<INVENTORY> 0
<CURRENT-ASSETS> 165,242
<PP&E> 1,843,074
<DEPRECIATION> 199,823
<TOTAL-ASSETS> 1,843,074
<CURRENT-LIABILITIES> 97,072
<BONDS> 1,224,951
0
101
<COMMON> 434
<OTHER-SE> 484,433
<TOTAL-LIABILITY-AND-EQUITY> 1,808,493
<SALES> 0
<TOTAL-REVENUES> 72,841
<CGS> 0
<TOTAL-COSTS> 84,528
<OTHER-EXPENSES> 2,608
<LOSS-PROVISION> 1,028
<INTEREST-EXPENSE> 24,023
<INCOME-PRETAX> (11,719)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,719)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,719)
<EPS-BASIC> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
