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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
Commission file number: 0-23616
PRIME RETAIL, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Maryland 38-2559212
- ------------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
100 East Pratt Street
Baltimore, MD 21202 (410) 234-0782
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(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.01 par value
10.5% Series A Cumulative Preferred Stock, $0.01 par value
8.5% Series B Cumulative Participating Convertible Preferred Stock,
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$0.01 par value
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(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
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None
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(Title of class)
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 period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $43,397,916 on April 13, 2000 (based on the
closing price per share as reported on the New York Stock Exchange -
Composite Transactions).
The number of shares of the registrant's Common Stock outstanding as of
March 31, 2000 was 43,397,916.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated
herein by reference:
Put on Form 10-K
Into Which
Document is
Document Incorporated
- -------- ------------
Proxy Statement for the 2000 annual meeting of shareholders Part III of
Form 10-K
PRIME RETAIL, INC.
Form 10-K
December 31, 1999
TABLE OF CONTENTS
Part I Page
Item 1. Business................... ...........................................1
Item 2. Properties................ ............................................6
Item 3. Legal Proceedings...... ..............................................13
Item 4. Submission of Matters to a Vote of Security Holders...................13
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.14
Item 6. Selected Financial Data...............................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................17
Item 7A.Quantitative and Qualitative Disclosures About Material Risk. ........34
Item 8. Financial Statements and Supplementary Data...........................34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................... .................34
Part III
Item 10.Directors and Executive Officers of the Registrant....................35
Item 11.Executive Compensation................................................35
Item 12.Security Ownership of Certain Beneficial Owners and Management........35
Item 13.Certain Relationships and Related Transactions........................35
Part IV
Item 14.Exhibits,Financial Statement Schedules, and Reports on Form 8-K.......35
Signatures............................................................40
PART I
ITEM 1- BUSINESS
The Company
Prime Retail, Inc. (including its predecessors, collectively, the
"Company") was organized as a Maryland corporation on July 16, 1993. The Company
commenced operations upon completion of its initial public offering (the
"Initial Public Offering") on March 22, 1994. The Company is a self-administered
and self-managed real estate investment trust ("REIT") and operates primarily
within one business segment. Concurrent with the completion of the Initial
Public Offering, the Company became the general partner of Prime Retail, L.P.
(the "Operating Partnership") which owns interests in and provides development,
leasing, marketing and management services for 51 outlet centers and three
community shopping centers (the "Properties") with a total of 14,699,000 and
424,000 square feet of gross leasable area ("GLA") at December 31, 1999,
respectively. The Properties are located throughout the United States, generally
near large metropolitan areas.
On November 1, 1994, the Company organized Prime Retail Services Limited
Partnership and Prime Retail Services, Inc. (collectively referred to as the
"Services Corporation"). The Services Corporation was formed primarily to
operate business lines of the Company that are not directly associated with the
collection of rents.
As used herein, unless the context otherwise requires, the term "Company"
shall mean the Company, including its predecessors, and those entities owned or
controlled by the Company.
The Company's executive offices are located at 100 East Pratt Street,
Baltimore, Maryland 21202 (telephone 410-234-0782).
Tax Status
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT,
the Company generally is not subject to federal income tax at the corporate
level on income it distributes to its stockholders so long as it distributes at
least 95% of its taxable income (excluding any net capital gain) each year.
Since the Initial Public Offering, the Company believes that it has complied
with the tax regulations to maintain its REIT status. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Even if the Company qualifies as a REIT, the
Company may be subject to certain state and local taxes on its income and
property.
Business of the Company
The Company is engaged primarily in the ownership, development,
construction, leasing, marketing and management of outlet centers throughout the
United States. Outlet centers have become an established segment of the retail
industry, enabling value-oriented shoppers to purchase designer and brand-name
products directly from manufacturers at discounts.
Since entering the outlet center business in 1988 (through the retail
division of The Prime Group, Inc. ("PGI"), from which the Company acquired
certain Properties and management and development operations), the Company has
become the leading developer and operator in the industry having developed or
acquired outlet centers containing 14,699,000 square feet of GLA at December 31,
1999, including 22 outlet centers containing 6,626,000 square feet of GLA that
was added to our portfolio in connection with the Company's June 1998 merger
with Horizon Group, Inc.
The average outlet center in the Company's portfolio contains approximately
288,000 square feet of GLA at December 31, 1999, significantly larger than the
industry average of approximately 195,000 square feet.
The Company's outlet centers feature a diversified mix of nationally
recognized manufacturers of designer and brand-name merchandise with which the
Company and its employees have established long-standing relationships,
including AnnTaylor/AnnTaylor Loft, Bose, Brooks Brothers, Corning-Revere,
Danskin, Donna Karan, Eddie Bauer, Ellen Tracy, Esprit, Guess?, J. Crew, Jones
New York, Levi's/Dockers Outlet, Mikasa, Nautica, Nike, Phillips-Van Heusen
(including Bass, Gant, Geoffrey Beene, Izod and Van Heusen), Polo/Ralph Lauren,
Reebok, Off-5th Saks Fifth Avenue, Sara Lee (including Champion, Coach, L'eggs,
Hanes, Bali, Playtex, and Socks Galore), Sony, Springmaid-Wamsutta, Tommy
Hilfiger and VF Corporation (including Barbizon and Vanity Fair). As a group,
the foregoing merchants accounted for approximately 29.20% of the gross revenues
of the Company during the year ended December 31, 1999, and occupied
approximately 34.38% of the total leased GLA contained in the Company's outlet
centers at December 31, 1999. During the year ended December 31, 1999, no group
of merchants under common control accounted for more than 5.09% of the gross
revenues of the Company or occupied more than 5.69% of the total leased GLA of
the Company at December 31, 1999.
Business Strategy
The Company's objective is to enhance its funds from operations and the
long-term value of its outlet centers by actively managing its current portfolio
of properties.
Active Portfolio Management. The Company employs the following strategies
that are designed to increase the sales and profitability of its tenants,
resulting in improved occupancy levels and higher overall rental income:
|X| Enhance Tenant Mix. A successful outlet center must provide a unique
and attractive shopping experience. The Company seeks to offer a superior
shopping experience to consumers by assembling a diverse mix of nationally and
internationally recognized manufacturers and retailers of designer and brand
name merchandise. The Company has identified certain key tenants (the "Prime
15") that it believes will enhance consumer traffic and increase tenant sales at
the Prime Outlets. The current "Prime 15" are Bose, Brooks Brothers, Calvin
Klein, Coach, Donna Karan, Eddie Bauer, Jones New York, Levi's/Dockers, Liz
Claiborne, Nautica, Nike, Polo/Ralph Lauren, Sony, The Gap and Tommy Hilfiger.
The Company currently leases 380 stores to the Prime 15 and actively seeks to
increase their representation throughout the Prime Outlets. In addition, the
Company continues to add new tenants that attract customers and enhance the
competitive position of the Prime Outlets.
|X| Implement Innovative Marketing Strategies. During 1998, the Company
adopted a nationwide branding strategy to increase sales, improve customer
awareness and loyalty and promote higher traffic at its centers. As part of this
strategy, the Company has renamed its outlet centers, with the "Prime Outlets"
brand name. In addition, the Company has entered into strategic marketing
alliances with companies such as Coca-Cola USA seeking to access the estimated
170 million customers at its centers.
|X| Minimize Operating Expenses. The Company's in-house capabilities in
property management and leasing reduce its reliance on third party service
providers and enable it to more effectively control the expenses associated with
these functions. The Company continually monitors its operating expenses at the
property, regional and corporate levels and attempts to minimize the occupancy
cost for its tenants. Where possible, the Company leverages its large size to
obtain more favorable rates from its vendors and suppliers.
Selective Growth and Expansion. The Company will selectively expand
existing centers to the extent proposed projects offer attractive investment
returns. In 1999, Prime Retail, Inc. added a total of 102,000 square feet of GLA
by expanding two of its existing centers. In addition, 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 scheduled to open during the second
quarter of 2000.
Competition
The Company's outlet centers compete for customers primarily with
traditional shopping malls, "off-price" retailers and other outlet centers. The
Company carefully considers the degree of existing and planned competition in a
proposed market area before developing a new outlet center. Merchants of outlet
centers generally avoid direct competition with major retailers and their own
full-price stores. Generally, this is accomplished by locating outlet centers at
least 20 miles from the nearest regional mall. For this reason, the Company's
outlet centers compete only to a limited extent with traditional retail malls in
or near metropolitan areas.
In addition to traditional sources of competition faced by the Company's
outlet centers, which are mentioned above, the Company's outlet centers compete
for customers with web-based retailers. Because of the newness of competition
from web-based retailers, it is difficult to quantify the risk of such
competition to the Company.
The Company's outlet centers compete to a limited extent with various
full-price and off-price retailers in the highly fragmented retailing industry.
However, management believes that the majority of the Company's customers visit
outlet centers specifically for designer and brand-name goods at discounted
prices. Traditional full-price and off-price retailers are often unable to
provide such a variety of products at attractive prices.
Because a number of the Company's outlet centers are located in relatively
undeveloped areas, there are often other potential sites near the Company's
outlet centers that may be developed into outlet centers by competitors. The
existence or development of an outlet center with a more convenient location or
lower rents may attract the Company's merchants or cause them to seek more
favorable lease terms at or prior to renewal of their leases and, accordingly,
may affect adversely the business, revenues and/or sales volume of the Company's
outlet centers.
The Company's community shopping centers compete with similar community
shopping centers located in the same geographic trade areas.
Relationship with Municipalities
Because of the favorable impact that the Company's Properties may have on a
local community's economy by generating sales and property taxes and increasing
employment in the area, local communities often assist the Company with respect
to zoning, economic incentives or favorable business development legislation.
The Company explores opportunities to obtain incentives from local, county and
state governments in connection with the development of its outlet centers. Such
incentives often fund the cost of off-site sewer and water services to the site,
required highway improvements and, on occasion, the cost of land and various
on-site improvements.
Environmental Matters
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous substances on their property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous substances. The costs of remediation or removal may be substantial,
and the presence of the hazardous substances, or the failure to promptly
remediate them, may adversely affect the owner's ability to sell the real estate
or to borrow using the real estate as collateral. In connection with its
ownership and operation of the Properties, the Company may be potentially liable
for the costs of removal or remediation of hazardous substances.
The Company has no knowledge, nor has the Company been notified by any
governmental authority, of any material noncompliance, liability or claim
relating to hazardous substances in connection with any properties in which any
of such entities now has or heretofore had an interest. However, no assurances
can be given that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition of
the Properties will not be affected by merchants and occupants of the
Properties, by the condition of properties in the vicinity of the Properties
(such as the presence of underground storage tanks) or by third parties
unrelated to the Company.
Insurance
Management believes that each of the Properties is covered by adequate
fire, flood, and property insurance provided by reputable companies and with
commercially reasonable deductibles and limits.
Employees
As of December 31, 1999, the Company had 1,082 employees. The Company
believes that its relations with its employees are satisfactory.
Executive Officers
The following table sets forth the names, position and age (as of April 1,
2000)of the current executive officers of the Company:
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Name Position Age
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Glenn D. Reschke President and Chief Executive Officer, Director 49
David G. Phillips Executive Vice President 38
Robert P. Mulreaney Executive Vice President - Chief Financial 41
Officer and Treasurer
C. Alan Schroeder Executive Vice President - General Counsel 42
and Secretary
Steven S. Gothelf Executive Vice President - Finance 40
John S. Mastin Executive Vice President - Leasing 54
Frederick J. Meno Senior Vice President - Operations 42
====================================================================================================================================
Biographies of Executive Officers
Glenn D. Reschke. Glenn D. Reschke is President and Chief Executive Officer
and a Director of the Company. Mr. Reschke's responsibilities with Prime include
leasing, marketing, operations, and management, development, and construction
for Prime's retail projects. Mr. Reschke joined PGI in 1983 and, since that
time, served as Vice President, Senior Vice President and Executive Vice
President of PGI, and was responsible for PGI's multi-family, senior housing,
single family and land development divisions. Mr. Reschke received a Masters in
Business Administration from Eastern Michigan University with a specialization
in finance after receiving a Bachelor of Science degree with honors in Chemical
Engineering from Rose Hulman Institute of Technology in Terre Haute, Indiana.
Mr. Reschke is the brother of Michael W. Reschke, the Company's Chairman of the
Board.
David G. Phillips. David G. Phillips is President of Athena/Prime Retail
Europe and Executive Vice President of the Company. Athena/Prime Retail Europe
is a joint venture between the Company and the Athena Group, a private equity
investment company based in New York. Mr. Phillips oversees the Company's
development, marketing, leasing and operations efforts in Europe. Mr. Phillips
joined PGI in 1989 and served as Vice President, Senior Vice President, and
Executive Vice President, Operations, Marketing and Leasing. Prior to joining
PGI, Mr. Phillips was a leasing representative at D.I. Realty, Inc., leasing a
variety of retail projects including outlet centers and traditional and
specialty malls. Mr. Phillips received a Masters of Science in Real Estate
Development at Johns Hopkins University and received a Bachelor of Science
degree in Business Administration from the University of Vermont. Mr. Phillips
is a member of the ICSC with a CLS (Certified Leasing Specialist) designation
and the Urban Land Institute.
Robert P. Mulreaney. Robert P. Mulreaney is Executive Vice President -
Chief Financial Officer and Treasurer of the Company. Mr. Mulreaney joined the
Company in 1994. Mr. Mulreaney's responsibilities with the Company include
capital market activities, corporate budgeting, financial reporting, investor
relations, accounting, taxation, treasury, and management information systems.
Prior to joining the Company, Mr. Mulreaney was associated for 14 years with
Ernst & Young LLP, where he specialized in accounting and consulting issues
related to real estate and financial institutions. Mr. Mulreaney received a
Bachelor of Business Administration in Accounting in 1980 from Marshall
University. Mr. Mulreaney is a member of the American Institute of Certified
Public Accountants, the Maryland Association of Certified Public Accountants,
and the West Virginia Society of Certified Public Accountants.
C. Alan Schroeder. C. Alan Schroeder is Executive Vice President - General
Counsel and Secretary of the Company. Mr. Schroeder has been General Counsel and
Secretary of the Company since the initial public offering of stock in the
Company in 1994. From 1990 to 1994, Mr. Schroeder was an Assistant General
Counsel of PGI and was responsible for legal matters relating to the retail
division of PGI. Prior to joining PGI, Mr. Schroeder was associated for four
years with Hopkins & Sutter, a Chicago, Illinois based law firm. Mr. Schroeder
received a Juris Doctorate degree from The University of Chicago Law School. Mr.
Schroeder received an A.B. degree in Economics and Sociology from Bowdoin
College in Brunswick, Maine. Mr. Schroeder is licensed to practice law in
Illinois.
Steven Gothelf. Steven Gothelf is Executive Vice President - Finance of the
Company. Mr. Gothelf joined PGI in 1990 and, since that time, served as Vice
President of Asset and Development Management. Mr. Gothelf's responsibilities
with the Company include financing, capital market activities, and the review
and analysis of potential outlet center acquisitions. For two years prior to
joining PGI, Mr. Gothelf was Vice President of Finance and Administration of
Clarion Development Inc. Before joining Clarion Development Inc., Mr. Gothelf
was a Market Maker for financial futures at the Chicago Board of Trade and prior
to that was a Manager of Real Estate Tax and Consulting for KPMG Peat Marwick
LLP. Mr. Gothelf received his B.S. degree in Accounting from the University of
Illinois and is a certified public accountant.
John S. Mastin. John S. Mastin is Executive Vice President - Leasing of the
Company. Mr. Mastin's responsibilities with the Company include supervision of
leasing and merchandising for all of the Company's outlet centers. Mr. Mastin
joined the Company in June of 1996. Prior to joining the Company, Mr. Mastin
spent 24 years with The Rouse Company. At The Rouse Company, Mr. Mastin began
his career as a Junior Leasing Representative and was promoted to Vice President
and Assistant Director of Leasing. Mr. Mastin led the leasing effort for The
Rouse Company with numerous regional malls as well as inner-city festival market
places which include Bayside in Miami, Florida, and the redevelopment of
Underground Atlanta in Atlanta, Georgia. Mr. Mastin was involved in the
releasing and remerchandising effort for the operating properties division of
The Rouse Company. Prior to The Rouse Company, Mr. Mastin was a Naval Aviator
for four years. Mr. Mastin received his Bachelor of Arts in English from Niagara
University. Mr. Mastin is a member of the ICSC.
Frederick J. Meno. Frederick J. Meno is Senior Vice President - Operations
of Prime Retail, where he is responsible for supervising the management,
operations, outdoor advertising and specialty leasing programs for Prime's
nationwide portfolio of outlet centers. Prior to joining Prime, Mr. Meno was
Executive Director of Insignia/ESG, Inc., where he was responsible for all
management, leasing, construction management, and business development
activities for Insignia/ESG's 10 million square foot national enclosed mall
portfolio, as well as Insignia/ESG's Dallas/Fort Worth office, industrial and
non-enclosed retail portfolio. For 10 years prior to joining Insignia/ESG, Inc.,
Mr. Meno was President of the Woodmont Property management Company in Fort
Worth, Texas. A 1979 graduate of Ohio State University, having majored in Urban
Land Development and Economics with a degree in Business Administration, Mr.
Meno is a member of the Institute of Real Estate Management and the ICSC. Mr.
Meno has achieved the designations of Certified Property Manager, Real Property
Administrator and Certified Shopping Manager and is a licensed Real Estate
Salesman in the State of Texas. Mr. Meno is also on the Advisory Board of the
Shopping Center Management Insider Publication and he is the 2001 Dean for
ICSC's University of Shopping Centers School of Outlet Retailing, ValueOrientor
and Community Centers.
Changes in Executive Officers
Abraham Rosenthal. Effective February 25, 2000, Abraham Rosenthal resigned
from his position as Chief Executive Officer and Director of the Company.
R. Bruce Armiger. Effective March 24, 2000, R. Bruce Armiger resigned from
his position as Senior Vice President - Development of the Company.
Michael W. Reschke. On April 5, 2000, Michael W. Reschke relinquished his
responsibilities as an executive officer and became non-executive Chairman of
the Board of the Company.
ITEM 2 - PROPERTIES
General
As a fully-integrated real estate company, the Company provides
development, construction, finance, leasing, accounting, marketing and
management services for all of its properties. At December 31, 1999, the
Company's portfolio consisted of (i) 51 outlet centers aggregating 14,699,000
square feet of GLA (including 1,490,000 square feet of GLA at outlet centers
owned through joint venture partnerships), (ii) three community shopping centers
aggregating 424,000 square feet of GLA and (iii) 159,000 square feet of GLA of
office space.
The table set forth below summarizes certain information with respect to
the Company's existing centers as of December 31, 1999 (see "Note 6 - Bonds and
Notes Payable" of the Notes to the Consolidated Financial Statements contained
herein for information with respect to mortgage indebtedness on the Company's
properties).
Portfolio of Properties
December 31, 1999
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Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
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Prime Outlets at Kittery - Kittery Maine.............................. I April 1984 25,000 100%
II May 1984 78,000 99
III August 1989 18,000 100
IV May 1998 10,000 100
------- ---
131,000 100
Prime Outlets at Fremont (2) - 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 (3) - Birch Run, Michigan................... I-XVI Various 591,000 96
XVII-
XVIII 1997 133,000 95
------- ---
724,000 97
Prime Outlets at Latham - Latham, New York............................. I August 1987 43,000 88
Prime Outlets at Michigan City (2) - Michigan City, Indiana............ I November 1987 199,000 100
II May 1988 130,000 100
III July 1991 36,000 86
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 (4) - Williamsburg, Virginia............. I April 1988 67,000 100
II November 1988 60,000 100
III October 1990 49,000 100
IV 1995 98,000 100
------- ---
274,000 100
Prime Outlets at Kenosha (2) - Kenosha, Wisconsin...................... I September 1988 89,000 91
II July 1989 65,000 100
III May 1990 115,000 96
------- ---
269,000 95
Prime Outlets at Silverthorne (2) - Silverthorne, Colorado............ I November 1988 95,000 99
II November 1990 75,000 95
III November 1993 88,000 83
------- ---
258,000 93
Portfolio of Properties (continued)
December 31, 1999
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Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Edinburgh (2) - Edinburgh, Indiana.................... I 1988 156,000 100%
II November 1994 142,000 100
------- ---
298,000 100
Prime Outlets at Burlington (2) - Burlington, Washington .............. I May 1989 89,000 86
II October 1989 36,000 100
III April 1993 49,000 97
------- ---
174,000 92
Prime Outlets at Queenstown (2) - Queenstown, Maryland................. I June 1989 67,000 100
II June 1990 55,000 99
III January 1991 16,000 97
IV June 1992 14,000 97
V August 1993 69,000 100
------- ---
221,000 99
Prime Outlets at Hillsboro (2) - Hillsboro, Texas...................... I October 1989 95,000 92
II January 1992 101,000 97
III May 1995 163,000 94
------- ---
359,000 94
Prime Outlets at Oshkosh (2) - Oshkosh, Wisconsin...................... I November 1989 215,000 93
II July 1991 45,000 93
------- ---
260,000 93
Prime Outlets at Warehouse Row (5) - Chattanooga, Tennessee............ I November 1989 95,000 84
Prime Outlets at Gilroy (2) - Gilroy, California....................... I January 1990 94,000 100
II August 1991 109,000 97
III October 1992 137,000 93
IV July 1994 170,000 100
V November 1995 69,000 100
------- ---
579,000 98
Prime Outlets at Perryville (2) - Perryville, Maryland................. I June 1990 148,000 91
Prime Outlets at Sedona - Sedona, Arizona ............................. I August 1990 82,000 96
Prime Outlets at San Marcos - San Marcos, Texas........................ I August 1990 177,000 95
II August 1991 70,000 98
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 96
Prime Outlets at Post Falls - Post Falls, Idaho ....................... I July 1991 111,000 75
II July 1992 68,000 83
------- ---
179,000 78
Prime Outlets at Ellenton - Ellenton, Florida.......................... I October 1991 187,000 100
II August 1993 123,000 92
III October 1996 30,000 100
IV November 1998 141,000 97
------- --
481,000 97
Prime Outlets at Morrisville - Raleigh - Durham, North Carolina........ I October 1991 181,000 95
II July 1996 6,000 100
------- ---
187,000 95
Portfolio of Properties (continued)
December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Naples - Naples/Marco Island, Florida................. I December 1991 94,000 85%
II December 1992 32,000 100
III March 1998 20,000 98
------- ---
146,000 90
Prime Outlets at Conroe (2) - Conroe, Texas............................ I January 1992 93,000 91
II June 1994 163,000 92
III October 1994 26,000 79
------- ---
282,000 91
Prime Outlets at Bellport (6) - Bellport, New York..................... I May 1992 95,000 88
II November 1996 126,000 86
III October 1997 71,000 60
------- ---
292,000 80
Prime Outlets at Niagara Falls USA - Niagara Falls, New York........... I July 1992 300,000 99
II August 1995 234,000 88
------- ---
534,000 94
Prime Outlets at Woodbury (2) - Woodbury, Minnesota.................... I July 1992 129,000 87
II November 1993 100,000 88
III August 1994 21,000 100
------- ---
250,000 88
Prime Outlets at Calhoun (2) - Calhoun, Georgia........................ I October 1992 123,000 97
II October 1995 131,000 94
------- ---
254,000 95
Prime Outlets at Castle Rock - Castle Rock, Colorado................... I November 1992 181,000 98
II August 1993 94,000 93
III November 1993 95,000 100
IV August 1997 110,000 96
------- ---
480,000 97
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 (2) - Jeffersonville, Ohio.......... I March 1993 126,000 68
II August 1993 123,000 52
III October 1994 65,000 74
------- ---
314,000 63
Prime Outlets at Jeffersonville I - Jeffersonville, Ohio............... I July 1993 186,000 87
II November 1993 100,000 98
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 86
II November 1994 106,000 88
------- ---
316,000 87
Prime Outlets at Loveland - Loveland, Colorado......................... I May 1994 139,000 99
II November 1994 50,000 88
III May 1995 114,000 91
IV May 1996 25,000 100
------- ---
328,000 95
Portfolio of Properties (continued)
December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Oxnard (7) - 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 93
II November 1995 90,000 76
------- ---
282,000 88
Prime Outlets at Florida City - Florida City, Florida.................. I September 1994 208,000 83
Prime Outlets at Pismo Beach (2) - Pismo Beach, California............. I November 1994 148,000 94
Prime Outlets at Tracy (2) - Tracy, California........................ I November 1994 153,000 92
Prime Outlets at Vero Beach (2) - Vero Beach, Florida.................. I November 1994 210,000 95
II August 1995 116,000 94
------- ---
326,000 94
Prime Outlets at Waterloo (2) - Waterloo, New York..................... I March 1995 208,000 99
II September 1996 115,000 95
III April 1997 68,000 94
------- ---
391,000 97
Prime Outlets at Odessa - Odessa, Missouri............................. I July 1995 191,000 90
II November 1996 105,000 58
------- ---
296,000 79
Prime Outlets at Darien (8) - Darien, Georgia.......................... I July 1995 238,000 88
IIA November 1995 49,000 99
IIB July 1996 20,000 100
------- ---
307,000 90
Prime Outlets at New River (7) - Phoenix, Arizona...................... I September 1995 217,000 97
II September 1996 109,000 90
------- ---
326,000 94
Prime Outlets at Gulfport (9) - Gulfport, Mississippi.................. I November 1995 228,000 91
IIA November 1996 40,000 78
IIB November 1997 38,000 64
------- ---
306,000 86
Prime Outlets at Lodi - Burbank, Ohio.................................. I November 1996 205,000 98
IIA May 1998 33,000 92
IIB November 1998 75,000 83
------- ---
313,000 94
Prime Outlets at Gaffney - Gaffney, South Carolina..................... I November 1996 235,000 92
II July 1998 70,000 92
------- ---
305,000 92
Prime Outlets at Lee (2) - Lee, Massachusetts.......................... I June 1997 224,000 100
Prime Outlets at Lebanon - Lebanon, Tennessee......................... I April 1998 208,000 95
IIA March 1999 21,000 79
------- ---
229,000 93
Prime Outlets at Hagerstown (10) - Hagerstown, Maryland................ I August 1998 218,000 100
II November 1998 103,000 100
------- ---
321,000 100
------- ---
Total Outlet Centers (11) 14,699,000 93%
========== ===
====================================================================================================================================
Notes:
(1) Percentage reflects fully executed leases as of December 31, 1999 as a
percent of square feet of GLA.
(2) The Company acquired this outlet center on June 15, 1998 as a result of its
merger with Horizon Group, Inc.
(3) The Company acquired this outlet center on June 15, 1998 as a result of its
merger with Horizon Group, Inc. 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 30.0% interest.
(4) The Company acquired this outlet center on June 15, 1998 as a result of its
merger with Horizon Group, Inc. 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 30.0% interest.
(5) The Company owns a 2% partnership interest as the sole general partner in
Phase I of this property but is entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. This mixed-use
development includes 154,000 square feet of office space which was 98%
leased as of December 31, 1999.
(6) On September 1, 1999, the Company acquired 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.
(7) The Company owns 50% of this outlet center in a joint venture partnership
with an unrelated third party.
(8) 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.
(9) The real property on which this outlet center is located is subject to a
long-term ground lease.
(10) The Company expects to close on the sale of this outlet center on or about
May 15, 2000 to a joint venture partnership with an unrelated party in
which the Company owns a 30.0% interest.
(11) The Company also owns three community centers not included in this table
containing 424,000 square feet of GLA in the aggregate that were 84% leased
as of December 31, 1999.
Lease Terms
In general, the leases relating to the Company's outlet centers have a term
of three to five years. Most leases provide for the payment of percentage rents
for annual sales in excess of certain thresholds. In addition, the typical lease
agreement provides for the recovery of all of a merchant's proportionate share
of actual common area maintenance ("CAM"), refuse removal, insurance, and real
estate taxes as well as a collection for advertising and promotion and an
administrative fee. CAM includes such items as common area utilities, security,
parking lot cleaning, maintenance and repair of common areas, capital
replacement reserves, landscaping, seasonal decorations, public restroom
maintenance and certain administrative expenses.
The following table sets forth, as of December 31, 1999, tenant lease
expirations for the next 10 years at the Company's outlet centers (assuming that
none of the tenants exercise any renewal option and including leases at
outlet centers owned through joint venture partnerships):
- ------------------------------------------------------------------------------------------------------------------------------------
Lease Expirations - Outlet Centers
% of Total Annualized
Number of Approximate Annualized Minimum Rent
Leases GLA Minimum Rent of Represented by
Year Expiring (Sq. Ft.) Expiring Leases Expiring Leases
- ------ ------------- ---------------- -------------------- ---------------
2000 665 2,270,809 $33,256,178 17.41%
2001 654 2,393,027 36,672,692 19.20
2002 605 2,225,248 36,033,566 18.86
2003 557 2,350,330 36,200,598 18.95
2004 359 1,449,052 23,785,980 12.45
2005 136 782,286 11,757,734 6.16
2006 62 433,394 5,828,693 3.05
2007 29 171,763 2,261,173 1.18
2008 33 204,171 3,221,453 1.69
2009 - - - -
====================================================================================================================================
Tenants
In management's view, tenant mix is an important factor in determining an
outlet center's success. Virtually all aspects of the Company's outlet centers,
ranging from site selection to architectural design, are planned to attract and
retain a diverse mix of nationally and internationally recognized manufacturers
of upscale designer and brand-name products. Crucial to the development of a new
outlet center is having lead tenants committed to the outlet center early in the
process. In management's view, lead tenants are manufacturers that during the
development of an outlet center attract other high-quality manufacturers to the
outlet center and provide for a well-balanced and diversified mix of tenants
that will attract consumers to the outlet center. Lead tenants are placed in
strategic locations designed to draw customers into the outlet center and to
encourage them to shop at more than one store. The Company continually examines
the placement of tenants within each center and, in collaboration with its
tenants, adjusts the size and location of their space within the center in an
effort to improve sales per square foot.
During the year ended December 31, 1999, no group of tenants under common
control accounted for more than 5.09% of the gross revenues of the Company or
occupied more than 5.12% of the total GLA of the Company.
The following list includes some of the lead tenants in the Company's
outlet centers based on leases executed as of December 31, 1999:
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF LEASED
STORES GLA
TENANT -------- ----------
------
PHILLIPS-VAN HEUSEN
BASS ...................................................................... 49 2.62%
VAN HEUSEN ................................................................ 49 1.57
GEOFFREY BEENE ............................................................ 32 1.02
IZOD ...................................................................... 28 0.46
GANT ...................................................................... 1 0.02
--- ----
SUBTOTAL PHILLIPS-VAN HEUSEN............................................ 159 5.69
DRESS BARN, INC.
WESTPORT, LTD./WESTPORT WOMAN/DRESS BARN................................... 48 2.53
SBX........................................................................ 2 0.07
--- ----
SUBTOTAL DRESS BARN, INC................................................ 50 2.60
NIKE............................................................................ 28 2.57
LEVI'S/DOCKERS.................................................................. 40 2.52
LIZ CLAIBORNE/ELISABETH......................................................... 43 2.52
GAP/OLD NAVY.................................................................... 31 2.23
CASUAL CORNER GROUP, INC.
CASUAL CORNER OUTLET....................................................... 35 1.48
PETITE SOPHISTICATE ....................................................... 20 0.38
CASUAL CORNER WOMAN........................................................ 14 0.33
--- ----
SUBTOTAL CASUAL CORNER GROUP, INC. ..................................... 69 2.19
MIKASA.......................................................................... 37 2.18
BROWN GROUP RETAIL, INC.
FACTORY BRAND SHOES........................................................ 34 1.33
NATURALIZER................................................................ 27 0.53
FAMOUS FOOTWEAR........................................................... 6 0.26
--- ----
SUBTOTAL BROWN GROUP.................................................... 67 2.12
REEBOK/ROCKPORT................................................................. 30 1.95
SARA LEE
L'EGGS/HANES/BALI/PLAYTEX................................................... 42 1.42
COACH....................................................................... 17 0.37
CHAMPION.................................................................... 1 0.02
SOCKS GALORE................................................................ 13 0.13
--- ----
SUBTOTAL SARA LEE....................................................... 73 1.94
VANITY FAIR/LEE/WRANGLER/BARBIZON............................................... 10 1.83
NUMBER OF % OF LEASED
TENANT STORES GLA
------ ---------- ----------
BUGLE BOY....................................................................... 41 1.68%
SPIEGEL......................................................................... 8 1.68
JONES NEW YORK.................................................................. 61 1.63
POLO/RALPH LAUREN............................................................... 29 1.57
NINE WEST....................................................................... 73 1.56
CORNING-REVERE.................................................................. 40 1.46
OSHKOSH B'GOSH/GENUINE KIDS..................................................... 37 1.43
SPRINGMAID-WAMSUTTA............................................................. 23 1.26
CARTERS......................................................................... 33 1.22
EDDIE BAUER..................................................................... 19 1.14
K*B TOY......................................................................... 31 1.13
OFF 5TH-SAKS FIFTH AVENUE....................................................... 7 1.08
FAMOUS BRANDS HOUSEWARES........................................................ 37 1.03
SAMSONITE/AMERICAN TOURISTER.................................................... 44 1.02
FOREMAN ENTERPRISES, INC.
AMERICAN OUTPOST........................................................... 27 0.83
FARAH/SAVANE/FARGO......................................................... 6 0.11
--- ----
SUBTOTAL FOREMAN ENTERPRISES, INC....................................... 33 0.94
RUE 21.......................................................................... 33 0.90
BIG DOG SPORTSWEAR.............................................................. 40 0.89
TOMMY HILFIGER/WOMAN/JEANS...................................................... 28 0.88
PAPER FACTORY/GREETINS 'N MORE.................................................. 35 0.88
KITCHEN COLLECTION.............................................................. 35 0.87
JOCKEY.......................................................................... 31 0.85
WELCOME HOME.................................................................... 40 0.85
J. CREW......................................................................... 16 0.83
BROOKS BROTHERS................................................................. 20 0.83
ANN TAYLOR...................................................................... 13 0.78
NAUTICA......................................................................... 24 0.68
BOSE............................................................................ 16 0.48
DONNA KARAN..................................................................... 11 0.36
SONY............................................................................ 7 0.31
----- -----
TOTAL........................................................................... 1,502 60.56%
===== =====
====================================================================================================================================
During the year ended December 31, 1999, total bad debt expense was
approximately $0.8 million or 0.25% of total revenues.
ITEM 3 - 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 ("NYSE") 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 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock trades on the NYSE under the trading symbol
"PRT".
The following table sets forth the quarterly high, low and end of period
closing sales prices per share of the Company's Common Stock as reported on the
NYSE as well as the cash distributions paid during the periods indicated:
Market Price of Common Stock and Cash Dividends Paid Per Common Share
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------- ----------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------------- ----------------------------------------------------
Market price per
common share:
High.................. $7.94 $8.94 $9.94 $10.19 $11.13 $12.81 $15.19 $15.56
Low................... 5.13 6.44 7.94 7.38 7.50 9.06 11.81 13.75
End of period close... 5.63 7.38 8.69 8.75 9.81 9.81 11.94 14.94
Cash dividends paid per
common share.......... $0.295 $0.295 $0.295 $0.295 $0.295 $0.295 $0.795 (1) $0.295
====================================================================================================================================
Note:
(1) Includes a special cash distribution of $0.50 per common share relating to
the Company's merger with Horizon completed in June 1998 (see Note 3 -
"Business Combination" of the Notes to Consolidated Financial Statements).
The Company's current policy regarding the payment of common stock
distributions is to only make distributions to the extent necessary to maintain
its status as a real estate investment trust for federal income tax purposes.
Based on its current federal tax income tax projections, the Company 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
and 8.5% Series B Cumulative Convertible Preferred Stock, the Board of Directors
considered and did not declare a quarterly distribution on such preferred stock
due February 15, 2000. The Company's Board of Directors will continue to
evaluate the payment of such preferred stock distributions on a quarterly basis.
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 (see Note 6 - "Bonds and Notes Payable"
of the Notes to Consolidated Financial Statements. In addition, the Company may
make no distribution to its common shareholders unless it is current with
respect to distributions to its preferred shareholders.
The approximate number of holders of record of the Common Stock was 949
including participants in security position listings as of March 28, 2000.
ITEM 6 - SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------
Years ended December 31
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Revenues
Base rents............................... $ 193,979 $ 148,376 $ 78,046 $ 54,710 $ 46,368
Percentage rents......................... 8,085 6,384 3,277 1,987 1,520
Tenant reimbursements.................... 90,063 67,152 37,519 25,254 22,283
Interest and other....................... 13,829 9,897 10,288 7,089 7,227
------- ------- -------- ------ ------
Total revenues................ 305,956 231,809 129,130 89,040 77,398
Expenses
Property operating....................... 70,862 52,684 29,492 20,421 17,389
Real estate taxes........................ 22,405 16,705 9,417 5,288 4,977
Depreciation and amortization............ 73,640 52,727 26,715 19,256 15,438
Corporate general and administrative..... 12,687 7,980 5,603 4,018 3,878
Interest................................. 93,934 60,704 36,122 24,485 20,821
Provision for abandoned projects......... 16,039 - - - -
Provision for asset impairment........... 15,842 - - - -
Loss on Designer Connection.............. 6,561 1,067 - - -
Other charges............................ 6,918 4,495 3,234 8,586 2,089
------- ------- ------- ------ -------
Total expenses................ 318,888 196,362 110,583 82,054 64,592
------- ------- ------- ------ -------
Income (loss) before loss on sale of real
estate, minority interests and
extraordinary loss.................... (12,932) 35,447 18,547 6,986 12,806
Loss on sale of real estate.............. (15,153) (15,461) - - -
------- ------- ------- ------ -------
Income (loss) before minority interests
and extraordinary loss................ (28,085) 19,986 18,547 6,986 12,806
(Income) loss allocated to minority
interests............................. (3,226) (2,456) (10,581) 2,092 5,364
------- ------ ------- ------ -------
Income (loss) before extraordinary loss.. (31,311) 17,530 7,966 9,078 18,170
Extraordinary loss....................... (3,518) - (2,061) (1,017) -
-------- --------- --------- --------- --------
Net income (loss)........................ (34,829) 17,530 5,905 8,061 18,170
Income allocated to preferred shareholders (9,962) (24,604) (12,726) (14,236) (20,944)
-------- --------- --------- --------- --------
Net loss applicable to common shares..... $ (44,791) $ (7,074) $ (6,821) $ (6,175) $ (2,774)
======== ========= ========= ========= ========
Net loss per common share - basic........ $ (1.04) $ (0.20) $ (0.36) $ (0.75) $ (0.96)
======== ========= ========= ========= =========
Net loss per common share - diluted...... $ (1.30) $ (0.20) $ (0.36) $ (0.75) $ (0.96)
======== ========= ========= ========= =========
Other Data
Funds from operations (1)................ $ 68,321 $ 90,020 $ 46,718 $ 27,637 $ 27,996
Net cash provided by operating activities $ 102,221 $ 61,335 $ 49,856 $ 45,191 $ 36,399
Net cash used in investing activities.... $ (56,666) $ (145,596) $ (229,956) $ (232,290) $ (81,978)
Net cash provided by (used in) financing
activities............................ $ (43,977) $ 83,653 $ 182,549 $ 176,096 $ 57,547
Distributions declared per common share.. $ 0.89 $ 1.68(2) $ 1.18 $ 1.33(3) $ 1.18
Reported merchant sales.................. $3,286,917 $3,169,268 $1,434,163 $1,044,348 $ 809,623
Total outlet GLA at end of period (4).... 14,699 14,348 7,217 5,780 4,331
Number of outlet centers at end of
period(4)................................ 51 50 28 21 17
December 31
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Rental property (before accumulated
depreciation)......................... $1,826,551 $2,015,722 $904,782 $640,759 $454,480
Net investment in rental property........ 1,642,597 1,887,975 822,749 583,085 414,290
Total assets............................. 1,856,058 1,976,464 904,183 666,803 462,405
Bonds and notes payable.................. 1,260,670 1,217,507 515,265 499,523 305,954
Total liabilities and minority interests. 1,359,371 1,332,730 559,655 527,594 340,921
Shareholders' equity..................... 496,687 643,734 344,528 139,209 121,484
======================================================================================================================
Notes:
(1) Management believes that in order to facilitate a clear understanding of
the consolidated historical operating results of the Company, Funds from
Operations ("FFO") should be considered in conjunction with net income
(loss) as presented in the financial statements included in this Annual
Report on Form 10-K. Management believes that FFO is an important and
widely accepted 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.
FFO represents net income (loss) (computed in accordance with generally
accepted accounting principles ("GAAP"), excluding gains or losses from
debt restructuring, sales of property and discontinued operations, plus
depreciation and amortization and after adjustments for unconsolidated
investment partnerships and joint ventures. In March 1995, the National
Association of Real Estate Investment Trusts ("NAREIT") issued a
clarification of its definition of FFO. Although the Company has adopted
the NAREIT definition of FFO, 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. FFO does not represent cash flow from operating
activities in accordance with GAAP and is not indicative of cash available
to fund all of the Company's cash needs. FFO should not be considered as an
alternative to net income or any other GAAP measure as an indicator of
performance and should not be considered as an alternative to cash flow as
a measure of liquidity or the ability to service debt or to pay dividends.
A reconciliation of income (loss) before allocations to minority interests
and preferred shareholders to FFO is as follows:
Years ended December 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interests and
Extraordinary loss (i), (ii)....................... $(28,085) $19,986 $18,547 $ 6,986 $12,806
FFO adjustments:
Loss on sale of real estate.......................... 15,153 15,461 - - -
Discontinued operations - Designer Connection........ 6,561 1,067 - - -
Real estate depreciation and amortization............ 73,053 52,295 26,413 18,703 14,884
Unconsolidated joint venture.........................
adjustments(ii)................................... 1,639 1,211 1,758 1,948 306
FFO before allocations to minority interests and -------- ------- ------- ------- -------
preferred shareholders............................ $ 68,321 $90,020 $46,718 $27,637 $27,996
======== ======= ======= ======= =======
==================================================================================================================================
Notes:
(i) Includes a nonrecurring charge of $6,131 related to the prepayment
of long-term debt recorded during 1996.
(ii)Amounts include net preferential partner distributions from a joint
venture partnership of $400 and $162 for the years ended December 31,
1996 and 1995, respectively.
(2) Includes a special cash distribution of $0.50 per common share relating to
the Company's merger with Horizon completed in June 1998 (see Note 3 -
"Business Combination" of the Notes to Consolidated Financial Statements).
(3) Includes a special cash distribution of $0.145 per common share relating to
the Company's exchange offer completed in June 1996.
(4) Includes outlet centers operated under joint venture partnerships with
unrelated third parties as follows:
December 31
------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate GLA........................................ 1,490 595 595 800 901
Number of outlet centers............................. 4 3 3 4 4
====================================================================================================================================
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except per share, per unit, and per 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 appearing elsewhere in this Annual Report on Form 10-K. 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 agreement sthat 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, given
the newness of web-based retailing, it is difficult to quantify at this time.
Merger with Horizon Group, Inc.
On June 15, 1998, the merger and other transactions (collectively, the
"Merger Transactions") between the Company and Horizon Group, Inc. ("Horizon")
were consummated for an aggregate consideration of $1,134,682, including
liabilities assumed and related transaction costs. The merger has been accounted
for using the purchase method of accounting and the purchase price of $1,134,682
was allocated to the assets acquired and the liabilities assumed based on
estimates of their respective fair values. Accordingly, the operating results of
the 22 properties acquired from Horizon have been included in the Company's
consolidated results of operations commencing on June 15, 1998. See "Liquidity
and Capital Resources - Business Combination" for further information.
Portfolio Growth
The Company grew to its present size, a process that had been largely
completed by the end of 1999, by developing and acquiring outlet centers and
expanding its existing outlet centers. The Company's outlet portfolio consisted
of 51 outlet centers totaling 14,699,000 square feet of gross leasable area
("GLA") at December 31, 1999, compared to 50 outlet centers totaling 14,348,000
square feet of GLA at December 31, 1998 and 28 outlet centers totaling 7,217,000
square feet of GLA at December 31, 1997. The significant increase in the number
of the Company's outlet centes and GLA are collectively referred to as the
"Portfolio Expansion and the Horizon Merger."
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. During 1998, the Company opened two
outlet centers and nine expansions to existing outlet centers totaling 931,000
square feet of GLA in the aggregate. In connection with the Merger Transactions,
the Company (i) acquired and integrated 22 of Horizon's outlet centers into its
existing portfolio adding 6,626,000 square feet of GLA in the aggregate and (ii)
sold two outlet centers to HGP totaling 426,000 square feet of GLA.
Results of Operations
Table 1-Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents..................................................................... $193,979 $ 148,376 $ 78,046
Percentage rents............................................................... 8,085 6,384 3,277
Tenant reimbursements.......................................................... 90,063 67,152 37,519
Interest and other............................................................. 13,829 9,897 10,288
------- ------- -------
Total revenues............................................................... 305,956 231,809 129,130
Expenses
Property operating............................................................. 70,862 52,684 29,492
Real estate taxes.............................................................. 22,405 16,705 9,417
Depreciation and amortization.................................................. 73,640 52,727 26,715
Corporate general and administrative........................................... 12,687 7,980 5,603
Interest....................................................................... 93,934 60,704 36,122
Provision for abandoned projects............................................... 16,039 - -
Provision for asset impairment................................................. 15,842 - -
Loss on Designer Connection.................................................... 6,561 1,067 -
Other charges.................................................................. 6,918 4,495 3,234
------- ------- -------
Total expenses.............................................................. 318,888 196,362 110,583
------- ------- -------
Income (loss) before loss on sale of real estate, minority interests and
extraordinary loss........................................................... (12,932) 35,447 18,547
Loss on sale of real estate.................................................... (15,153) (15,461) -
------- ------- -------
Income (loss) before minority interests and extraordinary loss................. (28,085) 19,986 18,547
Income allocated to minority interests......................................... (3,226) (2,456) (10,581)
------- ------- -------
Income (loss) before extraordinary loss........................................ (31,311) 17,530 7,966
Extraordinary loss on early extinguishment of debt,
net of minority interests in the amount of $887 in 1999 and $0 in 1997....... (3,518) - (2,061)
-------- -------- --------
Net income (loss).............................................................. (34,829) 17,530 5,905
Income allocated to preferred shareholders..................................... (9,962) (24,604) (12,726)
-------- -------- --------
Net loss applicable to common shares........................................... $(44,791) $ (7,074) $ (6,821)
======== ======== ========
Earnings per common share - basic:
Loss before extraordinary loss.............................................. $ (0.96) $ (0.20) $ (0.25)
Extraordinary loss.......................................................... (0.08) - (0.11)
-------- -------- --------
Net loss.................................................................... $ (1.04) $ (0.20) $ (0.36)
======== ======== ========
Earnings per common share - diluted
Loss before extraordinary loss.............................................. $ (1.22) $ (0.20) $ (0.25)
Extraordinary loss.......................................................... (0.08) - (0.11)
======== ======== ========
Net loss.................................................................... $ (1.30) $ (0.20) $ (0.36)
======== ======== ========
Weighted average common shares outstanding
Basic...................................................................... 43,196 35,612 19,189
======== ======== ========
Diluted.................................................................... 44,260 35,612 19,189
======== ======== ========
====================================================================================================================================
Table 2-Statements of Operations on a Weighted Average per Square Foot Basis
A summary of the operating results for the years ended December 31, 1999,
1998 and 1997 is presented in the following table, expressed in amounts
calculated on a weighted average occupied GLA basis.
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
GLA at end of period (1)........................................................ 13,787 14,457 7,326
Weighted average occupied GLA (1)............................................... 13,599 10,390 5,735
Executed leases at end of period (GLA) (1)...................................... 13,643 13,894 6,854
Outlet centers in operation at end of period (2)................................ 51 50 28
New Outlet centers opened and acquired (2)...................................... 1 24 7
Outlet centers expanded (2)..................................................... 2 9 4
Community centers in operation at end of period................................. 3 3 3
States operated in at end of period............................................. 26 26 20
Portfolio weighted average per square foot (3):
Revenues
Base rents...................................................................... $14.26 $14.28 $13.61
Percentage rents................................................................ 0.59 0.61 0.57
Tenant reimbursements........................................................... 6.62 6.46 6.54
Interest and other.............................................................. 1.02 1.06 1.79
------ ------ ------
Total revenues............................................................... 22.49 22.41 22.51
Expenses (4)
Property operating.............................................................. 5.21 5.07 5.14
Real estate taxes............................................................... 1.65 1.61 1.64
Depreciation and amortization................................................... 5.42 5.10 4.66
Corporate general and administrative............................................ 0.93 0.77 0.98
Interest........................................................................ 6.91 5.84 6.30
Other charges................................................................... 0.51 0.63 0.56
------ ------ ------
Total expenses............................................................... 20.63 19.02 19.28
------ ------ ------
Income before loss on sale of real estate, minority interests
and extraordinary loss....................................................... $ 1.86 $ 3.39 $ 3.23
====== ====== ======
Revenues
Base rents...................................................................... $14.51 $14.66 $14.19
Percentage rents................................................................ 0.62 0.68 0.63
Tenant reimbursements........................................................... 6.76 6.67 6.96
Interest and other.............................................................. 0.85 0.85 1.57
------ ------ ------
Total revenues............................................................... 22.74 22.86 23.35
Expenses (4)
Property operating.............................................................. 5.31 5.17 5.40
Real estate taxes............................................................... 1.65 1.62 1.67
Depreciation and amortization................................................... 5.53 5.09 4.67
Interest........................................................................ 6.42 5.95 6.31
Other charges................................................................... 0.26 0.33 0.43
------ ------ ------
Total expenses............................................................... 19.17 18.16 18.48
------ ------ ------
Income before corporate general and administrative expenses,
loss on sale of real estate, minority interests and extraordinary loss....... $ 3.57 $ 4.70 $ 4.87
====== ====== ======
===================================================================================================================================
Notes:
(1) Includes total GLA in which the Company receives substantially all of
the economic benefit.
(2) Includes outlet centers operated under unconsolidated joint venture
partnerships with unrelated third parties.
(3) Based on occupied GLA weighted by months of operation. The occupied GLA on
a weighted average basis from the 22 properties the Company acquired from
Horizon have been included in the weighted average GLA commencing on June
15, 1998.
(4) Excludes a (i) provision for abandoned projects of $16,039, (ii) a
provision for asset impairment of $15,842, and (iii) a loss on Designer
Connection outlet stores of $6,561 recorded during 1999.
Comparison of the year ended December 31, 1999 to the year ended December
31, 1998
For the year ended December 31, 1999, the Company reported net loss of
$34,829. The 1999 results include (i) a fourth quarter loss on the sale of real
estate of $15,153, (ii) a provision for abandoned projects of $16,039, (iii) a
provision for asset impairment of $15,842, (iv) a loss on Designer Connection
outlet stores of $6,561, and (v) an extraordinary loss of $3,518 related to the
pre-payment of certain long-term debt. For the year ended December 31, 1999, the
net loss applicable to common shareholders was $44,791, or $1.04 and $1.30 per
common share on a basic and diluted basis, respectively. For the year ended
December 31, 1998, the Company reported net income of $17,530. The 1998 results
include (i) a second quarter loss on the sale of real estate of $15,461 in
connection with the Merger Transactions and (ii) a loss on Designer Connection
outlet stores of $1,067. For the year ended December 31, 1998, the net loss
applicable to common shareholders was $7,074, or $0.20 per common share on a
basic and diluted basis.
Total revenues were $305,956 for the year ended December 31, 1999, compared
to $231,809 for the year ended December 31, 1998, an increase of $74,147, or
32.0%. Base rents increased $45,603, or 30.7%, in 1999 compared to 1998. These
increases are primarily due to the Portfolio Expansion and the Horizon Merger.
Straight-line rents (included in base rents) were $1,181 and $1,229 for the
years ended December 31, 1999 and 1998, respectively. The average base rent per
square foot for new outlet leases negotiated and executed by the Company was
$17.67 and $16.12 for the years ended December 31, 1999 and 1998, respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, increased $1,701, or 26.6%, during the year
ended December 31, 1999 compared to the same period in 1998. This increase was
attributable to higher reported merchant sales in 1999 as well as the Portfolio
Expansion and the Horizon Merger.
As summarized in TABLE 3, merchant sales reported to the Company increased
by $117.6 million, or 3.7%, to $3,286.9 million from $3,169.3 million for the
years ended December 31, 1999 and 1998, respectively. The increase in total
reported merchant sales is primarily due to the Portfolio Expansion and the
Horizon Merger. The weighted average reported merchant sales per square foot
increased by 0.8% to $256.50 per square foot in 1999 from $254.56 per square
foot in 1998. Total merchant occupancy cost per square foot increased slightly
from $21.30 in 1998 to $21.90 in 1999 and increased as a percentage of reported
sales from 8.37% to 8.54%, respectively.
Table 3-Summary of Reported Merchant Sales(1)
A summary of reported outlet merchant sales and related data for 1999, 1998
and 1997 follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Total reported merchant sales (in millions)(1)................................. $3,286.9 $3,169.3 $1,434.2
======== ======== ========
Weighted average reported merchant sales per square foot(2):
All store sales............................................................. $ 256.50 $ 254.56 $ 236.20
======== ======== ========
Same-space sales............................................................ $ 252.65 $ 248.44
======== ========
Total merchant occupancy cost per square foot(3)................................ $ 21.90 $ 21.30 $ 21.36
======== ======== ========
Cost of merchant occupancy to reported sales(4)................................. 8.54% 8.37% 9.04%
======== ======== ========
Cost of merchant occupancy (excluding marketing contributions) to
reported sales(5)............................................................. 7.84% 7.65% 8.39%
======== ======== ========
====================================================================================================================================
Notes:
(1) Total reported merchant sales summarizes gross sales generated by merchants
and includes changes in merchant mix and the effect of new space created
from the acquisition and opening of new and expanded outlet centers.
Several of the Company's outlet centers were constructed, expanded or
acquired during the time periods contained in TABLE 3 and therefore,
reported sales for such new openings, expansions and acquisitions were
reported only for the partial period and were not annualized. TABLE 3
should be read in conjunction with the information summarized under the
caption "Properties--Portfolio of Properties".
(2) Weighted average reported sales per square foot is based on reported sales
divided by the weighted average square footage occupied by the merchants
reporting those sales. Same-space sales is defined as the weighted average
reported merchant sales per square foot for space open since the beginning
of the prior year.
(3) Total merchant occupancy cost per square foot includes base rents,
percentage rents and tenant reimbursements which includes tenant marketing
contributions.
(4) Computed as follows: total merchant occupancy cost per square foot divided
by total weighted average reported merchant sales per square foot.
(5) Computed as follows: total merchant occupancy cost per square foot
(excluding marketing contributions paid by merchants) divided by total
weighted average reported merchant sales per square foot.
Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, increased by $22,911, or 34.1%, in 1999
over 1998. This increase is primarily due to the Portfolio Expansion and the
Horizon Merger.
As shown in TABLE 4, tenant reimbursements as a percentage of recoverable
property operating expenses and real estate taxes was 96.6% in 1999 compared to
96.8% in 1998. These levels reflect the Company's continued efforts to contain
operating expenses at its properties while requiring merchants to pay their pro
rata share of these expenses. TABLE 4 sets forth recoveries from merchants as a
percentage of total recoverable expenses for 1999, 1998, and 1997:
Table 4-Tenant Recoveries as a Percentage of Total Recoverable Expenses
- --------------------------------------------------------------------------------
Percentage of Expenses
Year Recovered from Tenants(1)
- --------------------------------------------------------------------------------
1999..................................................................96.6%
1998..................................................................96.8%
1997..................................................................96.4%
================================================================================
Note:
(1) Total recoverable expenses include property operating expenses and real
estate taxes.
Interest and other income increased by $3,932, or 39.7%, to $13,829 during
the year ended December 31, 1999 as compared to $9,897 for the year ended
December 31, 1998. The increase reflects higher (i) temporary tenant income of
$1,677, (ii) lease termination income of $717, (iii) municipal assistance income
of $506, (iv) parking garage income of $360, (v) property management fees of
$270, (vi) gift certificate program income of $241, and (vii) other ancillary
income of $161.
Property operating expense increased by $18,178, or 34.5%, to $70,862 in
1999 compared to $52,684 in 1998. Real estate taxes expense increased by $5,700,
or 34.1%, to $22,405 in 1999 from $16,705 in 1998. The increases in property
operating expenses and real estate taxes are primarily due to the Portfolio
Expansion and the Horizon Merger. As show in TABLE 5, depreciation and
amortization expense increased by $20,913, or 39.7%, to $73,640 in 1999,
compared to $52,727 in 1998. This increase results from the depreciation and
amortization of assets associated with the Portfolio Expansion and the Horizon
Merger.
Table 5-Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense for 1999, 1998 and
1997 are summarized as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
Building and improvements...................................................... $40,184 $30,299 $13,987
Land improvements.............................................................. 5,779 3,609 2,838
Tenant improvements............................................................ 25,374 16,616 7,372
Furniture and fixtures......................................................... 1,540 1,084 858
Leasing commissions(1)......................................................... 763 1,119 1,660
------ ------ ------
Total.................................................................... $73,640 $52,727 $26,715
======= ======= =======
====================================================================================================================================
Note:
(1) In accordance with generally accepted accounting principles ("GAAP"),
leasing commissions are classified as intangible assets. Therefore, the
amortization of leasing commissions is reported as a component of
depreciation and amortization expense.
As shown in TABLE 6, interest expense increased by $33,230, or 54.7%, to
$93,934 in 1999 compared to $60,704 in 1998. This increase reflects (i) higher
interest incurred of $30,571, (ii) a decrease in the amount of interest
capitalized in connection with development projects of $1,147 and (iii) an
increase in amortization of deferred financing costs of $2,587. Partially
offsetting these items was a decrease in amortization of interest rate
protection contracts of $1,075. Additionally, interest incurred reflects
amortization of debt premiums of $4,406 and $2,153 for the yers ended December
31, 1999 and 1998, respectively.
The increase in interest incurred is primarily attributable to an increase
of $387,408 in the Company's average debt outstanding during 1999 compared to
1998 and (ii) higher interest rates on variable-rate indebtedness due to
increased market rates.
Table 6-Components of Interest Expense
The components of interest expense for 1999, 1998 and 1997 are summarized
as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Interest incurred............................................................... $94,201 $63,630 $36,436
Interest capitalized............................................................ (4,646) (5,793) (4,056)
Amortization of deferred financing costs........................................ 4,302 1,715 2,352
Amortization of interest rate protection contracts.............................. 77 1,152 1,390
------- ------- -------
Total.................................................................... $93,934 $60,704 $36,122
======= ======= =======
====================================================================================================================================
Other charges increased by $2,423 to $6,918 in 1999 compared to $4,495 for
1998. This increase reflects (i) the write-off of $3,100 of capitalized costs
associated with the Company's expired option to purchase its joint venture
partner's 50.0% ownership interest in Prime Outlets at New River, and (ii) an
increase in other miscellaneous charges of $389. Partially offsetting these
items was (i) a decrease in the provision for uncollectible accounts receivable
of $608 and (ii) lower marketing costs of $458.
When accounting for the fourth quarter of 1999, the Company determined that
certain events and circumstances had occurred during 1999 including, limited
leasing success and revised occupancy estimates, which indicated two of the
Company's outlet centers (Prime Outlets at Jeffersonville II and Prime Outlets
at Oxnard) were permanently impaired. Accordingly, the results of operations for
1999 include a provision for asset impairment of $15,842 representing the
write-down of the carrying values of these assets to their estimated fair value
in accordance with SFAS No. 121. Additionally, when accounting for the fourth
quarter of 1999, the Company recorded a provision for abandoned projects of
$16,039 based on management's determination that as of December 31, 1999, the
Company s pre-development efforts associated with certain projects were no
longer viable.
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. Accordingly, the Company recorded non-recurring
charges aggregating $3,659 including (i) $1,659 related to the write-off of
costs associated with a web-site for Designer Connection and(ii) $2,000 of costs
to cover the expected cash and non-cash costs of the closure. The cash and
non-cash costs of the closure primarily consist of (i) employee termination
costs, (ii) lease obligations, and (iii) the write-down of assets to their net
realizable value. The Company expects that the operations of its Designer
Connection outlet stores will cease by July 31, 2000.
Table 7-Capital Expenditures
The components of capital expenditures for 1999, 1998 and 1997 are
summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
New developments................................................................ $ 37,553 $ 43,459 $ 34,175
Property acquisitions, net...................................................... - 1,013,231(1) 191,345(2)
Expansions and renovations...................................................... 49,934 99,585 39,037
Re-leasing tenant allowances.................................................... 2,482 2,130 561
-------- ---------- --------
Total..................................................................... $ 89,969 $1,158,405 $265,118
======== ========== ========
====================================================================================================================================
Notes:
(1) Includes the assets acquired by the Company during 1998 in connection with
its merger with Horizon, net of the spin-off of HGP.
(2) Includes the assets acquired by the Company during 1997 consisting of (i)
the purchase of seven outlet centers ($166,987) and (ii) the purchase of
the Company's joint venture partner's partnership interest in Prime Outlet
at Lodi ($24,358).
Table 8-Consolidated Quarterly Summary of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------- -----------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues......................... $ 75,137 $76,902 $75,574 $78,343 $76,947 $72,873 $44,594 $37,395
Total expenses(1)...................... 111,496 70,450 67,897 69,045 66,682 62,301 37,435 29,944
------- ------- ------- ------- ------- ------- ------- -------
Income before loss on sale of real
estate, minority interests and
extraordinary loss.................. (36,359) 6,452 7,677 9,298 10,265 10,572 7,159 7,451
Loss on sale of real estate............ (15,153) - - - - - (15,461) -
------- ------ -------- -------- -------- ------- ------- -------
Income (loss) before minority
interests and extraordinary loss.... (51,512) 6,452 7,677 9,298 10,265 10,572 (8,302) 7,451
(Income) loss allocated to minority
interests........................... (2,770) 78 (534) - - (214) 3,219 (5,461)
------- ------- -------- -------- -------- ------- ------- -------
Income (loss) before extraordinary
loss................................ (54,282) 6,530 7,143 9,298 10,265 10,358 (5,083) 1,990
Extraordinary loss on early
extinguishment of debt.............. (1,412) - (2,106) - - - - -
------- ------- -------- -------- -------- ------- ------- -------
Net income (loss)...................... (55,694) 6,530 5,037 9,298 10,265 10,358 (5,083) 1,990
(Income) loss allocated to
preferred shareholders.............. (5,668) (6,048) (6,046) 7,800 (6,956) (6,741) (6,741) (4,166)
------- ------- -------- -------- -------- ------- ------- -------
Net income (loss) applicable to
common shares....................... $(61,362) $ 482 $ (1,009) $17,098 $ 3,309 $ 3,617 $(11,824) $(2,176)
======== ======= ======= ======= ======= ======= ======== =======
Earnings per common share - basic:
Income (loss) before
extraordinary loss.................. $ (1.39) $ 0.01 $ 0.03 $ 0.40 $ 0.08 $ 0.09 $ (0.40) $ (0.08)
Extraordinary loss.................... (0.03) - (0.05) - - - - -
-------- ------- -------- ------- ------- ------- -------- -------
Net income (loss).................. $ (1.42) $ 0.01 $ (0.02) $ 0.40 $ 0.08 $ 0.09 $ (0.40) $ (0.08)
======== ======= ======== ======= ======= ======= ======== =======
Earnings per common share - diluted:
Income (loss) before
extraordinary loss............... $ (1.39) $ 0.01 $ 0.03 $ 0.06 $ 0.08 $ 0.09 $ (0.40) $ (0.08)
Extraordinary loss................. (0.03) - (0.05) - - - - -
-------- ------- -------- ------- ------- ------- -------- -------
Net income (loss)..................... $ (1.42) $ 0.01 $ (0.02) $ 0.06 $ 0.08 $ 0.09 $ (0.40) $ (0.08)
======== ======= ======== ======= ======= ======= ======== =======
Weighted average common shares
outstanding:
Basic.............................. 43,357 43,286 43,186 42,951 42,736 42,314 29,859 27,295
======== ======= ======== ======= ======= ======= ======== =======
Diluted............................ 43,357 43,286 43,186 58,376 42,736 42,314 29,859 27,295
======== ======= ======== ======= ======= ======= ======== =======
Distributions paid per common
share(2)........................... $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.795 $ 0.295
======== ======= ======== ======= ======= ======= ======== =======
====================================================================================================================================
Notes:
(1) The fourth quarter of 1999 reflects non-recurring charges and expenses
aggregating $37,981 including (i) a provision for asset impairment of
$15,842, (ii) a provision for abandoned projects of $16,039, (iii) the
write-off of $3,100 of capitalized costs associated with the Company's
expired option to purchase its joint venture partner's 50.0% ownership
interest in Prime Outlets at New River, and (iv) $3,000 of start-up and
organizational expenses associated with the Company's eOutlets.com
subsidiary (see Note 13 - "Special Charges" and Note 14 - "Subsequent
Event" of the Notes to Consolidated Financial Statements).
(2) The second quarter of 1998 includes a special cash distribution of $0.50
per common share relating to the Company's merger with Horizon completed in
June 1998 (see Note 3 - "Business Combination" of the Notes to Consolidated
Financial Statements).
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997
For the year ended December 31, 1998, the Company reported net income of
$17,530. The 1998 results include (i) a second quarter loss on the sale of real
estate of $15,461 in connection with the Merger Transactions and (ii) a loss on
Designer Connection outlet stores of $1,067. For the year ended December 31,
1998, the net loss applicable to common shareholders was $7,074, or $0.20 per
common share on a basic and diluted basis. For the year ended December 31, 1997,
the Company reported net income of $5,905. The 1997 results include an
extraordinary loss of $2,061 related to the pre-payment of certain long-term
debt. For the year ended December 31, 1997, the net loss applicable to common
shareholders was $6,821, or $0.36 per common share on a basic and diluted basis.
Total revenues were $231,809 for the year ended December 31, 1998, compared
to $129,130 for the year ended December 31, 1997, an increase of $102,679, or
79.5%. Base rents increased $70,330, or 90.1%, in 1998 compared to 1997. These
increases are primarily due to the Portfolio Expansion and the Horizon Merger.
Straight-line rents (included in base rents) were $1,229 and $643 for the years
ended December 31, 1998 and 1997, respectively. The average base rent per square
foot for new manufacturers' outlet leases negotiated and executed by the Company
was $16.12 and $15.52 for the years ended December 31, 1998 and 1997,
respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, increased $3,107, or 94.8%, during the year
ended December 31, 1998 compared to the same period in 1997. This increase was
attributable to higher reported merchant sales in 1998 as well as the Portfolio
Expansion and the Horizon Merger.
As summarized in TABLE 3, merchant sales reported to the Company increased
by $1,735.1 million, or 121.0%, to $3,169.3 million from $1,434.2 million for
the years ended December 31, 1998 and 1997, respectively. The increase in total
reported merchant sales is primarily due to the Portfolio Expansion and the
Horizon Merger. The weighted average reported merchant sales per square foot
increased by 7.8% to $254.56 per square foot in 1998 from $236.20 per square
foot in 1997. Total merchant occupancy cost per square foot decreased slightly
from $21.36 in 1997 to $21.30 in 1998 and decreased as a percentage of reported
sales from 8.39% to 7.65%, respectively. The decrease in the cost of merchant
occupancy to reported sales is primarily due to an increase in the weighted
average reported merchant sales per square foot for the Company's entire
manufacturers' outlet portfolio.
Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, increased by $29,633, or 79.0% in 1998
over 1997. These increases are primarily due to the Portfolio Expansion and the
Horizon Merger.
As shown in Table 4, tenant reimbursements as a percentage of recoverable
property operating expenses and real estate taxes was 96.8% in 1998 compared to
96.4% in 1997. These levels reflect the Company's continued efforts to contain
operating expenses at its properties while requiring merchants to pay their pro
rata share of these expenses.
Interest and other income decreased by $391, or 3.8%, to $9,897 during the
year ended December 31, 1998 as compared to $10,288 for the year ended December
31, 1997. The decrease reflects (i) lower interest income of $1,262 and (ii)
other ancillary income of $561. Partially offsetting these items was higher
temporary tenant income of $1,432. The reduction in interest income was
primarily the result of the use of a portion of the Company's expansion loan
escrow account to fund certain of its development activities during 1997 and
1998. The expansion loan escrow account is included in restricted cash in the
Consolidated Balance Sheets.
Property operating expense increased by $23,192, or 78.6%, to $52,684 in
1998 compared to $29,492 in 1997. Real estate taxes expense increased by $7,288,
or 77.4%, to $16,705 in 1998 from $9,417 in 1997. The increases in property
operating expenses and real estate taxes are primarily due to the Portfolio
Expansions and the Horizon Merger. As shown in Table 5, depreciation and
amortization expense increased by $26,012, or 97.4%, to $52,727 in 1998,
compared to $26,715 in 1997. This increase results from the depreciation and
amortization of assets associated with the Portfolio Expansion and the Horizon
Merger.
As shown in Table 6, interest expense increased by $24,582, or 68.1%, to
$60,704 in 1998 compared to $36,122 in 1997. This increase reflects higher
interest incurred of $27,194. Partially offsetting this item was an increase in
the amount of interest capitalized in connection with development projects of
$1,737, a decrease in amortization of deferred financing costs of $637, and a
decrease in amortization of interest rate protection contracts of $238.
Additionally, interest incurred reflects amortization of debt premiums of $2,153
for the year ended December 31, 1998.
The increase in interest incurred is primarily attributable to an increase
of $379,108 in the Company's average debt outstanding during 1998 compared to
1997.
Other charges increased by $1,261 to $4,495 in 1998 compared to $3,234 for
1997. This increase reflects (i) a higher provision for potentially unsuccessful
pre-development efforts of $508, (ii) an increase in the provision for
uncollectible accounts receivable of $417, (iii) an increase in other
miscellaneous charges of $215, and (iv) higher marketing costs of $121.
In connection with the closing of its merger with Horizon on June 15, 1998,
the Company sold Indiana Factory Shops and Nebraska Crossing Factory Stores
(collectively, the "Prime Transferred Properties") to HGP for an aggregate
consideration of $26,015 resulting in a second quarter loss on the sale of real
estate of $15,461.
Liquidity and Capital Resources
Sources and Uses of Cash
For the year ended December 31, 1999, net cash provided by operating
activities was $102,221, net cash used in investing activities was $56,666, and
net cash used in financing activities was $43,977.
The uses of cash for investing activities during 1999 of $89,969 included
(i) costs associated with development and construction of two expansions to
existing outlet centers aggregating 85,000 square feet of GLA which opened
during 1999, (ii) costs associated with development and construction of a new
center (Prime Outlets of Puerto Rico) and three expansions to existing centers
aggregating approximately 457,000 square feet of GLA which are expected to open
during 2000, (iii) costs associated with the completion of two outlet centers
and nine expansions to existing outlet centers aggregating 931,000 square feet
of GLA which opened during 1998, and (iv) costs for pre-development activities
related to future development opportunities. Partially offsetting these uses
were $33,303 of net proceeds from the sale of Prime Outlets at Birch Run. See
"Prime/Estein Joint Venture Transaction" for further information.
The gross uses of cash from financing activities during 1999 included (i)
principal repayments on notes payable of $204,432, (ii) preferred and common
stock distributions of $75,536, (iii) costs associated with the Company's
redemption of its outstanding shares of Series C preferred stock of $45,054,
(iv) distributions to minority interests, including limited partners of the
Operating Partnership, of $12,976, and (v) deferred financing costs of $10,321.
Partially offsetting these items were proceeds from new borrowings of $304,342.
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 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 December 31, 1999, unused commitments
available for borrowings under various loan facilities were $13,546 in the
aggregate.
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 considered and did not declare a quarterly distribution on such
preferred stock due February 15, 2000. The Board of Directors will continue to
evaluate the payment of such 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 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 December 31, 1999 are $6,038 and $16,636, respectively.
Debt Repayments
The Company's aggregate indebtedness was $1,260,670 and $1,217,507 at
December 31, 1999 and 1998, respectively. At December 31, 1999, such
indebtedness had a weighted average maturity of 5.19 years and bore interest at
a weighted average interest rate of 7.87% per annum. At December 31, 1999,
$940,484, or 74.6%, of such indebtedness bore interest at fixed rates and
$320,186, or 25.4%, of such indebtedness bore interest at variable rates. The
Company is obligated to repay, excluding acceleration provisions, $95,732 and
$229,632 of mortgage indebtedness during 2000 and 2001, respectively. See "Debt
Covenants."
Repurchase of Shares of Series C Preferred Stock
On March 31, 1999, the Company entered into an agreement providing for the
repurchase of all of its outstanding shares of Series C Preferred Stock for
$43,636 or $10.00 per share. The agreement provided for the repurchase to occur
in two stages. In the first stage, on March 31, 1999, the Company repurchased
3,300,000 shares of the Series C Preferred Stock in exchange for the issuance of
a 12.0% fixed rate $33,000 unsecured promissory note which was repaid on
September 29, 1999. In the second stage, the Company repurchased the remaining
1,063,636 outstanding shares of its Series C Preferred Stock for an aggregate
purchase price of $10,636 on September 29, 1999.
Business Combination
On June 15, 1998, the Merger Transactions as set forth in the agreement and
plan of merger (the "Merger Agreement") between the Company and Horizon were
consummated for an aggregate consideration of $1,134,682, including liabilities
assumed and related transaction costs.
Pursuant to the terms of the Merger Agreement, the Company acquired (i) all
of the outstanding shares of common stock of Horizon at an exchange ratio of
0.20 of a share of the Company's Series B Convertible Preferred Stock and 0.597
of a share of the Company's Common Stock for each share of common stock of
Horizon, and (ii) all of the outstanding limited partnership units of
Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership") at an
exchange ratio of 0.9193 of a Common Unit of partnership interest in the
Operating Partnership. A total of 4,846,325 shares of Series B Convertible
Preferred Stock and 14,466,329 shares of Common Stock were issued by the Company
to the shareholders of Horizon and 3,782,121 Common Units were issued by the
Operating Partnership to the limited partners of Horizon Partnership.
Immediately prior to the merger, Horizon Partnership contributed 13 of its
35 centers to Horizon Group Properties, L.P., of which HGP, a subsidiary of
Horizon, is the sole general partner. HGP was spun-off from the Company on June
15, 1998. The remaining 22 outlet centers of Horizon were integrated into the
Company's existing portfolio. On June 19, 1998, all of the common equity of HGP
was distributed to the convertible preferred and common shareholders and
unitholders of the Company and its Operating Partnership and the shareholders
and limited partners of Horizon and Horizon Partnership based on their ownership
in the Company immediately following consummation of the merger. One share of
common stock of HGP was distributed for every 20 shares of Common Stock and
Series C Preferred Stock of the Company and for every 20 Common Units of the
Operating Partnership. Additionally, approximately 1.196 shares of the common
stock of HGP were distributed for every 20 shares of Series
B Convertible Preferred Stock of the Company.
In connection with the Merger Transactions, the Company sold the Prime
Transferred Properties to HGP for an aggregate consideration of $26,015,
resulting in a loss of $15,461. Proceeds from the sale of the Prime Transferred
Properties were used to repay indebtedness associated with the Horizon
properties.
Concurrent with the closing of the merger, a special cash distribution was
made aggregating $21,871 consisting of $0.50 per share/unit to holders of Common
Stock, Series C Preferred Securities and Common Units and $0.60 per share to
holders of Series B Convertible Preferred Stock. Shareholders of Horizon and
limited partners of Horizon Partnership did not participate in these
distributions.
The merger has been accounted for using the purchase method of accounting
and the purchase price was allocated to the assets acquired and the liabilities
assumed based on estimates of their respective fair values. Certain assumptions
were made which management of the Company believed were reasonable. The
operating results of those properties acquired have been included in the
Company's consolidated results of operations commencing on the date of the
merger. The operating results of the Prime Transferred Properties have been
included in the Company's consolidated results of operations through the date of
disposition.
Debt Transactions
On December 8, 1999, the Company refinanced the existing mortgage
indebtedness on Prime Outlets at Williamsburg (the "Williamsburg Center") with a
$42,500 loan facility from a financial institution. At closing, the Company
received an initial funding of $32,500 (the "Initial Funding") and a commitment,
subject to various conditions, for up to $10,000 (the "Final Draw") to finance a
planned expansion to the Williamsburg Center. The Initial Funding generated net
cash proceeds of $9,077 after the repayment in full of $22,405 of existing
mortgage indebtedness and closing costs. The Final Draw is expected to be made
in a single advance subject to satisfaction of certain conditions, including the
substantial completion of the expansion to the Williamsburg Center. In
connection with the debt refinancing, the Company incurred an extraordinary loss
of $159, net of minority interests of $40. The loan facility consists of an
interim loan (the "Interim Loan") and a permanent loan (the "Permanent Loan").
The Interim Loan (i) bears interest at 30-day LIBOR plus 2.5%, (ii) requires
monthly interest-only payments, (iii) is collateralized by a first mortgage on
the Williamsburg Center, and (iv) matures on January 11, 2002. The Interim Loan
may be converted to the Permanent Loan subject to satisfaction of certain
conditions. The Permanent Loan would (i) bear interest at a fixed-rate equal to
prevailing market rates, (ii) require monthly principal and interest payments
pursuant to a 25-year amortization schedule, (iii) be collateralized by a first
mortgage on the Williamsburg Center, and (iv) have a term of 10 years.
On November 15, 1999, the Company closed on a $20,000 subordinated loan
(the "Subordinated Loan") from an institutional lender. The Subordinated Loan
(i) bears interest at a fixed-rate of 15.0%, (ii) requires monthly interest-only
payments, (iii) matures on June 30, 2000, and (iv) is secured by a pledge of a
security interest in certain of the Company's ownership interests in, and the
available cash flow from five outlet centers, including Prime Outlets of Puerto
Rico, which is currently under construction. The Company may elect, at its
option, to extend the maturity of the Subordinated Loan to December 31, 2000.
On November 12, 1999, the Company closed on $55,000 term loan (the "$55,000
Term Loan") from a financial institution. The $55,000 Term Loan (i) bears
interest at 30-day LIBOR plus 6.0%, (ii) requires monthly principal and interest
payments, and (iii) matures in two years. The $55,000 Term Loan was issued by
Prime Retail Capital I, L.L.C. ("PRC"), a newly-formed wholly-owned subsidiary
of Prime Retail, L.P., and is secured by the excess cash flow from 15 outlet
centers after the payment of senior debt service and reserves under an existing
$349,797 first mortgage loan. The $55,000 Term Loan also is secured by a pledge
of PRC's 49.9% limited partnership interest in partnerships that own twelve of
those outlet centers and Prime Retail, L.P.'s 100% equity interest in PRC. The
$55,000 Term Loan is unconditionally guaranteed by Prime Retail, L.P. and Prime
Retail, Inc. The Company used the net cash proceeds from the $55,000 Term Loan
to repay $40,944 of short-term indebtedness and to repay a portion of the
borrowings under the Line of Credit.
During October 1999, the Company refinanced its $28,250 of variable-rate,
tax-exempt revenue bonds by issuing $28,250 of fixed rate tax-exempt revenue
bonds (the "Fixed Rate Bonds"). The Fixed Rate Bonds bear interest ranging from
6.875% to 7.0%, require semi-annual interest payments and mature from December
15, 2012 through December 1, 2014. The Fixed Rate Bonds are redeemable by the
Company commencing in December 2006 at 102% of the outstanding principal
balance. The redemption price decreases incrementally each year thereafter
through December 2008, at which date the redemption price is fixed at 100% of
the outstanding principal balance. In connection with the debt refinancing, the
Company incurred an extraordinary loss on early extinguishment of debt of $536,
net of minority interests of $134. Unless cured or waived, the defaults existing
under certain of the Company's credit agreements discussed more fully below will
entitle the holders of the Fixed Rate Bonds to put such obligations to Prime
Retail, Inc. at a price equal to par plus accrued interest.
On September 29, 1999, the Company received $40,000 of proceeds from a line
of credit facility (the "Line of Credit") with a group of institutional lenders.
These proceeds were used to repurchase the Company's Series C Preferred Stock.
The Line of Credit (i) bore interest at a fixed-rate of 11.0%, (ii) required
monthly interest-only payments, and (iii) matured in nine months. The Line of
Credit was repaid in full on November 19, 1999. In connection with the repayment
of the Line of Credit, the Company incurred an extraordinary loss on the early
extinguishment of debt of $717, net of minority interests of $179. The lenders
are entitled to receive a cash payment that increases their internal rate of
return with respect to amounts advanced under such facility by 4.0% per annum
(the "Cash Payment"). Lenders under the Line of Credit also received warrants to
purchase a 5% interest in the Company's e-commerce subsidiary, which
subsequently ceased all operations effective April 12, 2000 (see eOutlets.com)
On July 11, 1999, the Company's $20,000 unsecured line of credit (the
"Corporate Line") was renewed and increased to $25,000. The purpose of the
Corporate Line is to provide working capital to facilitate the funding of
short-term operating cash needs of the Company. The Corporate Line bears an
interest rate of 30-day LIBOR plus 2.50% and matures on July 11, 2000. At
December 31, 1999, the Corporate Line had an outstanding principal balance of
$22,175. There can be no assurance that the Company will be successful in
renewing the Corporate Line or that a renewal of the Corporate Line will be on
terms as favorable as the Company has experienced in prior periods.
On April 27, 1999, the Company closed on a $63,000 debt financing with a
financial institution that provided approximately $27,900 of net proceeds. The
$63,000 note is (i) collateralized by a first mortgage on Prime Outlets at
Niagara Falls USA, (ii) bears interest at a fixed rate of 7.604%, (iii) requires
monthly principal and interest payments of $450 pursuant to a 30-year
amortization schedule, and (iv) matures in 10 years. In connection with the debt
refinancing, the Company incurred an extraordinary loss on early extinguishment
of debt of $2,106, net of minority interests of $534.
As of December 31, 1999, the Company is a guarantor or otherwise obligated
with respect to an aggregate of $12,722 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 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 December 31, 1999, 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 $28,938 at December 31, 1999, 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 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) 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 December 31,
1999, the Company is not in compliance with a financial covenant contained in
two of its credit facilities, the Subordinated Loan and a $40,000 unsecured
revolving loan (the "Unsecured Revolving Loan"). Neither of the loans has been
accelerated nor was notice of the respective lender's intention to accelerate
the maturity of the loans received by the Company. The Company entered into an
amendment to the Subordinated Loan on February 23, 2000 which waived the
covenant violation as of December 31, 1999 and modified the covenant terms
through the Subordinated Loan's maturity date. The Company is currently in
discussions with the Unsecured Revolving Loan lender to obtain a waiver and/or
amend the loan; however, there can be no assurance as to whether and when the
Company will obtain any such waiver or amendment. Furthermore, the Company's
failure to obtain from its independent auditor's an unqualified report with
respect to its consolidated financial statements will also constitute a default
under these two credit facilities.
In addition, noncompliance with the covenants described above has triggered
certain cross-default provisions with respect to several of the Company's other
debt instruments, including the Subordinated Loan, the $55,000 Term Loan and the
Fixed Rate Bonds. None of these loans have been accelerated nor was a notice of
the respective lender's intent to accelerate received by the Company. Management
is currently in discussion with the affected lenders to obtain a resolution of
the cross-default provisions. 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
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 interest and other 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 (of which Estein's obligation is $7,000), such amount to be payable
on or before the ealier 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 scheduled to open during the second quarter of 2000, for aggregate
consideration of approximately $80,500 on or about May 15, 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
December 31, 1999, the Company classified $97,639 representing the aggregate
carrying value of Prime Outlets at Williamsburg and Prime Outlets at Hagerstown
(collectively, the "Held for Sale Properties") as assets held for sale in its
Consolidated Balance Sheet. Total revenues and expenses for the Held for Sale
Properties were $16,243 and $12,185, respectively for the year ended December
31, 1999.
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
The Company opened a 21,000 square foot expansion at Prime Outlets at
Lebanon in March 1999 and a 64,000 square foot expansion at Prime Outlets at San
Marcos in August 1999. The Home Co., the Company's first home furnishings store
which it owns a 47.6% interest through a joint venture, occupies 64,000 square
feet of the expansion at San Marcos. In addition, 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 continues construction of two
expansions consisting of 162,000 and 50,000 square feet of GLA at Prime Outlets
at Hagerstown and Prime Outlets at San Marcos, respectively. These expansions
are scheduled to open during the second quarter of 2000. The Company expects to
begin construction in the second quarter of 2000 of a 60,000 square foot
expansion to Prime Outlets at Williamsburg. This expansion is scheduled to open
in the fourth quarter of 2000. At December 31, 1999, the remaining budgeted
capital expenditures for projects scheduled to open in 2000 aggregated
approximately $31,300, 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 $750.
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 has 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 expects
to incur a non-recurring loss of approximately $13,000 in the first quarter of
2000. The non-recurring loss includes (i) the write-off of $3,500 of costs
capitalized during 1999 and (ii) approximately $9,500 of costs incurred during
2000, including costs associated with discontinuing the operations of
eOutlets.com. In addition, during 1999 the Company incurred expenses of $3,500
related to organizational and other start-up expenditures of eOutlets.com which
are reflected in corporate general and administrative expense in the
Consolidated Statements of Operations.
Taxability of Distributions
TABLE 9 summarizes the taxability of distributions paid during (i) the year
ended December 31, 1999 (ii) the period from January 1 to June 15, 1998, and
(iii) the period from June 16 to December 31, 1998. Distributions paid by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gains dividends) will constitute taxable distributions to
each holder. To the extent the Company makes distributions (not designated as
capital gains dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each holder, reducing the adjusted basis which such holder has in his
shares of stock by the amount of such distributions (but not below zero), with
distributions in excess of a holder's adjusted basis in his stock taxable as
capital gains (provided that the shares have been held as a capital asset).
Table 9-Taxability of Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Period from Period from June
Year ended January 1 to 16 to December
December 31, 1999 June 15, 1998 31, 1998
-----------------------------------------------------------------------------------------------------------------------------------
Senior Preferred Stock
Ordinary income............................................................ 100.0% 100.0% 100.0%
Series B Convertible Preferred Stock
Ordinary income............................................................ 100.0% 100.0% 63.7%
Return of capital.......................................................... - - 36.3%
Series C Preferred Stock
Ordinary income............................................................ 100.0% 18.7% -
Return of capital.......................................................... - 81.3% 100.0%
Common Stock
Ordinary income............................................................ 23.0% - -
Return of capital.......................................................... 77.0% 100.0% 100.0%
====================================================================================================================================
No assurance can be made that future distributions, if any, will be treated
similarly. Each holder of stock may have a different basis in its stock and,
accordingly, each holder is advised to consult with a tax advisor.
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 years, the Company discussed the nature and progress of its plan
to become Year 2000 ready. In 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation 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 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.
Funds from Operations
Management believes that to facilitate a clear understanding of the
Company's operating results, funds from operations ("FFO") should be considered
in conjunction with net income (loss) presented in accordance with GAAP. In
March 1995, the National Association of Real Estate Investment Trusts ("NAREIT")
established guidelines clarifying the definition of FFO. FFO is defined as net
income (loss) (determined in accordance with GAAP) excluding gains (or losses)
from debt restructuring, sales of property and discontinued operations, plus
depreciation and amortization after adjustments 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 10 provides a reconciliation of income before allocations to minority
interests and preferred shareholders to FFO for the years ended December 31,
1999, 1998 and 1997. FFO decreased $21,699, or 24.1% to $68,321 for the year
ended December 31, 1999 from $90,020 for the year ended December 31, 1998. The
1999 FFO results reflect fourth quarter 1999 non-recurring charges and expenses
aggregating $37,981, including (i) a provision for asset impairment of $15,842,
(ii) a provision for abandoned projects of $16,039, (iii) the write-off of
$3,100 of capitalized costs associated with the Company's expired option to
purchase its joint venture partner's 50.0% ownership interest in Prime Outlets
at New River, and (iv) $3,000 of start-up and organizational expenses associated
with the Company's eOutlets.com subsidiary.
Excluding these non-recurring charges and expenses, FFO increased $16,282,
or 18.1%, to $106,302 for the year ended December 31, 1999 from $90,020 for the
year ended December 31, 1998. The increase is primarily attributable to the
Portfolio Expansion and the Horizon Merger.
Table 10-Funds from Operations
- ---------------------------------------------------------------------------------------------- ------------ -------------
Years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------- ------------ -------------
Income (loss) before minority interests and extraordinary loss.................. $(28,085) $19,986 $ 18,547
FFO adjustments:
Loss on sale of real estate..................................................... 15,153 15,461 -
Discontinued operations - Designer Connection................................... 6,561 1,067 -
Real estate depreciation and amortization....................................... 73,053 52,295 26,413
Unconsolidated joint venture adjustments........................................ 1,639 1,211 1,758
-------- ------- --------
FFO before allocations to minority interests and preferred shareholders......... $ 68,321 $90,020 $ 46,718
======== ======= ========
Other Data:
Net cash provided by operating activities....................................... $102,221 $61,335 $ 49,856
Net cash used in investing activities........................................... (56,666) (145,596) (229,956)
Net cash provided by (used in) financing activities............................. (43,977) 83,653 182,549
====================================================================================================================================
The payout ratios based on distributions made by the Company divided by FFO
for 1999, 1998 and 1997 were 97.4%, 92.9%, and 103.7%, respectively.
Table 11-Consolidated Quarterly Summary of Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interests and
extraordinary loss...................... $ (51,512) $6,452 $7,677 $ 9,298 $10,265 $10,572 $(8,302) $ 7,451
FFO adjustments:
Loss on sale of real estate................ 15,153 - - - - - 15,461 -
Discontinued operations - Designer Connection
5,553 120 543 345 163 324 287 293
Real estate depreciation and amortization.. 17,318 19,188 18,435 18,112 18,475 16,327 9,792 7,701
Unconsolidated joint venture adjustments... 737 473 174 255 303 303 302 303
-------- ------ ------- ------- -------- ------- ------- -------
FFO before allocations to minority interests
and preferred shareholders.............. $(12,751) $ 26,233 $ 26,829 $28,010 $ 29,206 $ 27,526 $ 17,540 $ 15,748
======== ======== ======== ======= ======== ======== ======== ========
Other Data:
Net cash provided by (used in) operating
activities.............................. $ 22,978 $ 27,058 $ 29,604 $ 22,581 $ 8,817 $ 34,346 $ (7,406) $ 25,578
Net cash provided by (used in) investing
activities.............................. 1,265 (11,079) (27,193) (19,659) (22,750) (44,469) (50,975) (27,402)
Net cash provided by (used in) financing
activities.............................. (20,284) (14,201) (1,135) (8,357) 5,940 5,144 76,595 (4,026)
====================================================================================================================================
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MATERIAL 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 December 31, 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
- --------------------------------------- ------------- ------------- ------------- ------------- ------------- -------------- -------
Fixed rate:
Principal........................... $37,605 $38,632 $46,529 $348,761 $17,050 $451,907 $940,484
Average interest rate............... 11.40% 7.54% 7.04% 7.76% 7.75% 7.09% 7.54%
Variable rate:
Principal........................... $58,127 $191,000 $33,137 $1,152 $36,770 - $320,186
Average interest rate............... 9.07% 8.94% 6.31% 7.98% 7.98% - 8.20%
====================================================================================================================================
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is set forth at the pages indicated in
Item 14(a) below.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10, 11, 12 and 13 (except that
information regarding executive officers called for by Item 10 that is contained
in Part I) is incorporated herein by reference from the definitive proxy
statement that the Company intends to file pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, on or before April 29, 2000.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements ofOperations for the years ended December 31,
1999, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999,1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedules
The following financial statement schedule is included in Item 14 (d):
Report of Independent Auditors on Schedule (included with consent filed
as Exhibit 23)
Schedule III--Real Estate and Accumulated Depreciation F-23
Notes to Schedule III F-25
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of Prime Retail, Inc.
[Incorporated by reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as amended
(File No. 0-23616)]
3.2 Articles Supplementary of Prime Retail, Inc. relating to Series B
Preferred Stock. [Incorporated by reference to the same titled exhibit in the
Company"s Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended (File No. 0-23616)]
3.3 Second Amended and Restated By-Laws of Prime Retail, Inc.
Exhibit
Number Description
- ------- -----------
4.1 Form of Series A Preferred Stock Certificate [Incorporated by reference
to the same titled exhibit in the Company"s Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-23616).]
4.2 Form of Series B Preferred Stock Certificate [Incorporated by reference
to the same titled exhibit in the Company"s Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-23616).]
4.3 Form of Common Stock Certificate [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-23616).]
10.1 Third Amended and Restated Agreement of Limited Partnership of Prime
Retail, L.P. dated as of October 15, 1998 and effective as of June 15, 1998.
[Incorporated by reference to the same titled exhibit in the Company"s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as amended
(File No. 0-23616)]
10.1A Amendment No. 1 to Third Amended and Restated Agreement of Limited
Partnership of Prime Retail, L.P. dated as of September 28, 1999.
# 10.2 1994 Stock Incentive Plan [Incorporated by reference to the same
titled exhibit in the Company's registration statement on Form S-11
(Registration No. 33-68536).]
# 10.3 1995 Stock Incentive Plan [Incorporated by reference to the same
titled exhibit in the Company's registration statement on Form S-11
(Registration No. 333-1666).]
# 10.4 Executive Employment Agreement (Michael W. Reschke) [Incorporated by
reference to the same titled exhibit in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
# 10.5 Separation Agreement dated February 23, 2000 by and between Prime
Retail, Inc. and Abraham Rosenthal.
# 10.6 Employment Agreement dated October 6, 1999 by and among
primeoutlets.com inc., Prime Retail, L.P., Prime Retail, Inc. and William H.
Carpenter, Jr.
# 10.7 Form of Executive Employment Agreement (David G. Phillips)
[Incorporated by reference to the same titled exhibit in the Company's
registration statement on Form S-11 (Registration No. 33-68536).]
10.15 Registration Rights Agreement dated June 15, 1998 by and between
Prime Retail, Inc. and Prime Retail, L.P. for the benefit of holders of common
units of Prime Retail, L.P. and certain stockholders of Prime Retail, Inc.
[Incorporated by reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as amended
(File No. 0-23616)]
10.16 Form of Property Level General Partnership Agreement [Incorporated by
reference to the same titled exhibit in the Company's registration statement on
Form S-11 (Registration No. 33-68536).]
10.17 Form of Property Level Limited Partnership Agreement [Incorporated by
reference to the same titled exhibit in the Company's registration statement on
Form S-11 (Registration No. 33-68536).]
10.18 Noncompetition and Restriction Agreement with Michael W. Reschke of
PGI [Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as
amended (File No. 0-23616).]
Exhibit
Number Description
- ------- -----------
# 10.21 Consulting Agreement between the Company and Marvin Traub
Associates, Inc. [Incorporated by reference to the same titled exhibit in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
(File No. 0-23616).]
10.28 Waiver, Recontribution and Indemnity Agreement by the Limited
Partners [Incorporated by reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as
amended (File No. 0-23616).]
10.29 Indemnity Agreement made by the Company in favor of The Prime Group,
Inc. and Prime Group Limited Partnership [Incorporated by reference to the same
titled exhibit in the Company's registration statement on Form S-11
(Registration No. 333-1666).]
10.30 Promissory Note dated October 31, 1996 by and between Prime Retail,
L.P. and Nomura Asset Capital Corporation [Incorporated by reference to the same
titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-233616).]
10.30A Form of Deed of Trust, Security Agreement, Assignment of Rents and
Fixture Filings with Nomura Asset Capital Corporation [Incorporated by reference
to the same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 0-23616).]
10.31 Form of Standby Bond Purchase and Indemnity Agreement [Incorporated
by reference to the same titled exhibit in the Company's registration statement
on Form S-11 (Registration No. 33-68536).]
10.32 Consulting Agreement between the Company and Financo, Inc.
[Incorporated by reference to the same titled exhibit in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-23616).]
10.33 Amended and Restated Agreement and Plan of Merger among Prime Retail,
Inc., Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group
Properties, Inc., Horizon Group Properties, L.P., and Horizon/Glen Outlet
Centers Limited Partnership dated as of February 1, 1998 [Incorporated by
reference to the same titled exhibit in the Company's Current Report on Form 8-K
dated February 1, 1998 (File No. 0-23616).]
10.34 Agreement among Prime Retail, Inc., Horizon Group, Inc., Mr. David H.
Murdock, Castle & Cooke Properties, Inc., and Pacific Holding Company dated as
of February 1, 1998 [Incorporated by reference to the same titled exhibit in the
Company's Current Report on Form 8-K dated February 1, 1998 (File No. 0-23616).]
# 10.35 Letter Agreement with David G. Phillips regarding the purchase of
units in Prime Retail, L.P. dated August 6, 1996. [Incorporated by reference to
the same titled exhibit in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (File No. 0-23616).]
# 10.36 Non-employee Director Stock Plan [Incorporated by reference to
Appendix I in the Company's registration statement on Form S-4 (File No.
333-51285).]
# 10.37 1998 Long-Term Stock Incentive Plan [Incorporated by reference to
Appendix J in the Company's registration statement on Form S-4 (File No.
333-51285).]
# 10.38 Description of the 1999 Long-Term Incentive Program. [Incorporated
by reference to the same titled exhibit in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616)]
Exhibit
Number Description
- ------- -----------
# 10.39 Loan Agreement dated as of June 15, 1998 between Outlet Village of
Kittery Limited Partnership, the Prime Outlets at Gilroy Limited Partnership,
The Prime Outlets at Michigan City Limited Partnership and Finger Lakes Outlet
Center, L.L.C. and Nomura Asset Capital Corporation (Permanent Loan)
[Incorporated by reference to Exhibit 10.1 in the Company's Current Report on
Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.40 Form of Deed of Trust, Security Agreement, Assignment of Rents and
Fixture Filings with Nomura Asset Capital Corporation (Permanent Loan and Bridge
Loan) [Incorporated by reference to Exhibit 10.2 in the Company' Current Report
on Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.41 Loan Agreement dated as of June 15, 1998 between Buckeye Factory
Shops Limited Partnership, Latham Factory Stores Limited Partnership, Carolina
Factory Shops Limited Partnership, Shasta Outlet Center Limited Partnership, The
Prime Outlets at Calhoun Limited Partnership and The Prime Outlets at Lee
Limited Partnership and Nomura Asset Capital Corporation (Bridge Loan)
[Incorporated by reference to Exhibit 10.3 in the Company's Current Report on
Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.42 Guaranty dated as of June 15, 1998 by Prime Retail, Inc. to and for
the benefit of Nomura Asset Capital Corporation [Incorporated by reference to
Exhibit 10.4 in the Company's Current Report on Form 8-K dated June 15, 1998
(File No. 001-13301)]
# 10.43 Guaranty dated as of June 15, 1998 by Prime Retail, L.P. to and for
the benefit of Nomura Asset Capital Corporation [Incorporated by reference to
Exhibit 10.5 in the Company's Current Report on Form 8-K dated June 15, 1998
(File No. 001-13301)]
# 10.44 Guaranty and Indemnity Agreement dated as of June 15, 1998 by and
among Horizon Group Properties, Inc., Horizon Group Properties, Inc. , Horizon
Group Properties, L.P., Prime Retail, Inc. and Prime Retail, L.P. [Incorporated
by reference to Exhibit 10.6 in the Company's Current Report on Form 8-K dated
June 15, 1998 (File No. 001-13301)]
# 10.45 Contribution Agreement dated as of June 15, 1998 by and among
Horizon Group, Inc., Sky Merger Corp., Horizon/Glen Outlet Centers Limited
Partnership, Horizon Group Properties, Inc., and Horizon Group Properties, L.P.
[Incorporated by reference to Exhibit 10.7 in the Company's Current Report on
Form 8-K dated June 15, 1998 (File No. 001-13301)]
10.46 Series C Preferred Share Repurchase Agreement dated as of March 31,
1999 among Security Capital Preferred Growth Incorporated, Prime Retail, Inc.,
and Prime Retail, L.P. [Incorporated by reference to Exhibit 10.1 in the
Company's Current Report on Form 8-K dated March 31, 1999 (File No. 0-23616)]
10.47 Purchase and Sale Agreement, dated as of August 6, 1999, among The
Prime Outlets at Birch Run, L.L.C., The Prime Outlets at Williamsburg, L.L.C.
and Outlet Village of Hagerstown Limited partnership and Welp Triple Outlet,
L.C. [Incorporated by reference to Exhibit 10.1 in the Company's Current Report
on Form 8-K dated August 11, 1999 (File No. 001-13301)]
12 Statement re: Computation of Ratio Earnings to Combined Fixed Charges
and Preferred Stock Dividends
21 Subsidiaries of Prime Retail, Inc.
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
_____________________
Note:
# Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c).
(b) Reports on Form 8-K
None
(c) Exhibits
The list of exhibits filed with this report is set forth in response to
Item 14 (a)(3). The required exhibits have been filed as indicated in the
Exhibit Index. The Company agrees to furnish a copy of any long-term debt
instrument wherein the securities authorized do not exceed 10 percent of the
registrant's total assets on a consolidated basis upon the request of the
Securities and Exchange Commission.
(d) Financial Statements and Schedules
Schedule III -- Real Estate and Accumulated Depreciation attached hereto is
hereby incorporated by reference to this Item.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 14, 2000 /s/ Glenn D. Reschke
--------------------
Glenn D. Reschke
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/Michael W. Reschke April 14, 2000
---------------------------
Michael W. Reschke
Chairman of the Board
/s/William H. Carpenter, Jr. April 14, 2000
----------------------------
William H. Carpenter, Jr.
Director
/s/William P. Dickey April 14, 2000
----------------------------
William P. Dickey
Director
/s/Norman Perlmutter April 14, 2000
----------------------------
Norman Perlmutter
Director
/s/Robert D. Perlmutter April 14, 2000
----------------------------
Robert D. Perlmutter
Director
/s/Kenneth A. Randall April 14, 2000
----------------------------
Kenneth A. Randall
Director
/s/Sharon Sharp April 14, 2000
----------------------------
Sharon Sharp
Director
/s/James R. Thompson April 14, 2000
----------------------------
James R. Thompson
Director
/s/Marvin S. Traub April 14, 2000
----------------------------
Marvin S. Traub
Director
Report of Independent Auditors
To the Board of Directors and Shareholders
Prime Retail, Inc.
We have audited the accompanying consolidated balance sheets of Prime
Retail, Inc. (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that
Prime Retail, Inc. will continue as a going concern. As more fully described in
Note 6, the Company is not in compliance with a financial covenant contained in
one of its credit facilities. In addition, noncompliance with the financial
covenant has triggered certain cross-default provisions with respect to several
of the Company's other debt instruments. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 6. The financial
statements do not include any adjustments 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.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 23, 2000,
except for Note 14, as to which the date is
April 12, 2000
Prime Retail, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share information)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in rental property:
Land........................................................................ $ 181,854 $ 206,386
Buildings and improvements.................................................. 1,560,710 1,753,641
Property under development.................................................. 66,581 45,068
Furniture and equipment..................................................... 17,406 10,627
--------- ---------
1,826,551 2,015,722
Accumulated depreciation....................................................... (183,954) (127,747)
--------- ---------
1,642,597 1,887,975
Cash and cash equivalents...................................................... 7,343 5,765
Restricted cash................................................................ 28,131 34,969
Accounts receivable, net....................................................... 18,926 21,233
Deferred charges, net.......................................................... 13,503 12,518
Investment in partnerships..................................................... 18,941 8,386
Assets held for sale........................................................... 97,639 -
Due from affiliates, net....................................................... 4,140 988
Other assets................................................................... 24,838 4,630
----------- ----------
Total assets.......................................................... $1,856,058 $1,976,464
=========== ===========
Liabilities and Shareholders' Equity
Bonds payable.................................................................. $ 32,900 $ 32,900
Notes payable(See Note 6)...................................................... 1,227,770 1,184,607
Accrued interest............................................................... 8,033 7,878
Real estate taxes payable...................................................... 10,700 11,229
Construction costs payable..................................................... 5,123 3,754
Accounts payable and other liabilities......................................... 73,340 69,879
--------- ---------
Total liabilities....................................................... 1,357,866 1,310,247
Minority interests............................................................. 1,505 22,483
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$57,500), 2,300,000 shares issued and
outstanding............................................................ 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock, $.01
par value (liquidation preference of $195,703), 7,828,125 shares issued
and outstanding........................................................ 78 78
Series C Cumulative Convertible Redeemable Preferred Stock, $.01 par
value 4,363,636 shares issued and outstanding at December 31, 1998.... - 44
Shares of common stock, 150,000,000 shares authorized:
Common stock, $.01 par value, 43,368,620 and 42,736,742 shares issued
and outstanding, respectively........................................... 434 427
Additional paid-in capital................................................. 709,122 759,105
Distributions in excess of net income...................................... (212,970) (115,943)
---------- ----------
Total shareholders' equity............................................ 496,687 643,734
---------- ---------
Total liabilities and shareholders' equity............................ $1,856,058 $1,976,464
========== ==========
===================================================================================================================================
See accompanying notes to financial statements.
Prime Retail, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share information)
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents..................................................................... $ 193,979 $148,376 $ 78,046
Percentage rents............................................................... 8,085 6,384 3,277
Tenant reimbursements.......................................................... 90,063 67,152 37,519
Interest and other............................................................. 13,829 9,897 10,288
--------- -------- --------
Total revenues........................................................... 305,956 231,809 129,130
Expenses
Property operating............................................................. 70,862 52,684 29,492
Real estate taxes.............................................................. 22,405 16,705 9,417
Depreciation and amortization.................................................. 73,640 52,727 26,715
Corporate general and administrative........................................... 12,687 7,980 5,603
Interest....................................................................... 93,934 60,704 36,122
Provision for abandoned projects............................................... 16,039 - -
Provision for asset impairment................................................. 15,842 - -
Loss on Designer Connection.................................................... 6,561 1,067 -
Other charges.................................................................. 6,918 4,495 3,234
-------- -------- --------
Total expenses........................................................... 318,888 196,362 110,583
-------- -------- --------
Income (loss) before loss on sale of real estate, minority interests
and extraordinary loss...................................................... (12,932) 35,447 18,547
Loss on sale of real estate.................................................... (15,153) (15,461) -
-------- -------- --------
Income (loss) before minority interests and extraordinary loss................. (28,085) 19,986 18,547
Income allocated to minority interests......................................... (3,226) (2,456) (10,581)
-------- -------- --------
Income (loss) before extraordinary loss........................................ (31,311) 17,530 7,966
Extraordinary loss on early extinguishment of debt,
net of minority interests in the amount of $887 in 1999 and $0 in 1997...... (3,518) - (2,061)
--------- -------- --------
Net income (loss).............................................................. (34,829) 17,530 5,905
Income allocated to preferred shareholders..................................... (9,962) (24,604) (12,726)
--------- -------- --------
Net loss applicable to common shares........................................... $ (44,791) $ (7,074) $ (6,821)
========= ======== ========
Earnings per common share - basic:
Loss before extraordinary loss........................................... $ (0.96) $ (0.20) $ (0.25)
Extraordinary loss....................................................... (0.08) - (0.11)
--------- -------- --------
Net loss................................................................. $ (1.04) $ (0.20) $ (0.36)
========= ======== ========
Earnings per common share - diluted:
Loss before extraordinary loss........................................... $ (1.22) $ (0.20) $ (0.25)
Extraordinary loss....................................................... (0.08) - (0.11)
--------- ------- --------
Net loss................................................................. $ (1.30) $ (0.20) $ (0.36)
========= ======= ========
Weighted average common shares outstanding
Basic.................................................................... 43,196 35,612 19,189
========= ======== ========
Diluted.................................................................. 44,260 35,612 19,189
========= ======== ========
===================================================================================================================================
See accompanying notes to financial statements.
Prime Retail, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss).............................................................. $(34,829) $17,530 $ 5,905
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Income allocated to minority interests.......................................... 3,226 2,456 10,581
Loss on sale of real estate.............................................. 15,153 15,461 -
Extraordinary loss, net of minority interests............................ 3,518 - 2,061
Depreciation............................................................. 72,877 51,638 25,055
Amortization of deferred financing costs and interest rate protection
contracts............................................................... 4,379 2,867 3,742
Amortization of leasing commissions...................................... 763 1,119 1,660
Provision for uncollectible accounts receivable.......................... 779 1,387 970
Provision for abandoned projects......................................... 16,039 - -
Provision for Designer Connection........................................ 3,659 - -
Provision for asset impairment........................................... 15,842 - -
Gain on sale of land..................................................... (72) (274) (904)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................................. 2,155 (17,605) (4,619)
(Increase) decrease in other assets......................................... 6,375 (3,903) 1,400
Increase (decrease) in other liabilities.................................... (7,798) (11,620) 3,878
Increase in accrued interest................................................ 155 2,279 127
------- -------- -------
Net cash provided by operating activities................................ 102,221 61,335 49,856
------- -------- -------
Investing Activities
Additions to investment in rental property..................................... (36,265) (46,862) (21,057)
Increase in property under development......................................... (53,704) (89,190) (49,668)
Acquisition of outlet centers.................................................. - - (159,232)
Acquisition of Horizon, net of cash acquired and spin-off of HGP............... - (35,559) -
Proceeds from sale of outlet centers........................................... 33,303 26,015 -
------- -------- --------
Net cash used in investing activities.................................... (56,666) (145,596) (229,956)
------- -------- --------
Financing Activities
Net proceeds from offerings.................................................... - - 242,729
Redemption of Series C preferred stock......................................... (45,054) - -
Proceeds from notes payable.................................................... 304,342 467,998 160,057
Principal repayments on notes payable.......................................... (204,432) (283,806) (175,683)
Deferred financing fees........................................................ (10,321) (3,277) (583)
Distributions and dividends paid............................................... (75,536) (79,451) (33,605)
Distributions to minority interests............................................ (12,976) (17,811) (10,366)
------- ------- -------
Net cash provided by (used in) financing activities...................... (43,977) 83,653 182,549
------- ------- -------
Increase (decrease) in cash and cash equivalents............................... 1,578 (608) 2,449
Cash and cash equivalents at beginning of year................................. 5,765 6,373 3,924
------- ------- -------
Cash and cash equivalents at end of year....................................... $ 7,343 $ 5,765 $ 6,373
======= ======= =======
===================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Cash Flows (continued)
(Amounts in thousands)
Supplemental Disclosure of Noncash Investing and Financing Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Assumption of notes payable..................................................... $ - $ - $ 31,368
======== ======= ==========
The following assets and liabilities were sold in connection
with the sale of Prime Outlets at Birch Run on November 19, 1999:
Book value of assets disposed, net.......................................... $ 96,384
Cash received............................................................... (33,303)
Loss on sale................................................................ (9,326)
--------
Debt disposed............................................................... $ 53,755
========
The following assets and liabilities were acquired and sold in connection
with the consummation of the Merger Transactions on June 15, 1998:
Acquisition of Horizon, net of spin-off of HGP:
Fair value of assets acquired............................................... $1,014,973
Cash paid, net of cash and cash equivalents acquired........................ (35,559)
Common shares issued........................................................ (214,282)
Common units issued......................................................... (56,023)
Series B convertible preferred shares issued................................ (118,735)
----------
Fair value of liabilities assumed........................................... $ 590,374
==========
Disposition of Prime Transferred Properties:
Book value of assets disposed............................................... $ 42,218
Cash received............................................................... (26,015)
Loss on sale................................................................ (15,461)
----------
Liabilities disposed........................................................ $ 742
==========
====================================================================================================================================
See accompanying notes to financial statements
Prime Retail, Inc.
Consolidated Statements of Shareholders' Equity
(Amounts in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------------------------
Series A Series B Series C Additional Distributions Total
Preferred Preferred Preferred Common Paid-in in Excess of Shareholders'
Stock Stock Stock Stock Capital Net Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1997............................. $ 23 $ 28 $ 134 $165,346 $(26,322) $139,209
Issuance of 175,800 shares of Series B preferred
stock, net of issuance cost....................... - 2 - 3,798 - 3,800
Issuance of 13,890,300 shares of common stock, net
of issuance cost.................................. - - 139 180,035 - 180,174
Issuance of 3,636,363 shares of Series C preferred
stock, net of issuance cost....................... - - $ 36 - 49,009 - 49,045
Net income........................................... - - - - - 5,905 5,905
Common distributions ($1.180 per share).............. - - - - - (21,232) (21,232)
Preferred distributions and dividends:
Series A ($2.625 per share)................. - - - - - (6,037) (6,037)
Series B ($2.125 per share)................. - - - - - (6,336) (6,336)
----- ----- ----- ----- ------- ------- -------
Balance, December 31, 1997........................... 23 30 36 273 398,188 (54,022) 344,528
Issuance of 14,466,329 shares of common stock, net
of issuance cost.................................. - - - 145 214,137 - 214,282
Issuance of 4,846,325 shares of Series B preferred
stock, net of issuance cost....................... - 48 - - 118,687 - 118,735
Exchange of 975,462 common units for common
stock ........................................... - - - 9 18,754 - 18,763
Exchange of 727,273 Series C preferred units for
727,273 shares of Series C preferred stock........ - - 8 - 9,339 - 9,347
Net income........................................... - - - - - 17,530 17,530
Common distributions ($1.680 per share).............. - - - - - (54,750) (54,750)
Preferred distributions and dividends:
Series A ($2.625 per share)..................... - - - - - (6,037) (6,037)
Series B ($2.725 per share)..................... - - - - - (13,275) (13,275)
Series C ($1.680 per share)..................... - - - - - (5,389) (5,389)
----- ----- ----- ----- ------- ------- --------
Balance, December 31, 1998........................... 23 78 44 427 759,105 (115,943) 643,734
Issuance of 160,585 restricted shares of
common stock ..................................... - - - 2 1,380 - 1,382
Exchange of 471,293 common units for common
stock ........................................... - - - 5 6,985 - 6,990
Redemption of 4,363,636 shares of Series C
preferred stock................................... - - (44) - (58,348) 13,338 (45,054)
Net loss............................................. - - - - - (34,829) (34,829)
Common distributions ($1.180 per share).............. - - - - - (50,948) (50,948)
Preferred distributions and dividends:
Series A ($2.625 per share)..................... - - - - - (6,038) (6,038)
Series B ($2.125 per share)......................... - - - - - (16,635) (16,635)
Series C ($0.885 per share)..................... - - - - - (1,915) (1,915)
----- ----- ----- ----- -------- --------- --------
Balance, December 31, 1999........................... $ 23 $ 78 $ - $ 434 $709,122 $(212,970) $496,687
===== ===== ===== ===== ======== ========= ========
====================================================================================================================================
See accompanying notes to financial statements.
Prime Retail, Inc.
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 - Organization and Basis of Presentation
Organization
Prime Retail, Inc. (the "Company") is a self-administered and self-managed
real estate investment trust ("REIT") that operates primarily within one
business segment and develops, acquires, owns and operates outlet centers in the
United States. The Company's outlet center portfolio, including four outlet
centers owned through joint venture partnerships, consists of 51 outlet centers
in 26 states, which total 14,699,000 square feet of gross leasable area ("GLA")
at December 31, 1999. As a fully-integrated real estate firm, the Company
provides development, construction, accounting, finance, leasing, marketing, and
management services for all of its properties (the "Properties"). The Company's
Properties are held and substantially all of its business and 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.
At December 31, 1999, the Company owned 2,300,000 Senior Preferred Units of
the Operating Partnership (the "Senior Preferred Units"), 7,828,125 Series B
Convertible Preferred Units of the Operating Partnership (the "Series B
Convertible Preferred Units"), and 43,368,620 Common Units of partnership
interest in the Operating Partnership (the "Common Units"). Each Senior
Preferred Unit, and Series B Convertible Preferred Unit, (collectively, the
"Preferred Units") entitles the Company to receive distributions from the
Operating Partnership in an amount equal to the dividend declared or paid with
respect to a share of the Company's Series A Senior Cumulative Preferred Stock
("Senior Preferred Stock") and Series B Cumulative Convertible Participating
Preferred Stock ("Series B Convertible Preferred Stock"), respectively, prior to
the payment by the Operating Partnership of distributions with respect to the
Common Units. Series B Convertible Preferred Units will be automatically
converted into Common Units to the extent of any conversion of Series B
Convertible Preferred Stock into Common Stock. The Preferred Units will be
redeemed by the Operating Partnership to the extent of any redemption of Senior
Preferred Stock or Series B Convertible Preferred Stock.
A summary of the holders of units in the Operating Partnership as of
December 31, 1999 is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Units
----------------------------------------------------
Holder Series A Series B Common
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Retail, Inc............................................................... 2,300,000 7,828,125 43,368,620
Prime Group, Inc., management and other (1)..................................... - - 10,840,208
--------- --------- ----------
2,300,000 7,828,125 54,208,828
========= ========= ==========
====================================================================================================================================
Note:
(1) Includes 993,480 units beneficially owned by management and 4,102,923 units
owned by certain executive officers based on their ownership interests in
Prime Group, Inc.
As of December 31, 1999, the Company has a 80% general partnership interest
in the Operating Partnership with full and complete control over the management
of the Operating Partnership as the sole general partner not subject to removal
by the limited partners.
The Operating Partnership is the 1% sole general partner of Prime Retail
Services Limited Partnership (the "Services Partnership"). The Operating
Partnership owns 100% of the non-voting preferred stock of Prime Retail
Services, Inc. (the "Services Corporation") which, in turn, is the 99% limited
partner of the Services Partnership. Certain members of management own 100% of
the voting common stock of the Services Corporation and no cash distributions
were made during the years ended December 31, 1999, 1998 and 1997. The Services
Partnership was formed primarily to operate business lines of the Company that
are not directly associated with the collection of rents. The Services
Corporation is subject to federal, state and local taxes.
Unless the context otherwise requires, all references to the Company herein
mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail,
Inc., including the Operating Partnership and the Services Partnership.
Basis of Presentation
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. The
preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in partnerships in which the Company does not have operational
control are accounted for on 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.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Operating results associated with the Company's Designer
Connection outlet stores have been classified as loss on Designer Connection in
the Consolidated Statements of Operations for all periods presented. Certain
amounts in prior years have been reclassified to the current year presentation.
Note 2 - Summary of Significant Accounting Policies
Rental Property
Depreciation is calculated on the straight-line basis over the estimated
useful lives of the assets which are as follows:
Land improvements.................................... 20 years
Buildings and improvements........................... Principally 40 years
Tenant improvements.................................. Term of related lease
Furniture and equipment.............................. 5 years
Rental property is generally carried at historical cost net of accumulated
depreciation. Development costs, which include fees and costs incurred in
developing new properties, are capitalized as incurred. Upon completion of
construction, development costs are amortized over the useful lives of the
respective properties on a straight-line basis. Expenditures for ordinary
maintenance and repairs are expensed to operations as incurred. Significant
renovations and improvements which improve and/or extend the useful life of
assets are capitalized and depreciated over their estimated useful lives.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts of those assets. Impairment
losses are measured as the difference between carrying value and fair value for
assets to be held in portfolio. For assets to be sold, impairment is measured as
the difference between carrying value and fair value, less costs to dispose.
Fair value is based on estimated cash flows discounted at a risk-adjusted rate
of interest.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
Management regularly reviews accounts receivable and determines an
appropriate range for the allowance for doubtful accounts based upon the impact
of economic conditions on the merchants' ability to pay, past collection
experience and such other factors which, in management's judgment, deserve
current recognition. In turn, a provision is charged against earnings in order
to maintain the allowance level within this range. The allowance for doubtful
accounts at December 31, 1999 and 1998 was $7,008 and $4,288, respectively.
Accounts receivable due after one year representing straight-line rents
were $8,285 and $7,233 at December 31, 1999 and 1998, respectively.
Deferred Charges
Deferred charges consist of leasing commissions and financing costs.
Deferred leasing commissions representing costs incurred to originate and renew
operating leases are deferred and amortized on a straight-line basis over the
term of the related lease. Fees and costs incurred to obtain financing are
deferred and are being amortized as a component of interest expense over the
terms of the respective loans on a basis that approximates the interest method.
Due from Affiliates, Net
Due from affiliates, net consists of amounts due from joint venture
partnerships related to the reimbursement of costs paid by the Company on their
behalf.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Minimum rental
income is recognized on a straight-line basis over the term of the lease and
unpaid rents are included in accounts receivable in the accompanying balance
sheet. Certain lease agreements contain provisions which provide for rents based
on a percentage of sales or based on a percentage of sales volume above a
specified threshold. These contingent rents are not recognized until the
required thresholds are exceeded. In addition, the lease agreements generally
provide for the reimbursement of real estate taxes, insurance, advertising and
certain common area maintenance costs. These additional rents and tenant
reimbursements are accounted for on the accrual basis.
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 year ended December 31, 1999, a
redemption discount and dividends aggregating $12,710 related to the Company's
repurchase of its Series C Preferred Stock were excluded from the numerator and
incremental shares of 1,064 were included in the denominator of the computation
of diluted EPS. For the year ended December 31, 1999, the effect of all other
exercises and conversions was anti-dilutive and, therefore, was excluded from
the computation of diluted EPS. For the years ended December 31, 1998 and 1997,
the effect of all exercises and conversions was anti-dilutive and, therefore,
dilutive EPS is equivalent to basic EPS.
The following table sets forth the computation of basic and diluted
earnings per share:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before minority interests and extraordinary loss.............. $(28,085) $19,986 $18,547
Income allocated to minority interests...................................... (3,226) (2,456) (10,581)
-------- ------- -------
Net income (loss) before extraordinary loss................................. (31,311) 17,530 7,966
Income allocated to preferred shareholders.................................. (9,962) (24,604) (12,726)
-------- ------- -------
Numerator for basic earnings per share -
loss before extraordinary loss available to common shareholders............ (41,273) (7,074) (4,760)
Effect of dilutive securities:
Series C preferred dividends................................................ 628 - -
Series C preferred stock redemption discount................................ (13,338) - -
-------- ------- -------
Numerator for diluted earnings per share -
loss before extraordinary loss available to common shareholders............ $ (53,983) $ (7,074) $ (4,760)
========= ======== ========
Denominator:
Denominator for basic earnings before extraordinary loss per share -
weighted average common shares outstanding................................ 43,196 35,612 19,189
Effect of dilutive securities:
Series C preferred shares................................................... 1,064 - -
-------- ------- -------
Denominator for diluted earnings before extraordinary loss per share -
adjusted weighted average common shares outstanding....................... 44,260 35,612 19,189
======== ======= =======
Basic earnings before extraordinary loss per common share .................. $ (0.96) $ (0.20) $ (0.25)
======== ======= =======
Diluted earnings before extraordinary loss per common share ................ $ (1.22) $ (0.20) $ (0.25)
======== ======= =======
====================================================================================================================================
Stock Based Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, recognizes no compensation expense for employee
stock option grants. The Company has elected to adopt only the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally will not be subject to federal income tax at the corporate level on
income it distributes to its shareholders so long as it distributes at least 95%
of its taxable income (excluding any net capital gain) each year. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Even if the Company qualifies as a
REIT, the Company may be subject to certain state and local taxes on its income
and property. The Company incurred $234, $337, and $263 of state and local taxes
for the years ended December 31, 1999, 1998 and 1997, respectively. The Company
paid $68, $424, and $170 of state and local taxes during the years ended
December 31, 1999 and 1998, and 1997, respectively.
The following table summarizes the taxability of dividends and
distributions paid during (i) the year ended December 31, 1999, (ii) the period
from January 1 to June 15, 1998, (iii) the period from June 16 to December 31,
1998, and (iv) the year ended December 31, 1997:
- ------------------------------------------------------------------------------------------------------------------------------------
Period from Period from
Year ended January 1 to June 16 to Year ended
December 31, June 15, December 31, December 31,
1999 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Senior Preferred Stock
Ordinary income ............................................................ $2.625 $1.3125 $1.3125 $2.625
====== ======= ======= ======
Series B Convertible Preferred Stock
Ordinary income ............................................................ $2.125 $ 1.663 $ 0.922 $1.940
Return of capital........................................................... - - 0.525 0.185
------ ------- ------- ------
$2.125 $ 1.663 $ 1.447 $2.125
Series C Preferred Stock ====== ======= ======= ======
Ordinary income ............................................................ $0.885 $0.167 $ - $ -
Return of capital........................................................... - 0.725 0.912 -
------ ------ ------- ------
$0.885 $0.892 $ 0.912 $ -
====== ======= ======= ======
Common Stock
Ordinary..................................................................... $0.271 $ - $ - $ -
Return of capital........................................................... 0.909 1.090 0.912 1.180
------ ------ ------ ------
$1.180 $1.090 $0.912 $1.180
====== ====== ====== ======
====================================================================================================================================
Risks and Uncertainties
The Company's results of operations are significantly dependent on the
overall health of the retail industry. The Company's tenant base is comprised
almost exclusively of merchants in the retail industry. The retail industry is
subject to external factors such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences. A decline in the retail industry
could reduce merchant sales, which could adversely affect the operating results
of the Company.
In addition to traditional sources of risks to retailers and owners of
outlet centers, which are mentioned above, the Company's outlet centers compete
for customers with web-based retailers. Because of the newness of competition
from web-based retailers, it is difficult to quantify the risk of such
competition to the Company.
Note 3 - Business Combination
On June 15, 1998, the merger and other transactions (collectively, the
"Merger Transactions") as set forth in the agreement and plan of merger (the
"Merger Agreement") between the Company and Horizon Group, Inc. ("Horizon") were
consummated for an aggregate consideration of $1,134,682, including liabilities
assumed and related transaction costs.
Pursuant to the terms of the Merger Agreement, the Company acquired (i) all
of the outstanding shares of common stock of Horizon at an exchange ratio of
0.20 of a share of the Company's Series B Convertible Preferred Stock and 0.597
of a share of the Company's Common Stock for each share of common stock of
Horizon, and (ii) all of the outstanding limited partnership units of
Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership") at an
exchange ratio of 0.9193 of a Common Unit of partnership interest in the
Operating Partnership. A total of 4,846,325 shares of Series B Convertible
Preferred Stock and 14,466,329 shares of Common Stock were issued by the Company
to the shareholders of Horizon and 3,782,121 Common Units were issued by the
Operating Partnership to the limited partners of Horizon Partnership.
Immediately prior to the merger, Horizon Partnership contributed 13 of its
35 centers to Horizon Group Properties, L.P., of which Horizon Group Properties,
Inc. ("HGP"), a subsidiary of Horizon, is the sole general partner. HGP was
spun-off from the Company on June 15, 1998. The remaining 22 outlet centers of
Horizon were integrated into the Company's existing portfolio. On June 19, 1998,
all of the common equity of HGP was distributed to the convertible preferred and
common shareholders and unitholders of the Company and its Operating Partnership
and the shareholders and limited partners of Horizon and Horizon Partnership
based on their ownership in the Company immediately following consummation of
the merger. One share of common stock of HGP was distributed for every 20 shares
of Common Stock and Series C Preferred Stock of the Company and for every 20
Common Units of the Operating Partnership. Additionally, approximately 1.196
shares of the common stock of HGP were distributed for every 20 shares of Series
B Convertible Preferred Stock of the Company.
In connection with the Merger Transactions, the Company sold Indiana
Factory Shops and Nebraska Crossing Factory Stores (collectively, the "Prime
Transferred Properties") to HGP for an aggregate consideration of $26,015,
resulting in a loss on the sale of real estate of $15,461. Proceeds from the
sale of the Prime Transferred Properties were used to repay indebtedness
associated with the Horizon properties.
Concurrent with the closing of the merger, a special cash distribution was
made aggregating $21,871 consisting of $0.50 per share/unit to holders of Common
Stock, Series C Preferred Securities and Common Units and $0.60 per share to
holders of Series B Convertible Preferred Stock. Shareholders of Horizon and
limited partners of Horizon Partnership did not participate in these
distributions.
The merger has been accounted for using the purchase method of accounting
and the purchase price was allocated to the assets acquired and the liabilities
assumed based on estimates of their respective fair values. Certain assumptions
were made which management of the Company believed were reasonable. The
operating results of these properties have been included in the Company's
consolidated results of operations commencing on the date of the merger. The
operating results of the Prime Transferred Properties have been included in the
Company's consolidated results of operations through the date of disposition.
The following unaudited pro forma information presents a summary of the
Company's consolidated results of operations as if these acquisitions and
dispositions had occurred on January 1, 1998:
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues.................................................................. $ 285,157
=========
Net income from continuing operations........................................... $ 35,699
=========
Net income applicable to common shares.......................................... $ 7,775
=========
Earnings per common share - basic and diluted................................... $ 0.18
=========
Weighted average common shares outstanding...................................... 42,151
=========
====================================================================================================================================
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense based on the purchase price of such assets acquired and interest expense
on debt incurred to finance the acquisitions. These unaudited pro forma results
do not purport to be indicative of the results of operations which actually
would have resulted had the combination been in effect on January 1, 1998 or of
future results of operations of the Company.
Note 4 - Restricted Cash
At December 31, 1999 and 1998, the Company had placed in escrow $28,131 and
$34,969, respectively, to be used to complete certain development projects, to
fund real estate taxes and debt service and to pay certain operating costs under
mortgage loan agreements. At December 31, 1999, restricted cash included $1,326
relating to a nonrecourse expansion loan which was funded during January 2000
for certain development costs relating to the completion of expansions of ten of
the Company's outlet centers.
Note 5 - Deferred Charges
Deferred charges were as follows:
----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Leasing commissions........................................................... $11,307 $10,775
Financing costs............................................................... 21,466 17,787
------- -------
32,773 28,562
Accumulated amortization...................................................... (19,270) (16,044)
------- -------
$13,503 $12,518
======= =======
==================================================================================================================================
Note 6 - Bonds and Notes Payable
Bonds payable consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed rate tax-exempt revenue bonds (the "Bonds"), interest rates, ranging from
6.88% to 7.00%, interest-only payments, due 2012 to 2014, collateralized by
properties in Chattanooga, TN and Knoxville,TN............................. $28,250 $28,250
UrbanDevelopment Action Grant Loans, 3% through August 31, 1997 and 6%
thereafter, interest-only payments, due 2016 to 2019, collateralized by
property in Chattanooga, TN................................................ 4,650 4,650
------- -------
$32,900 $32,900
======= =======
====================================================================================================================================
During October 1999, the Company refinanced its $28,250 of variable-rate,
tax-exempt revenue bonds by issuing $28,250 of fixed rate tax-exempt revenue
bonds (the "Fixed Rate Bonds"). The Fixed Rate Bonds bear interest ranging from
6.875% to 7.0%, require semi-annual interest payments and mature from December
15, 2012 through December 1, 2014. The Fixed Rate Bonds are redeemable by the
Company commencing in December 2006 at 102% of the outstanding principal
balance. The redemption price decreases incrementally each year thereafter
through December 2008, at which date the redemption price is fixed at 100% of
the outstanding principal balance. In connection with the debt refinancing, the
Company incurred an extraordinary loss on early extinguishment of debt of $536,
net of minority interests of $134. Unless cured or waived, the defaults existing
under certain of the Company's credit agreements discussed more fully below will
entitle the holders of the Fixed Rate Bonds to put such obligations to Prime
Retail, Inc. at a price equal to par plus accrued interest.
Notes payable consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
First Mortgage and Expansion Loan, LIBOR plus 1.51% through November 10,1998,
7.782% thereafter, monthly installments of $2,580 including interest, due
November 11, 2003, collateralized by fifteen properties located throughout the
United States............................................................... $349,797 $353,018
Permanent Loan, 6.99%, monthly installments of $1,248 including interest, due
July 11, 2008, collateralized by four properties located throughout the United
States.......................................................................... 176,734 179,096
Secured Revolving Loan, LIBOR plus 1.35%, 7.81% at December 31, 1999, monthly
interest-only payments, due June 11, 2001, collateralized by six properties
located throughout the United States............................................ 112,000 95,000
Mortgage, 6.927%, monthly installments of $565 including interest, due October
11, 2006, collateralized by four properties located throughout the United
States.......................................................................... 75,893 77,365
Mortgage, 6.927%, monthly installments of $527 including interest, due March 11,
2006, collateralized by four properties located throughout the United
States.......................................................................... 66,935 68,495
Mortgage, 7.60% monthly installments of $450 including interest, due May 10,
2009, collateralized by property located in Niagara Falls,
NY.............................................................................. 62,693 -
Term loan, LIBOR plus 6.00%, 12.48% at December 31, 1999, monthly interest-only
payments through January 10, 2000; monthly principal of $1,000 and interest
thereafter, due December 10, 2001, collateralized by excess cash flow from
fifteen properties located throughout the United States............. 55,000 -
Mortgage, 6.95%, monthly installments of $351 including interest, due November
1, 2005, collateralized by property located in Vero Beach, FL and Woodbury,
MN............................................................. 44,917 46,037
Unsecured Revolving Loan, LIBOR plus 1.75%, 8.21% at December 31, 1999, monthly
interest-only payments, quarterly principal payments of $1,000 commencing March
31, 2000, due September 11,2001................................................. 40,000 40,000
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Construction Mortgage Loan, LIBOR plus 1.50%, 7.98% at December 31, 1999,
monthly interest-only payments through May 31, 2002; monthly principal and
interest payments thereafter, due June 1, 2004, collateralized by property
located in Hagerstown, MD.................................................... $ 38,560 $ 29,914
Mortgage, 6.915%, monthly installments of $357 including interest, due June
10, 2002, collateralized by property located in Conroe, TX and
Jeffersonville,OH............................................................... 36,696 38,381
Interim loan, LIBOR plus 2.50%, 8.98% at
December 31, 1999, monthly interest-only payments, due January 11, 2002,
collateralized by property located in Williamsburg,VA.......................... 32,500 -
Mortgage, 8.35%, monthly installments of $215 including interest, due June
11, 2007, collateralized by three properties located throughout the United
States.......................................................................... 26,113 26,463
Unsecured Corporate Line, $25,000 at December 31, 1999, LIBOR plus 2.50%,7.88%
at December 31, 1999, monthly interest-only payments, due July 11, 2000.. 22,175 3,000
Subordinated loan, 15.00%, monthly interest-only payments, due June 30, 2000,
collateralized by a security interest and available cash flows of five
properties located throughout the United States................................. 20,000 -
Construction mortgage loan, prime rate or LIBOR plus 1.75%, 8.50% at
December 31, 1999, monthly interest-only payments, due December 31, 2000,
collateralized by property located in Lebanon, TN............................... 19,951 19,951
Mortgage, 6.91%, monthly installments of $154 including interest, due June
10, 2001, collateralized by property located in Edinburgh, IN................ 17,347 17,965
Mortgage, 6.95%, monthly installments of $81 including interest, due
November 1, 2005, collateralized by property located in Perryville, MD..... 10,157 10,433
Note Payable, 9.50%, monthly interest-only payments, due November 1, 2001,
collateralized by land located in Camarillo, CA............................... 7,400 7,400
Mortgage, 9.375%, monthly installments of $71 including interest, due March
1, 2004, collateralized by property located in Lombard, IL..................... 6,239 6,507
Mortgage, 7.50%, monthly installments of $29 including interest, due June
22, 2000, collateralized by property in Knoxville, TN........................... 3,590 3,666
Other notes payable............................................................. 3,073 858
Mortgage, 6.915%, monthly installments of $402 including interest, due June
10, 2002, collateralized by property located in Birch Run, MI................. - 47,572
Term loan, LIBOR plus 1.95%, 7.23% at December 31, 1998, monthly
interest-only payments through February 10, 1998; quarterly principal and
monthly interest payments thereafter, due November 11, 1999, collateralized by
excess cash flow of fifteen properties located throughout the United
States.......................................................................... - 45,260
Mortgage, 6.83%, monthly installments of $218 including interest, due June 6,
2006, collateralized by property in Niagara Falls NY........................... - 30,832
Mortgage, 6.93%, monthly installments of $221 including interest, due
November 1, 2000, collateralized by property located in Williamsburg, VA...... - 23,754
Mortgage, 6.91%, monthly installments of $93 including interest, due June
10, 2001, collateralized by property located in Birch Run, MI................ - 10,952
Term loan, LIBOR plus 1.95%, 7.23% at December 31, 1998, monthly
interest-only payments through April 10, 1998; monthly principal and interest
payments thereafter, due February 13, 2000, collateralized by excess cash flow
of three properties located throughout the United States....................... - 2,688
---------- ----------
$1,227,770 $1,184,607
========== ==========
====================================================================================================================================
At December 31, 1999, unused commitments available for borrowings under
various loan facilities were $13,546 in the aggregate. Interest costs are
summarized as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
Interest incurred.............................................................. $94,201 $63,630 $36,436
Interest capitalized........................................................... (4,646) (5,793) (4,056)
Amortization of deferred financing costs and interest
rate protection contracts................................................... 4,379 2,867 3,742
------- ------- -------
Interest expense............................................................... $93,934 $60,704 $36,122
======= ======= =======
Interest paid.................................................................. $94,046 $61,114 $36,424
======= ======= =======
===================================================================================================================================
The scheduled maturities, excluding acceleration provisions, of bonds and
notes payable at December 31, 1999 were as follows:
-------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------------
2000.......................................................... $ 95,732
2001.......................................................... 229,632
2002.......................................................... 79,666
2003.......................................................... 349,913
2004.......................................................... 53,820
Thereafter.................................................... 451,907
----------
$1,260,670
==========
===============================================================================
Bonds and notes payable include unamortized debt premiums of $17,303 in the
aggregate at December 31, 1999. Debt premiums are being amortized over the terms
of the related debt instruments in accordance with the effective interest
method. Additionally, interest incurred reflects amortization of debt premiums
of $4,406 and $2,153 for the years ended December 31, 1999 and 1998,
respectively. The aggregate carrying amount of bonds and notes payable at
December 31, 1999 approximated their fair value. At December 31, 1999, the
aggregate carrying amount of rental property collateralizing bonds and notes
payable was $1,738,012.
On December 8, 1999, the Company refinanced the existing mortgage
indebtedness on Prime Outlets at Williamsburg (the "Williamsburg Center") with a
$42,500 loan facility from a financial institution. At closing, the Company
received an initial funding of $32,500 (the "Initial Funding") and a commitment,
subject to various conditions, for up to $10,000 (the "Final Draw") to finance a
planned expansion to the Williamsburg Center. The Initial Funding generated net
cash proceeds of $9,077 after the repayment in full of $22,405 of existing
mortgage indebtedness and closing costs. The Final Draw is expected to be made
in a single advance subject to satisfaction of certain conditions, including the
substantial completion of the expansion to the Williamsburg Center. In
connection with the debt refinancing, the Company incurred an extraordinary loss
of $159, net of minority interests of $40. The loan facility consists of an
interim loan (the "Interim Loan") and a permanent loan (the "Permanent Loan").
The Interim Loan (i) bears interest at 30-day LIBOR plus 2.5%, (ii) requires
monthly interest-only payments, (iii) is collateralized by a first mortgage on
the Williamsburg Center, and (iv) matures on January 11, 2002. The Interim Loan
may be converted to the Permanent Loan subject to satisfaction of certain
conditions. The Permanent Loan would (i) bear interest at a fixed-rate equal to
prevailing market rates, (ii) require monthly principal and interest payments
pursuant to a 25-year amortization schedule, (iii) be collateralized by a first
mortgage on the Williamsburg Center, and (iv) have a term of 10 years.
On November 15, 1999, the Company closed on a $20,000 subordinated loan
(the "Subordinated Loan") from an institutional lender. The Subordinated Loan
(i) bears interest at a fixed-rate of 15.0%, (ii) requires monthly interest-only
payments, (iii) matures on June 30, 2000, and (iv) is secured by a pledge of a
security interest in certain of the Company's ownership interests in, and the
available cash flow from five outlet centers, including Prime Outlets of Puerto
Rico, which is currently under construction. This collateral is also pledged to
secure borrowings under the Line of Credit (as defined below). The Company may
elect, at its option, to extend the maturity of the Subordinated Loan to
December 31, 2000.
On November 12, 1999, the Company closed on $55,000 term loan (the "$55,000
Term Loan") from a financial institution. The $55,000 Term Loan (i) bears
interest at 30-day LIBOR plus 6.0%, (ii) requires monthly principal and interest
payments, and (iii) matures in two years. The $55,000 Term Loan was issued by
Prime Retail Capital I, L.L.C. ("PRC"), a newly-formed wholly-owned subsidiary
of Prime Retail, L.P., and is secured by the excess cash flow from 15 outlet
centers after the payment of senior debt service and reserves under an existing
$349,797 first mortgage loan. The $55,000 Term Loan also is secured by a pledge
of PRC's 49.9% limited partnership interest in partnerships that own twelve of
those outlet centers and Prime Retail, L.P.'s 100% equity interest in PRC. The
$55,000 Term Loan is unconditionally guaranteed by Prime Retail, L.P. and Prime
Retail, Inc. The Company used the net cash proceeds from the $55,000 Term Loan
to repay $40,944 of short-term indebtedness and to repay a portion of the
borrowings under the Line of Credit.
On September 29, 1999, the Company received $40,000 of proceeds from a line
of credit facility (the "Line of Credit") with a group of institutional lenders.
These proceeds were used to repurchase the Company's Series C Preferred Stock.
The Line of Credit (i) bore interest at a fixed-rate of 11.0%, (ii) required
monthly interest-only payments, and (iii) matured in nine months. The Line of
Credit was repaid in full on November 19, 1999. In connection with the repayment
of the Line of Credit, the Company incurred an extraordinary loss on the early
extinguishment of debt of $717, net of minority interests of $179. The lenders
are entitled to receive a cash payment that increases their internal rate of
return with respect to amounts advanced under such facility by 4.0% per annum
(the "Cash Payment"). Lenders under the Line of Credit also received warrants to
purchase a 5% interest in the Company's e-commerce subsidiary, which
subsequently ceased all operations effective April 12, 2000 (see Note 14 -
"Subsequent Event").
On July 11, 1999, the Company's $20,000 unsecured line of credit (the
"Corporate Line") was renewed and increased to $25,000. The purpose of the
Corporate Line is to provide working capital to facilitate the funding of
short-term operating cash needs of the Company. The Corporate Line bears an
interest rate of 30-day LIBOR plus 2.50% and matures on July 11, 2000. At
December 31, 1999, the Corporate Line had an outstanding principal balance of
$22,175.
On April 27, 1999, the Company closed on a $63,000 debt financing with a
financial institution that provided approximately $27,900 of net proceeds. The
$63,000 note is (i) collateralized by a first mortgage on Prime Outlets at
Niagara Falls USA, (ii) bears interest at a fixed rate of 7.604%, (iii) requires
monthly principal and interest payments of $450 pursuant to a 30-year
amortization schedule, and (iv) matures in 10 years. In connection with the debt
refinancing, the Company incurred an extraordinary loss on early extinguishment
of debt of $2,106, net of minority interests of $534.
As of December 31, 1999, the Company is a guarantor or otherwise obligated
with respect to an aggregate of $12,722 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 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 December 31, 1999, 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 $28,938 at December 31, 1999, 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 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) 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 December 31,
1999, the Company is not in compliance with a financial covenant contained in
two of its credit facilities, the Subordinated Loan and a $40,000 unsecured
revolving loan (the "Unsecured Revolving Loan"). Neither of the loans has been
accelerated nor was notice of the respective lender's intention to accelerate
the maturity of the loans received by the Company. The Company entered into an
amendment to the Subordinated Loan on February 23, 2000 which waived the
covenant violation as of December 31, 1999 and modified the covenant terms
through the Subordinated Loan's maturity date. The Company is currently in
discussions with the Unsecured Revolving Loan lender to obtain a waiver and/or
amend the loan; however, there can be no assurance as to whether and when the
Company will obtain any such waiver or amendment. Furthermore, the Company's
failure to obtain from its independent auditor's an unqualified report with
respect to its consolidated financial statements will also constitute a default
under these two credit facilities.
In addition, noncompliance with the covenants described above has triggered
certain cross-default provisions with respect to several of the Companys other
debt instruments, including the Subordinated Loan, the $55,000 Term Loan and the
Fixed Rate Bonds. None of these loans have been accelerated nor was a notice of
the respective lender's intent to accelerate received by the Company. Management
is currently in discussion with the affected lenders to obtain a resolution of
the cross-default provisions. 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.
Note 7 - Minority Interests
In conjunction with the formation of the Company and the Operating
Partnership, the predecessor owners contributed interests in certain properties
to the Operating Partnership and, in exchange, received 8,505,472 limited
partnership interests in the Operating Partnership ("Common Units").
Additionally, 3,782,121 Common Units were issued in June 1998 in connection with
the Company's merger with Horizon. Subject to certain conditions, each Common
Unit held by a Limited Partner may be exchanged for one share of Common Stock
or, at the option of the Company, cash equal to the fair market value of a share
of Common Stock at the time of exchange.
During 1999 and 1998, 471,923 and 975,462 Common Units, respectively, were
exchanged for shares of Common Stock. As of December 31, 1999, 10,840,208 Common
Units were issued and outstanding. Minority interests also includes interests in
two property partnerships that are not wholly owned by the Company. During the
years ended December 31, 1999, 1998 and 1997, expenses totaling $11,752, $3,035,
and $1,468, respectively, related solely to the operation of the Company were
allocated only to the common shareholders. Such allocation is consistent with
the federal and state tax treatment of these expenses.
During the year ended December 31, 1999, cash distributions paid to
minority interest totaled $12,976, minority interests conversions to common
stock totaled $6,990 and income allocated to minority interests totaled $2,339,
net of an $887 allocation of extraordinary losses. In addition, the minority
interests' balance was reduced by $3,351 in connection with the sale of a joint
venture property. During the years ended December 31, 1999 and 1997, cash
distributions and losses allocated to minority interests reduced the minority
interests' balance related to Common Units to zero. After reducing the minority
interests' balance to zero, all cash distributions related to Common Units are
treated as income allocated to minority interests.
At December 31, 1999 and 1998, loans to certain limited partners,
aggregating $1,188 and $2,375, respectively, were reported as a reduction in
minority interests in the Consolidated Balance Sheets.
Note 8 - 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
December 31, 1999, 43,368,620 shares of common stock, 2,300,000 shares of Senior
Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock
were issued and outstanding.
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.
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 December 31, 1999, there were 9,363,786
shares of Common Stock reserved for future issuance upon conversion of the
Series B Convertible Preferred Stock.
The Company has the right to redeem the Senior Preferred Stock and the
Series B Convertible Preferred Stock beginning on and after March 31, 1999 at
$26.75 and $27.125 per share, respectively, plus the amount equal to any accrued
and unpaid dividends thereon. The redemption price decreases incrementally each
year thereafter through March 31, 2004, at which date the redemption price is
fixed at $25.00 per share plus the amount equal to any accrued and unpaid
dividends thereon.
On March 31, 1999, the Company entered into an agreement providing for the
repurchase of all of its outstanding shares of Series C Preferred Stock for
$43,636 or $10.00 per share. The agreement provided for the repurchase to occur
in two stages. In the first stage, on March 31, 1999, the Company repurchased
3,300,000 shares of the Series C Preferred Stock in exchange for the issuance of
a 12.0% fixed rate $33,000 unsecured promissory note which was repaid on
September 29, 1999. In the second stage, the Company repurchased the remaining
1,063,636 outstanding shares of its Series C Preferred Stock for an aggregate
purchase price of $10,636 on September 29, 1999.
During the year ended December 31, 1999, a redemption discount of $13,338
representing the excess of the carrying amount of the Series C Preferred Stock
over its redemption amount is reflected in the Consolidated Statements of
Operations as a loss allocated to preferred shareholders.
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 Senior Preferred Stock and
Series B Convertible Preferred Stock, the Board of Directors considered and did
not declare a quarterly distribution on such preferred stock due February 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 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 (see Note 6 - "Bonds and Notes Payable"
of the Notes to Consolidated Financial Statements.) The Company may make no
distributions to its common shareholders unless it is current with respect to
distributions to its preferred shareholders. 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 December 31, 1999 are $6,038 and $16,636, respectively.
Note 9 - Stock Incentive Plans
Under various plans, the Company may grant stock options and other awards
to executive officers, other key employees, outside directors and consultants.
The exercise price for stock options granted is the fair market value of the
Company's common stock on the date of grant.
In general, stock options are fully vested on the date of grant and have a
term of 10 years. In certain cases for executive officers, stock options granted
become exercisable over periods up to six years.
During 1999, the Company awarded 135,955 shares of restricted Common Stock
to certain executive officers. These awards were 25% vested on the date of
grant. The restricted shares vest an additional 25% annually until fully vested.
In 1999, the Company also awarded 24,000 shares of restricted common stock and
granted options to outside directors to purchase 85,000 shares of Common Stock
at $9.85 per share. These awards were fully vested at the grant date. The
options have a term of 10 years.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation." Accordingly, no compensation expense
has been recognized for employee stock option grants. If the Company had elected
to recognize compensation based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, unaudited pro forma net income (loss)
and earnings per share would have been as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss......................................... $(31,376) $ 15,348 $ 7,442
Extraordinary loss.............................................................. (3,518) - (2,061)
-------- -------- --------
Net income (loss)............................................................... $(34,894) $ 15,348 $ 5,381
======== ======== ========
Net loss applicable to common shares............................................ $(44,856) $ (9,256) $ (7,345)
======== ======== ========
Basic earnings per common share:
Loss before extraordinary loss.............................................. $ (0.96) $ (0.26) $ (0.27)
Extraordinary loss.......................................................... (0.08) - (0.11)
-------- -------- --------
Net loss.................................................................... $ (1.04) $ (0.26) $ (0.38)
======== ======== ========
Diluted earnings per common share:
Loss before extraordinary loss.............................................. $ (1.22) $ (0.26) $ (0.27)
Extraordinary loss.......................................................... (0.08) - (0.11)
-------- -------- --------
Net loss.................................................................... $ (1.30) $ (0.26) $(0.38)
======== ======== ========
====================================================================================================================================
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate......................................................... 6.4% 5.0% 5.5%
Dividend yield.................................................................. 21.0% 12.0% 8.3%
Volatility factor............................................................... 0.37 0.36 0.36
Weighted average life (in years)................................................ 10.0 10.0 10.0
====================================================================================================================================
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
A summary of the Company's stock option plans for the years ended December
31 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year.......... 3,811,067 $14.90 1,148,250 $15.64 903,500 $16.49
Granted.................... 85,000 9.85 1,724,575 13.10 246,250 12.53
Transferred (Horizon)...... - - 959,742 18.62 - -
Cancelled.................. (615,750) 18.37 (21,500) 12.64 (1,500) 11.88
--------- ------ --------- ------ --------- ------
End of year................ 3,280,317 $14.12 3,811,067 $14.90 1,148,250 $15.64
Exercisable - ========= ====== ========= ====== ========= ======
end of year............. 2,900,314 $14.22 3,083,570 $15.24 1,017,753 $15.18
========= ====== ========= ====== ========= ======
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Price Shares Life in Years Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
$8.50........... 60,000 9.6 $8.50 60,000 $8.50
$11.15 to $13.09............... 2,574,417 7.8 12.60 2,274,414 12.53
$13.60 to $14.19............... 262,490 7.8 13.91 182,490 13.78
$19.00........... 35,000 4.2 19.00 35,000 19.00
$23.53........... 13,788 6.3 23.53 13,788 23.53
$24.55 to $26.53............... 334,622 0.4 26.11 334,622 26.11
--------- --- ------ --------- ------
3,280,317 7.0 $14.12 2,900,314 $14.22
========= === ====== ========= ======
====================================================================================================================================
The weighted fair value of options granted during the years ended December
31, 1999, 1998 and 1997 was $0.96 per share, $0.96 per share, and $1.90 per
share, respectively. Under the Company's various plans there were 2,279,425 and
1,748,675 shares reserved for future grants at December 31, 1999 and 1998,
respectively.
Note 10 - Lease Agreements
The Company is the lessor of retail and office space under operating leases
with lease terms that expire from 2000 to 2016. Most leases are renewable for
five years at the lessee's option. Future minimum base rent to be received under
noncancelable operating leases as of December 31, 1999 were as follows:
-------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------------
2000................................................................ $160,132
2001................................................................ 131,169
2002................................................................ 97,458
2003................................................................ 66,123
2004................................................................ 36,213
Thereafter.......................................................... 51,211
--------
$542,306
========
===============================================================================
The Company leases certain land, buildings, and equipment under various
noncancelable operating lease agreements. Rental expense for operating leases
was $3,699, $1,818, and $1,059 for the years ended December 31, 1999, 1998, and
1997, respectively. Future minimum rental payments, by year and in the
aggregate, payable under these noncancelable operating leases with initial or
remaining terms of one year or more as of December 31, 1999 consisted of the
following:
-------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------------
2000............................................................. $3,445
2001............................................................. 3,376
2002............................................................. 3,130
2003............................................................. 2,533
2004............................................................. 1,525
-------
$14,009
=======
===============================================================================
Note 11 - 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
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 (of which Estein's obligation is $7,000), 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 31, 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 scheduled to open during the second quarter of 2000, for aggregate
consideration of approximately $80,500 on or about May 15, 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
December 31, 1999, the Company classified $97,639 representing the aggregate
carrying value of Prime Outlets at Williamsburg and Prime Outlets at Hagerstown
(collectively, the "Held for Sale Properties") as assets held for sale in its
Consolidated Balance Sheet. Total revenues and expenses for the Held for Sale
Properties were $16,243 and $12,185, respectively, for the year ended December
31, 1999.
Note 12 - Special Charges
When accounting for the fourth quarter of 1999, the Company determined that
certain events and circumstances had occurred during 1999 including, limited
leasing success and revised occupancy estimates, which indicated two of the
Company's outlet centers (Prime Outlets at Jeffersonville II and Prime Outlets
at Oxnard) were permanently impaired. Accordingly, the results of operations for
1999 include a provision for asset impairment of $15,842 representing the
write-down of the carrying values of these assets to their estimated fair value
in accordance with SFAS No. 121. Additionally, when accounting for the fourth
quarter of 1999, the Company recorded a provision for abandoned projects of
$16,039 based on management's determination that as of December 31, 1999, the
Company's pre-development efforts associated with certain projects were no
longer viable.
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. Accordingly, the Company recorded non-recurring
charges aggregating $3,659 including (i) $1,659 related to the write-off of
costs associated with a web-site for Designer Connection and (ii) $2,000 of
costs to cover the expected cash and non-cash costs of the closure. The cash and
non-cash costs of the closure primarily consists of (i) employee termination
costs, (ii) lease obligations, and (iii) the write-down of assets to their net
realizable value. The Company expects that the operations of its Designer
Connection outlet stores will cease by July 31, 2000.
Note 13 - 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.
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 promotion 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.
Note 14 - Subsequent Event
On April 12, 2000, the Company announced that it has 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 expects
to incur a non-recurring loss of approximately $13,000 in the first quarter of
2000. The non-recurring loss includes (i) the write-off of $3,500 of costs
capitalized during 1999 and (ii) approximately $9,500 of costs incurred during
2000, including costs associated with discontinuing the operations of
eOutlets.com. In addition, during 1999 the Company incurred expenses of $3,500
related to organizational and other start-up expenditures of eOutlets.com which
are reflected in corporate general and administrative expense in the
Consolidated Statements of Operations.
PRIME RETAIL, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(in thousands)
Costs Capitalized
Initial Cost Subsequent to Gross Amount at Which
to Company Acquisition Carried at Close of Period
--------------- --------------- ---------------------------
Bldgs & Bldgs & Bldgs & Accum. Constructed (C)
Description Encumbrances Land Improve Land Improve Land Improve Total Depreciation Acquired (A)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Anderson $ 8,755 $1,125 $11,036 $ - $ 443 $1,125 $11,479 $12,604 $ 641 Dec. 1997(A)
Prime Outlets at Bend 7,737 2,560 8,476 1,101 4,629 3,661 13,105 16,766 910 Feb. 1997(A)
Prime Outlets at 14,571 3,694 21,370 - 205 3,694 21,575 25,269 1,393 June 1998(A)
Burlington
Prime Outlets at Calhoun 17,816 3,839 24,551 - 164 3,839 24,715 28,554 1,785 June 1998(A)
Prime Outlets at Castle
Rock 35,317 4,424 47,200 2,717 15,615 7,141 62,815 69,956 11,330 Mar. 1994(A)
Prime Outlets at Conroe 17,397 405 18,714 - 304 405 19,018 19,423 1,419 June 1998(A)
Prime Outlets at Darien 24,890 - - 3,004 31,424 3,004 31,424 34,428 6,267 July 1995(C)
Prime Outlets at Edinburgh 17,347 2,726 37,952 - 1,671 2,726 39,623 42,349 2,652 June 1998(A)
Prime Outlets at Ellenton 28,926 - - 5,457 49,073 5,457 49,073 54,530 9,078 Oct. 1991(C)
Prime Outlets at Florida 15,360 - - 2,875 21,603 2,875 21,603 24,478 5,004 Sept. 1994(C)
City
Prime Outlets at Fremont 14,005 3,250 24,096 - 94 3,250 24,190 27,440 1,495 Jun. 1998(A)
Prime Outlets at Gaffney 31,209 - - 1,886 32,979 1,886 32,979 34,865 4,449 Nov. 1996(C)
Prime Outlets at
Gainesville 20,462 - - 535 30,494 535 30,494 31,029 7,307 Aug. 1993(C)
Prime Outlets at Gilroy 73,293 21,173 95,534 4 1,011 21,177 96,545 117,722 4,727 June 1998(A)
Prime Outlets at Grove
City 40,586 1,123 58,630 - 3,499 1,123 62,129 63,252 7,450 Nov. 1996(A)
Prime Outlets at Gulfport 19,620 - - - 34,307 - 34,307 34,307 5,670 Oct. 1995(C)
Prime Outlets at Hillsboro 30,718 7,121 50,894 - 329 7,121 51,223 58,344 2,805 June 1998(A)
Prime Outlets at Huntley 17,490 - - 1,506 35,159 1,506 35,159 36,665 6,708 Sept. 1994(C)
Prime Outlets at
Jeffersonville I 26,067 843 31,084 250 15,216 1,093 46,300 47,393 8,907 Mar. 1994(A)
Prime Outlets at
Jeffersonville II 19,299 174 21,058 - (13,467) 174 7,591 7,765 1,669 Jun. 1998(A)
Prime Outlets at Kenosha 23,942 6,995 39,558 - 1,154 6,995 40,712 47,707 2,557 Jun. 1998(A)
Prime Outlets of Kittery 12,134 820 24,061 - 1,301 820 25,362 26,182 1,366 Oct. 1997(A)
Prime Outlets at Latham 1,453 507 1,476 - 23 507 1,499 2,006 80 Oct. 1997(A)
Prime Outlets at Lebanon 19,952 - - 2,689 30,928 2,689 30,928 33,617 2,568 Apr. 1998(C)
Prime Outlets at Lee 26,855 8,035 31,656 - 1,343 8,035 32,999 41,034 3,162 Jun. 1998(A)
Prime Outlets at Lodi 25,912 1,013 21,455 707 13,825 1,720 35,280 37,000 3,702 Sept. 1997(A)
Prime Outlets at Loveland 22,410 6,400 33,244 - 121 6,400 33,365 39,765 5,052 Nov. 1996(A)
Melrose Place 2,000 - - 499 1,884 499 1,884 2,383 829 Aug. 1987(C)
Prime Outlets at Michigan
City 50,574 7,241 77,027 - 831 7,241 77,858 85,099 4,525 June 1998(A)
Prime Outlets at
Morrisville 9,256 - - 2,502 21,720 2,502 21,720 24,222 6,054 Oct. 1991(C)
PRIME RETAIL, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION (continued)
December 31, 1999
(in thousands)
Costs Capitalized
Initial Cost Subsequent to Gross Amount at Which
to Company Acquisition Carried at Close of Period
--------------- --------------- ---------------------------
Bldgs & Bldgs & Bldgs & Accum. Constructed (C)
Description Encumbrances Land Improve Land Improve Land Improve Total Depreciation Acquired (A)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Outlets at Naples $10,651 $2,753 $15,602 $5 $2,769 $2,758 $18,371 $21,129 $2,604 Mar. 1994(A)
Prime Outlets at Niagara
Falls USA 62,693 7,247 82,842 - 1,247 7,247 84,089 91,336 4,586 Dec. 1997(A)
Northgate Plaza 6,239 3,626 11,630 - 149 3,626 11,779 15,405 1,964 Mar. 1994(A)
Prime Outlets at Odessa 14,351 815 31,311 - 1,611 815 32,922 33,737 5,088 Nov. 1996(A)
Prime Outlets at Oshkosh 14,417 2,160 26,895 - 431 2,160 27,326 29,486 2,164 June 1998(A)
Prime Outlets at
Perryville 10,157 3,089 16,287 - 152 3,089 16,439 19,528 938 June 1998(A)
Prime Outlets at Pismo
Beach 13,007 9,048 17,617 - 147 9,048 17,764 26,812 1,145 June 1998(A)
Prime Outlets at Post
Falls 11,509 3,100 12,163 - 103 3,100 12,266 15,366 1,003 Feb. 1997(A)
Prime Outlets at
Queenstown 18,923 4,422 35,592 - 674 4,422 36,266 40,688 1,831 June 1998(A)
Prime Outlets at San
Marcos 41,840 - - 6,091 57,449 6,091 57,449 63,540 12,690 Aug. 1990(C)
Prime Outlets at Sedona 6,867 1,924 9,099 750 146 2,674 9,245 11,919 707 Feb. 1997(A)
Prime Outlets at
Silverthorne 25,562 9,294 34,932 - 323 9,294 35,255 44,549 2,112 June 1998(A)
Prime Outlets at Tracy 13,245 6,170 16,715 - 254 6,170 16,969 23,139 1,301 June 1998(A)
Prime Outlets at Vero
Beach 26,950 4,530 41,878 - 2,543 4,530 44,421 48,951 3,456 Jun. 1998(A)
Prime Outlets at
Warehouse Row 23,900 - - 1,175 33,032 1,175 33,032 34,207 12,287 Nov. 1989(C)
Prime Outlets at Waterloo 40,733 1,927 60,658 - 613 1,927 61,271 63,198 3,802 June 1998(A)
Western Plaza 10,590 - - 2,000 7,246 2,000 7,246 9,246 1,496 June 1993(A)
Prime Outlets at Woodbury 17,967 2,528 27,645 - (306) 2,528 27,339 29,867 1,477 June 1998(A)
Property Under Development 7,400 - - - 66,581 - 66,581 66,581 - Under
Construction
Other Property - - 1,588 - 10,126 - 11,714 11,714 1,742 Mar. 1994 -
----------- -------- ---------- ------ -------- -------- ---------- --------- -------- Dec. 1998(A)
$ 1,052,354 $146,101 $1,121,526 $35,753 $523,171 $181,854 $1,644,697 $1,826,551 $183,954
=========== ======== ========== ======= ======== ======== ========== ========== ========
At December 31, 1999, the Company had two properties, Prime Outlets at
Hagerstown and Prime Outlets at Williamsburg, classified as held for sale with a
combined value of $97,639. The two properties have mortgage notes payable of
$71,060 outstanding at December 31, 1999.
PRIME RETAIL, INC.
Notes to Schedule III - Real Estate and Accumulated Depreciation
December 31, 1999
(in thousands)
Depreciation on building and improvements is calculated on a straight-line
basis over the estimated useful lives of the asset as follows:
Land improvements.......................................................20 years
Buildings and improvements..................................Principally 40 years
Tenant improvements........................................Term of related lease
Furniture and equipment..................................................5 years
The aggregate cost for federal income tax purposes was $1,719,218 at
December 31, 1999.
Investment in Rental Property
Year Ended December 31
------------------------------------------
1999 1998 1997
------------ ------------- ------------
Balance, beginning of year...................................................... $2,015,722 $904,782 $640,759
Retirements..................................................................... (4,727) (880) (718)
Acquisitions.................................................................... - 1,013,231 191,345
Improvements.................................................................... 89,969 145,174 73,773
Dispositions.................................................................... (138,321) (46,585) (377)
Transfer to assets held for sale................................................ (108,968) - -
Provision for asset impairment on rental properties............................. (13,572) - -
Provision for abandoned projects on rental properties........................... (13,552) - -
---------- ---------- ---------
Balance, end of year............................................................ $1,826,551 $2,015,722 $904,782
========== ========== =========
Accumulated Depreciation
Year Ended December 31
-----------------------------------------
1999 1998 1997
------------ ------------- ------------
Balance, beginning of year...................................................... $127,747 $82,033 $57,674
Retirements..................................................................... (4,727) (880) (718)
Other........................................................................... 346 134 22
Dispositions.................................................................... (6,787) (5,178) -
Transfer to assets held for sale................................................ (5,502) - -
Depreciation for the year....................................................... 72,877 51,638 25,055
--------- -------- -------
Balance, end of year............................................................ $183,954 $127,747 $82,033
========= ======== =======