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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X 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, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
Commission file number: 001-13301
PRIME RETAIL, INC.
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(Exact name of Registrant as specified in its Charter)
Maryland 38-2559212
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(State or other jurisdiction of (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, $0.01 par
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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_____ No__X___
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 $18,738,504 on March 26, 2001 (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
26, 2001 was 43,577,916.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated herein by
reference:
Part of Form 10-K
Into Which Document
Document Is Incorporated
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Proxy Statementfor the 2001 annual Part III of Form 10-K
meeting of shareholders
PRIME RETAIL, INC.
Form 10-K
December 31, 2000
TABLE OF CONTENTS
Part I Page
Item 1. Business...............................................................1
Item 2. Properties.............................................................5
Item 3. Legal Proceedings.....................................................10
Item 4. Submission of Matters to a Vote of Security Holders...................10
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.11
Item 6. Selected Financial Data...............................................13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................15
Item 7A.Quantitative and Qualitative Disclosures About Material Risk..........36
Item 8. Financial Statements and Supplementary Data...........................37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................37
Part III
Item 10.Directors and Executive Officers of the Registrant....................38
Item 11.Executive Compensation................................................38
Item 12.Security Ownership of Certain Beneficial Owners and Management........38
Item 13.Certain Relationships and Related Transactions........................38
Part IV
Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K......38
Signatures............................................................43
PART I
ITEM 1 -- BUSINESS
The Company
Prime Retail, Inc. (the "Company") was organized as a Maryland
corporation on July 16,1993. 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. The
Company's outlet center portfolio, including five outlet centers owned
through joint venture partnerships, consists of 48 outlet centers in 26 states
(including Puerto Rico), which total 13,497,000 square feet of gross leasable
area ("GLA") at December 31, 2000. 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 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.
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.
The Company's executive offices are located at 100 East Pratt Street,
19th Floor, 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% (90% for years beginning after December 31, 2000) of its taxable
income (excluding any net capital gain) each year. Since its initial public
offering ("IPO") on March 22, 1994, 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. Outlet
centers are 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 (as the retail
division of The Prime Group, Inc. ("PGI"), from which the Company later acquired
certain Properties and simultaneously assumed management and development
operations with the completion of the IPO), the Company has become a
significant operator and developer in its business sector. 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. As of December
31, 2000, the Company's outlet center portfolio consisted of 48 outlet centers
in 26 states (including Puerto Rico) totaling 13,497,000 square feet of GLA.
The average outlet center in the Company's portfolio contained approximately
281,000 square feet of GLA at December 31, 2000.
Business Strategy
The Company's strategy is to use its cash flow from the Properties to
fund property level improvements and reduce debt levels over time. The Company
will also pursue, on a selective basis, the sale of properties, including (i)
outlet centers, (ii) community centers and (iii) land holdings, in order to
reduce the overall leverage of the Company over time.
The Company actively manages the Properties in an effort to increase the
sales and profitability of its tenants and ultimately improve occupancy levels
and rental income. In this regard the Company will employ various strategies,
including the following:
o Tenant Mix. The Company will continue to evaluate the tenant mix at the
Properties and seek to enhance, if possible, the representation of those
tenants considered the biggest and best draws in the outlet industry. The
Company believes that an increase in the representation of such tenants
will positively affect consumer traffic and lead to overall higher sales
for all tenants. Additionally, the Company will continue to explore the
addition of new tenants to the outlet sector to strengthen the competitive
position of the Company.
o
Marketing Strategies. During 1998, the Company adopted a nation-wide
branding strategy with the goal of enhancing sales by improving customer
awareness and loyalty. Under this strategy, the Company renamed the
majority of its current outlet center portfolio with the "Prime Outlets"
brand name. While the Company intends to retain the "Prime Outlets" brand
name, the Company adopted more individualized, property specific marketing
programs developed by on-site management teams during 2000. In addition,
the Company augmented marketing dollars received from tenants with a
contribution of its own of approximately $3.5 million during 2000. The
Company will continue to evaluate its marketing programs in 2001 and make
enhancements as appropriate. Furthermore, the Company will continue to seek
strategic marketing alliances with companies seeking access to the customer
base of the Company's outlet center portfolio.
o Operating Expenses. The Company manages and leases its properties with
in-house personnel, thereby reducing its reliance on third-party
service providers and enabling it to continually monitor and control the
expenses associated with these functions. The Company strives to minimize
the occupancy cost of its tenants through active management of operating
expenses at the property, regional and corporate levels. Whenever possible,
the Company leverages the size of its portfolio to obtain favorable
rates from vendors and suppliers.
Competition
The Company's outlet centers compete for customers primarily with
traditional shopping malls, "off-price" retailers and other outlet centers.
Traditionally the 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 the traditional sources of competition faced by the Company's
outlet centers, the Company's outlet centers also compete for customers with
web-based and catalogue retailers.
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 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.
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, earthquake and property insurance provided by reputable companies
and with commercially reasonable deductibles and limits.
Employees
As of December 31, 2000, the Company had 1,027 employees. The Company
believes that its relations with its employees are satisfactory.
Executive Officers
The following table sets forth the name, position and age (as of
December 31, 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,
Chairman of the Board 49
Robert A. Brvenik Executive Vice President - Chief Financial
Officer and Treasurer 45
C. Alan Schroeder Executive Vice President - General Counsel
and Secretary 43
Steven S. Gothelf Executive Vice President - Finance 40
John S. Mastin Executive Vice President - Leasing 55
David G. Phillips Executive Vice President 39
R. Kelvin Antill Senior Vice President - Assistant General Counsel 41
and Assistant Secretary
W. Daniel Brown Senior Vice President - Human Resources 50
Frederick J. Meno Senior Vice President - Operations 43
================================================================================
Glenn D. Reschke. Glenn D. Reschke is President and Chief Executive
Officer and Chairman of the Board of the Company. Mr. Reschke's responsibilities
with the Company include oversight and responsibility for the Company's leasing,
marketing, operations, finance and administrative functions. 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.
Robert A. Brvenik. Robert A. Brvenik is Executive Vice President - Chief
Financial Officer and Treasurer of the Company. Mr. Brvenik joined the Company
in 2000. Mr. Brvenik'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. Brvenik was associated for 13 years with Pyramid
Management Group, Inc. where he served in several key capacities including Chief
Financial Officer, Chief Operating Officer, Director of Development and Senior
Leasing Representative in addition to liaison with several large commercial and
investment banks. Mr. Brvenik has also held positions at Arthur Andersen & Co.
and Citicorp. He received his B.S. in Accounting from Utica College of Syracuse
University and is a Certified Public Accountant.
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 S. Gothelf. Steven S. 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 also 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.
David G. Phillips. David G. Phillips is President of Prime Retail Europe
and an Executive Vice President of the Company. 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.
R. Kelvin Antill. R. Kelvin Antill is Senior Vice President -
Assistant General Counsel and Assistant Secretary of the Company. Mr. Antill
joined the Company in 1995. Mr. Antill's responsibilities include legal matters
(other than leasing) relating to the operating properties of the Company,
project financings and other capital transactions, as well as development and
re-development matters. Mr. Antill received a Juris Doctorate from the
University of Virginia and a Bachelor of Arts in Economics from the University
of Maryland at College Park. Mr. Antill is licensed to practice law in the
state of Maryland.
W. Daniel Brown. W. Daniel Brown is Senior Vice President - Human
Resources of the Company. Mr. Brown joined the Company to lead the Human
Resources function in 1998. From 1994 through 1998, Mr. Brown was a Vice
President in Human Resources at T. Rowe Price Associates. Prior to joining
T. Rowe Price, Mr. Brown was a member of the Principle Professional Staff of
the Johns Hopkins University Applied Physics Laboratory where he led the
compensation, benefits, employment, human resource information systems, and
training and development functions. Before beginning his career in Human
Resources in 1983, Mr. Brown played Principal Tuba for nine years with the
Baltimore Symphony Orchestra. Mr. Brown received an MBA from the University
of Maryland and a Bachelor of Music degree from the Peabody Conservatory.
He holds professional certifications in both human resources and compensation.
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.
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, 2000, the
Company's portfolio consisted of (i) 48 outlet centers aggregating 13,497,000
square feet of GLA (including 1,764,000 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) 154,000 square feet of GLA of
office space.
The table set forth below summarizes certain information with respect to
the Company's outlet centers as of December 31, 2000 (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).
Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage
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Prime Outlets at Fremont (2)-- Fremont, Indiana........................ October 1985 229,000 95%
Prime Outlets at Birch Run (3)-- Birch Run, Michigan................... September 1986 724,000 95
Prime Outlets at Latham-- Latham, New York............................. August 1987 43,000 88
Prime Outlets at Williamsburg (4)-- Williamsburg, Virginia............. April 1988 274,000 99
Prime Outlets at Pleasant Prairie (2)-- Kenosha, Wisconsin............. September 1988 269,000 96
Prime Outlets at Silverthorne-- Silverthorne, Colorado................. November 1988 258,000 97
Prime Outlets at Edinburgh (2)-- Edinburgh, Indiana.................... September 1989 298,000 99
Prime Outlets at Burlington (2)-- Burlington, Washington .............. May 1989 174,000 93
Prime Outlets at Queenstown (2)-- Queenstown, Maryland................. June 1989 221,000 100
Prime Outlets at Hillsboro (2)-- Hillsboro, Texas...................... October 1989 359,000 96
Prime Outlets at Oshkosh (2)-- Oshkosh, Wisconsin...................... November 1989 260,000 98
Prime Outlets at Warehouse Row (5)-- Chattanooga, Tennessee............ November 1989 95,000 91
Prime Outlets at Perryville (2)-- Perryville, Maryland................. June 1990 148,000 93
Prime Outlets at Sedona-- Sedona, Arizona ............................. August 1990 82,000 93
Prime Outlets at San Marcos-- San Marcos, Texas........................ August 1990 549,000 98
Prime Outlets at Anderson-- Anderson, California....................... August 1990 165,000 98
Prime Outlets at Post Falls-- Post Falls, Idaho ....................... July 1991 179,000 77
Prime Outlets at Ellenton-- Ellenton, Florida.......................... October 1991 481,000 100
Prime Outlets at Morrisville-- Raleigh - Durham, North Carolina........ October 1991 187,000 91
Prime Outlets at Naples-- Naples/Marco Island, Florida................. December 1991 146,000 91
Prime Outlets at Conroe (2)-- Conroe, Texas............................ January 1992 282,000 95
Bellport Outlet Center (6)-- Bellport, New York-- Phase I............. May 1992 95,000 87
Bellport Outlet Center (6)-- Bellport, New York-- Phases II/III....... November 1996 197,000 70
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292,000 76
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Grand GLA Occupancy
Outlet Centers Opening Date (Sq. Ft.) Percentage
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Prime Outlets at Niagara Falls USA-- Niagara Falls, New York........... July 1992 534,000 94%
Prime Outlets at Woodbury (2)-- Woodbury, Minnesota.................... July 1992 250,000 78
Prime Outlets at Calhoun (2)-- Calhoun, Georgia........................ October 1992 254,000 93
Prime Outlets at Castle Rock-- Castle Rock, Colorado................... November 1992 480,000 100
Prime Outlets at Bend-- Bend, Oregon................................... December 1992 132,000 97
Prime Outlets at Jeffersonville II (2)-- Jeffersonville, Ohio.......... March 1993 314,000 54
Prime Outlets at Jeffersonville I-- Jeffersonville, Ohio............... July 1993 407,000 97
Prime Outlets at Gainesville-- Gainesville, Texas...................... August 1993 316,000 86
Prime Outlets at Loveland-- Loveland, Colorado......................... May 1994 328,000 95
Oxnard Factory Outlet (7)-- Oxnard, California......................... June 1994 148,000 88
Prime Outlets at Grove City-- Grove City, Pennsylvania................. August 1994 533,000 100
Prime Outlets at Huntley-- Huntley, Illinois........................... August 1994 282,000 82
Prime Outlets at Florida City-- Florida City, Florida.................. September 1994 208,000 79
Prime Outlets at Pismo Beach (2)-- Pismo Beach, California............. November 1994 148,000 95
Prime Outlets at Tracy (2)-- Tracy, California........................ November 1994 153,000 94
Prime Outlets at Vero Beach (2)-- Vero Beach, Florida.................. November 1994 326,000 91
Prime Outlets at Odessa-- Odessa, Missouri............................. July 1995 296,000 81
Prime Outlets at Darien (8)-- Darien, Georgia.......................... July 1995 307,000 86
Prime Outlets at New River (7)-- Phoenix, Arizona...................... September 1995 326,000 95
Prime Outlets at Gulfport (9)-- Gulfport, Mississippi.................. November 1995 306,000 89
Prime Outlets at Lodi-- Burbank, Ohio.................................. November 1996 313,000 94
Prime Outlets at Gaffney (9) -- Gaffney, South Carolina................ November 1996 305,000 99
Prime Outlets at Lee (2)-- Lee, Massachusetts.......................... June 1997 224,000 100
Prime Outlets at Lebanon-- Lebanon, Tennessee......................... April 1998 229,000 99
Prime Outlets at Hagerstown-- Hagerstown, Maryland..................... August 1998 487,000 96
Prime Outlets of Puerto Rico-- Barceloneta, Puerto Rico................ July 2000 176,000 82
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Total Outlet Centers (10) 13,497,000 93%
========== ===
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Notes:
(1) Percentage reflects occupied space as of December 31, 2000 as a percent of
available 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 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 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, not included in
this table, which was 94% occupied as of December 31, 2000.
(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.
(7) The Company owns 50% of this outlet center in a joint venture partnership.
(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 owns three community centers, not included in this table,
containing 424,000 square feet of GLA in the aggregate that were 81%
occupied as of December 31, 2000.
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, 2000, 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):
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Lease Expirations -- Outlet Centers
-----------------------------------
% of Total
Number of Approximate Annualized Annualized
Leases GLA Minimum Rent of Minimum Rent of
Year Expiring (Sq. Ft.) Expiring Leases Expiring Leases
---- ---------- ------------ ---------------- ---------------
2001 786 2,659,230 $31,724,614 18.72%
2002 610 2,157,642 29,408,660 17.35
2003 573 2,418,648 34,804,345 20.54
2004 385 1,477,771 22,210,898 13.11
2005 412 1,732,497 26,160,705 15.44
2006 173 779,539 9,027,062 5.33
2007 49 211,059 3,455,036 2.04
2008 33 169,350 2,724,842 1.61
2009 24 156,828 2,107,768 1.24
2010 54 275,685 4,769,351 2.81
====================================================================================================================================
Tenants
In management's view, tenant mix is an important factor in determining
an outlet center's success. The Company's outlet centers, are managed to
attract and retain, if possible, a diverse mix of nationally and internationally
recognized manufacturers of upscale designer and brand-name products. Crucial
to the success of an outlet center is the presence of lead tenants. Lead tenants
are manufacturers that may attract a large number of qualified consumers to the
outlet center due to the strength of their brand name and the value offered to
the consumer. 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 each center in an effort to improve sales per
square foot.
During the year ended December 31, 2000, no group of tenants under
common control accounted for more than 4.86% of the gross revenues of the
Company or leased more than 5.71% 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, 2000:
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NUMBER OF % OF LEASED
TENANT STORES GLA
- ------ ------------ ------------
PHILLIPS-VAN HEUSEN
BASS ............................................................................. 45 2.63%
VAN HEUSEN ....................................................................... 44 1.52
GEOFFREY BEENE ................................................................... 31 1.05
IZOD ............................................................................. 28 0.51
----- ------
SUBTOTAL PHILLIPS-VAN HEUSEN................................................... 148 5.71
NIKE................................................................................... 27 2.79
GAP/OLD NAVY/BANANA REPUBLIC........................................................... 33 2.73
DRESS BARN, INC.
WESTPORT, LTD./WESTPORT WOMAN/DRESS BARN.......................................... 45 2.65
SBX............................................................................... 2 0.07
----- ------
SUBTOTAL DRESS BARN, INC....................................................... 47 2.72
LEVI'S/DOCKERS......................................................................... 37 2.69
LIZ CLAIBORNE/ELISABETH................................................................ 43 2.67
JONES APPAREL GROUP
JONES NEW YORK.................................................................... 45 1.33
NINE WEST/BANISTER/EASY SPIRIT.................................................... 27 1.11
----- -----
SUBTOTAL JONES APPAREL GROUP................................................... 72 2.44
BROWN GROUP RETAIL, INC.
FACTORY BRAND SHOES............................................................... 34 1.46
NATURALIZER....................................................................... 26 0.60
FAMOUS FOOTWEAR................................................................... 8 0.37
----- ------
SUBTOTAL BROWN GROUP........................................................... 68 2.43
CASUAL CORNER GROUP, INC.
CASUAL CORNER OUTLET.............................................................. 31 1.49
PETITE SOPHISTICATE............................................................... 19 0.42
CASUAL CORNER WOMAN............................................................... 14 0.39
----- ------
SUBTOTAL CASUAL CORNER GROUP, INC. ............................................ 64 2.30
MIKASA................................................................................. 34 2.17
REEBOK/ROCKPORT........................................................................ 27 1.94
SARA LEE
L'EGGS/HANES/BALI/PLAYTEX.......................................................... 40 1.44
COACH.............................................................................. 13 0.31
SOCKS GALORE....................................................................... 10 0.11
SARA LEE BAKERY.................................................................... 1 0.02
----- ------
SUBTOTAL SARA LEE.............................................................. 64 1.88
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF LEASED
TENANT STORES GLA
- ------ ------------ ---------
VANITY FAIR/BARBIZON................................................................... 9 1.62%
POLO/RALPH LAUREN...................................................................... 25 1.59
BUGLE BOY.............................................................................. 35 1.57
OSHKOSH B'GOSH/GENUINE KIDS............................................................ 34 1.46
SPIEGEL................................................................................ 6 1.36
CARTERS CHILDRENSWEAR.................................................................. 30 1.25
TOMMY HILFIGER/WOMAN/JEANS............................................................. 29 1.20
SPRINGMAID-WAMSUTTA.................................................................... 20 1.17
OFF 5TH-SAKS FIFTH AVENUE.............................................................. 7 1.17
SAMSONITE/AMERICAN TOURISTER........................................................... 44 1.10
EDDIE BAUER............................................................................ 16 1.06
WELCOME HOME........................................................................... 35 1.06
HOME COMPANY........................................................................... 2 1.06
K*B TOY................................................................................ 27 1.04
BIG DOG SPORTSWEAR..................................................................... 42 1.02
FAMOUS BRANDS HOUSEWARES............................................................... 33 0.99
CORNING-REVERE......................................................................... 24 0.91
RUE 21................................................................................. 30 0.90
KITCHEN COLLECTION..................................................................... 33 0.88
PAPER FACTORY/GREETINS `N MORE......................................................... 28 0.80
BROOKS BROTHERS........................................................................ 18 0.80
JOCKEY................................................................................. 27 0.78
J. CREW................................................................................ 13 0.71
NAUTICA/JEANS.......................................................................... 22 0.66
ANN TAYLOR/LOFT........................................................................ 9 0.53
BOSE................................................................................... 14 0.46
AMERICAN EAGLE/OUTPOST................................................................. 12 0.44
SONY................................................................................... 8 0.40
DONNA KARAN............................................................................ 7 0.28
----- ------
TOTAL.................................................................................. 1,303 60.74%
===== ======
====================================================================================================================================
During the year ended December 31, 2000 and 1999, total bad debt expense
was approximately $7.4 million, or 2.6%, and $0.8 million, or 0.3%, of total
revenues, respectively. The increase in bad debt expense was primarily
attributable to certain tenant bankruptcies, abandonments and store closings
during 2000.
ITEM 3 -- LEGAL PROCEEDINGS
On October 13, 2000 and thereafter, eight complaints were filed in the
United States District Court for the District of Maryland against the Company
and four individual defendants. The four individual defendants are: William
H. Carpenter, Jr., the former President and Chief Operating Officer and a
current director of the Company; Abraham Rosenthal, the former Chief Executive
Officer and a former director of the Company; Michael W. Reschke, the former
Chairman of the Board and a current director of the Company; and Robert P.
Mulreaney, the former Executive Vice President - Chief Financial Officer and
Treasurer of the Company. The complaints were brought by alleged stockholders
of the Company, individually and purportedly as class actions on behalf of all
other stockholders of the Company. The complaints allege that the individual
defendants made statements about the Company that were in violation of the
federal securities laws. The complaints seek unspecified damages and other
relief. The Lead plaintiffs and lead counsel were recently appointed. The
Company expects a consolidated complaint to be filed within the next 60 days.
The Company believes that the complaints are without merit and intends to
defend them vigorously. The outcome of these lawsuits, and the ultimate
liability of the defendants, if any, cannot be predicted.
The Company and its affiliates were defendants in a lawsuit filed on
August 10, 1999 in the Circuit Court for Baltimore City and removed to U. S.
District Court for the District of Maryland (the "U.S. District Court") on
August 20, 1999. The plaintiff alleged that the Company and its related entities
overcharged tenants for common area maintenance charges and promotion fund
charges. The U.S. District Court dismissed the lawsuit on June 19, 2000. The
plaintiff has filed a notice of its appeal from the U.S. District Court's
decision and a briefing schedule has been issued by the court. Management
believes that the Company has acted properly and intends to defend this lawsuit
vigorously. While any litigation contains an element of uncertainty, the
Company believes the losses, if any, resulting from this case will not have a
material adverse effect on the consolidated financial statements of the Company.
Several entities (the "Plaintiffs") have filed or stated an intention to
file lawsuits (the "Lawsuits") against the Company and its affiliates in which
the Plaintiffs are seeking to hold them responsible under various legal theories
for liabilities incurred by primeoutlets.com, inc., also known as eOutlets,
including the theory that the Company guaranteed the obligations of eOutlets and
the theory that the Company was the alter ego of eOutlets. primeoutlets.com,
inc. is also a defendant in some, but not all, of the Lawsuits. The Company
believes that it is not liable to the Plaintiffs as there was no privity of
contract between it and the various Plaintiffs. The Company intends to defend
all Lawsuits vigorously. primeoutlets.com inc. filed for protection under
Chapter 7 of the United States Bankruptcy Code during November 2000 under
the name E-Outlets Resolution Corp. The trustee for E-Outlets Resolution
Corp. has notified the Company that he is contemplating an action against the
Company and the Operating Partnership in which he may assert that E-Outlets
Resolutin Corp. was the "alter-ego" of the Company and the Operating Partnership
and that, as a result, the Company and the Operating Partnership are liable
for the debts of E-Outlets Resolution Corp. If the trustee pursues such an
action, the Company and the Operating Partnership will defend themselves
vigorously. In the case captioned Convergys Customer Management Group, Inc. v.
Prime Retail, Inc. and primeoutlets.com, inc., currently pending in the Court
of Common Pleas for Hamilton County (Ohio), the Company prevailed in a motion
to dismiss Plaintiff's claim that the Company was liable for primeoutlets.com,
inc.'s breach of contract based on the doctrine of piercing the corporate
veil. The outcome of these Lawsuits, and the ultimate liability of the Company,
if any, cannot be predicted. While any litigation contains an element of
uncertainty, the Company believes the losses, if any, resulting from the
Lawsuits will not have a material adverse effect on the consolidated financial
statements of the Company.
The New York Stock Exchange and the Securities and Exchange Commission
have notified the Company that they are reviewing transactions in the stock of
the Company prior to the Company's January 18, 2000 press release concerning
financial matters.
ITEM 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, 2000.
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
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------- ----------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------------- ----------------------------------------------------
Market price per common
share:
High.................. $0.69 $1.63 $2.13 $6.63 $ 7.94 $ 8.94 $ 9.94 $ 10.19
Low................... 0.25 0.22 0.94 1.94 5.13 6.44 7.94 7.38
End of period close... 0.47 0.34 1.27 2.19 5.63 7.38 8.69 8.75
Cash dividends paid per
common share.......... $ - $ - $ - $ - $0.295 $0.295 $0.295 $ 0.295
====================================================================================================================================
In order to qualify as a REIT for federal income tax purposes, the
Company is required to pay distributions to its common and preferred
shareholders of at least 95% (90% for years beginning after December 31, 2000)
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 Code, necessary to remain qualified as a REIT, it also
intends to retain such amounts as it considers necessary from time to time for
capital and liquidity needs of the Company.
The Company's current policy is to pay distributions only 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 for 2001, it does
not expect to pay any distributions on its 10.5% Series A Senior Cumulative
Preferred Stock ("Senior Preferred Stock"), 8.5% Series B Cumulative
Participating Convertible Preferred Stock ("Series B Convertible Preferred
Stock"), common stock or common units of limited partnership interest in the
Operating Partnership during 2001.
The Company is currently in arrears on five quarters of preferred stock
distributions due February 15, 2000 through February 15, 2001, respectively. The
holders of the Senior Preferred Stock and Series B Convertible Preferred Stock,
voting together as a single class, will 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 directors would be elected to serve until the earlier of (i) the election
and qualification of such director's successor, or (ii) payment of the
dividend arrearage.
The Company is prohibited from paying dividends or distributions except
to the extent necessary to maintain its REIT status under the terms of its
$90,000 Mezzanine Loan (see "Dividends and Distributions" of Item 7 -
Management's Discussions and Analysis of Financial Condition and Results of
Operations and Note 6 - "Bonds and Notes Payable" of the Notes to
Consolidated Financial Statements). In addition, the Company may make no
distributions to its common shareholders or its holders of common units of
limited partnership interest in the Operating Partnership unless it is current
with respect to distributions to its preferred shareholders. As of December 31,
2000, unpaid dividends for the period November 16, 1999 through December 31,
2000 on the Senior Preferred Stock and Series B Convertible Preferred Stock
aggregated $6.8 million and $18.7 million, respectively. The annualized
dividends on the Company's 2,300,000 shares of Senior Preferred Stock and
7,828,125 shares of Series B Convertible Preferred Stock outstanding as of
December 31, 2000 are $6.0 million ($2.625 per share) and $16.6 million ($2.125
per share), respectively.
The approximate number of holders of record of the Common Stock was 605
including participants in security position listings as of March 21, 2001.
On December 22, 2000, the Company issued warrants (the "Warrants") to
Fortress Investment Fund LLC and Greenwich Capital Financial Products, Inc. to
purchase an aggregate one million shares of the Company's common stock at an
exercise price of $1.00 per share. The Warrants were issued in connection with
the December 22, 2000 refinancing of the Company's assets and sale of four of
its outlet centers. See "Debt Transactions and Debt Compliance" of Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 6 - "Bonds and Notes Payable" of the Notes to the
Consolidated Financial Statements for additional information. The Warrants
were issued in a transaction exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended.
The Company has received notification from the NYSE that it believes the
Company is "below criteria" for continued listing of its common stock on the
NYSE. In order to avoid delisting for its common stock, the Company intends to
seek shareholder approval for a reverse stock split at its annual meeting of
shareholders expected to held in the summer of 2001.
ITEM 6 -- SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31
----------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents........................................... $ 178,830 $ 193,979 $ 148,376 $ 78,046 $ 54,710
Percentage rents..................................... 6,369 8,085 6,384 3,277 1,987
Tenant reimbursements................................ 83,350 90,063 67,152 37,519 5,254
Interest and other................................... 14,801 13,829 9,897 10,288 7,089
---------- ---------- ---------- ---------- ----------
Total revenues............................ 283,350 305,956 231,809 129,130 89,040
Expenses
Property operating................................... 68,537 70,862 52,684 29,492 20,421
Real estate taxes.................................... 21,776 22,405 16,705 9,417 5,288
Depreciation and amortization........................ 67,556 73,640 52,727 26,715 19,256
Corporate general and administrative................. 20,847 12,687 7,980 5,603 4,018
Interest............................................. 98,234 93,934 60,704 36,122 24,485
Provision for abandoned projects..................... - 16,039 - - -
Provision for asset impairment....................... 68,663 15,842 - - -
Loss on eOutlets.com................................. 14,703 - - - -
Loss on Designer Connection.......................... 1,815 6,561 1,067 - -
Other charges........................................ 17,555 6,918 4,495 3,234 8,586
---------- ---------- ---------- ---------- ----------
Total expenses............................ 379,686 318,888 196,362 110,583 82,054
---------- ---------- ---------- ---------- ----------
Income (loss) before loss on sale of real
estate, minority interests
and extraordinary loss............................ (96,336) (12,932) 35,447 18,547 6,986
Loss on sale of real estate.......................... (42,648) (15,153) (15,461) - -
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interests and
extraordinary loss............................... (138,984) (28,085) 19,986 18,547 6,986
(Income) loss allocated to minority interests........ 738 (3,226) (2,456) (10,581) 2,092
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary loss.............. (138,246) (31,311) 17,530 7,966 9,078
Extraordinary loss................................... (4,206) (3,518) - (2,061) (1,017)
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... (142,452) (34,829) 17,530 5,905 8,061
Income allocated to preferred shareholders........... (22,672) (9,962) (24,604) (12,726) (14,236)
---------- ---------- ---------- ---------- ----------
Net loss applicable to common shares................. $ (165,124) $ (44,791) $ (7,074) $ (6,821) $ (6,175)
========== ========== ========== ========== ==========
Net loss per common share - basic.................... $ (3.79) $ (1.04) $ (0.20) $ (0.36) $ (0.75)
========== ========== ========== ========== ==========
Net loss per common share - diluted......... $ (3.79) $ (1.30) $ (0.20) $ (0.36) $ (0.75)
========== ========== ========== ========== ==========
Other Data
Funds from operations (1)............................ $ 57,967 $ 84,163 $ 90,020 $ 46,718 $ 27,637
Net cash provided by operating activities............ $ 32,450 $ 97,815 $ 59,182 $ 49,856 $ 45,191
Net cash provided by (used in) investing activities.. $ 1,095 $ (56,666) $ (145,596) $ (229,956) $ (232,290)
Net cash provided by (used in) financing activities.. $ (31,982) $ (39,571) $ 85,806 $ 182,549 $ 176,096
Distributions declared per common share (2) (3)...... $ - $ 0.89 $ 1.68 $ 1.18 $ 1.33
Reported merchant sales.............................. $2,745,923 $3,286,917 $3,169,268 $1,434,163 $1,044,348
Total outlet GLA at end of period (4)................ 13,497 14,699 14,348 7,217 5,780
Number of outlet centers at end of period (4)........ 48 51 50 28 21
December 31
----------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Rental property (before accumulated depreciation).... $1,493,107 $1,826,551 $2,015,722 $ 904,782 $ 640,759
Net investment in rental property.................... 1,275,538 1,642,597 1,887,975 822,749 583,085
Total assets......................................... 1,462,021 1,856,058 1,976,464 904,183 666,803
Bonds and notes payable.............................. 1,030,153 1,260,670 1,217,507 515,265 499,523
Total liabilities and minority interests............. 1,107,533 1,359,371 1,332,730 559,655 527,594
Shareholders' equity................................. 354,488 496,687 643,734 344,528 139,209
====================================================================================================================================
Notes:
(1) 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) as presented in accordance
with generally accepted accounting principles ("GAAP"). FFO, pursuant to
guidelines established by the National Association of Real Estate
Investment Trusts ("NAREIT"), represents net income (loss) (determined in
accordance with GAAP) excluding provisions for asset impairment, gains (or
losses) from debt restructuring, sales of property and discontinued
operations, plus real estate depreciation and amortization after
adjustments for unconsolidated joint venture partnerships. Management
believes that FFO is an important and widely used measure of the operating
performance of equity real estate investment trusts ("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 NAREIT definition or that interpret the
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. 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. A reconciliation of income
(loss) before allocations to minority interests and preferred shareholders
to FFO is as follows:
Years ended December 31
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interests and
extraordinary loss................................ $(138,984) $(28,085) $ 19,986 $ 18,547 $ 6,986
FFO adjustments:
Loss on sale of real estate....................... 42,648 15,153 15,461 - -
Real estate depreciation and amortization......... 65,853 73,053 52,295 26,413 18,703
Unconsolidated joint venture adjustments.......... 3,269 1,639 1,211 1,758 1,948
Discontinued operations - Designer Connection..... 1,815 6,561 1,067 - -
Discontinued operations - eOutlets.com............ 14,703 - - - -
--------- -------- -------- -------- -------
FFO before adjustment for asset impairment........... (10,696) 68,321 90,020 46,718 27,637
Provision for asset impairment - operating properties 61,222 15,842 - - -
Provision for asset impairment - land............. 7,441 - - - -
--------- -------- -------- -------- -------
FFO before allocations to minority interests
and preferred shareholders........................ $ 57,967 $ 84,163 $ 90,020 $ 46,718 $ 27,637
========= ======== ======== ======== =======
==================================================================================================================================
(2) Includes a special cash distribution during 1998 of $0.50 per common share
relating to the Company's merger with Horizon completed in June 1998 (see
Note 3 -- "Acquisitions and Dispositions" of the Notes to Consolidated
Financial Statements).
(3) Includes a special cash distribution during 1996 of $0.145 per common share
relating to a stock exchange offer completed by the Company in June 1996.
(4) Includes outlet centers operated under joint venture partnerships with
unrelated third parties as follows:
December 31
----------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate GLA........................................ 1,764 1,490 595 595 800
Number of outlet centers............................. 5 4 3 3 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 (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 (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, risks associated with the Company's high level of
leverage and its ability to refinance such indebtedness as it becomes due; the
risk that the Company or its subsidiaries will not remain in compliance with
existing loan covenants; 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 tenant bankruptcies, store closings and
the non-payment of contactual rents; risk associated with the Company's
potential asset sales; 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 competition from web-based and catalogue retailers.
Outlet Center Portfolio
The Company's outlet center portfolio grew to its present size through the
development and acquisition of outlet centers and through expansions to existing
outlet centers. The Company's outlet portfolio consisted of 48 outlet centers
totaling 13,497,000 square feet of ("GLA") at December 31, 2000, compared to 51
outlet centers totaling 14,699,000 square feet of GLA at December 31, 1999 and
50 outlet centers totaling 14,348,000 square feet of GLA at December 31, 1998.
During 2000, the Company opened (i) Prime Outlets of Puerto Rico, the first
outlet center in Puerto Rico, which contains 176,000 square feet of GLA and (ii)
four expansions to existing outlet centers totaling 214,000 square feet of GLA.
During 1999, the Company (i) opened two expansions to existing outlet centers
totaling 85,000 square feet of GLA and (ii) acquired in September 1999 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. These development and
acquisition activities are collectively referred to as the "Portfolio
Expansion."
On December 22, 2000, the Company completed the sale of four outlet centers
aggregating 1,592,000 square feet of GLA to a joint venture partnership
comprised of Chelsea Property Group, Inc. and Fortress Investment Group, L.L.C.
The four outlet centers, which were sold, are located in Gilroy, California,
Michigan City, Indiana, Waterloo, New York and Kittery, Maine. The sale of these
outlet centers is collectively referred to as the "Permanent Loan Properties
Sale." See "Liquidity and Capital Resources - Sale of Permanent Loan Properties"
for additional information.
On November 19, 1999, the Company sold Prime Outlets at Birch Run, which
contains 724,000 square feet of GLA, to a joint venture partnership, (the
"Prime/Estein Venture"). Additionally, on February 23, 2000, the Company sold
Prime Outlets at Williamsburg, which contains 274,000 square feet of GLA, to the
Prime/Estein Venture. The Company owns a 30% interest in the Prime/Estein
Venture. Commencing on the dates of disposition, the Company accounts for the
operating results of these outlet centers in accordance with the equity method
of accounting. The sales of these outlet centers are collectively referred to as
the "Prime/Estein Transaction." See "Liquidity and Capital Resources -
Prime/Estein Joint Venture Transaction" for additional information.
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 was 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 "Note 3 -
Acquisitions and Dispositions" of the Notes to Consolidated Financial Statements
for additional information. In connection with the June 15, 1998 consummation of
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.
The Company's outlet center portfolio was 92.5%, 93.5% and 95.9% occupied
on December 31, 2000, 1999, and 1998, respectively. For the year ended December
31, 2000, weighted-average occupancy in the outlet center portfolio was 91.5%,
compared to 93.4% and 93.9% for the same period in 1999 and 1998, respectively.
The year 2000 decline in weighted average and year-end occupancy was primarily
attributable to certain tenant bankruptcies, abandonments and store closings.
Results of Operations
Table 1--Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents..................................................................... $ 178,830 $ 193,979 $ 148,376
Percentage rents............................................................... 6,369 8,085 6,384
Tenant reimbursements.......................................................... 83,350 90,063 67,152
Interest and other............................................................. 14,801 13,829 9,897
--------- --------- ---------
Total revenues............................................................... 283,350 305,956 231,809
Expenses
Property operating............................................................. 68,537 70,862 52,684
Real estate taxes.............................................................. 21,776 22,405 16,705
Depreciation and amortization.................................................. 67,556 73,640 52,727
Corporate general and administrative........................................... 20,847 12,687 7,980
Interest....................................................................... 98,234 93,934 60,704
Provision for abandoned projects............................................... - 16,039 -
Provision for asset impairment................................................. 68,663 15,842 -
Loss on eOutlets.com........................................................... 14,703 - -
Loss on Designer Connection.................................................... 1,815 6,561 1,067
Other charges.................................................................. 17,555 6,918 4,495
--------- --------- ---------
Total expenses.............................................................. 379,686 318,888 196,362
--------- --------- ---------
Income (loss) before loss on sale of real estate, minority interests and
extraordinary loss......................................................... (96,336) (12,932) 35,447
Loss on sale of real estate.................................................... (42,648) (15,153) (15,461)
--------- --------- ---------
Income (loss) before minority interests and extraordinary loss................. (138,984) (28,085) 19,986
(Income) loss allocated to minority interests.................................. 738 (3,226) (2,456)
--------- --------- ---------
Income (loss) before extraordinary loss........................................ (138,246) (31,311) 17,530
Extraordinary loss on early extinguishment of debt,
net of minority interests in the amount of $887 in 1999...................... (4,206) (3,518) -
--------- --------- ---------
Net income (loss).............................................................. (142,452) (34,829) 17,530
Income allocated to preferred shareholders..................................... (22,672) (9,962) (24,604)
--------- --------- ---------
Net loss applicable to common shares........................................... $(165,124) $ (44,791) $ (7,074)
========== ========= =========
Earnings per common share - basic:
Loss before extraordinary loss.............................................. $ (3.69) $ (0.96) $ (0.20)
Extraordinary loss.......................................................... (0.10) (0.08) -
--------- --------- ---------
Net loss.................................................................... $ (3.79) $ (1.04) $ (0.20)
========= ========= =========
Earnings per common share - diluted:
Loss before extraordinary loss.............................................. $ (3.69) $ (1.22) $ (0.20)
Extraordinary loss.......................................................... (0.10) (0.08) -
--------- --------- ---------
Net loss.................................................................... $ (3.79) $ (1.30) $ (0.20)
========= ========= =========
Weighted average common shares outstanding
Basic...................................................................... 43,517 43,196 35,612
========= ========= =========
Diluted.................................................................... 43,517 44,260 35,612
========= ========= =========
====================================================================================================================================
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,
2000, 1999 and 1998 is presented in the following table, expressed in amounts
calculated on a weighted average occupied GLA basis.
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
GLA at end of period (1)........................................................ 12,322 13,787 14,457
Weighted average occupied GLA (1)............................................... 12,483 13,599 10,390
Outlet centers in operation at end of period (2)................................ 48 51 50
New outlet centers opened and acquired (2)...................................... 1 1 24
Outlet centers expanded (2)..................................................... 2 2 9
Community centers in operation at end of period................................. 3 3 3
States (including Puerto Rico) operated in at end of period..................... 26 26 26
Portfolio weighted average per square foot (3):
Revenues
Base rents...................................................................... $14.33 $14.26 $14.28
Percentage rents................................................................ 0.51 0.59 0.61
Tenant reimbursements........................................................... 6.68 6.62 6.46
Interest and other.............................................................. 1.19 1.02 1.06
------ ------ ------
Total revenues............................................................... 22.71 22.49 22.41
Expenses (4)
Property operating.............................................................. 5.49 5.21 5.07
Real estate taxes............................................................... 1.74 1.65 1.61
Depreciation and amortization................................................... 5.41 5.42 5.10
Corporate general and administrative (5)........................................ 1.36 0.93 0.77
Interest........................................................................ 7.87 6.91 5.84
Other charges (6)............................................................... 1.32 0.51 0.63
------ ------ ------
Total expenses............................................................... 23.19 20.63 19.02
------ ------ ------
Income (loss) before loss on sale of real estate,
minority interests and extraordinary loss.................................... $(0.48) $1.86 $3.39
====== ====== ======
Outlet center weighted average per square foot (3):
Revenues
Base rents...................................................................... $14.61 $14.51 $14.66
Percentage rents................................................................ 0.53 0.62 0.68
Tenant reimbursements........................................................... 6.85 6.76 6.67
Interest and other.............................................................. 1.07 0.85 0.85
------ ------ ------
Total revenues............................................................... 23.06 22.74 22.86
Expenses (4)
Property operating.............................................................. 5.60 5.31 5.17
Real estate taxes............................................................... 1.75 1.65 1.62
Depreciation and amortization................................................... 5.45 5.53 5.09
Interest........................................................................ 6.92 6.42 5.95
Other charges................................................................... 1.13 0.26 0.33
------ ------ ------
Total expenses............................................................... 20.85 19.17 18.16
------ ------ ------
Income before corporate general and administrative
expenses,loss on sale of real estate, minority
interests and extraordinary loss............................................. $ 2.21 $ 3.57 $ 4.70
===== ====== ======
====================================================================================================================================
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.
(3) Based on occupied GLA weighted by months of operation. The occupied GLA on
a weighted average basis for (i) the four outlet centers sold on December
22, 2000 are included in the weighted average GLA through the date of
disposition and (ii) the 22 properties the Company acquired from Horizon
and the two properties sold to HGP on June 15, 1998 have been included in
the weighted average GLA commencing on the date the acquisition and through
the date of disposition, respectively.
(4) Excludes the following non-recurring items:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Provision for asset impairment............................................. $68,663 $15,842 $ -
Provision for abandoned projects........................................... - 16,039 -
Loss on eOutlets.com....................................................... 14,703 - -
Loss on Designer Connection................................................ 1,815 6,561 -
- ------------------------------------------------------------------------------------------------------------------------------------
(5) Excludes non-recurring corporate general and administrative costs
aggregating $3,876, including (i) severance and other compensation costs
totaling $2,421 and (ii) professional fees of $1,455 relating to
refinancing activities.
(6) Excludes non-recurring other charges of $1,100 related to the termination
of the sale of a joint venture interest in Prime Outlets at Hagerstown and
an expansion to Prime Outlets at Williamsburg, which was not constructed.
Comparison of the year ended December 31, 2000 to the year ended
December 31, 1999
Summary
The Company reported net losses of $142,452 and $34,829 for the years
ended December 31, 2000 and 1999, respectively. For the year ended December 31,
2000, the net loss applicable to common shareholders was $165,124, or $3.79 per
common share on a basic and diluted basis. 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.
The 2000 results reflect certain non-recurring items, including (i) a
loss on the sale of real estate of $42,648, (ii) a provision for asset
impairment of $68,663, (iii) a loss on eOutlets.com of $14,703, (iv) general and
administrative expenses consisting of severance and other compensation costs
aggregating $2,421 and professional fees of $1,455 related to refinancing
activities, (v) a gain on the sale of outparcel land of $2,472 included in
interest and other income, (vi) a loss on Designer Connection of $1,815, (vii)
other charges of $1,100 incurred in connection with the termination of the sale
of joint venture interests in certain properties and (viii) an extraordinary
loss of $4,206 related to the prepayment and modification to the terms of
certain long-term debt.
The 1999 results reflect certain non-recurring items, including (i) a
provision for abandoned projects of $16,039, (ii) a provision for asset
impairment of $15,842, (iii) a loss on the sale of real estate of $15,153, (iv)
a loss on Designer Connection of $6,561 and (v) an extraordinary loss of $3,518
(net of minority interests of $887) relating to the early extinguishment of
certain long-term debt.
Revenues
Total revenues were $283,350 for the year ended December 31, 2000,
compared to $305,956 for the year ended December 31, 1999, a decrease of
$22,606, or 7.4%. Base rents decreased $15,149, or 7.8%, in 2000 compared to
1999. These decreases are primarily due to the Prime/Estein Transaction and
reduced portfolio occupancy, partially offset by the PortfolioExpansion.
Straight-line rent income (expense), included in base rent were $(94) and $1,181
for the years ended December 31, 2000 and 1999, respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, decreased $1,716, or 21.2%, during the year
ended December 31, 2000 compared to the same period in 1999. This decline was
primarily attributable to the Prime/Estein Transaction.
As summarized in TABLE 3, merchant sales reported for centers remaining in
the Company's outlet center portfolio at period-end were $2,746 million and
$3,287 million for the years ended December 31, 2000 and 1999. The decrease in
total reported merchant sales is primarily due to the sale of the Permanent Loan
Properties on December 22, 2000. The reported merchant sales data for the
Permanent Loan Properties are excluded from the 2000 sales data presented in
TABLE 3. The weighted average reported merchant sales per square foot decreased
to $245 per square foot in 2000 from $257 per square foot in 1999. Total
merchant occupancy cost per square foot increased slightly from $21.90 in 1999
to $22.03 in 2000 and as a percentage of reported sales from 8.54% to 8.99%,
respectively.
Table 3--Summary of Reported Merchant Sales(1)
A summary of reported outlet merchant sales and related data for 2000,
1999 and 1998 follows:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Total reported merchant sales (in millions)(1)................................. $ 2,746 $ 3,287 $ 3,169
========= ========= =========
Weighted average reported merchant sales per square foot(2):
All store sales............................................................. $ 245 $ 257 $ 255
========= ========= =========
Same-space sales............................................................ $ 251 $ 249
========= =========
Total merchant occupancy cost per square foot(3)............................... $ 22.03 $ 21.90 $ 21.30
========= ========= =========
Cost of merchant occupancy to reported sales(4)................................ 8.99% 8.54% 8.37%
========= ========= =========
Cost of merchant occupancy (excluding marketing contributions)
to reported sales(5)......................................................... 8.26% 7.84% 7.65%
========= ========= =========
===================================================================================================================================
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, decreased by $6,713, or 7.5%, to $83,350
in 2000 compared to $90,063 in 1999. This decrease is primarily due to the
Prime/Estein Transaction and reduced occupancy in 2000, partially offset by the
Portfolio Expansion.
As shown in TABLE 4, tenant reimbursements as a percentage of
recoverable property operating expenses and real estate taxes was 92.3% in 2000
compared to 96.6% in 1999. This decline is partially attributable to the reduced
occupancy during 2000. TABLE 4 sets forth recoveries from merchants as a
percentage of total recoverable expenses for 2000, 1999, and 1998:
Table 4--Tenant Recoveries as a Percentage of Total Recoverable Expenses
- --------------------------------------------------------------------------------
Expenses Recovered
Year from Tenants(1)
- --------------------------------------------------------------------------------
2000............................................... 92.3%
1999............................................... 96.6%
1998............................................... 96.8%
================================================================================
Note:
(1) Total recoverable expenses include property operating expenses and real
estate taxes.
Interest and other income increased by $972, or 7.0%, to $14,801
during the year ended December 31, 2000 as compared to $13,829 for the year
ended December 31, 1999. This increase reflects (i) a nonrecurring first
quarter 2000 gain on sale of outparcel land of $2,472, (ii) an increase in
amortization of deferred income of $809, (iii) higher lease termination
income of $721, (iv) higher property management fee income of $694 and (v)
higher interest income of $434. These were partially offset by (i) a reduction
in equity earnings from investment in partnerships of $2,036, (ii) lower
temporary tenant income of $1,269, (iii) reduced municipal assistance income
of $313 and (iv) decreases in all other miscellaneous income of $540.
Expenses
Property operating expenses decreased by $2,325, or 3.3%, to $68,537 in
2000 compared to $70,862 in 1999. Real estate taxes expense decreased by $629,
or 2.8%, to $21,776 in 2000 from $22,405 in 1999. The decrease in property
operating expenses is primarily due to the Prime/Estein Transaction, partially
offset by the Portfolio Expansion. As shown in TABLE 5, depreciation and
amortization expense decreased by $6,084, or 8.3%, to $67,556 in 2000, compared
to $73,640 in 1999. This decrease results from the Prime/Estein Transaction
partially offset by the depreciation and amortization of assets associated
with the Portfolio Expansion.
Table 5--Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense for 2000, 1999
and 1998 are summarized as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Building and improvements...................................................... $35,536 $40,184 $30,299
Land improvements.............................................................. 6,197 5,779 3,609
Tenant improvements............................................................ 22,134 25,374 16,616
Furniture and fixtures......................................................... 2,988 1,540 1,084
Leasing commissions............................................................ 701 763 1,119
------- ------- -------
Total.................................................................... $67,556 $73,640 $52,727
======= ======= =======
====================================================================================================================================
As shown in TABLE 6, interest expense increased by $4,300, or 4.6%, to
$98,234 in 2000 compared to $93,934 in 1999. This increase reflects (i) higher
interest incurred of $2,942, (ii) a reduction in amortization of debt premiums
of $1,247 and (iii) a decrease in the amount of interest capitalized in
connection with development projects of $1,234. Partially offsetting these items
was (i) a decrease in amortization of deferred financing costs of $1,114 and
(ii) a decrease in amortization of interest rate protection contracts of $9.
The increase in interest incurred is primarily attributable to an
increase in the weighted average contractual interest rate on long-term debt for
the year ended December 31, 2000 compared to the same period in 1999. The
weighted average contractual interest rates for 2000 and 1999 were 8.46% and
7.90%, respectively. Partially offsetting the impact of the interest rate
increase was a reduction of $48,209 in the Company's weighted average debt
outstanding, excluding debt premiums, during 2000 compared to 1999.
Table 6--Components of Interest Expense
The components of interest expense for 2000, 1999 and 1998 are
summarized as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Interest incurred.............................................................. $101,549 $ 98,607 $ 65,783
Amortization of debt premiums.................................................. (3,159) (4,406) (2,153)
Interest capitalized........................................................... (3,412) (4,646) (5,793)
Amortization of deferred financing costs....................................... 3,188 4,302 1,715
Amortization of interest rate protection contracts............................. 68 77 1,152
-------- -------- --------
Total.................................................................... $ 98,234 $ 93,934 $ 60,704
======== ======== ========
===================================================================================================================================
Other charges increased by $10,637, or 153.8% to $17,555 for the year
ended December 31, 2000 compared to $6,918 for the same period in 1999.
The 2000 results reflect costs of $1,100 incurred in the third quarter in
connection with the discontinuance of the proposed sale of a 70% joint venture
interest in Prime Outlets at Hagerstown and a future expansion to Prime Outlets
at Williamsburg. The 1999 results reflect 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.
Excluding these items, other charges increased $12,637 due to (i) a higher
provision for uncollectible accounts receivable of $6,664 resulting in part
from certain tenant bankruptcies and abandonments, (ii) higher marketing
expenses of $4,263, (iii) increased non-capitalized pre-development costs of
$791, (iv) an increase in all other miscellaneous charges of $596 and (v) an
increase in ground lease expense of $323.
During 2000, management established a formal plan to sell three of its
wholly-owned properties (Prime Outlets at Silverthorne; Prime Northgate Plaza, a
community center; and land previously held for development) and, accordingly,
reclassified their respective carrying values to assets held for sale.
Total revenues and expenses for the operating properties classified as held for
sale were $6,354 and $6,697, respectively, for the year ended December 31, 2000.
Additionally, the Company also determined that certain events and circumstances
had occurred during 2000, including reduced occupancy and limited leasing
success, which indicated that four wholly-owned properties (Prime Outlets at
Odessa, Prime Outlets at Woodbury, Prime Outlets at Post Falls and Prime Outlets
at Latham) and two joint venture properties (Bellport Outlet Center I and
Bellport Outlet Center II) were permanently impaired.
In accordance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of", the Company incurred a provision for
asset impairment of $28,047 to reduce the carrying value of the three properties
classified as held for sale to their estimated sales value, less cost to
dispose. The aggregate carrying value of these properties as of December 31,
2000 was $43,230. Furthermore, the Company's results of operations for 2000
include a provision for asset impairment aggregating $40,616 representing the
write-down of the carrying values of the six permanently impaired properties to
their estimated fair value in accordance with SFAS No. 121
When accounting for 1999, the Company determined that certain events
and circumstances had occurred during 1999, including limited leasing success
and revised occupancy estimates, which indicated one wholly-owned property
(Prime Outlets at Jeffersonville II) and one joint venture property (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 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 1999,
because the Company decided to discontinue the operations of its Designer
Connection outlet stores, 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 consisted of (i) employee termination costs, (ii)
lease obligations, and (iii) the write-down of assets to their net realizable
value. The Company ceased operations of its Designer Connection outlet stores
in 2000.
Table 7--Capital Expenditures
The components of capital expenditures for 2000, 1999 and 1998 are
summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
New developments................................................................ $ 17,715 $ 37,553 $ 43,459
Property acquisitions, net (1).................................................. - - 1,013,231
Expansions and renovations...................................................... 26,068 49,934 99,585
Re-leasing tenant allowances.................................................... 8,050 2,482 2,130
-------- ---------- ----------
Total.............................................................. $ 51,833 $ 89,969 $1,158,405
======== ========== ==========
====================================================================================================================================
Note:
(1) Includes the assets acquired by the Company during 1998 in connection with
its merger with Horizon, net of the spin-off of HGP.
Table 8--Consolidated Quarterly Summary of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues (1) $ 70,517 $ 71,408 $ 68,584 $ 72,841 $ 75,137 $ 76,902 $ 75,574 $ 78,343
Total expenses (2) (3) (4) (5) (6) 135,056 75,759 84,343 84,528 111,496 70,450 67,897 69,045
--------- -------- -------- -------- -------- -------- -------- --------
Income before loss on sale of real
estate, minority interests and
extraordinary loss (64,539) (4,351) (15,759) (11,687) (36,359) 6,452 7,677 9,298
Loss on sale of real estate (42,648) - - - (15,153) - - -
--------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before minority
interests and extraordinary loss (107,187) (4,351) (15,759) (11,687) (51,512) 6,452 7,677 9,298
Income (loss) allocated to minority
interests 3 767 - (32) (2,770) 78 (534) -
--------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
loss (107,184) (3,584) (15,759) (11,719) (54,282) 6,530 7,143 9,298
Extraordinary loss on early
extinguishment of debt (4,206) - - - (1,412) - (2,106) -
--------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) (111,390) (3,584) (15,759) (11,719) (55,694) 6,530 5,037 9,298
Income (loss) allocated to
preferred shareholders (5,668) (5,668) (5,668) (5,668) (5,668) (6,048) (6,046) 7,800
--------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) applicable
to common shares $(117,058) $(9,252) $(21,427) $(17,387) $(61,362) $ 482 $(1,009) $ 17,098
========= ======== ======== ======== ======== ======== ======== ========
Earnings per Common Share-Basic:
Income (loss) before
extraordinary loss $ (2.59) $ (0.21) $ (0.49) $ (0.40) $ (1.39) $ 0.01 $ 0.03 $ 0.40
Extraordinary loss (0.10) - - - (0.03) - (0.05) -
--------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (2.69) $ (0.21) $ (0.49) $ (0.40) $ (1.42) $ 0.01 $(0.02) $ 0.40
========= ======== ======== ======== ======== ======== ======== ========
Earnings per Common Share-Diluted:
Income (loss) before
extraordinary loss $ (2.59) $ (0.21) $ (0.49) $ (0.40) $ (1.39) $ 0.01 $ 0.03 $ 0.06
Extraordinary loss (0.10) - - - (0.03) - (0.05) -
--------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (2.69) $ (0.21) $ (0.49) $ (0.40) $ (1.42) $ 0.01 $ (0.02) $ 0.06
========= ======== ======== ======== ======== ======== ======== ========
Weighted Average Common Shares
Outstanding:
Basic 43,578 43,578 43,532 43,379 43,357 43,286 43,186 42,951
========= ======== ======== ======== ======== ======== ======== ========
Diluted 43,578 43,578 43,532 43,379 43,357 43,286 43,186 58,376
========= ======== ======== ======== ======== ======== ======== ========
Distributions paid per common share $ - $ - $ - $ - $ 0.295 $ 0.295 $ 0.295 $ 0.295
========= ======== ======== ======== ======== ======== ======== ========
====================================================================================================================================
Notes:
(1) The first quarter of 2000 revenues reflect a non-recurring gain on the sale
of outparcel land of $2,472.
(2) The first quarter of 2000 expenses reflect non-recurring charges and
expenses aggregating $14,714 including (i) a loss of $12,964 associated
with the discontinuance of the Company's eOutlets.com subsidiary and (ii)
severance and other compensation costs totaling $1,750.
(3) The second quarter of 2000 expenses reflect non-recurring charges and
expenses aggregating $11,979 including (i) a provision for asset impairment
of $8,538, (ii) a loss of $1,315 associated with the discontinuance of the
Company's eOutlets.com subsidiary, (iii) professional fees related to
refinancing activities of $1,455 and (iv) severance and other compensation
costs totaling $671.
(4) The third quarter of 2000 expenses reflect non-recurring charges and
expenses aggregating $1,524 including (i) costs of $1,100 related to the
termination of the sale of a joint venture interest in Prime Outlets at
Hagerstown and an expansion to Prime Outlets at Williamsburg, which was not
constructed, and (ii) a loss of $424 related to the discontinuance of the
Company's eOutlets.com subsidiary.
(5) The fourth quarter of 2000 expenses reflect a non-recurring provision for
asset impairment of $60,125. Included is $20,547 related to the Company's
decision to reclassify three properties to assets held for sale and $39,578
related to five properties where significant tenants filed for bankruptcy
in the late 2000 and early 2001 and the Company has limited releasing
opportunities.
(6) The fourth quarter of 1999 expenses reflect non-recurring charges and
expenses aggregating $42,088 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, (iv) $3,659 of costs related to the
discontinuance of the operations of Designer Connection and (v) $3,448 of
start-up and organizational expenses associated with the Company's
eOutlets.com subsidiary.
Comparison of the year ended December 31, 1999 to the year ended
December 31, 1998
Summary
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.
Revenues
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 were 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 Merger Transactions.
As summarized in TABLE 3, merchant sales reported to the Company
increased by $118 million, or 3.7%, to $3,287 million from $3,169 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 Merger Transactions. 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.
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 was primarily due to the Portfolio Expansion and the
Merger Transactions.
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.
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 reflected 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.
Expenses
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 were primarily due to the Portfolio
Expansion and the Merger Transactions. 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 resulted 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 $33,230, or 54.7%, to
$93,934 in 1999 compared to $60,704 in 1998. This increase reflects (i) higher
interest incurred of $32,824, (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 (i) an increase in amortization of debt premiums of
$2,253 and (ii) a decrease in amortization of interest rate protection contracts
of $1,075.
The increase in interest incurred was 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.
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 1999, the Company determined that certain events
and circumstances had occurred during 1999 including, limited leasing success
and revised occupancy estimates, which indicated one wholly-owned property
(Prime Outlets at Jeffersonville II) and one joint venture property (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 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 1999,
because the Company decided to discontinue the operations of its Designer
Designer Connection outlet stores, 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 consisted of (i) employee termination
costs, (ii) lease obligations, and (iii) the write-down of assets to their net
realizable value.
Liquidity and Capital Resources
Sources and Uses of Cash
For the year ended December 31, 2000, net cash provided by operating
activities was $32,450, net cash provided by investing activities was $1,095,
and net cash used in financing activities was $31,982.
The gross cash provided by investing activities during the year ended
December 31, 2000 was $67,089 which consisted of (i) $51,403 of net proceeds
from the sale of four outlet centers in December 2000, (ii) $11,063 of net
proceeds from the February 2000 sale of a 70.0% joint venture partnership
interest in Prime Outlets at Williamsburg and (iii) $4,623 of net proceeds from
the sale of outparcel land. Substantially offsetting theses sources were gross
uses of cash totaling $65,994 comprised of (i) $51,833 of additions to rental
property, (ii) $11,161 of costs related to eOutlets.com and (iii) $3,000 of
capital contributions to joint venture partnerships. The additions to rental
property are primarily attributable to (i) the development and construction of
Prime Outlets of Puerto Rico, which consists of 176,000 square feet of GLA and
opened in July 2000 and (ii) four expansions to existing centers aggregating
approximately 389,000 square feet of GLA which opened during the first half of
2000.
The gross uses of cash for financing activities of $166,479 during 2000
consisted of (i) principal repayments on notes payable of $155,120 and (ii)
deferred financing costs of $11,359. Partially offsetting these items were
proceeds from new borrowings of $134,497.
Although, the Company believes that cash flow from (i) operations,
(ii) lender escrow reserves, (iii) refinancing of certain maturing debt and (iv)
the potential sale of certain properties will be sufficient to sustain its
operating cash needs, satisfy its required debt service obligations and fund its
remaining development costs (associated with 2000 openings) and expected capital
expenditure costs 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.
Dividends and Distributions
In order to qualify as a REIT for federal income tax purposes, the
Company is required to pay distributions to its common and preferred
shareholders of at least 95% (90% for years beginning after December 31, 2000)
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 Code necessary to remain qualified as a REIT, it also
intends to retain such amounts as it considers necessary from time to time for
capital and liquidity needs of the Company.
The Company's current policy is to pay distributions only 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 for 2001, it does
not expect to pay any distributions on its 10.5% Series A Senior Cumulative
Preferred Stock ("Senior Preferred Stock"), 8.5% Series B Cumulative
Participating Convertible Preferred Stock ("Series B Convertible Preferred
Stock"), common stock or common units of limited partnership interest in the
Operating Partnership during 2001.
The Company is currently in arrears on five quarters of preferred stock
distributions due February 15, 2000 through February 15, 2001, respectively. The
holders of the Senior Preferred Stock and Series B Convertible Preferred Stock,
voting together as a single class, will 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 directors would be elected to serve until the earlier of (i) the election
and qualification of such director's successor, or (ii) payment of the
dividend arrearage.
The Company is prohibited from paying dividends or distributions except
to the extent necessary to maintain its REIT status under the terms of its
$90,000 Mezzanine Loan (see Note 6 - "Bonds and Notes Payable" of the Notes
to Consolidated Financial Statements). In addition, the Company may make no
distributions to its common shareholders or its holders of common units of
limited partnership interest in the Operating Partnership unless it is current
with respect to distributions to its preferred shareholders. As of December 31,
2000, unpaid dividends for the period November 16, 1999 through December 31,
2000 on the Senior Preferred Stock and Series B Convertible Preferred Stock
aggregated $6,792 and $18,714, respectively. The annualized dividends on the
Company's 2,300,000 shares of Senior Preferred Stock and 7,828,125 shares of
Series B Convertible Preferred Stock outstanding as of December 31, 2000 are
$6,038 ($2.625 per share) and $16,636 ($2.125 per share), respectively.
Debt Service Obligations
The Company's aggregate indebtedness, excluding unamortized debt
premiums, was $1,016,009 and $1,243,367 at December 31, 2000 and 1999,
respectively. At December 31, 2000, such indebtedness had a weighted average
maturity of 4.03 years and bore interest at a weighted average interest rate of
9.43% per annum. At December 31, 2000, $828,769, or 81.6%, of such indebtedness
bore interest at fixed rates and $187,240, or 18.4%, of such indebtedness bore
interest at variable rates. The Company utilizes derivative financial
instruments to manage its interest rate risk associated with variable rate debt.
See "Interest Rate Risk" for additional information. The Company is obligated
to repay $67,712 and $64,914 of mortgage indebtedness during 2001 and 2002,
respectively.
The Company plans to either refinance or extend the maturity of certain
mortgage indebtedness maturing during 2001. In the event the Company is unable
to refinance or extend the maturity of such indebtedness, it will consider the
repayment of the outstanding balance through proceeds from potential sales of
property or may give the property back to the mortgage lender. There can no
assurance that the Company will be successful in obtaining the required amount
of funds for the maturing indebtedness or that the terms of the refinancings or
extensions of maturities, if they should occur, will be a favorable as the
Company has experienced in prior periods. See "Commitments & Contingencies" for
additional information.
Debt Transactions and Debt Compliance
On December 22, 2000, the Company closed a major refinancing of its
assets and the sale of four of its outlet centers through a series of
transactions (collectively, the "December 22, 2000 Transactions"). The
principal lenders involved in the December 22, 2000 Transactions were an
affiliate of Fortress Investment Fund LLC ("Fortress"); Greenwich Capital
Financial Products, Inc. ("Greenwich"); and Mercantile-Safe Deposit and Trust
Company ("Mercantile"). The sale of its outlet centers was to a joint venture
partnership comprised of Fortress and Chelsea GCA Realty, Inc. ("Chelsea")
(see "Sale of Permanent Loan Properties" for additional information). Fortress
and Greenwich (collectively, the "Lending Group") provided a mezzanine loan
in the amount of $90,000 (the "$90,000 Mezzanine Loan"). Greenwich funded
a $20,000 first mortgage loan (the "Puerto Rico First Mortgage Loan") on the
Company's outlet center that recently opened in Puerto Rico and Mercantile
provided a $10,000 second mortgage loan (the "Hagerstown Second Mortgage Loan")
on the Company's outlet center in Hagerstown, Maryland. The Company executed
agreements to extend the maturity date of two of its existing loans, a $112,000
first mortgage loan (the "Bridge Loan") from Nomura Asset Capital Corporation
("Nomura") and a $19,378 first mortgage loan (the "Lebanon First Mortgage Loan")
from KeyBank National Association.
The $90,000 Mezzanine Loan is secured by pledges of equity interests in
certain outlet centers. The loan is for a term of three-years; requires fixed
monthly principal amortization commencing on February 1, 2001 of $1,000 during
the first year, $1,667 during the second year and $2,333 during the third year;
requires the payment of certain exit fees; and is pre-payable at any time after
one year. The $90,000 Mezzanine Loan requires that the Company's excess cash
flow from operations and assets sales above certain thresholds be applied to
principal reductions. The interest rate is a floating rate based on 30-day LIBOR
plus 9.50%, but not less than 14.50%. The loan contains financial and other
covenants that restrict, among other things, the ability of the Company to
incur additional indebtedness or pay dividends (other than dividends to maintain
the Company's status as a REIT). In addition, in connection with the financing
the Company issued warrants (recoreded at fair value at the date of the
transaction) to the Lending Group to purchase one million shares of the
Company's common stock at an exercise price of $1.00 per share.
The Puerto Rico First Mortgage Loan is secured by the Company's outlet
center in Puerto Rico. The Puerto Rico First Mortgage Loan is for a term of
three-years, requires monthly amortization of $15 based upon a 25-year schedule
for the first year and $51 based upon a 15-year schedule thereafter. The Puerto
Rico First Mortgage Loan is non-recourse and is pre-payable at any time subject
to certain prepayment and exit fees. The interest rate is a floating rate based
on 30-day LIBOR plus 3.50%. In addition, the Puerto Rico First Mortgage Loan
provides for a commitment to fund up to an additional $5,000 subject to the
satisfaction of certain conditions, including the achievement of minimum sales,
occupancy and debt service coverage ratio thresholds no later than December 31,
2001.
The Hagerstown Second Mortgage Loan is secured by the Company's outlet
center in Hagerstown, Maryland and has a term of 30- months that is co-terminus
with Mercantile's existing $48,863 first mortgage loan on the same center.
The Second Mortgage Loan requires monthly amortization starting in the seventh
month of $164 per month and is pre-payable at any time without penalty or fee.
The interest rate is a floating rate based on 30-day LIBOR plus 2.50%.
On December 22, 2000, the term of the Bridge Loan, which was due to
mature on June 11, 2001, was extended until December 31, 2003. In consideration
for the extension, the interest rate was converted from 30-day LIBOR plus 1.35%
to a fixed-rate of 13.00%; the monthly interest-only payments were converted to
monthly interest and principal payments (principalm amortization of the greater
of (i) 50% of excess cash flow from properties collateralizing the Bridge Loan
or (ii) $50); and a loan extension fee of $1,120 was paid. The loan may be
prepaid at any time. In connection with the modification of the terms of
the Bridge Loan, the Company incurred an extraordinary loss of $1,345
during 2000. The extraordinary loss consisted of (i) the $1,120 extension
fee and (ii) the write-off of unamortized deferred financing costs and expenses
aggregating $225.
On December 22, 2000, the term of the Lebanon First Mortgage Loan,
secured by the Company's outlet center in Lebanon, Tennessee, which was due to
mature on December 31, 2000, was extended for a period of six months until June
30, 2001, with an additional three-month extension available if certain
conditions are met. In consideration for the extension, the interest rate was
increased by 1.25% to 30-day LIBOR plus 3.00% and the loan balance was reduced
to $18,378 through a $1,000 principal payment. The loan may be prepaid at any
time. The net proceeds from the December 22, 2000 Transactions were used to
(i) pay off $125,000 of short-term indebtedness as described below; (ii)
pay-down $3,500 of other indebtedness (the $1,000 principal reduction on the
Lebanon First Mortgage Loan and a $2,500 principal reduction on a first mortgage
loan on Phases II and III of the outlet center located in Bellport, New York),
and (iii) pay the $1,120 extension fee on the Bridge Loan. The remainder of
the proceeds have been and will be used (i) for general corporate purposes,
including the funding of certain programs to attract and retain tenants through
increased marketing and capital improvements and (ii) to fund remaining
development costs for Prime Outlets of Puerto Rico (see "Development Activities"
for additional information).
The Company used $125,000 of the net proceeds from the December 22, 2000
Transactions for the repayment of (i) a $20,000 subordinated loan (the
"Subordinated Loan") made by FBR Asset Investment Corporation that matured
August 14, 2000, (ii) a $25,000 unsecured corporate line of credit from
Mercantile which was due to mature on December 31, 2000, (iii) a $37,000
unsecured revolving loan (the "Unsecured Revolving Loan") from Nomura which was
scheduled to mature on September 11, 2001 and (iv) the prepayment of a $43,000
term loan (the "Term Loan") from Greenwich which was scheduled to mature on
December 10, 2001. In connection with the prepayment of the Unsecured Revolving
Loan and the Term Loan, the Company incurred an extraordinary loss on the early
extinguishment of debt aggregating $2,861 during 2000. The extraordinary loss
consisted of (i) a $1,700 prepayment penalty and (ii) the write-off of
unamortized deferred financing costs and expenses aggregating $1,161.
The Company had been in default of the Subordinated Loan and such
default had triggered certain cross-default provisions with respect to other
Company debt facilities. In addition, the Company previously was not in
compliance with financial covenants contained in certain of its debt facilities.
As a result of the debt repayments and the various restructuring and extension
agreements completed on December 22, 2000, the Company had cured or eliminated
all financial covenant defaults under its recourse loan agreements. However,
there can be no assurance that the Company will be in compliance with its
financial debt covenants in future periods since the Company's future financial
performance is subject to various risks and uncertainties, including but not
limited to, the effects of increases in market interest rates from current
levels, the risk of potential increases in vacancy rates and the resulting
impact on the Company's revenue, and risks associated with refinancing the
Company's current debt obligations or obtaining new financing under terms as
favorable as the Company has experienced in prior periods.
2001 Sales Transactions
On February 2, 2001, the Company completed the sale of Northgate Plaza,
a community center located in Lombard, Illinois to Arbor Northgate, Inc. for
aggregate consideration of $7,050. The net cash proceeds from the sale were
$510, after the repayment of mortgage indebtedness of $5,966 and closing costs
and fees. The net proceeds from the sale were applied against the $90,000
Mezzanine Loan in accordance with the terms of the loan agreement (see "Debt
Transactions and Debt Compliance" for additional information).
On March 16, 2001, the Company completed the sale of Prime Outlets at
Silverthorne, an outlet center comprising 257,000 square feet of GLA located
in Silverthorne, Colorado to Silverthorne Factory Stores, LLC for aggregate
consideration of $29,000. The net cash proceeds from the sale were $8,992,
after the repayment of mortgage indebtedness of $18,154 related to the
collateral substitution (see below) and closing costs and fees. The net
proceeds from the sale were applied against the $90,000 Mezzanine Loan in
accordance with the terms of the loan agreement (see "Debt Transactions and Debt
Compliance" for additional information).
Prime Outlets at Silverthorne was one of fifteen properties that
cross-collateralized The First Mortgage and Expansion Loan, (see Note 6 "Bonds
and Notes Payable" of the Notes to the Consolidated Financial Statements for
additional information), which contains collateral substitution provisions that
permit the exchange of specific assets pledged as collateral upon approval by
the lender. In conjunction with the sale of Prime Outlets at Silverthorne,
the Company substituted Prime Outlets at Lebanon (located in Lebanon, Tennessee)
and subsequently paid-off the Lebanon First Mortgage Loan.
Commitments & Contingencies
Subsidiaries of the Company have suspended regularly scheduled monthly
debt service payments on two non-recourse mortgage loans aggregating $34,890
which are cross-collateralized by Prime Outlets at Jeffersonville II, located
in Jeffersonville, Ohio, and Prime Outlets at Conroe, located in Conroe, Texas
The Company is currently discussing potential restructuring with the holder
of the mortgage loans; however, there can be no assurance that such discussions
will lead to a modification of the mortgage loans and that the two properties
will not be foreclosed. Because the two mortgage loans are non-recourse, the
Company does not believe the existing defaults or any related foreclosure will
have a material impact on its results of operations and financial position.
Various mortgage loans, related to projects in which the Company,
through subsidiaries, indirectly owns joint venture interests, have matured and
are in default. The mortgage loans are (i) a $10,389 first mortgage loan on
Phase I of the outlet center in Bellport, New York, held by Union Labor Life
Insurance Company ("Union Labor"); (ii) mortgage loans aggregating $29,670 on
Prime Outlets at New River located in New River, Arizona, held by Fru-Con
Development Corporation ("Fru-Con"); and (iii) a $13,639 first mortgage loan on
the outlet center in Oxnard, California, also held by Fru-Con. Fru-Con and the
Company are each 50.0% partners in both the New River and Oxnard outlet centers.
Union Labor has filed for foreclosure on Phase I of the Bellport outlet
center and Fru-Con has filed for foreclosure on Prime Outlets at New River The
Company is currently negotiating the terms of a transfer of its ownership
interest in the Oxnard outlet center to Fru-Con. The Company believes none of
these mortgage loans are recourse to the Company. Therefore the Company does not
believe the existing defaults under these loans or any related foreclosures on
the mortgaged properties will have a material impact on its results of
operations or financial position.
The Company, through affiliates, holds a 51% interest in the owner of
Phases II and III of an outlet center in Bellport, NY. The owner failed to make
a required $3,000 principal payment on a $10,795 first mortgage loan when due
on November 1, 2000. The Company paid, on behalf of the owner, the required
payment through a series of payments during November and December 2000,
including a $2,500 payment made from the net proceeds from the December 22,
2000 Transactions. The maturity date of the first mortgage loan of $7,795 was
extended to May 1, 2001. The Company plans to either refinance or extend the
maturity of this mortgage indebtedness. In the event the Company is unable to
refinance or extend the maturity of such indebtedness, it will consider the
repayment of the outstanding balance through proceeds from potention sale of the
property. There can be no assurance that the Company will be successful in
obtaining the required amount of funds for the maturity indebtedness or that the
terms of the refinancing or extension of the maturing, if it should occur, will
be as favorable as the Company has experienced in prior periods. Although this
loan is recourse, the Company believes that any default or foreclosure under
this loan will not have a material impact on its results of operations or
financial position.
As of December 31, 2000, 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. As of December 31, 2000, no claims had been
made againt the Company's guaranty by the lender.
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. 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. On August 15, 2000, the Company
exercised its option under the operating agreement of the joint venture and
transferred its entire interest in the joint venture to a Castle & Cooke
subsidiary.
Sale of Permanent Loan Properties
In connection with the December 22, 2000 Transactions, the Company sold
four of its outlet centers aggregating 1,592,000 square feet of GLA to a joint
venture partnership comprised of Fortress Investment Group L.L. C. and
Chelsea Property Group, Inc. for aggregate consideration of $239,500, including
the assumption of first mortgage debt of $174,235. The four outlet centers
(collectively, the "Permanent Loan Properties") that were sold are located
in Gilroy, California, Michigan City, Indiana, Waterloo, New York and Kittery,
Maine. In connection with the sale of the Permanent Loan Properties, the
Company incurred a loss on sale of real estate of $42,648 in the fourth quarter
of 2000. The net proceeds from the sale, after closing costs and fees and the
required purchase by the Company of land in the amount of $7,325 related to the
outlet center in Gilroy, California, was $51,403. The net proceeds were used
for the prepayment of certain long-term debt. The operating results of the
Permanent Loan Properties are included in the Company's results of operations
through the date of disposition.
Prime/Estein Joint Venture Transaction
On August 6, 1999, the Company entered into an agreement (the
"Prime/Estein Joint Venture Agreement") to sell three factory outlet centers,
including two future expansions, to a joint venture (the "Venture") between an
affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment
company, and the Company. The Prime/Estein Joint Venture Agreement provided for
a total purchase price of $274,000, including (i) the assumption of
approximately $151,500 of first mortgage indebtedness, (ii) an $8,000 payment to
the Company for a ten-year covenant-not-to-compete (the
"Covenant-not-to-Compete") and (iii) a $6,000 payment to the Company for a
ten-year licensing agreement (the "Licensing Agreement") with the Venture to
continue the use of the "Prime Outlets" brand name. The Covenant-not-to-Compete
and the Licensing Agreement are collectively referred to as the "Deferred
Income".
On November 19, 1999, the Company completed the initial installment of
the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets
at Birch Run to the Venture for aggregate consideration of $117,000, including a
$64,500 "wrap-around" first mortgage provided by the Company. In connection with
the sale of Prime Outlets at Birch Run, the Company received cash proceeds of
$33,303, net of transaction costs, and recorded a loss on the sale of real
estate of $9,326. Effective November 19, 1999, the Company commenced accounting
for its 30.0% ownership interest in Prime Outlets at Birch Run in accordance
with the equity method of accounting. The "wrap-around" first mortgage provided
by the Company to the Venture has a ten-year term at a fixed interest rate of
7.75% requiring monthly payments of principal and interest pursuant to a 25-year
amortization schedule. The Company's net investment in the "wrap-around" first
mortgage as of December 31, 2000 and 1999 was $10,731 and $10,745, respectively,
which is included in other assets in the Consolidated Balance Sheet.
Additionally, the Venture assumed $53,755 of outstanding mortgage indebtedness.
Included in the aggregate consideration was $8,500 of Deferred Income. The
Deferred Income was initially included in accounts payable and other liabilities
in the Consolidated Balance Sheet and was being amortized into other income over
its ten-year life. Effective on the date of disposition, the Company accounts
for its ownership interest in Prime Outlets at Birch Run in accordance with the
equity method of accounting.
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 and
(ii) $2,750 of Deferred Income. 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). The promissory note requires
the monthly payment of interest in arrears at an annual rate of 7.75% and the
outstanding principal amount was payable on or before December 15, 2000, subject
to satisfaction of certain conditions. As a result of the Company's inability to
refinance or convert the Venture's mortgage indebtedness of $32,500 to a
permanent loan at a fixed rate of interest, the December 15, 2000 maturity date
of the promissory note was extended until such time as such refinancing is
obtained. In addition, since the refinancing or conversion did not occur on or
before December 15, 2000, the Company is obligated to pay Estein $250 and the
Company is not entitled to receive operating distributions arising out of Prime
Outlets at Williamsburg until such refinancing or conversion occurs. Effective
on the date of disposition, the Company accounts for its ownership interest in
Prime Outlets at Williamsburg in accordance with the equity the equity method of
accounting.
Under the Prime/Estein Joint Venture Agreement, as amended, the outside
closing date for the sale of Prime Outlets at Hagerstown, including an expansion
which opened during 2000 (together, the "Hagerstown Center"), was August 31,
2000. Estein terminated the Prime/Estein Joint Venture Agreement as it applied
to the sale of the Hagerstown Center when the closing did not occur by the
specified closing date.
In connection with the discontinuance of the sales of a 70% joint
venture interest in (i) the Hagerstown Center and (ii) a proposed expansion to
Prime Outlets at Williamsburg (the "Williamsburg Expansion"), the Company
reduced the carrying value of the Deferred Income by $9,550 and incurred other
charges aggregating $1,100 during the third quarter of 2000. The reduction in
the Deferred Income is attributable to the remaining proceeds that will not be
received as a result of the termination of the Prime/Estein Joint Venture
Agreement. The $1,100 of other charges include (i) a $600 fee payable to Estein
resulting from inability to close the sale of the Hagerstown Center on or before
August 31, 2000 in accordance wit h the terms of the Prime/Estein Joint Venture
Agreement and (ii) a $500 fee payable to Estein for non-completion of the
Williamsburg Expansion by December 15, 2000.
During 2000, the Company reclassified $61,908 representing the aggregate
carrying value of the Hagerstown Center from assets held for sale to investment
in rental property in the Consolidated Balance Sheet. In connection with the
reclassification, the Company recorded $1,967 of depreciation and amortization
expense related to the Hagerstown Center comprising the period from January 1
through September 30, 2000, the date of reclassification. As of December 31,
1999, the Company classified $97,639 representing the aggregate carrying value
of Prime Outlets at Williamsburg and Prime Outlets at Hagerstown as assets held
for sale in its Consolidated Balance Sheet.
The Venture has agreed to retain the Company as its sole and exclusive
managing and leasing agent for a property management fee equal to 4.0% of gross
rental receipts. The Venture also will pay a monthly asset management and
partnership administration fee to an affiliate of Estein equal to 3.0% of the
monthly net operating income from the centers.
Development Activity
Prime Outlets of Puerto Rico, the first outlet center in Puerto Rico,
which contains 176,000 square feet of GLA, opened on July 27, 2000.
Additionally, the Company opened two expansions aggregating 166,000 square feet
of GLA at Prime Outlets at Hagerstown in March and April 2000. Furthermore, the
Company opened two expansions aggregating 48,000 square feet at Prime Outlets at
San Marcos in May of 2000. At December 31, 2000, the remaining expected capital
expenditures for these projects aggregated $6,133. As of December 31, 2000, the
Company had $5,142 of lender escrow reserves to fund development costs for Prime
Outlets of Puerto Rico and $199 of remaining availability under a construction
loan for Prime Outlets at Hagerstown. The Company expects to fund the remaining
development costs related to Prime Outlets at Hagerstown of $217 and Prime
Outlets at San Marcos of $575 from retained cash flow from operations.
eOutlets.com
On April 12, 2000, the Company announced that it had been unable to
conclude an agreement to transfer ownership of its wholly-owned e-commerce
subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a
management-led investor group comprised of eOutlets.com management and outside
investors. Effective April 12, 2000, eOutlets.com ceased all operations and on
November 6, 2000 filed for bankruptcy under Chapter 7. In connection with the
discontinuance of eOutlets.com, the Company incurred a non-recurring loss of
$14,703 which includes (i) the write-off of $3,497 of costs capitalized during
1999 and (ii) $11,206 of costs incurred during the year ended December 31, 2000.
During the year ended December 31, 1999, the Company incurred expenses of $3,500
related to organizational and other start-up expenditures for eOutlets.com which
are reflected in corporate general and administrative expense in the
Consolidated Statements of Operations.
Interest Rate Risk
In the ordinary course of business, the Company is exposed to the impact
of interest rate changes and, therefore, 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) lower its
overall borrowing costs.
The Company also uses derivative financial instruments to manage
interest rate risk associated with certain of its debt. Generally, the Company
purchases interest rate protection agreements, such as caps, which are
designated as hedges for underlying variable rate debt obligations. The Company
does not hold derivative financial instruments for trading purposes.
The interest rate caps specifically limit the Company's interest costs
with an upper limit on the underlying interest rate index. The cost of such
contracts are included in deferred charges and are being amortized as a
component of interest expense over the life of the contracts. Amounts earned
from interest rate protection contracts, if any, are recorded as a reduction of
interest expense. The Company is exposed to credit losses in the event of
counterparty nonperformance, but does not anticipate any such losses based on
the creditworthiness of the counterparties.
On December 22, 2000, the Company purchased an interest rate cap with a
notional amount of $90,000 to hedge its $90,000 Mezzanine Loan that was funded
on the same date. The interest rate cap has a three-year term with a strike
price of 8.00% based on 30-day LIBOR. The notional amount of this interest rate
cap amortizes monthly based on estimated principal repayments on the $90,000
Mezzanine Loan. Additionally, on December 22, 2000, the Company also purchased
an interest rate cap with a notional amount of $20,000 to hedge its $20,000
Puerto Rico First Mortgage Loan that was funded on the same date. The interest
rate cap has a three-year term with a strike price of 8.00% based on 30-day
LIBOR. In addition, the Company held an additional undesignated interest rate
protection cap with a notional amount of $44,000 with a strike price of 7.00%,
based on 30-day LIBOR, which matures in November 2001. The notional amount of
this interest rate cap amortizes $1,000 monthly. See Note 2 -- "Summary of
Significant Accounting Policies" and Note 6 -- "Bonds and Notes Payable" of the
Notes to Consolidated Financial Statements for additional information.
Although derivative financial instruments are an important component of
the Company's interest rate management program, their incremental effect on
interest expense for the years ended December 31, 2000, 1999 and 1998 was not
material.
Economic Conditions
Most of the merchants' leases contain provisions that somewhat mitigate
the impact of inflation. Such provisions include clauses providing for increases
in base rent and clauses enabling the Company to receive percentage rentals
based on merchants' gross sales. Most of the leases require merchants to pay
their proportionate share of all operating expenses, including common area
maintenance, real estate taxes and promotion, thereby reducing the Company's
exposure to increased costs and operating expenses resulting from inflation.
New Accounting Pronouncements
The Company from time to time enters into interest rate protection
agreements to effectively convert floating rate debt to a fixed rate basis
and/or limit the Company's exposure to interest rate fluctuations. Fees and
premiums paid for the Company's interest rate protection agreements are included
in deferred financing costs and are amortized ratably over the term of the
respective interest rate protection agreement. Settlement amounts paid or
received in connection with terminated interest rate protection agreements
are deferred and amortized over the remaining term of the related financing
transaction using the straight-line method. In the event of the early
extinguishments of the related financing, any realized or unrealized gain or
loss on the related interest rate protection agreement is recognized in income
coincident with the extinguishments. The Company believes it has limited
exposure to the extent of non-performance by the counter parties of each
protection agreement since each counter party is a major financial institution
and the Company does not anticipate their non-performance. The fair value of
the interest rate protection agreements is not recognized in the financial
statements as the agreements qualify as hedges of the Company's interest rate
risk. Interest rate protection agreements or specific notional components
thereof that do not qualify as a hedge of the Company's interest rate risk would
be recorded at fair value.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amends SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 was previously amended by SFAS No.
137, "Accounting For Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," which deferred the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 138 and SFAS No. 133 effective January 1, 2001 and
believes such adoption will not have a material impact on its results of
operations or financial position. SFAS No. 133 and SFAS No. 138 will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will
be recognized immediately in earnings.
In December 1999, the Securities and Exchange Commission (the
"Commission") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." SAB 101 summarizes certain of the
Commission's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company's adoption of SAB 101
retroactive to January 1, 2000 did not have a material impact on its results of
operations and financial position.
Taxability of Distributions
The Company did not make any distributions during the year ended
December 31, 2000. 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
-----------------------------------------------------------------------------------------------------------------------------------
Year ended Period from Period from June
December 31, January 1 to 16 to December
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.
Funds from Operations
Industry analysts generally consider Funds from Operations, as defined
by the National Association of Real Estate Investment Trusts ("NAREIT"), an
alternative measure of performance of an equity REIT. In October 1999, NAREIT
issued a new white paper statement and redefined how funds from operations is
calculated, effective January 1, 2000. Funds from Operations is now defined by
NAREIT as net income (loss) determined in accordance with GAAP, excluding gains
or losses from provisions for impairment and sales of depreciable operating
property, plus depreciation and amortization (other than amortization of
deferred financing costs and depreciation of non-real estate assets) and after
adjustment for unconsolidated partnership and joint ventures.
Management believes that FFO is an important and widely-used measure of
the operating performance of REITs which provides a relevant basis for
comparison to other REITs. Therefore, FFO is presented to assist investors in
analyzing the performance of the Company. The Company's FFO is not comparable to
FFO reported by other REITs that do not define the term using the current NAREIT
definition or that interpret the current NAREIT definition differently than does
the Company. Therefore, the Company cautions that the calculation of FFO may
vary from entity to entity and as such the presentation of FFO by the Company
may not be comparable to other similarly titled measures of other reporting
companies. The Company believes that in order to facilitate a clear
understanding of its operating results, FFO should be examined in conjunction
with net income determined in accordance with GAAP. FFO does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions.
TABLE 10 provides a reconciliation of income before allocations to
minority interests and preferred shareholders to FFO for the years ended
December 31, 2000, 1999 and 1998. FFO decreased $26,196, or 31.1% to $57,967 for
the year ended December 31, 2000 from $84,163 for the year ended December 31,
1999.
The 2000 FFO results reflect non-recurring items totaling ($2,504) as
follows:
o a first quarter gain on the sale of outparcel land of $2,472;
o severance and other compensation costs aggregating $2,421 through the first
two quarters;
o second quarter professional fees of $1,455 related to refinancing
activities; and
o third quarter costs aggregating $1,100 incurred in connection with the
termination of the sale of a 70% joint venture interest in Prime Outlets at
Hagerstown and the sale of a 70% joint venture interest in a proposed
expansion to Prime Outlets at Williamsburg which was not constructed.
The 1999 FFO results reflect fourth quarter non-recurring charges and
other expenses totaling ($22,587) as follows:
o a provision for abandoned development projects of $16,039 and
o other charges and other expenses totaling $6,548 comprised of the write-off
of capitalized costs associated with an expired option for the Company to
purchase its joint venture partner's 50% ownership interest in Prime
Outlets at New River and start-up and organizational expenses associated
with the Company's former eOutlets.com subsidiary.
Excluding the impact of these significant non-recurring items, FFO was
$60,471 and $106,750, for the fiscal years ended December 31, 2000 and 1999,
respectively.
The change in FFO for year ended December 31, 2000 compared to the same
period in 1999 are primarily attributable to the following factors:
o the loss of net operating income offset by decreased interest expense due
to the sale of a 70% joint venture interest in Prime Outlets at Birch Run
in November 1999 and Prime Outlets at Williamsburg in February 2000;
o reduced average occupancy in the outlet center portfolio (91.5% for the
2000 compared to 93.4% for 1999);
o higher interest expense resulting from increased short-term indebtedness
and higher financing costs;
o increased corporate general and administrative expenses attributable to
lower capitalization of overhead costs due to reduced development
activities; and
o an increase in the provision for uncollectible accounts receivable
resulting in part from certain tenant bankruptcies, abandonments and store
closings.
Table 10--Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interests and extraordinary loss.................. $(138,984) $ (28,085) $ 19,986
FFO adjustments:
Loss on sale of real estate................................................... 42,648 15,153 15,461
Real estate depreciation and amortization..................................... 65,853 73,053 52,295
Unconsolidated joint venture adjustments...................................... 3,269 1,639 1,211
Discontinued operations - eOutlets.com........................................ 14,703 - -
Discontinued operations - Designer Connection................................. 1,815 6,561 1,067
--------- --------- --------
FFO before adjustment for asset impairment...................................... (10,696) 68,321 90,020
Provision for asset impairment - operating properties......................... 61,222 15,842 -
Provision for asset impairment - land......................................... 7,441 - -
--------- --------- --------
FFO before allocations to minority interests and preferred shareholders......... $ 57,967 $ 84,163 $ 90,020
========= ========= ========
Other Data:
Net cash provided by operating activities....................................... $ 32,450 $ 97,815 $ 59,182
Net cash provided by (used in) investing activities............................ 1,095 (56,666) (145,596)
Net cash provided by (used in) financing activities............................. (31,982) (39,571) 85,806
====================================================================================================================================
The pay-out ratios based on distributions made by the Company divided by
FFO for 1999 and 1998 were 97.4% and 92.9%, respectively.
Table 11--Consolidated Quarterly Summary of Funds from Operations
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interests and
extraordinary loss...................... $(107,187) $(4,351) $(15,759) $(11,687) $(51,512) $ 6,452 $ 7,677 $ 9,298
FFO adjustments:
Loss on sale of real estate............. 42,648 - - - 15,153 - - -
Real estate depreciation and
amortization.......................... 17,222 17,179 15,400 16,052 17,318 19,188 18,435 18,112
Unconsolidated joint venture
adjustments........................... 640 915 1,128 586 737 473 174 255
Discontinued operations - eOutlets.com.. - 424 1,315 12,964 - - - -
Discontinued operations - Designer
Connection............................ 4 (274) 1,006 1,079 5,553 120 543 345
--------- ------- -------- -------- -------- ------- ------- -------
FFO before adjustment for asset
impairment............................. (46,673) 13,893 3,090 18,994 (12,751) 26,233 26,829 28,010
Provision for asset impairment -
operating properties.................. 52,684 - 8,538 - 15,842 - - -
Provision for asset impairment - land... 7,441 - - - - - - -
--------- ------- -------- -------- -------- ------- ------- -------
FFO before allocations to minority
interests and preferred shareholders..... $ 13,452 $13,893 $ 11,628 $ 18,994 $ 3,091 $26,233 $26,829 $28,010
========= ======= ======== ======== ======== ======= ======= =======
Other Data:
Net cash provided by (used in)
operating activities.................... $(15,708) $16,184 $ 22,990 $8,984 $23,992 $ 25,959 $26,589 $21,275
Net cash provided by (used in)
investing activities.................... 38,465 (11,070) (13,265) (13,035) 1,265 (11,079) (27,193) (19,659)
Net cash provided by (used in)
financing activities.................... (19,838) (5,732) (3,896) (2,516) (21,298) (13,102) 1,880 (7,051)
====================================================================================================================================
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. See "Interest Rate
Risk" and "New Accounting Pronouncements" of Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations for additional
information. 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 contractual interest
rates by fiscal year of maturity. Variable interest rates are based on the
weighted average rates of the portfolio at December 31, 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed rate:
Principal........................... $36,167 $41,694 $454,142 $11,264 $50,330 $235,172 $828,769
Average interest rate............... 9.77% 9.19% 9.06% 8.61% 8.05% 7.34% 8.54%
Variable rate:
Principal........................... $31,545 $23,220 $80,321 $52,154 $187,240
Average interest rate............... 11.47% 15.18% 9.87% 8.40% 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 30, 2001.
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, 2000 and 1999 F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 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-27
Notes to Schedule III F-29
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.
[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, 1999 (File No. 0-23616).]
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).]
4.4 Warrant to Purchase Common Stock of the Company dated December 22,
2000 issued to FRIT PRT Lending LLC.
4.5 Warrant to Purchase Common Stock of the Company dated December 22,
2000 issued to Greenwich Capital Financial Products, Inc.
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.
[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, 1999 (File No. 0-23616).]
# 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).]
# 10.5 Separation Agreement dated February 23, 2000 by and between Prime
Retail, Inc. and Abraham Rosenthal. [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, 1999 (File No. 0-23616).]
# 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. [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, 1999 (File No. 0-23616).]
# 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).]
# 10.8 Employment Agreement dated June 11, 2000 between Prime Retail, Inc.
and Robert A. Brvenik. [Incorporated by reference to the same
titled exhibit in the Company's Quarterly Report on Form 10-Q/A for
the quarterly period ended September 30, 2000 (File No. 001-13301).]
# 10.9 Employment Agreement dated May 3, 2000 between Prime Retail, Inc.
and C. Alan Schroeder. [Incorporated by reference to the same
titled exhibit in the Company's Quarterly Report on Form 10-Q/A for
the quarterly period ended September 30, 2000 (File No. 001-13301).]
# 10.10 Employment Agreement dated May 3, 2000 between Prime Retail, Inc. and
Steven S. Gothelf.
# 10.11 Employment Agreement dated May 3, 2000 between Prime Retail, Inc. and
John S. Mastin.
# 10.12 Separation Agreement dated August 24, 2000 by and between Prime
Retail, Inc., Prime Retail, L.P. and William H. Carpenter Jr.
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).]
# 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).]
10.32 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).]
# 10.39 Master Modification Agreement dated as of December 22, 2000 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, Nomura Asset Capital Corporation, Prime Retail, Inc.
and Prime Retail, L.P.
# 10.40 The Agreement for Purchase and Sale, dated December 22, 2000, by and
between Finger Lakes Outlet Center, L.L.C., The Prime Outlets at
Michigan City Limited Partnership, The Prime Outlets at Gilroy
Limited Partnership and Outlet Village of Kittery Limited
Partnership as seller and F/C Waterloo Development LLC, F/C Michigan
City Development LLC, F/C Gilroy Development LLC, F/C Kittery
Development LLC and F/C Michigan Parking LLC as buyer. [Incorporated
by reference to the same titled exhibit in the Company's Amended
Current Report on Form 8-K/A dated December 22, 2000
(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).]
# 10.48 Loan Agreement dated as of December 22, 2000 between FRIT PRT Lending
LLC and Prime Retail, L.P.
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
Note:
# Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c).
(b) Reports on Form 8-K
On January 8, 2001, the Company filed a Report on Form 8-K dated
December 22, 2000 announcing the Company closed on a major refinancing of its
assets and the sale of four outlet centers through a series of transactions.
The filing included (i) unaudited pro forma financial information pursuant
to Article 11 of Regulation S-X; and (ii) the press release issued by the
Company on December 22, 2000 regarding (a) closing of loans totaling $120,000,
(b) completion of the sale of four outlet centers and (c) extension of the terms
of two other loans. On January 25, 2001, the Company filed an Amended Report on
Form 8-K/A dated December 22, 2000 that included the The Agreement for Purchase
and Sale, dated December 22, 2000, by and between Finger Lakes Outlet Center,
L.L.C., The Prime Outlets at Michigan City Limited Partnership, The Prime
Outlets at Gilroy Limited Partnership and Outlet Village of Kittery Limited
Partnership as seller and F /C Waterloo Development LLC, F/C Michigan City
Development LLC, F/C Gilroy Development LLC, F/C Kittery Development LLC and
F/C Michigan Parking LLC as buyer.
(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: March 30, 2001 /s/ Robert A. Brvenik
---------------------
Robert A. Brvenik
Executive Vice President, Chief Financial Officer
and Treaurer
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/Glenn D. Reschke March 30, 2001
--------------------------------------
Glenn D. Reschke
Chairman of the Board
President and Chief Executive Officer
/s/William H. Carpenter, Jr. March 30, 2001
--------------------------------------
William H. Carpenter, Jr.
Director
/s/William P. Dickey March 30, 2001
--------------------------------------
William P. Dickey
Director
/s/Kenneth A. Randall March 30, 2001
--------------------------------------
Kenneth A. Randall
Director
/s/Sharon Sharp March 30, 2001
--------------------------------------
Sharon Sharp
Director
/s/Marvin S. Traub March 30, 2001
--------------------------------------
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, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 21, 2001
PRIME RETAIL, INC.
Consolidated Balance Sheets
(Amounts in thousands, except share information)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in rental property:
Land........................................................................ $ 151,941 $ 181,854
Buildings and improvements.................................................. 1,322,368 1,560,710
Property under development.................................................. 3,573 66,581
Furniture and equipment..................................................... 15,225 17,406
---------- ----------
1,493,107 1,826,551
Accumulated depreciation.................................................... (217,569) (183,954)
---------- ----------
1,275,538 1,642,597
Cash and cash equivalents...................................................... 8,906 7,343
Restricted cash................................................................ 54,920 28,131
Accounts receivable, net....................................................... 13,480 18,926
Deferred charges, net......................................................... 19,533 13,503
Investment in partnerships..................................................... 22,372 18,941
Assets held for sale........................................................... 43,230 97,639
Due from affiliates, net....................................................... 2,432 4,140
Other assets................................................................... 21,610 24,838
---------- ----------
Total assets.......................................................... $1,462,021 $1,856,058
========== ==========
Liabilities and Shareholders' Equity
Bonds payable (see Note 6)..................................................... $ 32,455 $ 32,900
Notes payable (see Note 6)..................................................... 997,698 1,227,770
Accrued interest............................................................... 5,267 8,033
Real estate taxes payable...................................................... 8,555 10,700
Construction costs payable..................................................... 1,850 5,123
Accounts payable and other liabilities......................................... 60,213 73,340
---------- ----------
Total liabilities..................................................... 1,106,038 1,357,866
Minority interests............................................................. 1,495 1,505
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock, $.01 par value
(liquidation preference of $64,292), 2,300,000 shares issued and
outstanding............................................................ 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock,
$.01 par value (liquidation preference of $214,417), 7,828,125
shares issued and outstanding.......................................... 78 78
Shares of common stock, 150,000,000 shares authorized:
Common stock, $.01 par value, 43,577,916 and 43,368,620 shares
issued and outstanding, respectively.................................... 436 434
Additional paid-in capital.................................................. 709,373 709,122
Distributions in excess of net income....................................... (355,422) (212,970)
---------- ----------
Total shareholders' equity............................................ 354,488 496,687
---------- ----------
Total liabilities and shareholders' equity............................ $1,462,021 $1,856,058
========== ==========
===================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Operations
(Amounts in thousands, except per share information)
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents..................................................................... $ 178,830 $ 193,979 $148,376
Percentage rents............................................................... 6,369 8,085 6,384
Tenant reimbursements.......................................................... 83,350 90,063 67,152
Interest and other............................................................. 14,801 13,829 9,897
--------- --------- --------
Total revenues........................................................... 283,350 305,956 231,809
Expenses
Property operating.............................................................` 68,537 70,862 52,684
Real estate taxes.............................................................. 21,776 22,405 16,705
Depreciation and amortization.................................................. 67,556 73,640 52,727
Corporate general and administrative........................................... 20,847 12,687 7,980
Interest....................................................................... 98,234 93,934 60,704
Provision for abandoned projects............................................... - 16,039 -
Provision for asset impairment................................................. 68,663 15,842 -
Loss on eOutlets.com........................................................... 14,703 - -
Loss on Designer Connection.................................................... 1,815 6,561 1,067
Other charges.................................................................. 17,555 6,918 4,495
--------- --------- --------
Total expenses........................................................... 379,686 318,888 196,362
--------- --------- --------
Income (loss) before loss on sale of real estate, minority interests
and extraordinary loss...................................................... (96,336) (12,932) 35,447
Loss on sale of real estate.................................................... (42,648) (15,153) (15,461)
--------- --------- --------
Income (loss) before minority interests and extraordinary loss................. (138,984) (28,085) 19,986
(Income) loss allocated to minority interests.................................. 738 (3,226) (2,456)
--------- --------- ---------
Income (loss) before extraordinary loss........................................ (138,246) (31,311) 17,530
Extraordinary loss on early extinguishment of debt,
net of minority interests in the amount of $887 in 1999..................... (4,206) (3,518) -
--------- --------- --------
Net income (loss).............................................................. (142,452) (34,829) 17,530
Income allocated to preferred shareholders..................................... (22,672) (9,962) (24,604)
--------- --------- --------
Net loss applicable to common shares........................................... $(165,124) $ (44,791) $ (7,074)
========= ========= ========
Earnings per common share - basic:
Loss before extraordinary loss........................................... $ (3.69) $ (0.96) $ (0.20)
Extraordinary loss....................................................... (0.10) (0.08) -
--------- --------- --------
Net loss................................................................. $ (3.79) $ (1.04) $ (0.20)
========= ========= ========
Earnings per common share - diluted:
Loss before extraordinary loss........................................... $ (3.69) $ (1.22) $ (0.20)
Extraordinary loss....................................................... (0.10) (0.08) -
--------- --------- --------
Net loss................................................................. $ (3.79) $ (1.30) $(0.20)
========= ========= ========
Weighted average common shares outstanding:
Basic.................................................................... 43,517 43,196 35,612
========= ========= ========
Diluted.................................................................. 43,517 44,260 35,612
========= ========= ========
===================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss).............................................................. $(142,452) $(34,829) $17,530
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Loss allocated to minority interests..................................... 738 3,226 2,456
Loss on sale of real estate.............................................. 42,648 15,153 15,461
Extraordinary loss, net of minority interests............................ 4,206 3,518 -
Depreciation............................................................. 66,855 72,877 51,638
Amortization of deferred financing costs and interest rate
protection contracts..................................................... 3,256 4,379 2,867
Amortization of debt premiums............................................ (3,159) (4,406) (2,153)
Amortization of leasing commissions...................................... 701 763 1,119
Provision for uncollectible accounts receivable.......................... 7,443 779 1,387
Provision for abandoned projects......................................... - 16,039 -
Loss on eOutlets.com..................................................... 14,703 - -
Loss on Designer Connection.............................................. 1,815 3,659 -
Provision for asset impairment........................................... 68,663 15,842 -
Gain on sale of land..................................................... (2,472) (72) (274)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................................. (4,903) 2,155 (17,605)
(Increase) decrease in restricted cash...................................... (28,151) 7,044 7,538
(Increase) decrease in other assets......................................... 3,285 (669) (11,441)
Increase (decrease) in accounts payable and other liabilities............... 2,796 (7,285) (14,496)
Increase (decrease) in real estate taxes payable............................ (2,145) (513) 2,876
Increase (decrease) in accrued interest..................................... (1,377) 155 2,279
------- ------- -------
Net cash provided by operating activities................................ 32,450 97,815 59,182
------- ------- -------
Investing Activities
Additions to investment in rental property..................................... (51,833) (85,977) (136,052)
Payments for eOutlets.com...................................................... (11,161) (3,992) -
Contribution to joint venture partnership...................................... (3,000) - -
Acquisition of Horizon, net of cash acquired and spin-off of HGP............... - - (35,559)
Proceeds from sale of outlet centers and land.................................. 67,089 33,303 26,015
------- ------- -------
Net cash provided by (used in) investing activities...................... 1,095 (56,666) (145,596)
------- ------- -------
Financing Activities
Redemption of Series C preferred stock......................................... - (45,054) -
Proceeds from notes payable.................................................... 134,497 304,342 467,998
Principal repayments on notes payable.......................................... (155,120) (200,026) (281,653)
Deferred financing fees........................................................ (11,359) (10,321) (3,277)
Distributions and dividends paid............................................... - (75,536) (79,451)
Distributions to minority interests............................................ - (12,976) (17,811)
------- ------- -------
Net cash provided by (used in) financing activities...................... (31,982) (39,571) 85,806
------- ------- -------
Increase (decrease) in cash and cash equivalents............................... 1,563 1,578 (608)
Cash and cash equivalents at beginning of year................................. 7,343 5,765 6,373
------- ------- -------
Cash and cash equivalents at end of year....................................... $ 8,906 $ 7,343 $ 5,765
======= ======= =======
===================================================================================================================================
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:
The following assets and liabilities were sold in connection with the sale of
the Permanent Loan Properties on December 22, 2000:
Book value of assets disposed, net............................... $ 268,286
Cash received.................................................... (51,403)
Loss on sale..................................................... (42,648)
--------
Debt disposed.................................................... $ 174,235
========
The following assets and liabilities were sold in connection with the sale of a
70% joint venture interest in Prime Outlets at Williamsburg on February 23,
2000:
Book value of assets disposed, net............................... $ 53,563
Cash received.................................................... (11,063)
Promissory note received......................................... (10,000)
--------
Debt disposed.................................................... $ 32,500
========
The following assets and liabilities were sold in connection with the sale of a
70% joint venture interest in 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, 1998............................. $ 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
Issuance of 180,000 restricted shares of
common stock.................................... - - - 2 251 - 253
Exchange of 29,296 common units for
common stock.................................... - - - - - - -
Net loss............................................. - - - - - (142,452) (142,452)
----- ----- ----- ----- -------- --------- ----------
Balance, December 31, 2000........................... $ 23 $ 78 $ - $ 436 $709,373 $(355,422) $354,488
===== ===== ==== ===== ======== ========= ========
====================================================================================================================================
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") was organized as a Maryland corporation
on July 16, 1993. 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. The Company's
outlet center portfolio, including five outlet centers owned through joint
venture partnerships, consists of 48 outlet centers in 26 states (including
Puerto Rico), which total 13,497,000 square feet of gross leasable area ("GLA")
at December 31, 2000. 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, 2000, 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 43,577,916 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, 2000 is as follows:
- --------------------------------------------------------------------------------
Number of Units
-------------------------------------------
Holder Series A Series B Common
- --------------------------------------------------------------------------------
Prime Retail, Inc................. 2,300,000 7,828,125 43,577,916
Affiliates of The Prime Group, Inc.,
management and others(1)......... - - 10,810,912
--------- --------- ----------
2,300,000 7,828,125 54,388,828
========= ========= ==========
================================================================================
Note:
(1) Includes 251,300 units beneficially owned directly by an executive officer.
As of December 31, 2000, the Company has an 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.
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.
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 Operating Partnership agreement. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States ("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 of the Operating Partnership 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. 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. The carrying value of cash
and cash equivalents and restricted cash as reported in the Consolidated Balance
Sheets approximates their fair value.
The Company maintains its cash and cash equivalents and restricted cash at
various financial institutions. The combined account balances at each insitution
periodically exceed FDIC insurance coverage, and as result, there is a
concentration of credit risk related to amounts on deposit in excess of FDIC
insurance coverage. The Company believes that the risk is not significant.
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, 2000 and 1999 was $7,383 and $7,008, respectively.
Accounts receivable due after one year representing straight-line rents
were $6,837 and $8,285 at December 31, 2000 and 1999, 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
Consolidated Balance Sheets. 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.
Interest Rate Protection Contracts
The Company uses interest rate protection contracts, including interest
rate caps and corridors, to manage interest rate risk associated with floating
rate debt. These contracts generally involve limiting the Company's interest
costs with an upper limit or specified range on the underlying interest rate
index. The cost of such contracts are included in deferred charges and are being
amortized on a straight-line basis as a component of interest expense over the
life of the contracts. Amounts earned from interest rate protection contracts
are recorded as a reduction of interest expense. The Company is exposed to
credit losses in the event of counterparty nonperformance, but does not
anticipate any such losses based on the creditworthiness of the counterparties.
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, 2000, the
effect of all exercises and conversions was anti-dilutive and, therefore,
dilutive EPS is equivalent to basic EPS. For the year ended December 31, 1999,
(i) 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 (ii) incremental shares of 1,064, related to the assumed
conversion of Series C Preferred Stock, 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 year ended December 31,
1998, 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, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before minority interests and extraordinary loss.................. $(138,984) $ (28,085) $ 19,986
Loss (income) allocated to minority interests................................... 738 (3,226) (2,456)
-------- --------- -------
Net income (loss) before extraordinary loss..................................... (138,246) (31,311) 17,530
Income allocated to preferred shareholders...................................... (22,672) (9,962) (24,604)
-------- --------- -------
Numerator for basic earnings per share -
Loss before extraordinary loss available to common shareholders................ (160,918) (41,273) (7,074)
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................ $(160,918) $ (53,983) $ (7,074)
========= ========= ========
Denominator:
Denominator for basic earnings before extraordinary loss per share -
Weighted average common shares outstanding.................................... 43,517 43,196 35,612
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........................... 43,517 44,260 35,612
======== ========= ========
Basic earnings before extraordinary loss per common share ...................... $ (3.69) $ (0.96) $ (0.20)
======== ========= ========
Diluted earnings before extraordinary loss per common share ..................... $ (3.69) $ (1.22) $ (0.20)
======== ========= ========
====================================================================================================================================
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%
(90% for years beginning after December 31, 2000) 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 $197, $234, and $337 of state and local taxes for the years
ended December 31, 2000, 1999 and 1998, respectively. The Company paid $235,
$68, and $424 of state and local taxes during the years ended December 31, 2000
and 1999, and 1998, respectively.
The Company did not make any distributions during the year ended December
31, 2000. 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, and (iii) the period from June 16 to December
31, 1998:
- ------------------------------------------------------------------------------------------------------------------------------------
Period from Period from
Year ended January 1 to June 16 to
December 31, June 15, December 31,
1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Senior Preferred Stock
Ordinary income ................................................................... $ 2.625 $1.3125 $1.3125
====== ====== ======
Series B Convertible Preferred Stock
Ordinary income ................................................................... $ 2.125 $1.663 $ 0.922
Return of capital.................................................................. - - 0.525
----- ----- -----
$ 2.125 $1.663 $1.447
====== ===== =====
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 $1.090 $0.912
====================================================================================================================================
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 and catalogue retailers.
New Accounting Pronouncements
The Company from time to time enters into interest rate protection
agreements to effectively convert floating rate debt to a fixed rate basis
and/or limit the Company's exposure to interest rate fluctuations. Fees and
premiums paid for the Company's interest rate protection agreements are included
in deferred financing costs and are amortized ratably over the term of the
respective interest rate protection agreement. Settlement amounts paid or
received in connection with terminated interest rate protection agreements are
deferred and amortized over the remaining term of the related financing
transaction using the straight-line method. In the event of the early
extinguishments of the related financing, any realized or unrealized gain or
loss on the related interest rate protection agreement is recognized in income
coincident with the extinguishments. The Company believes it has limited
exposure to the extent of non-performance by the counter parties of each
protection agreement since each counter party is a major financial institution
and the Company does not anticipate their non-performance. The fair value of the
interest rate protection agreements is not recognized in the financial
statements as the agreements qualify as hedges of the Company's interest rate
risk. Interest rate protection agreements or specific notional components
thereof that do not qualify as a hedge of the Company's interest rate risk would
be recorded at fair value.
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amends SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 was previously amended by SFAS No. 137,
"Accounting For Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 138 and SFAS No. 133 effective January 1, 2001 and believes such
adoption will not have a material impact on its results of operations or
financial position. SFAS No. 133 and SFAS No. 138 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be recognized
immediately in earnings.
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the Commission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's adoption of SAB 101 retroactive to January
1, 2000 did not have a material impact on its results of operations or
financial position.
Note 3 --Acquisitions and Dispositions
Sale of Permanent Loan Properties
On December 22, 2000, the Company completed the sale of four outlet
centers aggregating 1,592,000 square feet of GLA to a joint venture partnership
comprised of Fortress Investment Fund LLC ("Fortress") and Chelsea GCA Realty,
Inc., ("Chelsea") for aggregate consideration of $239,500, including the
assumption of first mortgage debt of $174,235. The four outlet centers
(collectively, the "Permanent Loan Properties"), that were sold, are located in
Gilroy, California, Michigan City, Indiana, Waterloo, New York and Kittery,
Maine. In connection with the sale of the Permanent Loan Properties, the Company
incurred a loss on sale of real estate of $42,648 in the fourth quarter of 2000.
The net proceeds from the sale, after closing costs and fees and the required
purchase of land in the amount of $7,325 related to the outlet center in
Gilroy, California, was $51,403. Net proceeds from the sale were used for the
prepayment of certain long-term debt. The operating results of the Permanent
Loan Properties are included in the Company's results of operations through the
date of disposition.
Prime/Estein Joint Venture Transaction
On August 6, 1999, the Company entered into an agreement (the
"Prime/Estein Joint Venture Agreement") to sell three factory outlet centers,
including two future expansions, to a joint venture (the "Venture") between an
affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment
company, and the Company. The Prime/Estein Joint Venture Agreement provided for
a total purchase price of $274,000, including (i) the assumption of
approximately $151,500 of first mortgage indebtedness, (ii) an $8,000 payment to
the Company for a ten-year covenant-not-to-compete (the
"Covenant-not-to-Compete") and (iii) a $6,000 payment to the Company for a
ten-year licensing agreement (the "Licensing Agreement") with the Venture to
continue the use of the "Prime Outlets" brand name. The Covenant-not-to-Compete
and the Licensing Agreement are collectively referred to as the "Deferred
Income".
On November 19, 1999, the Company completed the initial installment of
the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets
at Birch Run to the Venture for aggregate consideration of $117,000, including a
$64,500 "wrap-around" first mortgage provided by the Company. In connection with
the sale of Prime Outlets at Birch Run, the Company received cash proceeds of
$33,303, net of transaction costs, and recorded a loss on the sale of real
estate of $9,326. Effective November 19, 1999, the Company commenced accounting
for its 30.0% ownership interest in Prime Outlets at Birch Run in accordance
with the equity method of accounting. The "wrap-around" first mortgage provided
by the Company to the Venture has a ten-year term at a fixed interest rate of
7.75% requiring monthly payments of principal and interest pursuant to a 25-year
amortization schedule. The Company's net investment in the "wrap-around" first
mortgage as of December 31, 2000 and 1999 was $10,731 and $10,745, respectively,
which is included in other assets in the Consolidated Balance Sheet.
Additionally, the Venture assumed $53,755 of outstanding mortgage indebtedness.
Included in the aggregate consideration was $8,500 of Deferred Income. The
Deferred Income was initially included in accounts payable and other liabilities
in the Consolidated Balance Sheet and was being amortized into other income over
its ten-year life. Effective on the date of disposition, the Company accounts
for its ownership interest in Prime Outlets at Birch Run in accordance with the
equity method of accounting.
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 and
(ii) $2,750 of Deferred Income. 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). The promissory note requires
the monthly payment of interest in arrears at an annual rate of 7.75% and the
outstanding principal amount was payable on or before December 15, 2000, subject
to satisfaction of certain conditions. As a result of the Company's inability to
refinance or convert the Venture's mortgage indebtedness of $32,500 to a
permanent loan at a fixed rate of interest, the December 15, 2000 maturity date
of the promissory note was extended until such time as such refinancing is
obtained. In addition, since the refinancing or conversion did not occur on or
before December 15, 2000, the Company is obligated to pay Estein $250 and the
Company is not entitled to receive operating distributions arising out of Prime
Outlets at Williamsburg until such refinancing or conversion occurs. Effective
on the date of disposition, the Company accounts for its ownership interest in
Prime Outlets at Williamsburg in accordance with the equity method of
accounting.
Under the Prime/Estein Joint Venture Agreement, as amended, the outside
closing date for the sale of Prime Outlets at Hagerstown, including an expansion
which opened during 2000 (together, the "Hagerstown Center"), was August 31,
2000. Estein terminated the Prime/Estein Joint Venture Agreement as it applied
to the sale of the Hagerstown Center when the closing did not occur by the
specified closing date.
In connection with the discontinuance of the sales of a 70% joint
venture interest in (i) the Hagerstown Center and (ii) a proposed expansion to
Prime Outlets at Williamsburg (the "Williamsburg Expansion"), the Company
reduced the carrying value of the Deferred Income by $9,550 and incurred other
charges aggregating $1,100 during the third quarter of 2000. The reduction in
the Deferred Income is attributable to the remaining proceeds that will not be
received as a result of the termination of the Prime/Estein Joint Venture
Agreement. The $1,100 of other charges include (i) a $600 fee payable to Estein
resulting from inability to close the sale of the Hagerstown Center on or before
August 31, 2000 in accordance with the terms of the Prime/Estein Joint Venture
Agreement and (ii) a $500 fee payable to Estein for non-completion of the
Williamsburg Expansion by December 15, 2000.
During 2000, the Company reclassified $61,908 representing the aggregate
carrying value of the Hagerstown Center from assets held for sale to investment
in rental property in the Consolidated Balance Sheet. In connection with the
reclassification, the Company recorded $1,967 of depreciation and amortization
expense related to the Hagerstown Center comprising the period from January 1
through September 30, 2000, the date of the reclassification.
As of December 31, 1999, the Company classified $97,639 representing the
aggregate carrying value of Prime Outlets at Williamsburg and Prime Outlets at
Hagerstown as assets held for sale in its Consolidated Balance Sheet.
Merger Transactions
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, 1999:
- --------------------------------------------------------------------------------
Years ended December 31, 2000 1999
- --------------------------------------------------------------------------------
Total revenues....................................... $ 240,991 $244,693
========= ========
Net loss from continuing operations.................. $ (96,091) $(20,205)
========= ========
Net loss applicable to common shares................. $(118,763) $(30,167)
========= ========
Loss per common share:
Basic.............................................. $ (2.73) $ (0.70)
========= ========
Diluted............................................ $ (2.73) $ (0.68)
========= ========
Weighted average common shares outstanding:
Basic.............................................. 43,517 43,196
========= ========
Diluted............................................ 43,517 44,260
========= ========
================================================================================
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the above transactions been in effect on
January 1, 1999 or of future results of operations of the Company.
Note 4 -- Restricted Cash
As of December 31, 2000 and 1999, $54,920 and $28,131 of cash was placed
in various escrows and, therefore, classified as restricted cash in the
Consolidated Balance Sheet. Restricted cash generally consists of lender escrows
for the payment of debt service, real estate taxes, insurance, capital
expenditures and certain operating expenses.
Restricted cash also includes amounts relating to future development
costs. At December 31, 2000, $5,142 was held in escrow for the completion of
Prime Outlets of Puerto Rico. At December 31, 1999, $1,326 was held in escrow
for 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, 2000 1999
------------------------------------------------------------------------------
Leasing commissions.............................. $10,046 $ 11,307
Financing costs.................................. 28,062 21,466
------ ------
38,108 32,773
Accumulated amortization......................... (18,575) (19,270)
------ ------
$19,533 $13,503
====== ======
==============================================================================
Note 6 -- Bonds and Notes Payable
Bonds payable consisted of the following:
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Fixed rate tax-exempt revenue bonds (the "Fixed Rate 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.............. $27,805 $28,250
Urban Development 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
------- -------
$32,455 $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.
The Fixed Rate Bonds contain certain financial covenants, including minimum
debt service coverage ratios and cross-default provisions with respect to
certain of the Company's other credit agreements. In the event of non-compliance
or default, the holders of the Fixed Rate Bonds may elect to put such
obligations to the Company at a price equal to par plus accrued interest.
Certain of the Fixed Rate Bonds require mandatory sinking fund payments as
follows:
-------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------------
2001............................................................ $ 480
2002............................................................ 505
2003............................................................ 540
2004............................................................ 575
2005............................................................ 615
Thereafter...................................................... 18,090
-------
$20,805
=======
===============================================================================
During 2000, $445 of the Fixed Rate Bonds were redeemed from the sinking fund.
Notes payable consists of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
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
located throughout the United States....................................... $ 346,392 $ 349,797
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
Bridge Loan, LIBOR plus 1.35% with monthly interest-only payments at December
31, 1999, 13% with monthly interest payments plus principal payments of the
greater of $50 or 50% of excess cash flow at December 31, 2000, due December
31, 2003, collateralized by six properties located throughout
the United States............................................................. 112,000 112,000
Mortgage, 6.927%, monthly installments of $565 including interest, due
October 11, 2006, collateralized by four properties located throughout the
United States................................................................. 74,481 75,893
Mortgage, 6.927%, monthly installments of $527 including interest, due
March 11, 2006, collateralized by four properties located throughout the
United States................................................................. 65,293 66,935
Mortgage, 7.60% monthly installments of $450 including interest, due
May 10, 2009, collateralized by property located in Niagara Falls, NY......... 62,120 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.................................................................. 43,859 44,917
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
Construction Mortgage Loan, LIBOR plus 1.50%, 8.30% at December 31, 2000,
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..................................................... 48,863 38,560
Mortgage, 6.915%, monthly installments of $357 including interest, due June 10,
2002, collateralized by property located in Conroe, TX and
Jeffersonville, OH............................................................ 34,890 36,696
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................................................................. 25,740 26,113
Unsecured Corporate Line, $25,000 at December 31, 1999, LIBOR plus 2.50%,
7.88% at December 31, 1999, monthly interest-only payments, due
December 31, 2000............................................................. - 22,175
Subordinated Loan, 15.00%, monthly interest-only payments, due August 14, 2000,
collateralized by a security interest and available cash flows of five
properties located throughout the United States............................... - 20,000
Lebanon First Mortgage Loan, LIBOR plus 3.00%, 8.56% at December 31, 2000,
monthly interest plus $100 principal payments, due June 30, 2001,
collateralized by property located in Lebanon, TN............................. 18,378 19,951
Mortgage, 6.91%, monthly installments of $154 including interest, due June 10,
2001, collateralized by property located in Edinburgh, IN..................... 16,681 17,347
Mortgage, 6.95%, monthly installments of $81 including interest, due November 1,
2005, collateralized by property located in Perryville, MD.................... 9,893 10,157
Note Payable, 13.50%, monthly interest-only payments, due November 1, 2001,
collateralized by land located in Camarillo, CA............................... 6,527 7,400
Mortgage, 9.375%, monthly installments of $71 including interest, due March 1,
2004, collateralized by property located in Lombard, IL....................... 5,990 6,239
Mortgage, 7.50%, monthly installments of $29 including interest, due
October 31, 2001, collateralized by property in Knoxville, TN................ 3,521 3,590
Other notes payable............................................................. 3,070 3,073
Hagerstown Second Mortgage Loan, LIBOR plus 2.50%, 9.30% at December 31, 2000,
monthly interest-only payments through June 30, 2001; monthly principal of
$164 and interest payments thereafter, due June 1, 2004, collateralized by
property located in Hagerstown, MD............................................ 10,000 -
Puerto Rico First Mortgage Loan, LIBOR plus 3.50%, 10.16% at December 31, 2000,
monthly interest payments plus (i) principal installments based on a 25 year
amortization schedule using an interest rate of 9% until January 1, 2002 and
(ii) principal installments based on a 15 year amortization schedule using an
interest rate of 9% thereafter, due December 31, 2003, collateralized by
property located in Barceloneta, Puerto Rico.................................. 20,000 -
$90,000 Mezzanine Loan, LIBOR plus 9.50% (minimum of 14.50%), 16.13% at December
31, 2000, monthly principal and interest due December 31, 2003, collateralized
by pledges of equity interests in certain properties. ........................ 90,000 -
--------- -----------
$ 997,698 $1,227,770
========= ===========
===================================================================================================================================
Notes payable include unamortized debt premiums of $14,144 in the
aggregate at December 31, 2000. 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 $3,159 and $4,406 for the years ended December 31, 2000 and 1999,
respectively. The aggregate carrying amount of bonds and notes payable at
December 31, 2000 approximated their fair value. At December 31, 2000, the
aggregate carrying amount of rental property collateralizing bonds and notes
payable was $1,316,490.
Interest costs are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest incurred.............................................................. $98,390 $94,201 $63,630
Interest capitalized........................................................... (3,412) (4,646) (5,793)
Amortization of deferred financing costs and interest
rate protection contracts................................................... 3,256 4,379 2,867
------- ------- -------
Interest expense............................................................... $98,234 $93,934 $60,704
======= ======= =======
Interest paid.................................................................. $99,611 $94,046 $61,114
======= ======= =======
====================================================================================================================================
The scheduled principal maturities of bonds and notes payable, excluding
unamortized debt premiums, and related average interest rates by year of
maturity as of December 31, 2000 were as follows:
-------------------------------------------------------------------------------
Average Principal
Years ended December 31, Interest Rates Maturity
-------------------------------------------------------------------------------
2001.............................................. 10.56% $ 67,712
2002.............................................. 11.33 64,914
2003.............................................. 9.87 534,463
2004.............................................. 8.43 63,418
2005.............................................. 8.05 50,330
Thereafter........................................ 7.34 235,172
----- ----------
9.16% $1,016,009
===== ==========
===============================================================================
The Company plans to either refinance or extend the maturity of certain
mortgage indebtedness maturing during 2001. In the event the Company is unable
to refinance or extend the maturity of such indebtedness, it will consider the
repayment of the outstanding balance through proceeds from potential sales of
property or may give the property back to the mortgage lender. There can be no
assurance that the Company will be successful in obtaining the required amount
of funds for the maturing indebtedness or that the terms of the refinancings or
extensions of maturities, if they should occur, will be as favorable as the
Company has experienced in prior periods. See "Commitments & Contingencies" for
additional information.
On December 22, 2000, the Company closed a major refinancing of its assets
and the sale of four of its outlet centers through a series of transactions
(collectively, the "December 22, 2000 Transactions"). The principal lenders
involved in the December 22, 2000 Transactions were an affiliate of Fortress;
Greenwich Capital Financial Products, Inc. ("Greenwich"); and Mercantile-Safe
Deposit and Trust Company ("Mercantile"). The sale of its outlet centers was to
a joint venture partnership comprised of Fortress and Chelsea (see Note 3 -
"Acquisitions and Dispositions" for additional information). Fortress and
Greenwich (collectively, the "Lending Group") provided a mezzanine loan in the
amount of $90,000 (the "$90,000 Mezzanine Loan"). Greenwich funded a $20,000
first mortgage loan (the "Puerto Rico First Mortgage Loan") on the Company's
outlet center that recently opened in Puerto Rico and Mercantile provided a
$10,000 second mortgage loan (the "Hagerstown Second Mortgage Loan") on the
Company's outlet center in Hagerstown, Maryland. The Company executed agreements
to extend the maturity date of two of its existing loans, a $112,000 first
mortgage loan (the "Bridge Loan") from Nomura Asset Capital Corporation
("Nomura") and a $19,378 first mortgage loan (the "Lebanon First Mortgage Loan")
from KeyBank National Association.
The $90,000 Mezzanine Loan is secured by pledges of equity interests in
certain outlet centers. The loan is for a term of three-years; requires fixed
monthly principal amortization commencing on February 1, 2001 of $1,000 during
the first year, $1,667 during the second year and $2,333 during the third year;
requires the payment of certain exit fees; and is pre-payable at any time after
one year. The $90,000 Mezzanine Loan requires that the Company's excess cash
flow from operations and assets sales above certain thresholds be applied to
principal reductions. The interest rate is a floating rate based on 30-day LIBOR
plus 9.50%, but not less than 14.50%. The loan contains financial and other
covenants that restrict, among other things, the ability of the Company to incur
additional indebtedness or pay dividends (other than dividends to maintain the
Company's status as a REIT). In addition, in connection with the financing the
Company issued warrants (recorded at fair value at the date of the transaction)
to the Lending Group to purchase one million shares of the Company's common
stock at an exercise price of $1.00 per share.
The Puerto Rico First Mortgage Loan is secured by the Company's outlet
center in Puerto Rico. The Puerto Rico First Mortgage Loan is for a term of
three-years, requires monthly amortization of $15 based upon a 25-year schedule
for the first year and $51 based upon a 15-year schedule thereafter. The Puerto
Rico First Mortgage Loan is non-recourse and is pre-payable at any time subject
to certain prepayment and exit fees. The interest rate is a floating rate based
on 30-day LIBOR plus 3.50%. In addition, the Puerto Rico First Mortgage Loan
provides for a commitment to fund up to an additional $5,000 subject to the
satisfaction of certain conditions, including the achievement of minimum sales,
occupancy and debt service coverage ratio thresholds no later than December 31,
2001.
The Hagerstown Second Mortgage Loan is secured by the Company's outlet
center in Hagerstown, Maryland and has a term of 30-months that is co-terminus
with Mercantile's existing $48,863 first mortgage loan on the same center. The
Second Mortgage Loan requires monthly amortization starting in the seventh month
of $164 per month and is pre-payable at any time without penalty or fee. The
interest rate is a floating rate based on 30-day LIBOR plus 2.50%.
On December 22, 2000, the term of the Bridge Loan, which was due to mature
on June 11, 2001, was extended until December 31, 2003. In consideration for the
extension, the interest rate was converted from 30-day LIBOR plus 1.35% to a
fixed-rate of 13.00%; the monthly interest-only payments were converted to
monthly interest and principal payments (principal amortization of the greater
of (i) 50% of excess cash flow from the properties collateralizing the Bridge
Loan or (ii) $50) and a loan extension fee of $1,120 was paid. The loan may be
prepaid at any time. In connection with the modification of the terms of the
Bridge Loan, the Company incurred an extraordinary loss of $1,345 during 2000.
The extraordinary loss consisted of (i) the $1,120 extension fee and (ii) the
write-off of unamortized deferred financing costs and expenses aggregating $225.
On December 22, 2000, the term of the Lebanon First Mortgage Loan, secured
by the Company's outlet center in Lebanon, Tennessee, which was due to mature on
December 31, 2000, was extended for a period of six months until June 30, 2001,
with an additional three-month extension available if certain conditions are
met. In consideration for the extension, the interest rate was increased by
1.25% to 30-day LIBOR plus 3.00% and the loan balance was reduced to $18,378
through a $1,000 principal payment. The loan may be prepaid at any time. The net
proceeds from the December 22, 2000 Transactions were used to (i) pay off
$125,000 of short-term indebtedness as described below; (ii) pay-down $3,500 of
other indebtedness (the $1,000 principal reduction on the Lebanon First Mortgage
Loan and a $2,500 principal reduction on a first mortgage loan on Phases II and
III of the outlet center located in Bellport, New York), and (iii) pay the
$1,120 extension fee on the Bridge Loan. The remainder of the proceeds have been
and will be used (i) for general corporate purposes, including the funding of
certain programs to attract and retain tenants through increased marketing and
capital improvements and (ii) to fund remaining development costs for Prime
Outlets of Puerto Rico.
The Company used $125,000 of the net proceeds from the December 22, 2000
Transactions for the repayment of (i) a $20,000 subordinated loan (the
"Subordinated Loan") made by FBR Asset Investment Corporation that matured
August 14, 2000, (ii) a $25,000 unsecured corporate line of credit from
Mercantile which was due to mature on December 31, 2000, (iii) a $37,000
unsecured revolving loan (the "Unsecured Revolving Loan") from Nomura which was
scheduled to mature on September 11, 2001 and (iv) the prepayment of a $43,000
term loan (the "Term Loan") from Greenwich which was scheduled to mature on
December 10, 2001. In connection with the prepayment of the Unsecured Revolving
Loan and the Term Loan, the Company incurred an extraordinary loss on the early
extinguishment of debt aggregating $2,861 during 2000. The extraordinary loss
consisted of (i) a $1,700 prepayment penalty and (ii) the write-off of
unamortized deferred financing costs and expenses aggregating $1,161.
The Company had been in default of the Subordinated Loan and such default
had triggered certain cross-default provisions with respect to other Company
debt facilities. In addition, the Company previously was not in compliance with
financial covenants contained in certain of its debt facilities. As a result of
the debt repayments and the various restructuring and extension agreements
completed on December 22, 2000, the Company had cured or eliminated all
financial covenant defaults under its recourse loan agreements. However, there
can be no assurance that the Company will be in compliance with its financial
debt covenants in future periods since the Company's future financial
performance is subject to various risks and uncertainties, including but not
limited to, the effects of increases in market interest rates from current
levels, the risk of potential increases in vacancy rates and the resulting
impact on the Company's revenue, and risks associated with refinancing the
Company's current debt obligations or obtaining new financing under terms as
favorable as the Company has experienced in prior periods.
During 1999, the Company incurred an extraordinary loss on the early
extinguishment of debt of $3,518, net of minority interests of $887.
2001 Sales Transactions
On February 2, 2001, the Company completed the sale of Northgate Plaza, a
community center located in Lombard, Illinois to Arbor Northgate, Inc. for
aggregate consideration of $7,050. The net cash proceeds from the sale were
$510, after the repayment of mortgage indebtedness of $5,966 and closing costs
and fees. The net proceeds from the sale were applied against the $90,000
Mezzanine Loan in accordance the with terms of the loan agreement.
On March 16, 2001, the Company completed the sale of Prime Outlets at
Silverthorne, an outlet center comprising 257,000 square feet of GLA located in
Silverthorne, Colorado to Silverthorne Factory Stores, LLC for aggregate
consideration of $29,000. The net cash proceeds from the sale were $8,992, after
the repayment of mortgage indebtedness of $18,154 related to the collateral
substitution (see below) and closing costs and fees. The net proceeds from the
sale were applied against the $90,000 Mezzanine Loan in accordance with the
terms of the loan agreement.
Prime Outlets at Silverthorne was one of fifteen properties that
cross-collateralized The First Mortgage and Expansion Loan, which contains
collateral substitution provisions that permit the exchange of specific assets
pledged as collateral upon approval by the lender. In conjunction with the sale
of Prime Outlets at Silverthorne, by the Company substituted Prime Outlets at
Lebanon (located in Lebanon, Tennessee) and subsequently paid-off the Lebanon
First Mortgage Loan.
Commitments & Contingencies
Subsidiaries of the Company have suspended regularly scheduled monthly debt
service payments on two non-recourse mortgage loans aggregating $34,890 which
are cross-collateralized by Prime Outlets at Jeffersonville II, located in
Jeffersonville, Ohio, and Prime Outlets at Conroe, located in Conroe, Texas. The
Company is currently discussing potential restructuring with the holder of the
mortgage loans; however, there can be no assurance that such discussions will
lead to a modification of the mortgage loans and that the two properties will
not be foreclosed. Because the two mortgage loans are non-recourse, the Company
does not believe the existing defaults or any related foreclosure will have a
material impact on its results of operations or financial position.
Various mortgage loans, related to projects in which the Company, through
subsidiaries, indirectly owns joint venture interests, have matured and are in
default. The mortgage loans are (i) a $10,389 first mortgage loan on Phase I of
the outlet center in Bellport, New York, held by Union Labor Life Insurance
Company ("Union Labor"); (ii) mortgage loans aggregating $29,670 on Prime
Outlets at New River located in New River, Arizona, held by Fru-Con Development
Corporation ("Fru-Con"); and (iii) a $13,639 first mortgage loan on the outlet
center in Oxnard, California, also held by Fru-Con. Fru-Con and the Company are
each 50.0% partners in both the New River and Oxnard outlet centers.
Union Labor has filed for foreclosure on Phase I of the Bellport outlet
center and Fru-Con has filed for foreclosure on Prime Outlets at New River. The
Company is currently negotiating the terms of a transfer of its ownership
interest in the Oxnard outlet center to Fru-Con. The Company believes none of
these mortgage loans are recourse to the Company. Therefore, the Company does
not believe the existing defaults under these loans or any related foreclosures
on the mortgaged properties will have a material impact on its results of
operations or financial position.
The Company, through affiliates, holds a 51% interest in the owner of
Phases II and III of an outlet center in Bellport, NY. The owner failed to make
a required $3,000 principal payment on a $10,795 first mortgage loan when due on
November 1, 2000. The Company paid, on behalf of the owner, the required payment
through a series of payments during November and December 2000, including a
$2,500 payment made from the net proceeds from the December 22, 2000
Transactions. The maturity date of the first mortgage loan of $7,795 was
extended to May 1, 2001. The Company plans to either refinance or extend the
maturity of this mortgage indebtedness. In the event the Company is unable to
refinance or extend the maturity of such indebtedness, it will consider the
repayment of the outstanding balance through proceeds from potential sale of the
property. There can be no assurance that the Company will be successful in
obtaining the required amount of funds for the maturing indebtedness or that the
terms of the refinancing or extension of the maturity, if it should occur, will
be as favorable as the Company has experienced in prior periods. Although this
loan is recourse, the Company believes that any default or foreclosure under
this loan will not have a material impact on its results of operations or
financial position.
As of December 31, 2000, 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. As of December 31, 2000, no claims had been made
against the Company's guaranty by the lender.
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. 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. On August 15, 2000, the Company
exercised its option under the operating agreement of the join venture and
transferred its entire interest in the joint venture to a Castle & Cooke
subsidiary.
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 2000 and 1999, 29,296 and 471,923 Common Units, respectively, were
exchanged for shares of Common Stock. As of December 31, 2000, 10,810,912 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, 2000, 1999 and 1998, expenses totaling $2,928, $11,752,
and $3,035, 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, 2000, the loss allocated to minority
interests totaled $738. During the year ended December 31, 1999, income
allocated to minority interests totaled $2,339, net of an $887 allocation of
extraordinary losses. In addition, during 1999 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,
cash distributions, if any, related to Common Units are treated as income
allocated to minority interests.
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, 2000, 43,577,916 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, 2000,
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
$13,388 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 REIT for federal income tax purposes, the Company
is required to pay distributions to its common and preferred shareholders of at
least 95% (90% for years beginning after December 31, 2000) of its REIT taxable
income in addition to satisfying other requirements. Although the Company
intends to make distributions in accordance with the requirements of the
Internal Revenue Code of 1986, as amended, necessary to remain qualified as a
REIT, it also intends to retain such amounts as it considers necessary from time
to time for capital and liquidity needs of the Company.
The Company's current policy is to pay distributions only 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 for 2001, it does
not expect to pay any distributions on its 10.5% Series A Senior Cumulative
Preferred Stock ("Senior Preferred Stock"), 8.5% Series B Cumulative
Participating Convertible Preferred Stock ("Series B Convertible Preferred
Stock"), common stock or common units of limited partnership interest in the
Operating Partnership during 2001.
The Company is currently in arrears on five quarters of preferred stock
distributions due February 15, 2000 through February 15, 2001, respectively. The
holders of the Senior Preferred Stock and Series B Convertible Preferred Stock,
voting together as a single class, wil 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 directors would be elected to serve until the earlier of (i) the
election and qualification of such director's successor, or (ii) payment of the
dividend arrearage.
The Company is prohibited from paying dividends or distributions except
to the extent necessary to maintain its REIT status under the terms of its
$90,000 Mezzanine Loan (see Note 6 - "Bonds and Notes Payable". In addition,
the Company may make no distributions to its common shareholders or its
holders of common units of limited partnership interest in the Operating
Partnership unless it is current with respect to distributions to its preferred
shareholders. As of December 31, 2000, unpaid dividends for the period November
16, 1999 through December 31, 2000 on the Senior Preferred Stock and Series B
Convertible Preferred Stock aggregated $6,792 and $18,714, respectively. The
annualized dividends on the Company's 2,300,000 shares of Senior Preferred Stock
and 7,828,125 shares of Series B Convertible Preferred Stock outstanding as of
December 31, 2000 are $6,038 ($2.625 per share) and $16,636, ($2.125 per share),
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 no less than 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 stock options granted become exercisable
over periods up to six years.
During 2000, the Company granted options to executive officers and other
key employees to purchase 1,087,600 shares of common stock at $2.00 per share.
These options, which have a term of 10 years, were 50% vested as of December 31,
2000 and will fully vest on June 30, 2001. Additionally, during 2000, the
Company awarded 180,000 shares of restricted common stock and granted options to
outside directors to purchase 420,0000 shares of common stock at $1.69 per
share. The restricted common stock was fully vested as of September 1, 2000. The
options, which have a term of 10 years, vest pro-ratably on a monthly basis from
May 1, 2000 through February 1, 2001.
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, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss......................................... $(139,910) $(31,376) $ 15,348
Extraordinary loss.............................................................. (4,206) (3,518) -
---------- -------- --------
Net income (loss)............................................................... $(144,116) $(34,894) $ 15,348
========== ======== ========
Net loss applicable to common shares............................................ $(166,788) $(44,856) $ (9,256)
========== ======== ========
Basic earnings per common share:
Loss before extraordinary loss.............................................. $ (3.73) $ (0.96) $ (0.26)
Extraordinary loss.......................................................... (0.10) (0.08) -
-------- -------- --------
Net loss.................................................................... $ (3.83) $ (1.04) $ (0.26)
======== ======== ========
Diluted earnings per common share:
Loss before extraordinary loss.............................................. $ (3.73) $ (1.22) $ (0.26)
Extraordinary loss.......................................................... (0.10) (0.08) -
-------- -------- --------
Net loss.................................................................... $ (3.83) $ (1.30) $ (0.26)
======== ======== ========
====================================================================================================================================
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, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate......................................................... 5.0% 6.4% 5.0%
Dividend yield.................................................................. -% 21.0% 12.0%
Volatility factor............................................................... 0.87 0.37 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:
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning of year.......... 3,280,317 $14.12 3,811,067 $14.90 1,148,250 $15.64
Granted.................... 1,507,600 1.91 85,000 9.85 1,724,575 13.10
Transferred (Horizon)...... - - - - 959,742 18.62
Cancelled.................. (656,861) 12.13 (615,750) 18.37 (21,500) 12.64
--------- ------ -------- ------ --------- ------
End of year................ 4,131,056 $ 9.98 3,280,317 $14.12 3,811,067 $14.90
========= ====== ========= ====== ========= ======
Exercisable -
end of year............. 3,276,987 $11.84 2,900,314 $14.22 3,083,570 $15.24
========= ====== ========= ====== ========= ======
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Price Shares Life in Years Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1.69 to $ 2.00............... 1,459,550 9.3 $ 1.91 665,481 $ 1.85
$ 8.50............... 60,000 8.6 8.50 60,000 8.50
$11.15 to $13.09............... 1,970,606 5.2 12.51 1,970,606 12.51
$13.60 to $14.19............... 262,490 6.8 13.91 202,490 13.82
$19.00............... 30,000 3.2 19.00 30,000 19.00
$23.53............... 13,788 5.3 23.53 13,788 23.53
$24.55 to $26.53............... 334,622 0.3 26.11 334,622 26.11
--------- --- ------ --------- ------
4,131,056 6.4 $ 9.98 3,276,987 $15.24
========= === ====== ========= ======
====================================================================================================================================
The weighted fair value of options granted during the years ended
December 31, 2000, 1999 and 1998 was $0 per share, $0.96 per share, and $0.96
per share, respectively. Under the Company's various plans there were 1,428,686
and 2,279,425 shares reserved for future grants at December 31, 2000 and 1999,
respectively.
Note 10 -- Lease Agreements
The Company is the lessor of retail and office space under operating
leases with lease terms that expire from 2001 to 2017. 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, 2000 were as follows:
-------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------------
2001............................................................. $143,387
2002............................................................. 112,881
2003............................................................. 84,961
2004............................................................. 57,479
2005............................................................. 36,421
Thereafter....................................................... 65,272
--------
$500,401
========
===============================================================================
The Company leases certain land, buildings, and equipment under various
noncancelable operating lease agreements. Rental expense for operating leases
was $2,988, $3,699, and $1,818 for the years ended December 31, 2000, 1999, and
1998, 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, 2000 consisted of the
following:
-------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------------
2001................................................................ $ 1,840
2002................................................................ 1,534
2003................................................................ 1,135
2004................................................................ 286
2005................................................................ 239
Thereafter.......................................................... 6,065
-------
$11,099
=======
===============================================================================
Note 11-- Special Charges
During 2000, management established a formal plan to sell three of its
wholly-owned properties (Prime Outlets at Silverthorne, Prime Northgate Plaza, a
community center; and land previously held for development) and, accordingly,
reclassified their respective carrying values to assets held for sale.
Total revenues and expenses for the operating properties classified as held for
sale were $6,354 and $6,697, respectively, for the year ended December 31, 2000.
Additionally, the Company also determined that certain events and circumstances
had occurred during 2000, including reduced occupancy and limited leasing
success, which indicated that four wholly-owned properties (Prime Outlets at
Odessa, Prime Outlets at Woodbury, Prime Outlets at Post Falls and Prime Outlets
at Latham) and two joint venture properties (Bellport Outlet Center I and
Bellport Outlet Center II) were permanently impaired.
In accordance with the requirements of SFAS No. 121, the Company
incurred a provision for asset impairment of $28,047 to reduce the carrying
value of the three properties classified as held for sale to their estimated
sales value, less cost to dispose. The aggregate carrying value of these
properties as of December 31, 2000 was $43,230. Furthermore, the Company's
results of operations for 2000 include a provision for asset impairment
aggregating $40,616 representing the write-down of the carrying values of the
six permanently impaired properties to their estimated fair value in accordance
with SFAS No. 121
On April 12, 2000, the Company announced that it had been unable to
conclude an agreement to transfer ownership of its wholly-owned e-commerce
subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a
management-led investor group comprised of eOutlets.com management and outside
investors. Effective April 12, 2000, eOutlets.com ceased all operations and on
November 6, 2000 filed for bankruptcy under Chapter 7. In connection with the
discontinuance of eOutlets.com, the Company incurred a non-recurring loss of
$14,703 which includes (i) the write-off of $3,497 of costs capitalized during
1999 and (ii) $11,206 of costs incurred during the year ended December 31, 2000.
In addition, the Company incurred expenses of $3,500 related to organizational
and start-up expenditures of eOutlets.com which are reflected in corporate
general and administrative expenses in the Consolidated Statements of
Operations.
When accounting for 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 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 1999,
because the Company decided to discontinue the operations of its Designer
Connection outlet stores, 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 consisted of (i) employee termination costs, (ii)
lease obligations, and (iii) the write-down of assets to their net realizable
value. The operations of Designer Connection outlet stores ceased in 2000.
Note 12 -- Risk Management Activities
Interest Rate Risk
In the ordinary course of business, the Company is exposed to the impact
of interest rate changes and, therefore, employs established policies and
procedures to manage its exposure to interest rate changes. 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) lower its overall
borrowing costs.
The Company also uses derivative financial instruments to manage
interest rate risk associated with certain of its debt. Generally, the Company
purchases interest rate protection agreements, such as caps, which are
designated as hedges for underlying variable rate debt obligations. The Company
does not hold derivative financial instruments for trading purposes.
The interest rate caps specifically limit the Company's interest costs
with an upper limit on the underlying interest rate index. The cost of such
contracts are included in deferred charges and are being amortized as a
component of interest expense over the life of the contracts. Amounts earned
from interest rate protection contracts, if any, are recorded as a reduction of
interest expense. The Company is exposed to credit losses in the event of
counterparty nonperformance, but does not anticipate any such losses based on
the creditworthiness of the counterparties.
On December 22, 2000, the Company purchased an interest rate cap with a
notional amount of $90,000 to hedge its $90,000 Mezzanine Loan that was funded
on the same date. The interest rate cap has a three-year term with a strike
price of 8.00% based on 30-day LIBOR. The notional amount of this interest rate
cap amortizes monthly based on estimated principal repayments on the $90,000
Mezzanine Loan. Additionally, on December 22, 2000, the Company also purchased
an interest rate cap with a notional amount of $20,000 to hedge its $20,000
Puerto Rico First Mortgage Loan that was funded on the same date. The interest
rate cap has a three-year term with a strike price of 8.00% based on 30-day
LIBOR. In addition, the Company held an additional undesignated interest rate
protection cap with a notional amount of $44,000 with a strike price of 7.00%,
based on 30-day LIBOR, which matures in November 2001. The notional amount of
this interest rate cap amortizes $1,000 monthly. See Note 2 -- "Summary of
Significant Accounting Policies" and Note 6 -- "Bonds and Notes Payable" for
additional information.
Although derivative financial instruments are an important component of
the Company's interest rate management program, their incremental effect on
interest expense for the years ended December 31, 2000, 1999 and 1998 was not
material.
Economic Conditions
Most of the merchants' leases contain provisions that somewhat mitigate
the impact of inflation. Such provisions include clauses providing for increases
in base rent and clauses enabling the Company to receive percentage rentals
based on merchants' gross sales. Most of the leases require merchants to pay
their proportionate share of all operating expenses, including common area
maintenance, real estate taxes and promotion, thereby reducing the Company's
exposure to increased costs and operating expenses resulting from inflation.
Note 13 -- Legal Proceedings
On October 13, 2000 and thereafter, eight complaints were filed in the
United States District Court for the District of Maryland against the Company
and four individual defendants. The four individual defendants are: William H.
Carpenter, Jr., the former President and Chief Operating Officer and a current
director of the Company; Abraham Rosenthal, the former Chief Executive Officer
and a former director of the Company; Michael W. Reschke, the former Chairman of
the Board and a current director of the Company; and Robert P. Mulreaney, the
former Executive Vice President - Chief Financial Officer and Treasurer of the
Company. The complaints were brought by alleged stockholders of the Company,
individually and purportedly as class actions on behalf of all other
stockholders of the Company. The complaints allege that the individual
defendants made statements about the Company that were in violation of the
federal securities laws. The complaints seek unspecified damages and other
relief. The Lead plaintiffs and lead counsel were recently appointed. The
Company expects a consolidated complaint to be filed within the next 60 days.
The Company believes that the complaints are without merit and intends to defend
them vigorously. The outcome of these lawsuits, and the ultimate liability of
the defendants, if any, cannot be predicted.
The Company and its affiliates were defendants in a lawsuit filed on August
10, 1999 in the Circuit Court for Baltimore City and removed to U. S. District
Court for the District of Maryland (the "U.S. District Court") on August 20,
1999. The plaintiff alleged that the Company and its related entities
overcharged tenants for common area maintenance charges and promotion fund
charges. The U.S. District Court dismissed the lawsuit on June 19, 2000. The
plaintiff has filed a notice of its appeal from the U.S. District Court's
decision and a briefing schedule has been isued by the Court. Management
believes that the Company has acted properly and intends to defend this lawsuit
vigorously. While any litigation contains an element of uncertainty, the Company
believes the losses, if any, resulting from this case will not have a material
adverse effect on the consolidated financial statements of the Company.
Several entities (the "Plaintiffs") have filed or stated an intention to
file lawsuits (the "Lawsuits") against the Company and its affiliates in which
the Plaintiffs are seeking to hold them responsible under various legal theories
for liabilities incurred by primeoutlets.com, inc., also known as eOutlets,
including the theory that the Company guaranteed the obligations of eOutlets and
the theory that the Company was the alter ego of eOutlets. primeoutlets.com inc.
is also a defendant in some, but not all, of the Lawsuits. The Company believes
that it is not liable to the Plaintiffs as there was no privity of contract
between it and the various Plaintiffs. The Company intends to defend all
Lawsuits vigorously. primeoutlets.com inc. filed for protection under Chapter 7
of the United States Bankruptcy Code during November 2000 under the name
E-Outlets Resolution Corp. The trustee for E-Outlets Resolution Corp. has
notified the Company that he is contemplating an action against the Company and
the Operating Partnership in which he may assert that E-Outlets Resolution Corp.
was the "alter-ego" of the Company and the Operating Partnership and that, as a
result, the Company and the Operating Partnership are liable for the debts of
E-Outlets Resolution Corp. If the trustee pursues such an action, the Company
and the Operating Partnership will defend themselves vigorously. In the case
captioned Convergys Customer Management Group, Inc. v. Prime Retail, Inc. and
primeoutlets.com inc., currently pending in the Court of Common Pleas for
Hamilton County (Ohio), the Company prevailed in a motion to dismiss Plaintiff's
claim that the Company was liable for primeoutlets.com inc.'s breach of contract
based on the doctrine of piercing the corporate veil. The outcome of these
Lawsuits, and the ultimate liability of the Company, if any, cannot be
predicted. While any litigation contains an element of uncertainty, the Company
believes the losses, if any, resulting from the Lawsuits will not have a
material adverse effect on the consolidated financial statements of the Company.
The New York Stock Exchange and the Securities and Exchange Commission have
notified the Company that they are reviewing transactions in the stock of the
Company prior to the Company's January 18, 2000 press release concerning
financial matters.
Prime Retail, Inc.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2000
(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 $ - $ 460 $ 1,125 $ 11,496 $ 12,621 $ 955 Dec 1997(A)
Prime Outlets at
Bend 7,627 2,560 8,476 1,101 4,676 3,661 13,152 16,813 1,366 Feb 1997(A)
Prime Outlets at
Burlington 14,214 3,694 21,370 - (56) 3,694 21,314 25,008 2,177 Jun 1998(A)
Prime Outlets at
Calhoun 17,816 3,839 24,551 - (58) 3,839 24,493 28,332 2,844 Jun 1998(A)
Prime Outlets at
Castle Rock 34,973 4,424 47,200 2,717 15,214 7,141 62,414 69,555 13,309 Mar 1994(A)
Prime Outlets at
Conroe 16,541 405 18,714 - 152 405 18,866 19,271 2,207 Jun 1998(A)
Prime Outlets at
Darien 24,648 - - 3,004 30,875 3,004 30,875 33,879 7,197 Jul 1995(C)
Prime Outlets at
Edinburgh 16,681 2,726 37,952 - 1,378 2,726 39,330 42,056 4,257 Jun 1998(A)
Prime Outlets at
Ellenton 28,644 - - 5,457 49,542 5,457 49,542 54,999 11,234 Oct 1991(C)
Prime Outlets at
Florida City 15,210 - - 4,275 21,572 4,275 21,572 25,847 5,331 Sept 1994(C)
Prime Outlets at
Fremont 13,661 3,250 24,096 - 48 3,250 24,144 27,394 2,396 Jun 1998(A)
Prime Outlets at
Gaffney 31,209 - - 1,886 33,262 1,886 33,262 35,148 6,263 Nov 1996(C)
Prime Outlets at
Gainesville 20,263 - - 1,100 30,420 1,100 30,420 31,520 8,195 Aug 1993(C)
Prime Outlets at
Grove City 40,191 1,123 58,630 789 2,546 1,912 61,176 63,088 8,412 Nov 1996(A)
Prime Outlets at
Gulfport 19,429 - - - 35,282 - 35,282 35,282 7,494 Oct 1995(C)
Prime Outlets at
Hagerstown 58,863 - - 3,507 58,687 3,507 58,687 62,194 5,391 Aug 1998(C)
Prime Outlets at
Hillsboro 30,162 7,121 50,894 - 493 7,121 51,387 58,508 4,611 Jun 1998(A)
Prime Outlets at
Huntley 17,320 - - 1,970 35,278 1,970 35,278 37,248 7,900 Sept 1994(C)
Prime Outlets at
Jeffersonville I 25,813 843 31,084 250 14,788 1,093 45,872 46,965 9,968 Mar 1994(A)
Prime Outlets at
Jeffersonville II 18,349 174 21,058 - (13,399) 174 7,659 7,833 2,279 Jun 1998(A)
Prime Outlets at
Kenosha 23,355 6,995 39,558 50 2,930 7,045 42,488 49,533 4,224 Jun 1998(A)
Prime Outlets at
Latham 1,453 507 1,476 - (1,015) 507 461 968 99 Oct 1997(A)
Prime Outlets at
Lebanon 18,378 - - 2,689 32,098 2,689 32,098 34,787 4,354 Apr 1998(C)
Prime Outlets at
Lee 26,855 8,035 31,656 - 1,338 8,035 32,994 41,029 5,101 Jun 1998(A)
Prime Outlets at
Lodi 25,912 1,013 21,455 707 14,059 1,720 35,514 37,234 5,620 Sept 1997(A)
Prime Outlets at
Loveland 22,192 6,400 33,244 - 253 6,400 33,497 39,897 6,680 Nov 1996(A)
Melrose Place 1,970 - - 499 1,891 499 1,891 2,390 867 Aug 1987(C)
Prime Outlets at
Morrisville 9,166 - - 2,502 21,221 2,502 21,221 23,723 6,244 Oct 1991(C)
Prime Outlets at
Naples 10,547 2,753 15,602 5 2,874 2,758 18,476 1,234 3,128 Mar 1994(A)
Prime Retail, Inc.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2000
(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
Niagara Falls USA $ 62,120 $ 7,247 $ 82,842 $ - $ 1,475 $ 7,247 $ 84,317 $ 91,564 $ 6,823 Dec 1997(A)
Prime Outlets at
Odessa 14,211 815 31,311 - (12,510) 815 18,801 19,616 6,065 Nov 1996(A)
Prime Outlets at
Oshkosh 14,063 2,160 26,895 - 230 2,160 27,125 29,285 3,268 Jun 1998(A)
Prime Outlets at
Perryville 9,893 3,089 16,287 - (65) 3,089 16,222 19,311 1,497 Jun 1998(A)
Prime Outlets at
Pismo Beach 12,755 9,048 17,617 - (50) 9,048 17,567 26,615 1,853 Jun 1998(A)
Prime Outlets at
Post Falls 11,344 3,100 12,163 - (7,728) 3,100 4,435 7,535 1,354 Feb 1997(A)
Prime Outlets of
Puerto Rico 20,000 - - 4,748 41,306 4,748 41,306 46,054 523 Jul 2000(C)
Prime Outlets at
Queenstown 18,571 4,422 35,592 - 395 4,422 35,987 40,409 2,985 Jun 1998(A)
Prime Outlets at
San Marcos 38,470 - - 1,995 5,766 1,995 5,766 7,761 14,237 Aug 1990(C)
Prime Outlets at
San Marcos 2,992 - - 4,468 17,680 4,468 17,680 22,148 796 Nov 1999(C)
Prime Outlets at
Sedona 6,769 1,924 9,099 750 427 2,674 9,526 12,200 974 Feb 1997(A)
Prime Outlets at
Tracy 12,994 6,170 16,715 - 66 6,170 16,781 22,951 2,053 Jun 1998(A)
Prime Outlets at
Vero Beach 26,315 4,530 41,878 - 1,873 4,530 43,751 48,281 4,862 Jun 1998(A)
Prime Outlets at
Warehouse Row 23,485 - - 1,174 33,309 1,174 33,309 34,483 13,354 Nov 1989(C)
Western Plaza 10,521 - - 2,000 7,395 2,000 7,395 9,395 1,744 Jun 1993(A)
Prime Outlets at
Woodbury 17,544 2,528 27,645 - (14,281) 2,528 13,364 15,892 2,361 Jun 1998(A)
Property Under
Development - - - 2,278 3,573 2,278 3,573 5,851 - Under
Constru-
ction
Other Property 90,079 - 1,588 - 7,812 - 9,400 9,400 2,717 Mar. 1994 -
Dec. 1999(A)
-------- -------- -------- ------- -------- -------- ----------- ---------- ---------
$992,323 $102,020 $817,684 $49,921 $523,482 $151,941 $1,341,166 $1,493,107 $ 217,569
======== ======== ======== ======= ======== ======== =========== ========== =========
At December 31, 2000, the Company had three encumbered properties, Prime
Outlets at Silverthorne (encumbrance of $25,314), Northgate Plaza (encumbrance
of $5,990) and certain land previously held for development (encumbrance of
$6,527), classified as held for sale with an aggregate carrying value of
$43,230.
PRIME RETAIL, INC.
Notes to Schedule III - Real Estate and Accumulated Depreciation
December 31, 2000
(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 $1,498,106 at December
31, 2000.
Investment in Rental Property
Year Ended December 31
----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Balance, beginning of year...................................................... $1,826,551 $2,015,722 $ 904,782
Retirements..................................................................... (6,281) (4,727) (880)
Acquisitions.................................................................... - - 1,013,231
Improvements.................................................................... 51,833 89,969 145,174
Dispositions.................................................................... (309,942) (138,321) (46,585)
Transfer (to) from assets held for sale, net.................................... (4,513) (108,968) -
Provision for asset impairment on rental properties............................. (64,541) (13,572) -
Provision for abandoned projects................................................ - (13,552) -
---------- ---------- ----------
Balance, end of year............................................................ $1,493,107 $1,826,551 $2,015,722
========== ========== ==========
Accumulated Depreciation
Year Ended December 31
----------------------------------------------
2000 1999 1998
-------------- ------------- --------------
Balance, beginning of year...................................................... $ 183,954 $ 127,747 $ 82,033
Retirements..................................................................... (6,281) (4,727) (880)
Other........................................................................... (818) 346 134
Dispositions.................................................................... (23,469) (6,787) (5,178)
Transfer (to) from assets held for sale, net.................................... (2,672) (5,502) -
Depreciation for the year....................................................... 66,855 72,877 51,638
---------- ---------- ----------
Balance, end of year............................................................ $ 217,569 $ 183,954 $ 127,747
========== ========== ==========