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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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
COMMISSION FILE NUMBER: 0-23616
PRIME RETAIL, INC.
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(Exact name of Registrant as specified in its Charter)
MARYLAND 52-1836258
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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
8.5% Series B Cumulative Participating Convertible Preferred Stock, $0.01 par
value
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(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
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10.5% Series A Cumulative Preferred Stock, $0.01 par value
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was approximately $383,835,248 on March 13, 1998 (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
13, 1998 was 27,294,951.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the registrant are incorporated herein by
reference:
DOCUMENT
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Proxy Statement for the 1998 annual meeting of
shareholders Part III of Form 10-K
PRIME RETAIL, INC.
Form 10-K
December 31, 1997
TABLE OF CONTENTS
Part I Page
Item 1. Business.......................................................1
Item 2. Properties.....................................................8
Item 3. Legal Proceedings.............................................13
Item 4. Submission of Matters to a Vote of Security Holders...........13
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters......................................................13
Item 6. Selected Financial Data.......................................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................17
Item 8. Financial Statements and Supplementary Data...................31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................31
Part III
Item 10. Directors and Executive Officers of the Registrant............31
Item 11. Executive Compensation........................................31
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................31
Item 13. Certain Relationships and Related Transactions................31
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.....................................................32
Signatures....................................................38
PART I
ITEM 1 -- BUSINESS
The Company
Prime Retail, Inc. (the "Company") was organized as a Maryland
corporation on July 16, 1993. The Company commenced operations upon completion
of its initial public offering (the "Initial Public Offering") on March 22,
1994. The Company is a self-administered and self-managed real estate investment
trust ("REIT"). Concurrent with the completion of the Initial Public Offering,
the Company became the general partner of Prime Retail, L.P. (the "Operating
Partnership") which owns interests in and provides development, leasing,
marketing and management services for 28 upscale factory outlet centers and
three community shopping centers (the "Properties") with a total of 7,217,000
and 424,000 square feet of gross leasable area ("GLA") at December 31, 1997,
respectively. The Properties are located throughout the United States, generally
near large metropolitan areas.
On November 1, 1994, the Company organized Prime Retail Services Limited
Partnership and Prime Retail Services, Inc. (collectively referred to as the
"Services Corporation"). The Services Corporation was formed primarily to
operate business lines of the Company that are not directly associated with the
collection of rents.
As used herein, unless the context otherwise requires, the term
"Company" shall mean the Company and those entities owned or controlled by the
Company.
On November 12, 1997 and as amended on February 1, 1998, the Company
entered into a definitive merger agreement ("Merger Agreement") with Horizon
Group, Inc. ("Horizon") for an aggregate consideration of approximately
$945,200, including the assumption of $556,900 of Horizon debt and transaction
costs. Upon completion of the transaction, the Company will own and operate 48
outlet centers totaling approximately 13,406,261 square feet of GLA. See Note 15
- - "Merger Agreement" of the Notes to the Consolidated Financial Statements for
additional information.
The Company's executive offices are located at 100 East Pratt Street,
Baltimore, Maryland 21202 (telephone 410-234-0782).
Tax Status
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT,
the Company generally will not be subject to federal income tax at the corporate
level on income it distributes to its stockholders so long as it distributes at
least 95% of its taxable income (excluding any net capital gain) each year.
Since the Initial Public Offering the Company believes that it has complied with
the tax regulations to maintain its REIT status. If the Company fails to qualify
as a REIT in any taxable year, the Company will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Even if the Company qualifies as a REIT, the Company
may be subject to certain state and local taxes on its income and property.
Business of the Company
The Company is engaged primarily in the ownership, development,
construction, acquisition, leasing, marketing and management of factory outlet
centers throughout the United States. Factory outlet centers have become an
established segment of the retail industry, enabling value-oriented shoppers to
purchase designer and brand-name products directly from manufacturers at
discounts generally ranging from 25% to 50% below regular department and
specialty store prices.
Since entering the factory outlet center business in 1988 (through the
retail division of The Prime Group, Inc. ("PGI"), from whom the Company acquired
certain Properties and management and development operations), the Company has
become one of the leading developers and operators in the industry having
successfully developed or acquired outlet centers containing approximately 7.2
million square feet of GLA at December 31, 1997, including approximately
1,221,000 square feet of GLA that was acquired and approximately 224,000 square
feet of GLA that was developed and completed during 1997.
The Company pursues acquisition and development strategies designed to
take advantage of growth opportunities in the factory outlet segment of the
retail industry and to distinguish itself among its competitors. The Company
strives to differentiate itself from competitors in the outlet center industry
by owning and operating larger outlet centers with highly accessible locations,
a larger and more diverse merchandising mix, extensive food and recreational
amenities and quality architecture and landscaping, all designed to create an
upscale environment in which to showcase merchandise and encourage shopping.
The average outlet center in the Company's portfolio contains 257,750
square feet of GLA at December 31, 1997, compared to an industry average of
approximately 177,656 square feet as reported in January 1998 by Value Retail
News ("VRN") an industry trade magazine whose Advisory Board and executive
committee includes William H. Carpenter, Jr., President and Chief Operating
Officer of theCompany. Management believes that the considerable size of its
outlet centers, coupled with the Company's established base of national and
international manufacturers of designer and brand-name merchandise,
significantly enhances the competitive position of the Company's factory outlet
centers.
The Company's factory outlet centers feature a diversified mix of
nationally recognized manufacturers of designer and brand-name merchandise with
which the Company and its employees have established long-standing
relationships, including AnnTaylor/AnnTaylor Loft, Bose, Brooks Brothers,
Corning-Revere, Danskin, Donna Karan, Eddie Bauer, Ellen Tracy, Esprit, First
Choice/Escada, Guess?, J. Crew, Jones New York, Levi's/Dockers Outlet, Mikasa,
Nautica, Nike, Phillips-Van Heusen (including Bass, Gant, Geoffrey Beene, Izod
and Van Heusen), Polo/Ralph Lauren, Reading China & Glass, Reebok, Off-5th Saks
Fifth Avenue, Sara Lee (including Champion, Coach, L'eggs, Hanes, Bali, Playtex,
and Socks Galore), Sony, Springmaid-Wamsutta, Tommy Hilfiger and VF Corporation
(including Lee, Wrangler, Barbizon and Vanity Fair). As a group, the foregoing
merchants accounted for approximately 50.2% of the gross revenues of the Company
during the year ended December 31, 1997, and occupied approximately 48.9% of the
total leased GLA contained in the Company's outlet centers at December 31,
1997. During the year ended December 31, 1997, no group of merchants under
common control accounted for more than 5.74% of the gross revenues of the
Company or occupied more than 5.36% of the total leased GLA of the Company at
December 31, 1997.
Management has developed close working relationships with its merchants
to understand and better anticipate the merchants' immediate and long-term
merchandising strategies and retail space requirements. The Company established
The Manufacturers Forum(R), an organization of over 100 manufacturers that
conducts between three and six industry meetings per year--two of which meetings
are held at semi-annual conventions. The meetings are organized and hosted by
executives of the Company and are attended by senior executives from member
manufacturers. Industry experts are invited to attend as guest speakers to
discuss ideas, trends, data and other issues pertinent to the ongoing growth of
the factory outlet center business. The Manufacturers Forum(R) was developed as
an educational tool for both the Company and the member merchants, including new
manufacturers that are investigating opening factory outlet stores, and allows
both the Company and member merchants to stay up-to-date with changes in the
industry. Topics discussed at The Manufacturers Forum(R) lead to stronger
relationships with key merchants and a shared vision with the manufacturers as
to future growth of the industry.
Strategies For Growth
The Company intends, on a long-term basis, to increase its per share
funds from operations ("FFO") and the value of its portfolio of factory outlet
centers through the active management and expansion of existing factory outlet
centers and the selective acquisition and development of factory outlet centers.
FFO does not represent cash flow from operating activities in accordance with
generally accepted accounting principles ("GAAP"), is not indicative of cash
available to fund all of the Company's cash needs and should not be considered
as an alternative to net income or any other GAAP measure as an indicator of the
Company's performance or as an alternative to cash flow as a measure of
liquidity or the ability to service debt or pay dividends. See "Funds from
Operations" of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company intends to continue to increase its FFO per share over time
by (i) selectively acquiring, expanding, and developing factory outlet centers
that offer strong prospects for cash flow growth and capital appreciation,
subject to the availability of debt financing on favorable terms and additional
equity capital and (ii) managing, leasing and marketing its portfolio of retail
properties to increase consumer traffic, sales per square foot, tenant occupancy
levels, and the effective base and percentage rents. While no assurances can be
given that the Company will successfully implement the foregoing objectives, the
Company intends to employ the following strategies:
Acquisition of Existing Outlet Centers. The Company explores
opportunities to acquire factory outlet centers or interests
therein that are compatible with the Company's existing portfolio
and offer attractive yields, potential cash flow growth and capital
appreciation. The Company draws upon its development, leasing,
operating and marketing expertise to improve such centers through
expansion and/or remerchandising or reletting. Properties may be
acquired separately or as part of a portfolio, and may be acquired
for cash and/or in exchange for equity securities of the Company.
During 1997, the Company acquired seven centers totaling 1,221,000
square feet of GLA for an aggregate purchase price of $164,300.
Planned Development of New Factory Outlet Centers. The Company
develops new factory outlet centers on sites with favorable
demographics, access to interstate highways, good visibility and
favorable market conditions that generally can accommodate a
minimum of 300,000 square feet of GLA over multiple phases. In
March 1997, the Company commenced construction on the Outlet
Village of Lebanon located east of Nashville, Tennessee. The Outlet
Village of Lebanon, which will contain approximately 208,000 square
feet of GLA, has a total expected development cost of approximately
$28,900 and is expected to open in the second quarter of 1998. In
October 1997, the Company commenced construction on the Outlet
Village of Hagerstown located west of Baltimore, Maryland and
northwest of Washington, D.C. The Outlet Village of Hagerstown,
which will contain approximately 216,000 square feet of GLA, has a
total expected development cost of approximately $29,300 and is
expected to open in the third quarter of 1998. Management believes
that there is sufficient demand for continued development of new
factory outlet centers and the expansion of existing outlet
centers.
Strategic Expansions of Existing Centers. The Company selectively
expands its existing factory outlet centers in phased developments
that respond to merchant and consumer demand, thereby maximizing
returns from these outlet centers through higher effective rents
from new merchants based on the proven success and customer drawing
power of existing phases. The Company expects to open approximately
327,000 square feet of GLA during 1998 in connection with planned
expansions of existing centers. As of February 28, 1998, the
Company owned, or held under long-term lease, land contiguous to
its outlet centers to construct additional phases totaling
approximately 1,500,000 square feet of GLA. The Company also holds
options to purchase property adjoining its existing factory outlet
centers upon which additional expansions could be constructed.
Active Property Management. The Company monitors and seeks to
enhance the operating performance of its centers through intensive
merchant and property management, and by providing experienced and
professional on-site management. Property managers and marketing
directors work with leasing representatives of the Company to
systematically review merchant performance, merchandising mix and
layout in order to improve sales per square foot. Through its
intensive management efforts, the Company attempts to reduce the
average occupancy cost on its outlet portfolio while at the same
time continuing to provide a high level of merchant and customer
service, maintenance and security.
Innovative Marketing and Promotion. The Company continuously seeks
to increase the sales performance of each factory outlet center and
markets its factory outlet centers with promotional materials and
advertising strategies that target and attract customers.
Substantially all factory outlet centers have an experienced
marketing director who creates and administers retail marketing
strategies that are designed to highlight each factory outlet
center's unique merchandising strengths, customized to the local
customer base and demographics. The Company advertises its centers
using a wide variety of media that can include television, radio
and print advertising, promotions, billboards, special events, and
an extensive public relations program. These activities are
supported by quantitative and qualitative market research based on
such information gathering techniques as focus groups and detailed
customer surveys. To better understand the needs and expectations
of its customers, the Company routinely conducts exit surveys, the
results of which are closely reviewed by senior management and,
when appropriate, merchants in the center. All of these activities
are monitored and reviewed at least quarterly by senior marketing
management of the Company.
Competition
The Company's outlet centers compete for customers primarily with
traditional shopping malls, "off-price" retailers and other outlet centers. The
Company carefully considers the degree of existing and planned competition in a
proposed trade area before developing a new outlet center. Merchants of outlet
centers carefully 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.
The Company's outlet centers compete to a limited extent with various
full-price and off-price retailers in the highly fragmented retailing industry.
However, management believes that the majority of the Company's customers visit
outlet centers specifically for designer and brand-name goods at discounted
prices. Traditional full-price and off-price retailers are often unable to
provide such a variety of products at attractive prices.
Because several 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. Seven projects in the Company's portfolio, Factory Outlets at Post
Falls (Post Falls, Idaho), Gulf Coast Factory Shops (Ellenton, Florida),
Magnolia Bluff Factory Shops (Darien, Georgia), Ohio Factory Shops
(Jeffersonville, Ohio), Oxnard Factory Outlet (Oxnard, California), Prime Retail
Outlets of Kittery (Kittery, Maine), and San Marcos Factory Shops (San Marcos,
Texas), are located within twelve miles of competing factory outlet centers and,
therefore, are subject to direct outlet competition. The existence or
development of an outlet center with a more convenient location or lower rents
may attract the Company's merchants or cause them to seek more favorable lease
terms at or prior to renewal of their leases and, accordingly, may affect
adversely the business, revenues and/or sales volume of the Company's outlet
centers.
The Company's community shopping centers compete with similar community
shopping centers located in the same geographic trade areas.
Relationship with Municipalities
Because of the favorable impact that the Company's properties may have
on a local community's economy by generating sales and property taxes and
increasing employment in the area, local communities often assist the Company
with respect to zoning, economic incentives or favorable business development
legislation. The Company explores opportunities to obtain incentives from local,
county and state governments in connection with the development of its factory
outlet centers. Such incentives often fund the cost of off-site sewer and water
services to the site, required highway improvements and, on occasion, the cost
of land and various on-site improvements.
Environmental Matters
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous substances on their property. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous substances. The costs of remediation or removal may be substantial,
and the presence of the hazardous substances, or the failure to promptly
remediate them, may adversely affect the owner's ability to sell the real estate
or to borrow using the real estate as collateral. In connection with its
ownership and operation of the Properties, the Company may be potentially liable
for the costs of removal or remediation of hazardous substances.
The Company has no knowledge, nor has the Company been notified by any
governmental authority, of any material noncompliance, liability or claim
relating to hazardous substances in connection with any properties in which any
of such entities now has or heretofore had an interest. However, no assurances
can be given that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition of
the Properties will not be affected by merchants and occupants of the
Properties, by the condition of properties in the vicinity of the Properties
(such as the presence of underground storage tanks) or by third parties
unrelated to the Company.
Insurance
Management believes that each of the Properties is covered by adequate
fire, flood, and property insurance provided by reputable companies and with
commercially reasonable deductibles and limits.
Employees
As of December 31, 1997, the Company had 560 employees. The Company
believes that its relations with its employees are satisfactory.
Executive Officers
The following table sets forth the names, positions and, as of December
31, 1997, ages of the executive officers of the Company:
Name Position Age
Michael W. Reschke Chairman of the Board, Director 42
Abraham Rosenthal Chief Executive Officer, Director 48
William H. Carpenter, Jr. President, Chief Operating Officer, Director 46
Glenn D. Reschke Executive Vice President, Development 46
and Acquisitions, Director
Robert P. Mulreaney Executive Vice President, Chief Financial 39
Officer and Treasurer
David G. Phillips Executive Vice President, Operations and Marketing 36
C. Alan Schroeder Executive Vice President, General Counsel 40
and Secretary
R. Bruce Armiger Senior Vice President, Development and Construction 52
Management Services
Steven S. Gothelf Senior Vice President, Finance 37
Anya T. Harris Senior Vice President, Marketing and Communications 31
John S. Mastin Senior Vice President, Leasing 51
Steven M. McGhee Senior Vice President, Operations 43
Biographies of Executive Officers
Michael W. Reschke. Michael W. Reschke has been the Chairman of the Board
of Directors of the Company since the Company's inception. Mr. Reschke founded
PGI in 1981 and, since that time, has acted as PGI's Chairman, Chief Executive
Officer, and President. For the last 16 years, Mr. Reschke has directed and
managed the development, finance, construction, leasing, marketing, acquisition,
renovation, and property management activities of PGI. Mr. Reschke also is
Chairman of the Board of Directors of Prime Group Realty Trust (NYSE: PGE), a
real estate investment trust engaged in the ownership, operation, acquisition
and development of office and industrial properties, primarily in the greater
Chicago market, and is the successor in interest to the former office and
industrial divisions of PGI. Mr. Reschke also is Chairman of the Board of
Directors of Brookdale Living Communities, Inc. (NASD: BLCI), a corporation
engaged in the ownership, operation, acquisition, and development of senior
housing and assisted living facilities and is the successor in interest to the
former senior housing division of PGI. Mr. Reschke also is a member of the Board
of Directors of Ambassador Apartments, Inc. (NYSE: AAH), a real estate
investment trust engaged in the ownership, operation, acquisition and renovation
of multi-family residential projects and the successor in interest to the former
multi-family division of PGI. Mr. Reschke received a Juris Doctorate degree
(summa cum laude) from the University of Illinois after having received a B.A.
degree (summa cum laude) in Accounting from Northern Illinois University. Mr.
Reschke is licensed to practice law in the State of Illinois and is a certified
public accountant. Mr. Reschke is a member of the Chairman's Roundtable and the
Executive Committee of the National Realty Committee, as well as a full member
of the Urban Land Institute. Mr. Reschke is the brother of Glenn D. Reschke, an
executive officer of the Company.
Abraham Rosenthal. Abraham Rosenthal has been the Chief Executive Officer
and a Director of Prime Retail since the Company's inception. Prime Retail was
formed to succeed the retail division of PGI, which has been a developer of
retail and factory outlet centers since 1988. Mr. Rosenthal joined PGI in 1988,
serving as Vice President, Senior Vice President and, immediately prior to
joining the Company, as Executive Vice President. Mr. Rosenthal's
responsibilities with the Company include strategic planning, investor
relations, capital markets, financing, site selection, site planning and
building design, and new business development for the
Company. Mr. Rosenthal has been involved in retail design and development for
the past 20 years. Prior to joining PGI, Mr. Rosenthal was Vice President,
Design and Construction of Cordish/Embry and Associates. Mr. Rosenthal received
a Bachelor of Architecture degree from the University of Maryland School of
Architecture, is a registered architect in the State of Maryland and is
certified by the National Council of Architectural Registration Board. Mr.
Rosenthal is a full member of the Urban Land Institute, the International
Council of Shopping Centers ("ICSC"), the National Realty Committee and National
Association of Real Estate Investment Trusts ("NAREIT"). Mr. Rosenthal is on the
executive committee of the Baltimore Museum of Art and chairs the organization's
Development, Marketing and Finance Committee. Mr. Rosenthal is also a member of
the Maryland/Israel Development Center and is on the board and a member of the
executive committee for Baltimore's Downtown Partnership. Mr. Rosenthal was
therecipient of the 1995 Entrepreneur of the Year Award for Maryland Real
Estate.
William H. Carpenter, Jr. William H. Carpenter, Jr. has been President,
Chief Operating Officer and a Director of the Company since the Company's
inception. Immediately prior to the Initial Public Offering, Mr. Carpenter was
associated with PGI. Mr. Carpenter joined PGI in 1989, serving as Senior Vice
President and, immediately prior to joining the Company, as Executive Vice
President. Mr. Carpenter's responsibilities with the Company include leasing,
marketing, operations and management, development, and construction for the
Company's retail projects. Prior to joining PGI, Mr. Carpenter was President of
D.I. Realty, Inc. (a division of Design International) from 1988 to 1989 and in
such capacity managed all aspects of retail leasing and development for D.I.
Realty, Inc., including property management, construction, and merchant
coordination. Mr. Carpenter previously was senior regional leasing director with
The Rouse Company and a partner with Cordish/Embry and Associates in Baltimore,
Maryland. In these positions, Mr. Carpenter directed the development and leasing
of a number of major urban projects in cooperation with city governments. Over
the last 23 years, Mr. Carpenter has been involved in over 57 major urban,
suburban and specialty projects throughout the United States. Mr. Carpenter
attended the University of Baltimore, is a member of the ICSC, a member of
Developers of Outlet Centers, a full member of the Urban Land Institute, sits on
the Board and the Executive Committee of the BSO and also sits on the ICSC/VRN
Executive Committee.
Glenn D. Reschke. Glenn D. Reschke is Executive Vice President of
Development and Acquisitions and a Director of the Company, where he is
responsible for site selection, design and construction for the Company's new
retail projects as well as the acquisition of existing outlet centers
nationwide. 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. Prior to that, Mr. Reschke was the Director of the EPA's
Automotive Emission Testing Laboratory in Ann Arbor, Michigan where he managed
the nation's automotive emission certification and fuel economy testing programs
for the Federal Government. Mr. Reschke received a Masters in Business
Administration from Eastern Michigan University with a specialization in finance
after receiving a Bachelor of Science degree with honors in Chemical Engineering
from Rose Hulman Institute of Technology in Terre Haute, Indiana. Mr. Reschke is
the brother of Michael W. Reschke, the Company's Chairman of the Board.
Robert P. Mulreaney. Robert P. Mulreaney is Executive Vice President, Chief
Financial Officer and Treasurer of the Company. Mr. Mulreaney joined the Company
in 1994. Mr. Mulreaney's responsibilities with the Company include capital
market activities, corporate budgeting, financial reporting, investor relations,
accounting, taxation, treasury, and management information systems. Prior to
joining the Company, Mr. Mulreaney was associated for 14 years with Ernst &
Young LLP, where he specialized in accounting and consulting issues related to
real estate and financial institutions. Mr. Mulreaney received a Bachelor of
Business Administration in Accounting in 1980 from Marshall University. Mr.
Mulreaney is a member of the American Institute of Certified Public Accountants,
the Maryland Association of Certified Public Accountants, and the West Virginia
Society of Certified Public Accountants.
David G. Phillips. David G. Phillips is Executive Vice President,
Operations and Marketing of the Company. Mr. Phillips joined PGI in 1989 and
served as Vice President, Senior Vice President, and Executive Vice President,
Leasing. Mr. Phillips' responsibilities with the Company include the management
and supervision of the Company's operations, marketing and advertising efforts
for all of the Company's outlet centers. 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. Prior to
joining D.I. Realty, Inc., Mr. Phillips owned and operated Bowdoin Street
Contracting in Boston, Massachusetts. 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.
C. Alan Schroeder. C. Alan Schroeder is Executive Vice President, General
Counsel and Secretary of the Company. From 1990 to 1994, Mr. Schroeder was an
Assistant General Counsel of PGI, responsible for legal matters relating to the
retail division of PGI and involved in the division's development, financing,
corporate, partnership, construction and management matters. Prior to joining
PGI, Mr. Schroeder was associated for four years with Hopkins & Sutter,
a Chicago, Illinois based law firm, where he worked primarily on real estate and
financing matters. 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.
R. Bruce Armiger. R. Bruce Armiger is Senior Vice President, Development
and Construction Management Services for the Company. Mr. Armiger's
responsibilities with the Company include supervision of project development and
construction for all of the Company's outlet centers. Mr. Armiger joined PGI in
1992, and since that time, acted as Vice President of the Retail Division of
PGI. Prior to joining PGI, Mr. Armiger was Vice President and Director of
Construction and Engineering of The Rouse Company for a period of 15 years. At
The Rouse Company, Mr. Armiger was responsible for all of the construction
activities of the company consisting of over 5,000,000 square feet of GLA during
his tenure. Mr. Armiger has a Bachelor of Arts degree and Masters of Business
Administration from Loyola College, Baltimore, Maryland.
Steven Gothelf. Steven Gothelf is Senior 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.
Anya T. Harris. Anya T. Harris is Senior Vice President, Marketing and
Communications of the Company. Ms. Harris began her tenure at the Company in
September 1994 as Director of Public Relations, responsible for media relations
and community outreach programs for the Company's various outlet centers
nationwide. In her present position, Ms. Harris oversees all aspects of the
Company's center marketing, public relations and corporate communications
programs in order to increase the Company's marketing power and reach in terms
of advertising, company identity and media relations. Prior to joining the
Company, Ms. Harris served as Senior Account Executive for Trahan, Burden &
Charles, Inc., an advertising and public relations firm in Baltimore. In this
capacity, Ms. Harris managed advertising, public relations and marketing
campaigns for numerous clients, including the Company. Formerly, she was Senior
Account Executive for New York-based Edelman Public Relations, responsible for
managing multi-million-dollar corporate communications and media relations for
clients such as Motts U.S.A. and Weight Watchers International. Ms. Harris
received her Bachelor of Arts in Political Science and Sociology from Goucher
College.
John S. Mastin. John S. Mastin is Senior Vice President, Leasing of the
Company. Mr. Mastin's responsibilities with the Company include supervision of
leasing and merchandising for all of the Company's outlet centers. Mr. Mastin
joined the Company in June of 1996. Prior to joining the Company, Mr. Mastin
spent 24 years with The Rouse Company. At The Rouse Company, Mr. Mastin began
his career as a Junior Leasing Representative and was promoted to Vice President
and Assistant Director of Leasing. Mr. Mastin led the leasing effort for The
Rouse Company with numerous regional malls as well as inner-city festival market
places which include Bayside in Miami, Florida, and the redevelopment of
Underground Atlanta in Atlanta, Georgia. Mr. Mastin was involved in the
releasing and remerchandising effort for the operating properties division of
The Rouse Company. Prior to The Rouse Company, Mr. Mastin was a Naval Aviator
for four years. Mr. Mastin received his Bachelor of Arts in English from Niagara
University. Mr. Mastin is a member of the ICSC.
Steven M. McGhee. Steven M. McGhee is Senior Vice President, Operations of
the Company. Mr. McGhee has been affiliated with PGI since October, 1989, most
recently as Vice President and Director of Operations. Prior to joining PGI, Mr.
McGhee was General Manager for CBL and Associates for two years where he
marketed and managed a portfolio of 1,500,000 square feet of retail properties.
Prior to that Mr. McGhee spent 15 years with the Melville Corporation, a
specialty retail chain were he was eventually responsible for the operations of
approximately 140 stores nationwide. Mr. McGhee attended the University of
Tennessee majoring in Business Administration. Mr. McGhee is a member of the
ICSC, Value Retail News and Building Owners and Managers Association (BOMA), and
Honorary Editorial Board Member for Specialty Retail Report. Mr. McGhee received
designation as a CSM, (certified shopping center manager) from the ICSC in
October 1995.
ITEM 2 -- PROPERTIES
General
The Company's strategy is to build on its reputation and experience in
the factory outlet center business and to capitalize on the current trend
in value-oriented retailing through the selective acquisition and development of
factory outlet centers and the strategic expansion of its existing factory
outlet centers. 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, 1997, the
Company's portfolio consisted of (i) 28 factory outlet centers aggregating
7,217,000 square feet of GLA (including 595,000 square feet of GLA at factory
outlet centers owned through joint venture partnerships), (ii) three community
shopping centers aggregating 424,000 square feet of GLA and (iii) 159,000 square
feet of GLA of office space.
The table set forth below summarizes certain information with respect to
the Company's existing centers as of December 31, 1997 (see "Note 7 -- Bonds and
Notes Payable" of the Notes to the Consolidated Financial Statements contained
herein for information with respect to mortgage indebtedness on the Company's
properties).
Portfolio of Properties
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Niagara International Factory Outlets (2)--Niagara Falls, New York...... I July 1982 300,000 96%
II August 1985 234,000 79
-------- ---
534,000 88
Prime Retail Outlets of Kittery (3)--Kittery Maine...................... I April 1984 25,000 100
II May 1984 78,000 100
III August 1989 18,000 100
-------- ---
121,000 100
Latham Factory Outlets (3)--Latham, New York............................ I August 1987 43,000 100
Warehouse Row Factory Shops (4)--Chattanooga, Tennessee................. I November 1989 95,000 94
II August 1993 26,000 94
-------- ---
121,000 94
Oak Creek Factory Stores (5)--Sedona, Arizona .......................... I August 1990 82,000 100
San Marcos Factory Shops--San Marcos, Texas............................. I August 1990 177,000 99
II August 1991 70,000 100
III August 1993 117,000 98
IIIB November 1994 20,000 91
IIIC November 1995 35,000 100
-------- ---
419,000 99
Shasta Factory Stores (2)--Anderson, California......................... I August 1990 165,000 91
Factory Outlets at Post Falls (5)--Post Falls, Idaho ................... I July 1991 111,000 92
II July 1992 68,000 71
-------- ---
179,000 84
Gulf Coast Factory Shops--Ellenton, Florida............................. I October 1991 187,000 98
II August 1993 123,000 100
III October 1996 30,000 100
-------- ---
340,000 99
Triangle Factory Shops--Raleigh-Durham, North Carolina.................. I October 1991 181,000 99
II July 1996 6,000 100
-------- ---
187,000 99
Portfolio of Properties (continued)
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Coral Isle Factory Shops--Naples/Marco Island, Florida.................. I December 1991 94,000 100%
II December 1992 32,000 82
-------- ---
126,000 95
Castle Rock Factory Shops--Castle Rock, Colorado........................ I November 1992 181,000 97
II August 1993 94,000 99
III November 1993 95,000 100
IV August 1997 110,000 100
-------- ---
480,000 99
Bend Factory Outlets (5)--Bend, Oregon.................................. I December 1992 97,000 86
Ohio Factory Shops--Jeffersonville, Ohio................................ I July 1993 186,000 98
II November 1993 100,000 100
IIB November 1994 13,000 75
IIIA August 1996 35,000 100
IIIB March 1997 73,000 73
-------- ---
407,000 93
Gainesville Factory Shops--Gainesville, Texas........................... I August 1993 210,000 89
II November 1994 106,000 92
-------- ---
316,000 90
Nebraska Crossing Factory Stores (6)--Gretna, Nebraska.................. I October 1993 192,000 88
Rocky Mountain Factory Stores--Loveland, Colorado....................... I May 1994 139,000 100
II November 1994 50,000 100
III May 1995 114,000 100
IV May 1996 25,000 100
-------- ---
328,000 100
Oxnard Factory Outlet (7)--Oxnard, California........................... I June 1994 148,000 88
Grove City Factory Shops--Grove City, Pennsylvania...................... I August 1994 235,000 99
II November 1994 95,000 100
III November 1995 85,000 99
IV November 1996 118,000 99
-------- ---
533,000 99
Huntley Factory Shops--Huntley, Illinois................................ I August 1994 192,000 98
II November 1995 90,000 88
-------- ---
282,000 92
Florida Keys Factory Shops--Florida City, Florida....................... I September 1994 208,000 88
Indiana Factory Shops (6)--Daleville, Indiana........................... I November 1994 208,000 90
IIA November 1996 26,000 35
--------- ---
234,000 84
Kansas City Factory Outlets--Odessa, Missouri........................... I July 1995 191,000 100
II November 1996 105,000 66
--------- ---
296,000 88
Magnolia Bluff Factory Shops (8)--Darien, Georgia....................... I July 1995 238,000 89
IIA November 1995 49,000 99
IIB July 1996 20,000 100
--------- ---
307,000 91
Portfolio of Properties (continued)
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Grand GLA Percentage
Factory Outlet Centers Phase Opening Date (Sq. Ft.) Leased(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Arizona Factory Shops (9)--Phoenix, Arizona............................. I September 1995 217,000 98%
II September 1996 109,000 93
--------- ---
326,000 96
Gulfport Factory Shops (10)--Gulfport, Mississippi...................... I November 1995 228,000 97
IIA November 1996 40,000 82
IIB November 1997 38,000 38
--------- ---
306,000 88
Buckeye Factory Shops (11)--Burbank, Ohio............................... I November 1996 205,000 95
Carolina Factory Shops--Gaffney, South Carolina......................... I November 1996 235,000 95
--------- ---
Total Factory Outlet Centers (12)...................................... 7,217,000 94%
========= ===
====================================================================================================================================
Notes:
(1) Percentage reflects fully executed leases as of December 31, 1997 as a
percent of square feet of GLA.
(2) The Company acquired this factory outlet center on December 2, 1997 from an
unrelated third party.
(3) The Company acquired this factory outlet center on October 29, 1997 from an
unrelated third party.
(4) The Company owns a 2% partnership interest as the sole general partner in
Phase I of this property but is entitled to 99% of the property's operating
cash flow and net proceeds from a sale or refinancing. An unrelated third
party holds a 35% limited partnership interest and the Company holds a 65%
general partnership interest in the partnership that owns Phase II of this
property. Phase I of this mixed-use development includes 154,000 square
feet of office space and Phase II includes 5,000 square feet of office
space. The total office space of 159,000 square feet is not included in
this table and such space was 78% leased as of December 31, 1997.
(5) The Company acquired this factory outlet center on February 13, 1997 from
an unrelated third party.
(6) Upon consummation of the Merger Agreement, the Company intends to sell this
factory outlet center (see Note 15 - "Merger Agreement" of the Notes to
Consolidated Financial Statements).
(7) On February 7, 1997, the Company purchased an additional 20% interest from
a joint venture partner, increasing the Company's ownership interest in
this property to 50%.
(8) The Company operates this property pursuant to a long-term ground lease
under which the Company receives the economic benefit of a 100% ownership
interest.
(9) The Company owns 50% of this factory outlet center in a joint venture
partnership with an unrelated third party.
(10) The real property on which this outlet center is located is subject to a
long-term ground lease. The Company receives the economic benefit of a 100%
ownership interest.
(11) On September 2, 1997, the Company purchased its joint venture partner's 25%
partnership interest in Buckeye Factory Shops Limited Partnership and now
owns 100% of this factory outlet center.
(12) The Company also owns three community centers not included in this table
containing 424,000 square feet of GLA in the aggregate that were 96% leased
as of December 31, 1997.
As of February 28, 1998, the Company owned, or held under long-term
leases, land contiguous to its outlet centers to construct additional phases
totaling approximately 1,500,000 square feet of GLA. The Company also holds
options to purchase property adjoining its existing factory outlet centers upon
which additional expansion could be constructed. Property held for sale by a
REIT is subject to significant restrictions imposed by the Code. Consequently,
it is the Company's intention to hold its undeveloped parcels for future
development, expansion or lease, rather than for sale.
Lease Terms
In general, the leases relating to the Company's outlet centers have a
term of five to seven 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, 1997, tenant lease
expirations for the next 10 years at the Company's factory outlet centers
(assuming that none of the tenants exercise any renewal option and including
leases at factory outlet centers owned through joint venture partnerships):
- ------------------------------------------------------------------------------------------------------------------------------------
Lease Expirations -- Outlet Centers
--------------------------------------------------- % of Total
Annualized
Number of Approximate Annualized Minimum Rent
Leases GLA Minimum Rent of Represented by
Year Expiring (Sq. Ft.) Expiring Leases Expiring Leases
- ------ --------- ----------- --------------- ---------------
1998 208 672,590 $ 8,676,382 8.95%
1999 282 951,096 13,884,059 14.32
2000 362 1,219,241 19,129,588 19.73
2001 386 1,318,768 20,735,895 21.39
2002 280 974,632 15,499,971 15.99
2003 67 309,794 4,904,704 5.06
2004 53 328,272 4,646,025 4.79
2005 46 272,619 4,268,191 4.40
2006 30 178,420 2,730,946 2.82
2007 9 36,262 552,230 0.57
====================================================================================================================================
Tenants
In management's view, the tenant mix is one of the most important
factors in promoting an outlet center's success. Virtually all aspects of the
Company's outlet centers, ranging from site selection to architectural design,
are planned to attract and retain a diverse mix of nationally and
internationally recognized manufacturers of upscale designer and brand-name
products. Crucial to the development of a new outlet center is having lead
tenants committed to the outlet center early in the process. In management's
view, lead tenants are manufacturers that during the development of an outlet
center attract other high-quality manufacturers to the outlet center and provide
for a well-balanced and diversified mix of tenants that will attract consumers
to the outlet center. During the year ended December 31, 1997, no group of
tenants under common control accounted for more than 5.74% of the gross revenues
of the Company or occupied more than 5.36% 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, 1997:
NUMBER OF % OF LEASED
TENANT STORES GLA
- ------ --------- -----------
PHILLIPS-VAN HEUSEN
BASS ............................................................................. 19 1.82%
VAN HEUSEN ....................................................................... 24 1.46
GEOFFREY BEENE ................................................................... 21 1.32
IZOD ............................................................................. 16 0.51
GANT ............................................................................. 6 0.25
--- ----
SUBTOTAL PHILLIPS-VAN HEUSEN................................................... 86 5.36
DRESS BARN, INC.
WESTPORT, LTD./WESTPORT WOMAN/DRESS BARN.......................................... 29 2.75
SBX............................................................................... 2 0.19
--- ----
SUBTOTAL DRESS BARN, INC....................................................... 31 2.94
SARA LEE
L'EGGS/HANES/BALI/PLAYTEX.......................................................... 22 1.46
CHAMPION........................................................................... 6 0.29
COACH.............................................................................. 11 0.42
SOCKS GALORE....................................................................... 3 0.06
--- ----
SUBTOTAL SARA LEE.............................................................. 42 2.24
CASUAL CORNER GROUP, INC.
CASUAL CORNER OUTLET.............................................................. 16 1.08
CASUAL CORNER WOMAN............................................................... 9 0.35
PETITE SOPHISTICATE .............................................................. 16 0.59
--- ----
SUBTOTAL CASUAL CORNER GROUP, INC. ............................................ 41 2.01
OFF 5TH-SAKS FIFTH AVENUE.............................................................. 8 2.39
LEVI'S OUTLET.......................................................................... 16 2.04
BUGLE BOY.............................................................................. 23 1.90
MIKASA................................................................................. 16 1.83
GAP.................................................................................... 12 1.74
REEBOK................................................................................. 12 1.57
OSHKOSH B'GOSH/GENUINE KIDS............................................................ 25 1.51
NIKE................................................................................... 9 1.49
SPRINGMAID-WAMSUTTA.................................................................... 14 1.46
CORNING-REVERE......................................................................... 20 1.44
JONES NEW YORK......................................................................... 33 1.42
DESIGN'S INC./BOSTON TRADER............................................................ 12 1.38
VANITY FAIR/LEE/WRANGLER/BARBIZON...................................................... 4 1.36
CARTERS................................................................................ 19 1.34
POLO/RALPH LAUREN...................................................................... 11 1.21
READING CHINA & GLASS.................................................................. 3 1.05
ANN TAYLOR............................................................................. 8 0.88
JOCKEY................................................................................. 16 0.82
EDDIE BAUER............................................................................ 7 0.80
LIZ CLAIBORNE.......................................................................... 5 0.73
AMERICAN OUTPOST....................................................................... 13 0.66
NINE WEST.............................................................................. 17 0.64
DANSKIN................................................................................ 9 0.64
ESPRIT................................................................................. 5 0.61
NUMBER OF % OF LEASED
TENANT STORES GLA
- ------ --------- -----------
GUESS?................................................................................. 7 0.58%
J. CREW................................................................................ 6 0.58
BROOKS BROTHERS........................................................................ 7 0.53
DONNA KARAN............................................................................ 8 0.50
BOSE................................................................................... 9 0.50
COUNTY SEAT............................................................................ 6 0.49
VILLEROY & BOCH........................................................................ 8 0.47
TOMMY HILFIGER......................................................................... 9 0.47
SONY................................................................................... 5 0.42
NAUTICA................................................................................ 6 0.29
NORDIC TRACK........................................................................... 6 0.24
ANNE KLEIN............................................................................. 3 0.14
ELLEN TRACY............................................................................ 2 0.10
FIRST CHOICE/ESCADA.................................................................... 2 0.05
--- -----
TOTAL.................................................................................. 601 48.80%
=== =====
Lead tenants are placed in strategic locations designed to draw
customers into the outlet center and to encourage them to shop at more than one
store. The Company continually examines the placement of tenants within each
center and, in collaboration with its tenants, adjusts the size and location of
their space within the center to improve sales per square foot.
The Company strives to identify tenants with potential credit problems
at an early stage by closely monitoring tenant's performance. The Company has
worked successfully to limit its delinquencies and bad debt losses. During the
year ended December 31, 1997, total bad debt expense was approximately $970 or
.01% of total revenues. The Company has not lost any material revenue related to
tenant bankruptcies or other lease defaults.
ITEM 3 -- LEGAL PROCEEDINGS
The Company is involved in various legal matters incidental to its
business. The outcome of litigation is not susceptible to easy or certain
prediction. While an unfavorable outcome in a particular proceeding could have a
significant effect on the Company's consolidated results of operations in a
future reporting period, the Company believes ultimate resolution of these
matters would not, either singly or in the aggregate, significantly affect the
Company's results of operations, liquidity or financial position.
On December 10, 1997, a shareholder of Horizon filed a purported class
action lawsuit in the Circuit Court for Muskegon County, Michigan against
Horizon, the Company, and certain directors and former directors of Horizon
claiming, among other things, that Horizon's directors breached their fiduciary
duties to Horizon's shareholders in approving the merger of Horizon and the
Company and that the consideration to be paid to Horizon's shareholders in
connection with the merger is unfair and inadequate. The lawsuit requests that
such merger be enjoined or, in the event that the purported transaction is
consummated, that it be rescinded or unspecified damages be awarded to the class
members. On January 16, 1998, the defendants answered the complaint, denying
that the Horizon board of directors breached their fiduciary duties and denying
that such consideration is unfair or inadequate. Although the Company is named
as a defendant in the complaint, the substantive allegations focus on the
actions of Horizon and its board of directors and not on any actions of the
Company or its board of directors. Since this litigation is in the initial
phases of discovery, its outcome is not susceptible to easy or certain
prediction; however, the Company intends to defend itself vigorously.
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, 1997.
PART II
ITEM 5 -- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock commenced trading on the New York Stock
Exchange ("NYSE") on August 27, 1997 under the trading symbol "PRT". Prior
thereto, the Common Stock was quoted in the Nasdaq National Market under the
trading symbol "PRME".
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 and in the Nasdaq National Market, as the case may be, as well as the cash
distributions paid during the periods indicated:
Market Price of Common Stock and Cash Dividends Paid Per Common Share
1997 1996
--------------------------------------------- ------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------------------------- ------------------------------------------------
Market price per common
share:
High $16.50 $15.63 $13.63 $13.38 $12.75 $12.25 $12.00 $12.50
Low 13.31 13.13 11.88 12.00 11.38 11.00 10.88 11.00
End of period close 14.19 15.63 13.44 13.00 12.50 12.00 11.31 11.50
Cash dividends paid per
common share $0.295 $0.295 $0.295 $0.295 $0.295 $0.440(1) $0.295 $0.295
===========================================================================================================================
Note:
(1) Includes a special cash distribution of $0.145 per common share relating to
the Company's exchange offer completed in June 1996 (see Note 8 -- "Equity
Offerings and Other Transactions" of the Notes to Consolidated Financial
Statements).
Instruments governing the Company's indebtedness contain certain
covenants regarding the payment of dividends (see Note 7 -- "Bonds and Notes
Payable" of the Notes to Consolidated Financial Statements) if the Company's
debt service coverage ratio, as defined, falls below a minimum threshold. Based
on continuing favorable operations and available funds from operations,
management intends to continue to pay regular quarterly distributions.
The approximate number of holders of record of the Common Stock was 381
including participants in security position listings as of March 13, 1998. The
Company believes, however, they have in excess of 5,000 beneficial shareholders
as of March 13, 1998.
ITEM 6 -- SELECTED FINANCIAL DATA
(Amounts in thousands, except per share and per unit amounts)
Prime Retail
Prime Retail, Inc. Properties (Combined)
----------------------------------------------------------- ----------------------------
Period from Period from
March 22 to January 1 to Year ended
Year ended December 31 December 31 March 21 December 31
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents............................... $ 78,046 $ 54,710 $ 46,368 $ 28,657 $ 3,670 $ 14,298
Percentage rents......................... 3,277 1,987 1,520 1,404 187 709
Tenant reimbursements.................... 37,519 25,254 22,283 11,858 2,113 5,370
Income from investment partnerships...... 103 1,239 1,729 453 336 821
Interest and other....................... 10,185 5,850 5,498 2,997 24 602
--------- --------- --------- --------- --------- ---------
Total revenues................ 129,130 89,040 77,398 45,369 6,330 21,800
Expenses
Property operating....................... 29,492 20,421 17,389 9,952 1,927 5,046
Real estate taxes........................ 9,417 5,288 4,977 2,462 497 1,558
Depreciation and amortization............ 26,715 19,256 15,438 9,803 2,173 7,632
Corporate general and administrative..... 5,603 4,018 3,878 2,710 -- --
Interest................................. 36,122 24,485 20,821 9,485 3,280 8,928
Property management fees................. -- -- -- -- 299 777
Other charges............................ 3,234 8,586 2,089 1,503 562 1,732
--------- --------- --------- --------- --------- ---------
Total expenses................ 110,583 82,054 64,592 35,915 8,738 25,673
--------- --------- --------- --------- --------- ---------
Income (loss) before minority interests
and extraordinary item................ 18,547 6,986 12,806 9,454 (2,408) (3,873)
(Income) loss allocated to minority
interests............................ (10,581) 2,092 5,364 5,204 -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item.. 7,966 9,078 18,170 14,658 (2,408) (3,873)
Extraordinary item....................... (2,061) (1,017) -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss)........................ 5,905 8,061 18,170 14,658 $ (2,408) $ (3,873)
--------- --------- --------- --------- ========== ==========
Income allocated to preferred
shareholders.......................... 12,726 14,236 20,944 16,290
--------- --------- --------- ---------
Net loss applicable to common shares..... $ (6,821) $ (6,175) $ (2,774) $ (1,632)
========= ========= ========= =========
Net loss per common share-basic and
diluted (1)........................... $ (0.36) $ (0.75) $ (0.96) $ (0.57)
========= ========= ========= =========
Other Data
Funds from operations (2)................ $ 46,718 $ 27,637 $ 27,996 $ 21,996 $ 139 $ 4,351
Net cash provided by (used in) operating
activities............................ $ 49,856 $ 45,191 $ 36,399 $ 17,458 $ (1,873) $ 14,450
Net cash used in investing activities.... (229,956) (232,290) (81,978) (149,435) (1,239) (54,210)
Net cash provided by financing
activities............................ 182,549 176,096 57,547 134,936 4,087 39,907
Distributions declared per common share.. $ 1.18 $ 1.33(3) $ 1.18 $ 0.623 $ -- $ --
Reported merchant sales.................. $1,434,163 $ 1,044,348 $ 809,623 $ 497,624 $ 73,553 $ 303,833
Total factory outlet GLA at end of
period (4)......... .................. 7,217 5,780 4,331 3,382 1,839 1,839
Number of factory outlet centers at end
of period (4)......................... 28 21 17 14 7 7
Prime Retail
Prime Retail, Inc. Properties (Combined)
------------------------------------------------------- -----------------------------
December 31 March 21, December 31,
------------------------------------------------------- -----------------------------
1997 1996 1995 1994 1994 1993
- ---------------------------------------------------------------------------------------------------- -----------------------------
Balance Sheet Data
Rental property (before accumulated
depreciation)......................... $904,782 $640,759 $454,480 $376,181 $180,170 $185,394
Net investment in rental property........ 822,749 583,085 414,290 349,513 164,159 169,674
Total assets............................. 904,183 666,803 462,405 385,930 186,034 190,685
Bonds and notes payable.................. 515,265 499,523 305,954 214,025 188,378 184,037
Total liabilities and minority interests. 559,655 527,594 340,921 258,279 198,244 197,400
Shareholders' equity (deficit)........... 344,528 139,209 121,484 127,651 (12,210) (6,715)
====================================================================================================================================
Notes:
(1) On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" (see Note 2 - "Summary of
Significant Accounting Policies - - Earnings per Share" of the Notes to
Consolidated Financial Statements). The adoption of SFAS No. 128 had no
impact on the Company's earnings per share computations for all periods
presented and, therefore, no restatement of prior period computations was
required.
(2) Management believes that in order to facilitate a clear understanding of
the consolidated historical operating results of the Company, Funds from
Operations ("FFO") should be considered in conjunction with net income
(loss) as presented in the financial statements included in this Annual
Report on Form 10-K. Management generally considers FFO to be an
appropriate measure of the performance of an equity REIT because industry
analysts have accepted it as a performance measure of equity REITs. FFO
represents net income (loss) (computed in accordance with generally
accepted accounting principles ("GAAP")), excluding gains or losses from
debt restructuring and sales of property, plus depreciation and
amortization and after adjustments for unconsolidated investment
partnerships and joint ventures. In March 1995, the National Association of
Real Estate Investment Trusts ("NAREIT") issued a clarification of its
definition of FFO. Prime cautions that the calculation of FFO may vary from
entity to entity and as such the presentation of FFO by the Company may not
be comparable to other similarly titled measures of other reporting
companies. FFO does not represent cash flow from operating activities in
accordance with GAAP and is not indicative of cash available to fund all of
the Company's cash needs. FFO should not be considered as an alternative to
net income or any other GAAP measure as an indicator of performance and
should not be considered as an alternative to cash flow as a measure of
liquidity or the ability to service debt or to pay dividends. A
reconciliation of income (loss) before allocation to minority interests and
preferred shareholders to FFO is as follows:
Prime Retail
Prime Retail, Inc. Properties (Combined)
--------------------------------------------------------- ----------------------------
Period Period
from from
Year ended December 31 March 22 to January 1 to Year ended
------------------------------------------ December 31, March 21, December 31,
1997 1996 1995 1994 1994 1993
- --------------------------------------------------------------------------------------- ------------ ----------------------------
Income (loss) before allocations to
minority interests and preferred
shareholders.......................... $18,547 $ 6,986(i) $12,806 $ 9,454 $(2,408) $(3,873)
FFO Adjustments:
Depreciation and amortization............ 26,413 18,703 14,884 9,508 2,173 7,504
Unconsolidated joint venture
adjustments(ii)....................... 1,758 1,948 306 2,514 374 720
------- ------- ------- ------- ------- -------
FFO before allocation to minority
interests and preferred shareholders.. $46,718 $27,637 $27,996 $21,476 $ 139 $ 4,351
======= ======= ======= ======= ======= =======
====================================================================================================================================
Notes:
(i) Includes a nonrecurring charge of $6,131 related to the prepayment of
long-term debt recorded during 1996.
(ii) Amounts include net preferential partner distributions from a joint venture
partnership of $162 and $2,538 for the year ended December 31, 1995 and the
period from March 22, 1994 to December 31, 1994, respectively.
(3) Includes a special cash distribution of $0.145 per common share relating to
the Company's exchange offer completed in June 1996 (see Note 8 -- "Equity
Offerings and Other Transactions" of the Notes to Consolidated Financial
Statements).
(4) Includes factory outlet centers operated under joint venture partnerships
with unrelated third parties as follows:
Prime Retail
Prime Retail, Inc. Properties (Combined)
-------------------------------------------------- --------------------------
December 31 March 21 December 31
--------------------------------------------------------------------------------
1997 1996 1995 1994 1994 1993
-------------------------------------------------------------------------------------------------------------------------------
Aggregate GLA............................ 595 800 901 599 121 121
Number of factory outlet centers......... 3 4 4 3 1 1
===============================================================================================================================
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except share, unit, and per square foot information)
Introduction
The following discussion and analysis of the consolidated financial
condition and results of operations of Prime Retail, Inc. (the "Company") should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Annual Report on Form 10-K. The Company's
operations are conducted through Prime Retail, L.P. (the "Operating
Partnership"). The Company controls the Operating Partnership as its sole
general partner and is dependent upon the distributions or other payments from
the Operating Partnership to meet its financial obligationS. Historical results
and percentage relationships set forth herein are not necessarily indicative of
future operations.
Cautionary Statements
The following discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which reflect management's current views with respect to future events and
financial performance. Such forward-looking statements are subject to certain
risks and uncertainties; including, but not limited to, the effects of future
events on the Company's financial performance; the risk that the Company may be
unable to finance its planned acquisition and development activities; risks
related to the retail industry in which the Company's outlet centers compete,
including the potential adverse impact of external factors such as inflation,
consumer confidence, unemployment rates and consumer tastes and preferences;
risks associated with the Company's property acquisition activities, such as the
lack of predictability with respect to financial returns; risks associated with
the Company's property development activities, such as the potential for cost
overruns, delays and lack of predictability with respect to the financial
returns associated with these development activities; the risk of potential
increase in market interest rates from current rates; and risks associated with
real estate ownership, such as the potential adverse impact of changes in the
local economic climate on the revenues and the value of the Company's
properties.
Portfolio Growth
The Company has grown by developing and acquiring factory outlet centers
and expanding its existing factory outlet centers. The Company's factory outlet
portfolio consisted of 28 operating factory outlet centers totaling 7,217,000
square feet of gross leasable area ("GLA") at December 31, 1997, compared to 21
factory outlet centers totaling 5,780,000 square feet of GLA at December 31,
1996 and 17 factory outlet centers totaling 4,331,000 square feet of GLA at
December 31, 1995.
During 1997, the Company purchased seven factory outlet centers
totaling 1,221,000 square feet of GLA and opened expansions to existing factory
outlet centers totaling 224,000 square feet of GLA. Additionally, the Company
acquired its joint venture partner's 25% ownership interest in Buckeye Factory
Shops Limited Partnership ("Buckeye") on September 2, 1997 and now owns 100% of
this factory outlet center with 205,000 square feet of GLA. During 1996, the
Company opened two new factory outlet centers and nine expansions, and acquired
two factory outlet centers from an unrelated third party, adding 1,449,000
square feet of GLA in the aggregate. Additionally, the Company purchased its
joint venture partner's first mortgage and 50% partnership interest in Grove
City Factory Shops Partnership on November 1, 1996 and owns 100% of this factory
outlet center with 533,000 square feet of GLA. The significant increases in the
number of the Company's operating properties and total GLA during 1996 and 1997
are collectively referred to as the "Portfolio Expansion."
Results of Operations
Table 1--Consolidated Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents......................................................................... $ 78,046 $ 54,710 $ 46,368
Percentage rents................................................................... 3,277 1,987 1,520
Tenant reimbursements.............................................................. 37,519 25,254 22,283
Income from investment partnerships................................................ 103 1,239 1,729
Interest and other................................................................. 10,185 5,850 5,498
--------- --------- ---------
Total revenues................................................................ 129,130 89,040 77,398
Expenses
Property operating................................................................. 29,492 20,421 17,389
Real estate taxes.................................................................. 9,417 5,288 4,977
Depreciation and amortization...................................................... 26,715 19,256 15,438
Corporate general and administrative............................................... 5,603 4,018 3,878
Interest........................................................................... 36,122 24,485 20,821
Other charges...................................................................... 3,234 8,586 2,089
--------- --------- ---------
Total expenses................................................................ 110,583 82,054 64,592
--------- --------- ---------
Income before minority interests and extraordinary item........................... 18,547 6,986 12,806
(Income) loss allocated to minority interests..................................... (10,581) 2,092 5,364
--------- --------- ---------
Income before extraordinary item.................................................. 7,966 9,078 18,170
Extraordinary item - loss on early extinguishment of debt,
net of minority interests in the amount of $0 in 1997 and $3,263 in 1996....... (2,061) (1,017) --
--------- --------- ---------
Net income........................................................................ 5,905 8,061 18,170
Income allocated to preferred shareholders........................................ 12,726 14,236 20,944
--------- --------- ---------
Net loss applicable to common shares.............................................. $ (6,821) $ (6,175) $ (2,774)
========= ========= =========
Earnings per common share - basic and diluted (1):
Loss before extraordinary item................................................. $ (0.25) $ (0.63) $ (0.96)
Extraordinary item............................................................. (0.11) (0.12) --
--------- --------- ---------
Net loss....................................................................... $ (0.36) $ (0.75) $ (0.96)
========= ========= =========
Weighted average common shares outstanding........................................ 19,189,000 8,221,000 2,875,000
========== ======== =========
=================================================================================================================================
Note:
(1) On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" (see Note 2 - "Summary of
Significant Accounting Policies - - Earnings per Share" of the Notes to
Consolidated Financial Statements). The adoption of SFAS No. 128 had no
impact on the Company's earnings per share computations for all periods
presented and, therefore, no restatement of prior period computations was
required.
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,
1997, 1996 and 1995 is presented in the following table, expressed in amounts
calculated on a weighted average occupied GLA basis.
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
GLA at end of period (1)........................................................... 7,326 5,684 4,134
Weighted average occupied GLA (1).................................................. 5,735 4,075 3,458
Executed leases at end of period (GLA) (1)......................................... 6,854 5,252 3,950
Factory outlet centers in operation at end of period (2)........................... 28 21 17
New factory outlet centers opened (2).............................................. -- 2 3
Factory outlet centers expanded (2)................................................ 4 9 4
Factory outlet centers acquired.................................................... 7 2 --
Community centers in operation at end of period.................................... 3 3 3
States operated in at end of period................................................ 20 16 14
Portfolio weighted average per square foot (2):
Revenues
Base rents......................................................................... $13.61 $13.43 $13.41
Percentage rents................................................................... 0.57 0.49 0.44
Tenant reimbursements.............................................................. 6.54 6.20 6.44
Interest and other................................................................. 1.79 1.74 2.09
------ ------ ------
Total revenues..................................................................... 22.51 21.86 22.38
Expenses
Property operating................................................................. 5.14 5.01 5.03
Real estate taxes.................................................................. 1.64 1.30 1.44
Depreciation and amortization...................................................... 4.66 4.73 4.46
Corporate general and administrative............................................... 0.98 0.99 1.12
Interest........................................................................... 6.30 6.01 6.02
Other charges...................................................................... 0.56 2.11(4) 0.60
------ ------ ------
Total expenses..................................................................... 19.28 20.15 18.67
------ ------ ------
Income before minority interests and extraordinary item............................ $ 3.23 $ 1.71 $ 3.71
====== ====== ======
Factory outlet center weighted average per square foot (3):
Revenues
Base rents......................................................................... $14.19 $ 14.18 $14.36
Percentage rents................................................................... 0.63 0.55 0.51
Tenant reimbursements.............................................................. 6.96 6.75 7.16
Interest and other................................................................. 1.75 0.82 0.66
------ ------ ------
Total revenues..................................................................... 23.53 22.30 22.69
Expenses
Property operating................................................................. 5.40 5.45 5.54
Real estate taxes.................................................................. 1.67 1.29 1.46
Depreciation and amortization...................................................... 4.67 4.87 4.38
Interest........................................................................... 6.31 6.82 6.81
Other charges...................................................................... 0.43 0.81(5) 0.23
------ ------ ------
Total expenses..................................................................... 18.48 19.24 18.42
------ ------ ------
Income before minority interests, corporate general and administrative expenses,
and extraordinary item........................................................... $ 5.05 $ 3.06 $ 4.27
====== ====== ======
====================================================================================================================================
Notes:
(1) Includes total GLA in which the Company receives substantially all of the
economic benefit.
(2) Includes factory outlet centers operated under unconsolidated joint venture
partnerships with unrelated third parties.
(3) Based on occupied GLA weighted by months of operation.
(4) Includes certain nonrecurring charges of $6,131, or $1.51 per square foot,
relating to the prepayment of long-term debt recorded during 1996.
(5) Includes certain nonrecurring charges of $1,806, or $0.51 per square foot,
relating to the prepayment of long-term debt recorded during 1996.
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
For the year ended December 31, 1997, the Company reported net income of
$5,905. During the third quarter of 1997, the Company recorded an extraordinary
loss of $2,061 related to the pre-payment of certain long-term debt. For the
year ended December 31, 1997, the net loss applicable to common shareholders was
$6,821, or $0.36 per common share on a basic and diluted basis. For the year
ended December 31, 1996, the Company reported net income of $8,061. These
results included a nonrecurring charge and an extraordinary loss of $6,131 and
$1,017 (net of minority interests of $3,263), respectively, related to the
pre-payment of certain long-term debt. For the year ended December 31, 1996, the
net loss applicable to common shareholders was $6,175, or $0.75 per common share
on a basic and diluted basis.
Total revenues were $129,130 for the year ended December 31, 1997,
compared to $89,040 for the year ended December 31, 1996, an increase of
$40,090, or 45%. Base rents increased $23,336, or 42.7%, in 1997 compared to
1996. These increases are primarily due to the Portfolio Expansion, including
the effect of the acquisition of seven factory outlet centers from unrelated
third parties and the Company's purchase of its joint venture partner's 25%
partnership interest in a factory outlet center on September 2, 1997.
Straight-line rents (included in base rents) were $643 and $600 for the years
ended December 31, 1997 and 1996, respectively. The average base rent per square
foot for new factory outlet leases negotiated and executed by the Company was
$15.52 and $15.36 for the years ended December 31, 1997 and 1996, respectively.
Percentage rents, which represent rents based on a percentage of sales
volume above a specified threshold, increased $1,290, or 64.9%, during the year
ended December 31, 1997 compared to the same period in 1996. This increase was
attributable to higher reported merchant sales in 1997 and the Portfolio
Expansion.
As summarized in TABLE 3, merchant sales reported to the Company
increased by $389.9 million, or 37.3%, to $1,434.2 million from $1,044.3 million
for the years ended December 31, 1997 and 1996, respectively. The increase in
total reported merchant sales is primarily due to the Portfolio Expansion,
including the effect of the acquisition of certain properties in 1997. The
weighted average reported merchant sales per square foot increased by 3.1% to
$236.20 per square foot in 1997 from $229.08 per square foot in 1996. Total
merchant occupancy cost per square foot increased slightly from $21.12 in 1996
to $21.36 in 1997 but decreased as a percentage of reported sales from 8.64% to
8.39%, respectively. The decrease in the cost of merchant occupancy to reported
sales is primarily due to an increase in the weighted average reported merchant
sales per square foot for the Company's entire factory outlet portfolio.
Table 3--Summary of Reported Merchant Sales(1) A summary of reported factory
outlet merchant sales and related data for 1997, 1996 and 1995 follows:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
Total reported merchant sales (in millions)(1)................................................. $1,434.2 $1,044.3 $ 809.6
======== ======== =======
Weighted average reported merchant sales per square foot(2):
All store sales............................................................................ $ 236.20 $ 229.08 $235.99
======== ======== =======
Same-space sales........................................................................... $ 231.89 $ 232.45
======== ========
Total merchant occupancy cost per square foot(3)............................................... $ 21.36 $ 21.12 $ 21.64
======== ======== =======
Cost of merchant occupancy to reported sales(4)............................................... 9.04% 9.22% 9.17%
======== ======== =======
Cost of merchant occupancy (excluding marketing contributions) to reported sales(5)........... 8.39% 8.64% 8.48%
======== ======== =======
===================================================================================================================================
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 factory outlet
centers. Several of the Company's factory 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 January 1,
1996.
(3) Total merchant occupancy cost per square foot includes base rents,
percentage rents and tenant reimbursements which includes tenant marketing
contributions.
(4) Computed as follows: total merchant occupancy cost per square foot divided
by total weighted average reported merchant sales per square foot.
(5) Computed as follows: total merchant occupancy cost per square foot
(excluding marketing contributions paid by merchants) divided by total
weighted average reported merchant sales per square foot.
Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, increased by $12,265, or 48.6%, in 1997
over 1996. These increases are primarily due to the Portfolio Expansion,
including the effect of the acquisition of seven factory outlet centers from
unrelated third parties and the Company's purchase of its joint venture
partner's 25% partnership interest in a factory outlet center on September 2,
1997.
As shown in TABLE 4, tenant reimbursements as a percentage of
recoverable property operating expenses and real estate taxes was 96.4% in 1997
compared to 98.2% in 1996. These levels reflect the Company's continued efforts
to contain operating expenses at its properties while requiring merchants to pay
their pro rata share of these expenses. TABLE 4 sets forth recoveries from
merchants as a percentage of total recoverable expenses for 1997, 1996 and 1995:
Table 4--Tenant Recoveries as a Percentage of Total Recoverable Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of Expenses
Year Recovered from Tenants(1)
- ------------------------------------------------------------------------------------------------------------------------------------
1997................................................................................................ 96.4%
1996................................................................................................ 98.2%
1995................................................................................................ 99.6%
====================================================================================================================================
Note:
(1) Total recoverable expenses include property operating expenses and real
estate taxes.
Income from investment partnerships decreased by $1,136, or 91.7%, to
$103 for the year ended December 31, 1997 compared to $1,239 for the year ended
December 31, 1996. This decrease reflects the Company's purchases of (i) its
joint venture partner's first mortgage and 50% partnership interest in Grove
City Factory Shops Partnership on November 1, 1996 and (ii) its joint venture
partner's first mortgage and 25% partnership interest in Buckeye Factory Shops
Partnership on September 2, 1997. As a result of these acquisitions, the Company
owns 100% of both Grove City Factory Shops and Buckeye Factory Shops. Prior to
the acquisition dates, the operating results of these factory outlet centers
were accounted for by the Company under the equity method of accounting.
Commencing with their respective acquisition dates, the operating results of
these factory outlet centers were included in the consolidated results of the
Company.
Interest and other income increased by $4,335, or 74.1%, to $10,185
during the year ended December 31, 1997 as compared to $5,850 for the year ended
December 31, 1996. The increase reflects higher (i) interest income of $2,954,
(ii) gains on sales of land of $988, (iii) municipal assistance income of $903,
(iv) push cart income of $304, (v) temporary tenant income of $218, (vi) lease
termination income of $213, and (vii) all other ancillary income of $63.
Partially offsetting these increases were reduced property development and
construction management fees and leasing commissions of $1,308. The increase in
interest income was primarily due to interest earnings on the Company's
expansion loan escrow account included in restricted cash.
Property operating expense increased by $9,071, or 44.4%, to $29,492 in
1997 compared to $20,421 in 1996. Real estate taxes expense increased by $4,129,
or 78.1%, to $9,417 in 1997 from $5,288 in 1996. Depreciation and amortization
expense increased by $7,459, or 38.7%, to $26,715 in 1997, compared to $19,256
in 1996. The increases in property operating, real estate taxes, and
depreciation and amortization expense are primarily due to the Portfolio
Expansion, including the acquisition of seven factory outlet centers from an
unrelated third parties and the Company's purchase of its joint venture
partner's partnership interest in two factory outlet centers.
Table 5--Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense for 1997, 1996
and 1995 are summarized as follows:
----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Building and improvements................................................................. $13,987 $ 9,471 $ 8,159
Land improvements......................................................................... 2,838 2,161 1,440
Tenant improvements....................................................................... 7,372 5,165 3,563
Furniture and fixtures.................................................................... 858 671 554
Leasing commissions(1).................................................................... 1,660 1,788 1,722
------- ------- -------
Total............................................................................... $26,715 $19,256 $15,438
======= ======= =======
===================================================================================================================================
Note:
(1) In accordance with generally accepted accounting principles ("GAAP"),
leasing commissions are classified as intangible assets. Therefore, the
amortization of leasing commissions is reported as a component of
depreciation and amortization expense.
As shown in TABLE 6, interest expense increased by $11,637, or 47.5%, to
$36,122 in 1997 compared to $24,485 in 1996. This increase reflects higher
interest incurred of $12,241, a reduction in interest earned on interest rate
protection contracts of $86, an increase in amortization of deferred financing
costs of $11, and an increase in amortization of interest rate protection
contracts of $7. Partially offsetting these items was an increase in the amount
of interest capitalized in connection with development projects of $708.
The increase in interest incurred is primarily attributable to an
increase of $166,015 in the Company's average debt outstanding during 1997
compared to 1996. The increase in interest incurred also reflects a slightly
higher weighted average interest rate for the year ended December 31, 1997
compared to the same period in 1996. The weighted average interest rates were
7.36% and 7.22% for 1997 and 1996, respectively.
Table 6--Components of Interest Expense
The components of interest expense for 1997, 1996 and 1995 are
summarized as follows:
----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Interest incurred...................................................................... $36,551 $24,310 $19,354
Interest capitalized................................................................... (4,056) (3,348) (2,336)
Interest earned on interest rate protection contracts.................................. (115) (201) (721)
Amortization of deferred financing costs............................................... 2,352 2,341 3,248
Amortization of interest rate protection contracts..................................... 1,390 1,383 1,276
------- ------- -------
Total............................................................................ $36,122 $24,485 $20,821
======= ======= =======
==================================================================================================================================
Other charges decreased by $5,352 to $3,234 in 1997 compared to $8,586
for 1996. The 1996 amount reflects a nonrecurring loss of $6,131 related to the
prepayment of certain long-term debt. Excluding this nonrecurring loss, other
charges increased by $779, or 31.2%, in 1997. This increase reflects higher
marketing costs of $272, an increase in the provision for uncollectible accounts
receivable of $260, a higher provision for potentially unsuccessful
pre-development efforts of $150, and an increase in other miscellaneous charges
of $97.
Table 7--Capital Expenditures
The components of capital expenditures for 1997, 1996 and 1995 are
summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
New developments.................................................................. $ 34,175 $ 33,787 $59,222
Property acquisitions, net......................................................... 191,345(1) 131,593(2) --
Expansions and renovations......................................................... 37,941 20,428 19,237
Re-leasing tenant allowances....................................................... 561 473 616
-------- --------- -------
Total............................................................................ $264,022 $ 186,281 $79,075
======== ========= =======
=================================================================================================================================
Notes:
(1) Includes the net assets acquired by the Company during 1997 consisting of
(i) the purchase of seven factory outlet centers ($166,987) and (ii) the
purchase of the Company's joint venture partner's partnership interest in
Buckeye Factory Shops ($24,358).
(2) Includes the net assets acquired by the Company during 1996 consisting of
(i) the purchase of two factory outlet centers ($71,770) and (ii) the
purchase of the Company's joint venture partner's partnership interest in
Grove City Factory Shops ($57,094).
Table 8--Consolidated Quarterly Summary of Operations
-----------------------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------------- --------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------------------------------------------
Total revenues...................... $36,206 $31,549 $31,213 $30,162 $25,928 $21,831 $20,150 $21,131
Total expenses...................... 28,826 27,458 27,630 26,669 22,224 17,656 24,100 18,074
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before minority
interests and extraordinary item. 7,380 4,091 3,583 3,493 3,704 4,175 (3,950) 3,057
(Income) loss allocated to
minority interests............... (2,778) (2,540) (2,672) (2,591) (2,568) (1,810) 4,993 1,477
------- ------- ------- ------- ------- ------- ------- -------
Income before extraordinary item.... 4,602 1,551 911 902 1,136 2,365 1,043 4,534
Extraordinary item--loss on early
extinguishment of debt, net of
minority interests in the amount
of $0 in 1997 and $3,263 in 1996. -- (2,061) -- -- -- -- (1,017) --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................... 4,602 (510) 911 902 1,136 2,365 26 4,534
Income allocated to preferred
shareholders..................... 3,446 3,094 3,093 3,093 3,000 3,000 3,000 5,236
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) applicable to
common shares.................... $ 1,156 $(3,604) $(2,182) $(2,191) $(1,864) $ (635) $(2,974) $ (702)
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common share
basic and diluted (1):
Income (loss) before
extraordinary item............ $ 0.04 $ (0.08) $ (0.14) $ (0.15) $ (0.14) $ (0.05) $ (0.62) $ (0.24)
Extraordinary item............. -- (0.11) -- -- -- -- (0.32) --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).............. $ 0.04 $ (0.19) $ (0.14) $ (015) $ (0.14) $ (0.05) $ (0.94) $ (0.24)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average common shares
outstanding...................... 27,295 19,159 15,795 14,344 13,405 13,322 3,171 2,875
======= ======= ======= ======= ======= ======= ======= =======
Distributions paid per common share.. $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.295 $ 0.440(2) $ 0.295 $ 0.295
======= ======= ======= ======= ======= ======= ======= =======
===================================================================================================================================
Notes:
(1) On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" (see Note 2 - "Summary of
Significant Accounting Policies - - Earnings per Share" of the Notes to
Consolidated Financial Statements). The adoption of SFAS No. 128 had no
impact on the Company's earnings per share computations for all periods
presented and, therefore, no restatement of prior period computations was
required.
(2) Includes a special cash distribution of $0.145 per common share relating to
the Company's exchange offer completed in June 1996 (see Note 8 -- "Equity
Offerings and Other Transactions" of the Notes to Consolidated Financial
Statements).
Comparison of the year ended December 31, 1996 to the year ended December 31,
1995
For the year ended December 31, 1996, the Company reported net income of
$8,061 on total revenues of $89,040. These results include a nonrecurring charge
and an extraordinary loss of $6,131 and $1,017 (net of minority interests of
$3,263), respectively, related to a binding loan commitment that the Company
obtained on June 5, 1996 resulting in the pre-payment of certain long-term debt.
For the year ended December 31, 1996, the net loss applicable to common
shareholders was $6,175, or $0.75 per common share on a basic and diluted basis.
For the year ended December 31, 1995, the Company reported net income of $18,170
on total revenues of $77,398. For the year ended December 31, 1995, the net loss
applicable to common shareholders was $2,774, or $0.96 per common share on a
basic and diluted basis.
Total revenues were $89,040 for the year ended December 31, 1996, as
compared to $77,398 for the year ended December 31, 1995, an increase of
$11,642, or 15.0%. Base rents increased $8,342, or 18.0%, in 1996 compared to
1995. These increases were primarily due to the Portfolio Expansion, including
the effect of the acquisition of two factory outlet centers from an unrelated
third party on November 1, 1996 and the Company's purchase of its joint venture
partner's 50% partnership interest in a factory outlet center on November 1,
1996. Straight-line rents (included in base rents) were $600 and $931 for the
years ended December 31, 1996 and 1995, respectively. The average base rent per
square foot for new factory outlet leases negotiated and executed by the Company
was $15.36 and $14.90 for the years ended December 31, 1996 and 1995,
respectively.
As summarized in TABLE 3, merchant sales reported to the Company
increased by $234.7 million, or 29.0%, to $1,044.3 million from $809.6 million
for the years ended December 31, 1996 and 1995, respectively. The increase in
total reported merchant sales was primarily due to the Portfolio Expansion,
including the effect of the acquisition of certain properties in 1996. However,
the weighted average reported merchant sales per square foot decreased by 2.9%
to $229.08 per square foot from $235.99 per square foot for the years ended
December 31, 1996 and 1995, respectively. The Company's factory outlet centers
(including centers operated under partnerships with unrelated third parties)
contained an average of 275,238 and 254,765 square feet of GLA at December 31,
1996 and 1995, respectively. The increase in the cost of merchant occupancy to
reported sales was primarily due to a decrease in the weighted average reported
merchant sales per square foot for the Company's entire factory outlet
portfolio.
Tenant reimbursements, which represent the contractual recovery from
tenants of certain operating expenses, increased by $2,971, or 13.3%, in 1996
over 1995. This increase was primarily due to the Portfolio Expansion, including
the effect of the acquisition of two factory outlet centers from an unrelated
third party and the Company's purchase of its joint venture partner's first
mortgage and 50% partnership interest in a factory outlet center on November 1,
1996.
As shown in TABLE 4, tenant reimbursements as a percentage of
recoverable operating expenses were 98.2% in 1996 compared to 99.6% in 1995.
These levels reflect the Company's continued efforts to contain operating
expenses at its properties while requiring merchants to pay their pro rata share
of these expenses. TABLE 4 highlights the trend of recoveries from merchants as
a percentage of total recoverable expenses.
Income from investment partnerships decreased by $490, or 28.3%, to
$1,239 for the year ended December 31, 1996 compared to $1,729 for the year
ended December 31, 1995. This decrease reflected the Company's purchase of its
joint venture partner's first mortgage and 50% partnership interest in Grove
City Factory Shops Partnership on November 1, 1996. As a result of its
acquisition, the Company owns 100% of this factory outlet center and, therefore,
commencing November 1, 1996, its operations were included in the consolidated
results of the Company. Prior to November 1, 1996, the Company accounted for its
interest under the equity method of accounting. The decrease in income from
investment partnerships in 1996 compared to 1995 was offset, in part, by the
openings of Arizona Factory Shops (Phase II-September 1996) and Buckeye Factory
Shops (Phase I-November 1996).
Interest and other income increased by $352, or 6.4%, to $5,850 during
the year ended December 31, 1996 as compared to the year ended December 31,
1995. The increase reflected higher temporary and customer service income, lease
termination income, and property management fees of $736, $620, and $149,
respectively, partially offset by lower leasing commissions, real estate
brokerage commissions, ancillary income, interest income, municipal assistance
income, and construction and development management fees of $364, $278, $139,
$115, $104 and $47, respectively. Also offsetting this increase was a $106 gain
on the sale of land during the year ended December 31, 1995.
Property operating expense increased by $3,032, or 17.4%, to $20,421 in
1996 compared to $17,389 in 1995. Real estate taxes expense increased by $311,
or 6.2%, to $5,288 in 1996 from $4,977 in 1995. Depreciation and amortization
expense increased by $3,818, or 24.7%, to $19,256 in 1996, compared to $15,438
in 1995. The increases in property operating expense and real estate taxes
expense, and depreciation and amortization expense were primarily due to the
Portfolio Expansion, including the acquisition of two factory outlet centers
from an unrelated third party and the Company's purchase of its joint venture
partner's 50% partnership interest in a factory outlet center on November 1,
1996.
As shown in TABLE 6, interest expense increased by $3,664, or 17.6%, to
$24,485 in 1996 compared to $20,821 in 1995. This increase reflected higher
interest incurred of $4,956, an increase in amortization of interest rate
protection contracts of $107 and a reduction in interest earned on interest rate
protection contracts of $520, partially offset by a decrease in amortization of
deferred financing costs of $907 and an increase in the amount of interest
capitalized in connection with development projects of $1,012.
The increase in interest incurred was primarily attributable to an
increase of approximately $86,256 in the Company's average debt outstanding
during 1996 compared to 1995. Additionally, the increase in interest incurred
was offset by a decrease of 0.59% in the weighted average interest rate for the
year ended December 31, 1996 compared to the same period in 1995. The weighted
average interest rates were 7.22% and 7.81% for 1996 and 1995, respectively.
The decrease in amortization of deferred financing costs was primarily
attributable to reduced amortization expense related to certain deferred
financing costs which were written-off in 1996. These costs were part of the
$10,411 nonrecurring loss recorded in the second quarter of 1996 related to a
binding loan commitment that the Company obtained on June 5, 1996 in connection
with the Company's refinancing approximately $253,000 of debt.
Other charges increased by $6,497 to $8,586 in 1996 compared to $2,089
for 1995. This increase was primarily due to the nonrecurring loss of $6,131
described above. Excluding this nonrecurring charge, other charges increased by
$366, or 17.5%, to $2,455 in 1996 reflecting a higher provision for
uncollectible accounts receivable of $364, an increase in ground lease expense
of $228, offset by a lower provision for potentially unsuccessful
pre-development efforts of $204 and a decline in miscellaneous other charges of
$22.
Liquidity and Capital Resources
Sources and Uses of Cash
For the year ended December 31, 1997, net cash provided by operating
activities was $49,856, net cash used in investing activities was $229,956, and
net cash provided by financing activities was $182,549.
The primary uses of cash for investing activities during 1997 included (i)
costs associated with the acquisition of seven factory outlet centers and the
purchase of an unrelated joint venture partner's 25% equity interest in a
factory outlet center, (ii) costs associated with development and construction
of expansions to existing factory outlet centers aggregating 224,000 square feet
of GLA which opened during 1997, (iii) costs associated with the completion of
factory outlet centers and expansions to existing factory outlet centers
aggregating 930,000 square feet of GLA which opened during 1996, and (iv) costs
for pre-development activities associated with future developments.
The sources of cash from financing activities during 1997 included: (i) net
proceeds from public and private equity offerings totaling $242,729 and (ii)
proceeds from new borrowings of $160,057. Such proceeds were partially offset by
(i) principal repayments on notes payable of $175,683, (ii) preferred and common
stock distributions of $33,605, and (iii) distributions to minority interests
(including distributions to limited partners of the Operating Partnership) of
$10,366.
Sources and Uses of Cash -- Equity Offerings
On January 10, 1997, the Company filed a Form S-3 Registration Statement
(the "January 1997 Shelf Registration") with the Securities and Exchange
Commission (the "SEC") to register $100,000 of the Company's equity securities.
On February 20, 1997, the Company completed a public offering by issuing
2,080,000 shares of its Common Stock at $12.50 per share and 175,800 shares of
its Series B Cumulative Participating Convertible Preferred Stock (the "Series
B Convertible Preferred Stock") at $22.75 per share. In addition, on March 10,
1997, the underwriter of the public offering exercised its overallotment
option to purchase 310,300 shares of the Company's Common Stock at $12.50 per
share. As a result of the public offering and the exercise of the overallotment
option, the Company received net proceeds of $31,754 that were used to (i)
repay certain outstanding indebtedness aggregating $26,500, (ii) fund
development and construction activities, and (iii) fund general corporate
expenditures.
On June 17, 1997, the Company filed a Form S-3 Registration Statement
(the "June 1997 Shelf Registration") with the SEC to register $300,000 of the
Company's equity securities, including $66,122 of the Company's equity
securities that remained available under the January 1997 Shelf Registration.
On August 8, 1997, the Company entered into a purchase agreement with an
institutional investor providing for the issuance of a new series of cumulative
convertible non-voting preferred securities (the "Series C Preferred
Securities") at $13.75 per unit, or an aggregate of $60,000 in cash (the
"Private Placement"). The Series C Preferred Securities pay dividends equivalent
to the amount being paid on the Company's Common Stock, with an annual minimum
equal to $1.18 per security. In addition, the Company, subject to certain
conditions, has agreed to waive the ownership limitations otherwise applicable
to the Common Stock to permit the investor to own, at any one time, the shares
of Common Stock issuable upon conversion of the Series C Preferred Securities.
The Company has the right to call the Series C Preferred Securities, at par,
after ten years. Subject to certain conditions, the Series C Preferred
Securities may be issued in the form of shares of preferred stock in the Company
or preferred units of partnership interest in Prime Retail, L.P. (the "Operating
Partnership") that are exchangeable for shares of preferred stock or Common
Stock on a one-to-one basis. The Series C Preferred Securities may be
converted into shares of Common stock on a one-to-one basis commencing
August 8, 1998 (or earlier subject to certain conditions). See Note 8 - "Equity
Offerings and Other Transactions" of the Notes to the Consolidated Financial
Statements for additional information.
In September 1997, the Company completed a public offering of 11,500,000
shares (including 1,500,000 shares related to exercise of underwriters'
overallotment option) of its Common Stock at $14.00 per share (the "September
1997 Offering"). In addition, on September 8, 1997, the Company issued 727,273
Series C Preferred Securities at $13.75 per unit pursuant to the initial sale
under the Private Placement. As a result of the September 1997 Offering and the
initial sale under the Private Placement (collectively, the "September Capital
Transactions"), the Company received net proceeds of $161,930 after commissions
and underwriting discounts. A portion of the net proceeds from the September
Capital Transactions were used (i) to repay certain outstanding corporate
indebtedness aggregating $113,410 and (ii) to acquire the 25% ownership interest
of the Company's joint venture partner in Buckeye for $23,148 (including $22,642
of mortgage indebtedness relating to such property). The remaining net proceeds
from the September Capital Transactions of $26,192 were used (i) to fund
development and construction activities, (ii) to fund property acquisitions, and
(iii) for general corporate purposes.
As a result of the September Offering, as of December 31, 1997, the
Company had $139,000 of availability under the June 1997 Shelf Registration.
From time to time, the Company will consider issuing additional equity
securities under the June 1997 Shelf Registration for the development or
acquisition of additional properties, the expansion and improvement of existing
properties, repayment of indebtedness, and for general corporate purposes.
On December 2, 1997 the Company issued 3,636,363 shares of its Series C
Preferred Securities at $13.75 per share pursuant to the final sale under
the Private Placement. As a result of this issuance, the Company received
net proceeds of $49,045 that were used in the acquisition of Niagara
International Factory Outlets and Shasta Factory Stores.
Sources and Uses of Cash -- Property Acquisitions
On February 13, 1997, the Company, acquired Oak Creek Factory Stores,
Bend Factory Outlets and Factory Outlets at Post Falls from an unrelated third
party for an aggregate purchase price of $37,250. The Company financed the
purchase with loan proceeds from a financial institution and a $4,000 promissory
note issued to the seller. The operating results of the Company for 1997 include
the results of these acquisitions effective with the closing on February 13,
1997.
Oak Creek Factory Outlets is located in Sedona, Arizona, which is north
of Phoenix and south of the Grand Canyon. Oak Creek Factory Outlets contains
approximately 82,000 square feet of GLA and was 100% executed at December 31,
1997. Bend Factory Outlets is located in Bend, Oregon, which is east of Eugene,
Oregon and southeast of Portland. Bend Factory Outlets contains approximately
97,000 square feet of GLA and was 86% executed at December 31, 1997. Factory
Outlets at Post Falls is located in Post Falls, Idaho, which is 30 miles east of
Spokane, Washington. Factory Outlets at Post Falls contains approximately
179,000 square feet of GLA and was 84% executed at December 31, 1997.
On September 2, 1997, the Company acquired the 25% ownership interest in
Buckeye from its joint venture partner, SBRC, for $23,148 (including $22,642 of
mortgage indebtedness relating to such property), thereby increasing its
ownership percentage in such property to 100%. Prior to September 2, 1997, the
Company accounted for its 75% investment in Buckeye using the equity method of
accounting. Commencing September 2, 1997, the operating results of Buckeye are
consolidated. The Company financed the acquisition with proceeds from the
September Offering.
On October 29, 1997, the Company acquired Tidewater Outlet Mall,
Manufacturer's Outlet Mall, Kittery Outlet Village (collectively "Prime Retail
Outlets of Kittery"), and Latham Factory Outlet Center (the "Latham Property")
from an unrelated third party for an aggregate purchase price of $26,000. The
Company financed the purchase primarily with the proceeds from the September
Offering.
Prime Retail Outlets of Kittery are located in Kittery, Maine and serve
the Boston, Massachusetts and Portland, Maine markets. Prime Retail Outlets of
Kittery contain approximately 121,000 square feet of GLA, and were 100% executed
as of December 31, 1997. The Latham Property is located in Latham, New York,
north of Albany, New York and south of Saratoga Springs, New York. The Latham
Property contains approximately 43,000 square feet of GLA and was 100% executed
as of December 31, 1997.
On December 2, 1997, the Company acquired Niagara International Factory
Outlets ("Niagara") and Shasta Factory Stores ("Shasta") from an unrelated third
party for an aggregate purchase price of $100,975, including the assumption of
mortgage indebtedness of $31,368. The Company financed the purchase with
proceeds from the September Offering and the Private Placement.
Niagara is located in Niagara Falls, New York and serves Buffalo, New
York; Ontario, Canada; and tourist markets. Niagara contains approximately
534,000 square feet of GLA and was 88% executed as of December 31, 1997. Shasta
is located six miles west of Redding, California and serves the Northern
California tourist market. Shasta contains approximately 165,000 square feet of
GLA and was 91% executed as of December 31, 1997.
During 1998, the Company will explore acquisitions of factory outlet
centers in the United States and in Europe as well as consider possible
strategic acquisitions of other assets in the retail sector. The Company has
evaluated and is evaluating such opportunities and prospects and will continue
to do so throughout 1998. The Company cannot predict if any transaction will be
consummated, nor the terms or form of consideration required.
Merger Agreement
On November 12, 1997 and as amended on February 1, 1998, the Company
entered into a definitive merger agreement (as amended, the "Merger Agreement")
with Horizon Group, Inc. ("Horizon") for an aggregate consideration of
approximately $945,200, including the assumption of $556,900 of Horizon debt and
estimated transaction costs. Upon completion of the transaction, the Company
will own and operate 48 outlet centers totaling approximately 13,406,261 square
feet of GLA, including the purchase of Horizon's joint venture partner's
50% ownership interest in Finger Lakes Outlet Center for $46,100 (the
"Finger Lakes Acquisition").
Under the terms of the Merger Agreement, the Company will pay a fixed
exchange ratio of 0.20 of a share of Series B Convertible Preferred Stock and
0.597 of a share of Common Stock for each share of common stock of Horizon. In
addition, each common unit in Horizon Partnership will entitle the holder to
receive 0.9193 of a Common Unit of the Operating Partnership that will be
exchangeable for a like number of shares of Common Stock of the Company.
Immediately prior to the merger, Horizon Group Properties, Inc. ("HGP"),
a subsidiary of Horizon, will become the sole general partner of Horizon/Glen
Outlet Center Limited Partnership ("Horizon Partnership") and the common stock
of HGP will be distributed to the shareholders of both the Company and Horizon.
All of the common equity of HGP will be distributed to the convertible preferred
and common shareholders and unitholders of the Company and the shareholders and
limited partners of Horizon based on their ownership in the Company immediately
following the merger. It is presently expected that following the merger one
share of common stock of HGP will be distributed for every 10 shares of Common
Stock or Common Units of the Company, and that approximately 1.196 shares of
common stock of HGP will be distributed for every 10 shares of Series B
Convertible Preferred Stock held in the Company. Immediately prior to the
closing of the merger, the Company will pay a special cash distribution of $0.60
per share of Series B Convertible Preferred Stock and $0.50 per share/unit of
Common Stock, Series C Preferred Security and Common Unit, as applicable,
totaling $21,865 (the "Special Cash Distribution"). Shareholders and limited
partners in Horizon will not participate in this distribution. HGP will own and
operate 15 outlet centers (including Indiana Factory Shops and Nebraska Crossing
Factory Stores which will be acquired from the Company) totaling 3,084,823
square feet of GLA.
The merger will be accounted for as a purchase. It is conditioned upon,
among other things, the approvals of each Company's shareholders and partners
and the satisfaction of other customary conditions. The closing is expected
during the second quarter of 1998. The exchange of shares of Horizon for shares
of the Company will be made on a tax-free basis.
The Company expects to finance the Finger Lakes Acquisition, the Special
Cash Distribution and estimated closing costs of $18,750 with proceeds from
certain contemplated loan facilities expected to close concurrent with the
closing of the merger. There can be no assurance that the Company will be
successful in obtaining the required amount of debt financing or that the terms
of such loan facilities will be as favorable as the Company has experienced in
prior periods.
Planned Development
Management believes that there is sufficient demand for continued
development of new factory outlet centers and expansions of certain existing
factory outlet centers. The Company expects to open approximately 751,000 square
feet of GLA during 1998 including two new factory outlet centers currently under
construction. At December 31, 1997, the budgeted remaining capital expenditures
for 1998 planned developments aggregated approximately $78,200, while
anticipated capital expenditures related to the completion of expansions of
existing factory outlet centers opened during 1997 (aggregating 224,000 square
feet of GLA) approximated $5,200.
Management believes that the Company has sufficient capital and capital
commitments to fund the remaining capital expenditures associated with its 1997
and 1998 development activities. These funding requirements are expected to be
met, in large
part, with the proceeds from various loan facilities, including the financing of
certain unencumbered properties. If adequate financing for such development and
expansion is not available, the Company may not be able to develop new centers
or expand existing centers at currently planned levels.
The Company currently plans to open one new factory outlet center and
several expansions in 1999 that are expected to contain approximately 400,000
square feet of GLA, in the aggregate, and have a total expected development cost
of approximately $56,000. The Company expects to fund the development cost of
these projects from (i) certain line of credit facilities, (ii) joint venture
partners, (iii) retained cash flow from operations, (iv) construction loans, and
(v) the potential sale of common or preferred equity in the public or private
capital markets. As of December 31, 1997, there were no material commitments
with regard to the construction of the new factory outlet centers and expansions
scheduled to open in 1999. There can be no assurance that the Company will be
successful in obtaining the required amount of equity capital or debt financing
for the 1999 planned openings or that the terms of such capital raising
activities will be as favorable as the Company has experienced in prior periods.
Debt Transactions
On February 13, 1997, the Company closed on $30,000 of loan facilities
with Nomura Asset Capital Corporation. The transaction provided (i) a $27,000
nonrecourse first mortgage loan (the "First Mortgage Loan") and (ii) a junior
secured loan (the "Junior Secured Loan") of $3,000. The First Mortgage Loan (i)
is cross collateralized by first mortgages on three of the Company's factory
outlet centers, (ii) bears a fixed rate of interest of 8.35%, and (iii) requires
monthly principal and interest payments pursuant to a 360-month amortization
schedule. The Junior Secured Loan is a recourse loan to the Company that (i) is
secured by a pledge of excess cash flow after debt service on the First Mortgage
Loan, (ii) bears a variable interest rate at the London Interbank offered rate
for 30-day deposits in U.S. dollars ("30-day LIBOR") plus 1.95%, (iii) matures
in three years, (iv) requires monthly interest only payments through April 10,
1998 and (v) monthly principal and interest payments thereafter.
On July 11, 1997, the Company's $15,000 unsecured line of credit (the
"Corporate Line") was renewed. The purpose of the Corporate Line is to provide
working capital to facilitate the funding of short-term operating cash needs of
the Company. The Corporate Line bears an interest rate of 30-day LIBOR plus
2.50% and matures on July 11, 1998. No amounts were outstanding under the
Corporate Line at December 31, 1997.
In September 1997, the Company repaid certain outstanding corporate
indebtedness aggregating $113,410, including the Junior Secured Loan, with
proceeds from certain public and private equity offerings (see Note 8 - "Equity
Offerings and Other Transactions" of the Notes to the Consolidated Financial
Statements). As a result of the prepayment of such indebtedness, the Company
incurred an extraordinary loss of $1,423 related to the write-off of certain
unamortized financing costs. The Company also incurred an extraordinary loss of
$638 related to the write-off of certain unamortized financing costs in
connection with the Buckeye Acquisition (see Note 5 - "Investment in
Partnerships" of the Notes to the Consolidated Financial Statements).
On November 13, 1997, the Company closed on a term loan with Nomura
Securities (Bermuda) Ltd. ("Nomura Securities") of $53,290 (the "Term Loan").
The Term Loan is a recourse loan to the Company that (i) is secured by a pledge
of excess cash flow after debt service on a first mortgage loan collateralized
by 16 of the Company's factory outlet centers, (ii) bears a variable interest
rate of 30-day LIBOR plus 1.95%, (iii) matures on November 11, 1999, (iv)
requires monthly interest-only payments through February 10, 1998 and monthly
interest payments and quarterly principal payments thereafter that approximate a
six-year amortization schedule, and (v) may be subject to earlier principal
payments via "mark-to-market" of the underlying debt instrument.
In addition, on November 13, 1997, the Company closed on a term loan
with Nomura Securities of $3,000 (the "Second Term Loan"). The Second Term Loan
is a recourse loan to the Company that (i) is secured by a pledge of excess cash
flow after debt service on a first mortgage loan collaterlized by three of the
Company's factory outlet centers, (ii) bears a variable interest rate of 30-day
LIBOR plus 1.95%, (iii) matures on February 13, 2000, (iv) requires monthly
interest-only payments through April 10, 1998 and monthly principal and interest
payments thereafter that approximate a five-year amortization schedule, and (v)
may be subject to earlier principal payments via "mark-to-market" of the
underlying debt instrument.
On December 2, 1997, the Company assumed a $31,328 mortgage loan in
connection with the purchase of Niagara International Factory Outlets (the
"Niagara Loan"). The Niagara Loan (i) bears a fixed rate of interest of 6.83%,
(ii) requires monthly principal and interest payments that approximates a
25-year amortization schedule, and (iii) is collateralized by Niagara
International Factory Outlets.
On December 31, 1997, the Company obtained from a financial institution
a commitment for a construction mortgage loan in an amount not to exceed $20,396
(the "Construction Mortgage Loan"). The Construction Mortgage Loan (i) bears a
variable interest
rate at the financial institution's prime rate or, at the Company's option, a
LIBOR index plus 1.75%, (ii) matures on December 31, 1999, and (iii) requires
monthly interest-only payments. The Construction Mortgage Loan is collateralized
by a first mortgage on Lebanon Factory Shops, a factory outlet center located in
Lebanon, Tennessee. At December 31, 1997, no amounts were outstanding on the
Construction Mortgage Loan.
Debt Repayments and Preferred Stock Dividends
The Company's aggregate indebtedness was $515,265 and $499,523 at
December 31, 1997 and 1996, respectively. At December 31, 1997, such
indebtedness had a weighted average maturity of 6. 5 years and bore interest at
a weighted average interest rate of 7.36% per annum. At December 31, 1997,
$74,729 , or 14.5%, of such indebtedness bore interest at fixed rates and
$440,536, or 85.5%, of such indebtedness, including $28,250 of tax-exempt bonds,
bore interest at variable rates. Of the variable rate indebtedness outstanding
at December 31, 1997, $355,996 is scheduled to convert to a fixed rate of 7.782%
in November 1998 for the remaining five year term of such indebtedness.
At December 31, 1997, the Company held interest rate protection
contracts on all $28,250 of its floating rate tax-exempt indebtedness which
expire in 1999 and approximately $355,996 of other floating rate indebtedness
which expire in November 1998 (or approximately 80.8% of its total floating rate
indebtedness). In addition, the Company held additional interest rate protection
contracts on $43,900 (of which $22,000 expires in July 1998 and $21,900 expires
in April 1999) of the $355,998 floating rate indebtedness to further reduce the
Company's exposure to increases in interest rates. See Note 2 -- "Summary of
Significant Accounting Policies" and Note 7 -- "Bonds and Notes Payable" of the
Notes to Consolidated Financial Statements for additional information concerning
the accounting policies and significant terms of the interest rate protection
contracts.
The Company's ratio of debt to total market capitalization at December
31, 1997 (defined as total long-term debt divided by the sum of: (a) the
aggregate market value of the outstanding shares of Common Stock, assuming the
full exchange of Common Units, Series C Preferred Securities into Common Stock;
(b) the aggregate market value of the outstanding shares of Series B Convertible
Preferred Stock; (c) the aggregate liquidation preference of the Series A Senior
Cumulative Preferred Stock ("Senior Preferred Stock") at $25.00 per share; and
(d) the total long-term debt of the Company) was 42.4%.
The Company is obligated to repay $13,951 and $50,179 of mortgage
indebtedness during 1998 and 1999, respectively. Annualized cumulative dividends
on the Company's Senior Preferred Stock, Series B Convertible Preferred Stock,
and Series C Preferred securities outstanding as of December 31, 1997 are
$6,038, $6,336, and $5,149, respectively. These dividends are paid quarterly, in
arrears.
The Company anticipates that cash flow from operations, together with
cash available from borrowings and other sources, including proceeds from the
September Offering and the Private Placement, will be sufficient to satisfy its
debt service obligations, expected distribution and dividend requirements and
operating cash needs for the next year.
Table 9--Taxability of Distributions
TABLE 9 summarizes the taxability of distributions paid during the years
ended December 31, 1997 and 1996. 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).
--------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996
--------------------------------------------------------------------------------------------------------------------------
Senior Preferred Stock
Ordinary income......................................................................... 100.0% 100.0%
Return of capital....................................................................... -- --
Series B Convertible Preferred Stock
Ordinary income......................................................................... 91.3% 38.0%
Return of capital....................................................................... 8.7% 62.0%
Common Stock
Ordinary income......................................................................... -- --
Return of capital....................................................................... 100.0% 100.0%
==========================================================================================================================
No assurances can be made that future distributions will be treated similarly.
Each holder of stock may have a different basis in its stock and, accordingly,
each holder is advised to consult its tax advisors.
Economic Conditions
Substantially all of the merchants' leases contain provisions that
somewhat mitigate the impact of inflation. Such provisions include clauses
providing for increases in base rent and clauses enabling the Company to receive
percentage rentals based on merchants' gross sales. Substantially all leases
require merchants to pay their proportionate share of operating expenses,
including common area maintenance, real estate taxes and promotion, thereby
reducing the Company's exposure to increased costs and operating expenses
resulting from inflation. At December 31, 1997, the Company maintained interest
rate protection contracts to protect against increases in interest rates on
certain floating rate indebtedness (see "Debt Repayments and Preferred Stock
Dividends").
The Company intends to reduce operating and leasing risks by managing
its existing portfolio of properties with the goal of improving its tenant mix,
rental rates and lease terms and attracting high fashion, upscale manufacturers
and national brand-name manufacturers as merchants.
Year 2000
Recognizing the need to ensure that the Company's operations will not be
adversely impacted by year 2000 software failures, management has assessed the
potential impact of the year 2000 on the processing of date-sensitive
information by the Company's computerized information systems. Based on this
assessment, management believes that the Company's primary computerized
information systems are year 2000 compliant and the Company's operations will
not be adversely impacted by year 2000 software failures.
Funds from Operations
Management believes that to facilitate a clear understanding of the
Company's operating results, funds from operations ("FFO") should be considered
in conjunction with net income (loss) presented in accordance with GAAP. In
March 1995, the National Association of Real Estate Investment Trusts ("NAREIT")
established guidelines clarifying the definition of FFO. FFO is defined as net
income (loss) (determined in accordance with GAAP) excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization after adjustments for unconsolidated partnerships and joint
ventures.
The Company generally considers FFO an appropriate measure of liquidity
of an equity REIT because industry analysts have accepted it as a performance
measure of equity REITs. The Company's FFO is not comparable to FFO reported by
other REITs that do not define the term using the current NAREIT definition or
that interpret the current NAREIT definition differently than does the Company.
Therefore, the Company cautions that the calculation of FFO may vary from entity
to 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 allocation to
minority interests and preferred shareholders to FFO for the years ended
December 31, 1997, 1996 and 1995. FFO increased $19,081, or 69.0% to $46,718 for
the year ended December 31, 1997 from $27,637 for the year ended December 31,
1996. The increase in FFO primarily reflects the $6,131 nonrecurring charge
related to the prepayment of certain long-term debt in 1996, offset by the
Portfolio Expansion, including the effect of the acquisition of certain
properties in November 1996.
Table 10--Funds from Operations
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Income before allocations to minority interests and preferred shareholders.............. $ 18,547 $ 6,986 $ 12,806
FFO adjustments:
Real estate depreciation and amortization............................................... 26,413 18,703 14,884
Unconsolidated joint venture adjustments................................................ 1,758 1,948 306
-------- -------- --------
FFO before allocations to minority interests and preferred shareholders................. $ 46,718 $ 27,637 $ 27,996
======== ======== ========
Other Data:
Net cash provided by operating activities............................................... $ 49,856 $ 45,191 $ 36,399
Net cash used in investing activities................................................... (229,956) (232,290) (81,978)
Net cash provided by financing activities............................................... 182,549 176,096 57,547
==================================================================================================================================
The payout ratios based on distributions made by the Company divided by
FFO for the applicable periods were 103.7%, 106.4%, and 108.7%, respectively.
Table 11--Consolidated Quarterly Summary of Funds from Operations
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------- ----------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before allocations to
minority interests and preferred
shareholders........................ $ 7,380 $ 4,091 $ 3,583 $ 3,493 $ 3,704 $ 4,175 $ (3,950) $ 3,057
FFO adjustments:
Real estate depreciation and
amortization........................ 7,108 6,558 6,473 6,274 4,905 3,603 3,281 1,757
Unconsolidated joint venture
adjustments......................... 288 455 530 485 388 822 482 358
-------- -------- -------- -------- -------- -------- -------- --------
FFO before allocations to minority
interests and preferred
shareholders........................ $ 14,776 $ 11,104 $ 10,586 $ 10,252 $ 9,693 $ 9,379 $ 951 $ 7,614
======== ======== ======== ======== ======== ======== ======== ========
Other Data:
Net cash provided by operating
activities.... .................... $ 15,298 $ 18,301 $ 9,301 $ 6,956 $ 13,888 $ 11,718 $ 10,366 $ 9,219
Net cash used in investing activities.. (123,220) (41,697) (17,492) (47,547) (184,130) (24,200) (12,212) (11,748)
Net cash provided by (used in)
financing activities................ 90,518 46,188 (10,906) 56,749 164,564 18,044 3,297 (9,809)
===========================================================================================================================
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, 1998.
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 of the Company as of
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations of the Company
for the years ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Cash Flows of the Company
for the years ended December 31,1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity
of the Company for the years ended December 31, 1997,
1996 and 1995 F-5
Notes to Consolidated Financial Statements of the Company F-6
2. Financial Statement Schedules
The following financial statement schedule of the Company 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-21
Notes to Schedule III F-22
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 Restated Articles of Incorporation of Prime Retail, Inc.
[Restated to incorporate amendment dated August 8, 1997
for purposes of Regulation S-T Section 232.102(c) only]
3.2 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, 1995 (File No. 0-23616).]
4.1 Form of Senior 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 Convertible Preferred Stock Certificate
[Incorporated by reference to the same titled exhibit in
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 (File No. 0-23616).]
4.3 Form of Common Stock Certificate [Incorporated by
reference to the same titled exhibit in the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-23616).]
10.1 Amended and Restated Agreement of Limited Partnership of
Prime Retail, L.P. dated as of September 8, 1997
Exhibit
Number Description
10.1A Common Unit Contribution Agreement [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-11 (Registration No.
333-1666).]
# 10.2 1994 Stock Incentive Plan [Incorporated by reference
to the same titled exhibit in the Company's registration
statement on Form S-11 (Registration No. 33-68536).]
# 10.3 1995 Stock Incentive Plan [Incorporated by reference
to the same titled exhibit in the Company's
registration statement on Form S-11 (Registration No.
333-1666).]
# 10.4 Executive Employment Agreement (Michael W. Reschke)
[Incorporated by reference to the same titled exhibit
in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, as amended (File No.
0-23616).]
10.5 Combined Service and Special Distribution and
Allocation Agreement (Abraham Rosenthal) [Incorporated
by reference to the same titled exhibit in the
Company's registration statement on Form S-4
(Registration No. 333-1784).]
10.5A Special Distribution and Allocation Agreement by and
between the Company, the Operating Partnership and the
Rosenthal Family LLC [Incorporated by reference to the
same titled exhibit in the Company's registration
statement on Form S-4 (Registration No. 333-1784).]
10.5B Indemnification and Option Agreement by and between the
Prime Group, Inc., the Rosenthal Family LLC and
Abraham Rosenthal [Incorporated by reference to the same
titled exhibit in the Company's registration statement on
Form S-4 (Registration No. 333-1784).]
10.6 Combined Service and Special Distribution and Allocation
Agreement (William H. Carpenter, Jr.) [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No.
333-1784).]
10.6A Special Distribution and Allocation Agreement by and
between the Company, the Operating Partnership and the
Carpenter Family Associates LLC [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No.
333-1784).]
10.6B Indemnification and Option Agreement by and between
the Prime Group, Inc., William H. Carpenter, Jr. and
the Carpenter Family Associates LLC [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No.
333-1784).]
# 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 Letter Agreement with R. Bruce Armiger [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).]
10.9 Right of First Refusal Agreement (Northgate
Plaza--Improved Parcel) [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).]
10.10 Right of First Refusal Agreement (Northgate
Plaza--Vacant Parcel) [Incorporated by reference to the
same titled exhibit in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994,
as amended (File No. 0-23616).]
Exhibit
Number Description
10.11 Right of First Refusal Agreement (Huntley Factory Shops)
[Incorporated by reference to the same titled exhibit in
the Company's registration statement on Form S-11
(Registration No. 33-68536).]
10.12 Right of First Refusal Agreement (San Marcos Factory
Shops) [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).]
10.13 Purchase Option Agreement (Northgate Plaza--Excluded
Parcel) [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).]
10.14A Purchase Option Agreement (Huntley Factory Shops)
[Incorporated by reference to the same titled exhibit in
the Company's registration statement on Form S-11
(Registration No. 33-68536).]
10.14B First Amendment to Purchase and Option Agreement (Huntley
Factory Shops) [Incorporated by reference to the same
titled exhibit in the Company's registration statement
on Form S-11 (Registration No. 333-1666).]
10.15 Registration Rights Agreement [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).]
10.16 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).]
10.19 Second Amended and Restated Subscription Agreement of
Abraham Rosenthal regarding Common Units of Prime
Retail, L.P. [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).]
10.20 Second Amended and Restated Subscription Agreement of
William H. Carpenter, Jr. regarding Common Units of
Prime Retail, L.P. [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 Revolving Loan Agreement dated March 2, 1995 between
Gainesville Factory shops Limited Partnership, Florida
Keys Factory Shops Limited Partnership, Indianapolis
Factory Shops Limited Partnership and Nomura Asset
Capital Corporation [Incorporated by reference to the
same titled exhibit in the Company's Current Report on
Form 8-K dated December 18, 1995 (File No. 0-23616).]
# 10.22 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).]
10.23 Secured Promissory Note of Rosenthal Family LLC with
respect to the purchase of the Restricted Common Units
[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).]
10.23A Allonge related to the Secured Promissory Note of
Rosenthal Family LLC [Incorporated by reference to the
same titled exhibit in the Company's registration
statement on Form S-4 (Registration No. 333-1784).]
10.24 Secured Promissory Note of Carpenter Family Associates
LLC with respect to the purchase of the Restricted
Common Units [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).]
10.24A Allonge related to the Secured Promissory Note of
Carpenter Family Associates LLC [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No. 333-
1784).]
10.25 Pledge and Security Agreement of Rosenthal Family LLC
with respect to the purchase of the Restricted Common
Units [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).]
10.26 Pledge and Security Agreement of Carpenter Family
Associates LLC with respect to the purchase of the
Restricted Common Units [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).]
10.27 Guaranty of Abraham Rosenthal with respect to the
purchase of the Restricted Common Units [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).]
10.27A Reaffirmation of Pledge and Guaranty with respect to the
Restricted Common Units of Rosenthal Family LLC and
Abraham Rosenthal [Incorporated by reference to the same
titled exhibit in the Company's registration statement
on Form S-4 (Registration No. 333-1784).]
10.28 Guaranty of William H. Carpenter, Jr. with respect to the
purchase of the Restricted Common Units [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).]
10.28A Reaffirmation of Pledge and Guaranty with respect to the
Restricted Common Units of Carpenter Family Associates
LLC and William H. Carpenter, Jr. [Incorporated by
reference to the same titled exhibit in the Company's
registration statement on Form S-4 (Registration No.
333-1784).]
10.29 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).]
10.30 Indemnity Agreement made by the Company in favor of 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).]
10.31 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. 0-23616).]
Exhibit
Number Description
10.31A 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 Form of Standby Bond Purchase and Indemnity Agreement
[Incorporated by reference to the same titled exhibit in
the Company's registration statement on Form S-11
(Registration No. 33-68536).]
10.33 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).]
10.34 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).]
10.35 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).]
# 10.36 Letter Agreement with David G. Phillips regarding the
purchase of units in Prime Retail, L.P. dated August 6,
1996
12 Statement re Computation of Ratio Earnings to Combined
Fixed Charges and Preferred Stock Dividends
21 Subsidiaries of Prime Retail, Inc.
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule -- Restated 1997 Interim Periods
27.3 Financial Data Schedule -- Restated 1996 Periods
Note:
# Management contract or compensatory plan or arrangement required to
be filed pursuant to Item 14(c).
(b) Reports on Form 8-K
On October 29, 1997, the Company filed a Current Report on Form 8-K,
dated October 29, 1997, reporting that the Company purchased Tidewater Outlet
Mall, Manufacturer's Outlet Mall, Kittery Outlet Village (collectively "Prime
Retail Outlets of Kittery") and Latham Factory Outlet Center. No financial
statements were included.
On November 12, 1997, the Company filed a Current Report on Form 8-K,
dated November 12, 1997, reporting that the Company and Horizon Group, Inc.
entered into a definitive merger agreement. No financial statements were
included.
On December 2, 1997, the Company filed a Current Report on Form 8-K,
dated December 2, 1997, reporting that the Company purchased Niagara
International Factory Outlets and Shasta Factory Stores. No financial statements
were included.
On December 31, 1997, the Company filed a Current Report on Form 8-K/A,
dated October 29, 1997, reporting that the Company purchased Prime Retail
Outlets of Kittery, Latham Factory Outlet Center, Niagara International Factory
Outlets and Shasta Factory Stores. Proforma consolidated financial statements of
the Company and audited statements of revenue and certain expenses of the
acquired properties were filed with this Form 8-K/A.
On February 1, 1998, the Company filed a Current Report on Form 8-K,
dated February 1, 1998, reporting the amended merger agreement between the
Company and Horizon Group, Inc. No financial statements were included.
(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 25, 1998 /s/ Abraham Rosenthal
---------------------
Abraham Rosenthal
Chief Executive Officer
Dated: March 25, 1998 /s/ Robert P. Mulreaney
-----------------------
Robert P. Mulreaney
Executive Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Michael W. Reschke March 25, 1998
-------------------------------------------------
Michael W. Reschke
Chairman of the Board
/s/ Abraham Rosenthal March 25, 1998
Abraham Rosenthal
Chief Executive Officer and Director
/s/ William H. Carpenter, Jr. March 25, 1998
-------------------------------------------------
William H. Carpenter, Jr.
President, Chief Operating Officer and Director
/s/ Glenn D. Reschke March 25, 1998
-------------------------------------------------
Glenn D. Reschke
Executive Vice President, Development and
Acquisitions and Director
/s/ Terence C. Golden March 25, 1998
-------------------------------------------------
Terence C. Golden
Director
/s/ Kenneth A. Randall March 25, 1998
-------------------------------------------------
Kenneth A. Randall
Director
/s/ Sharon Sharpe March 25, 1998
Sharon Sharpe
Director
/s/ James R. Thompson March 25, 1998
-------------------------------------------------
James R. Thompson
Director
/s/ Marvin S. Traub March 25, 1998
-------------------------------------------------
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, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, the consolidated results of the Company's operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
January 23, 1998, except
for Note 15, as to which the date
is February 1, 1998
PRIME RETAIL, INC.
Consolidated Balance Sheets of the Company
(Amounts in thousands, except share information)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in rental property:
Land $ 66,277 $ 44,731
Buildings and improvements.......................................................................... 779,191 570,761
Property under development.......................................................................... 53,139 20,900
Furniture and equipment............................................................................. 6,175 4,367
--------- ---------
904,782 640,759
Accumulated depreciation............................................................................ (82,033) (57,674)
--------- ---------
822,749 583,085
Cash and cash equivalents.............................................................................. 6,373 3,924
Restricted cash........................................................................................ 41,736 45,127
Accounts receivable, net............................................................................... 9,745 6,096
Deferred charges, net.................................................................................. 16,206 20,841
Due from affiliates, net............................................................................... 1,052 1,549
Investment in partnerships............................................................................. 3,278 5,625
Other assets........................................................................................... 3,044 556
--------- ---------
Total assets.................................................................................. $ 904,183 $ 666,803
========= =========
Liabilities and Shareholders' Equity
Bonds payable.......................................................................................... $ 32,900 $ 32,900
Notes payable.......................................................................................... 482,365 466,623
Accrued interest....................................................................................... 3,767 3,640
Real estate taxes payable.............................................................................. 4,639 2,138
Construction costs payable............................................................................. 5,849 3,047
Accounts payable and other liabilities................................................................. 20,210 19,246
--------- ---------
Total liabilities............................................................................. 549,730 527,594
Minority interests..................................................................................... 9,925 --
Shareholders' equity:
Shares of preferred stock, 24,315,000 shares authorized:
10.5% Series A Senior Cumulative Preferred Stock, $.01 par value
(liquidation preference of $57,500), 2,300,000 shares issued and outstanding................... 23 23
8.5% Series B Cumulative Participating Convertible Preferred Stock, $.01
par value (liquidation preference of $74,545 and $70,150,
respectively), 2,981,800 and 2,806,000 shares issued and outstanding, respectively............. 30 28
Series C Cumulative Participating Convertible Redeemable Preferred Stock, $.01 par value
(liquidation preference of $50,000), 3,636,363 shares issued and outstanding at
December 31, 1997............................................................................. 36 --
Shares of common stock, 75,000,000 shares authorized:
Common stock, $.01 par value, 27,294,951 and 13,404,651 issued and outstanding, respectively..... 273 134
Additional paid-in capital.......................................................................... 398,188 165,346
Distributions in excess of net income............................................................... (54,022) (26,322)
--------- ---------
Total shareholders' equity.................................................................... 344,528 139,209
--------- ---------
Total liabilities and shareholders' equity................................................ $ 904,183 $ 666,803
========= =========
===================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Operations of the Company
(Amounts in thousands, except per share information)
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
Revenues
Base rents................................................................................... $ 78,046 $ 54,710 $ 46,368
Percentage rents............................................................................. 3,277 1,987 1,520
Tenant reimbursements........................................................................ 37,519 25,254 22,283
Income from investment partnerships.......................................................... 103 1,239 1,729
Interest and other........................................................................... 10,185 5,850 5,498
-------- -------- --------
Total revenues......................................................................... 129,130 89,040 77,398
Expenses
Property operating........................................................................... 29,492 20,421 17,389
Real estate taxes............................................................................ 9,417 5,288 4,977
Depreciation and amortization................................................................ 26,715 19,256 15,438
Corporate general and administrative......................................................... 5,603 4,018 3,878
Interest..................................................................................... 36,122 24,485 20,821
Other charges................................................................................ 3,234 8,586 2,089
-------- -------- --------
Total expenses....................................................................... 110,583 82,054 64,592
-------- -------- --------
Income before minority interests and extraordinary item...................................... 18,547 6,986 12,806
(Income) loss allocated to minority interests................................................ (10,581) 2,092 5,364
-------- -------- --------
Income before extraordinary item............................................................. 7,966 9,078 18,170
Extraordinary item - loss on early extinguishment of debt,
net of minority interests in the amount of $0 in 1997 and $3,263 in 1996.................. (2,061) (1,017) --
-------- -------- --------
Net income................................................................................... 5,905 8,061 18,170
Income allocated to preferred shareholders................................................... 12,726 14,236 20,944
-------- -------- --------
Net loss applicable to common shares......................................................... $ (6,821) $ (6,175) $ (2,774)
======== ======== ========
Earnings per common share - basic and diluted:
Loss before extraordinary item......................................................... $ (0.25) $ (0.63) $ (0.96)
Extraordinary item..................................................................... (0.11) (0.12) --
-------- -------- --------
Net loss............................................................................... $ (0.36) $ (0.75) $ (0.96)
======== ======== ========
Weighted average common shares outstanding................................................... 19,189 8,221 2,875
======== ======== ========
===================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Cash Flows of the Company
(Amounts in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income............................................................................ $ 5,905 $ 8,061 $ 18,170
Adjustments to reconcile net income to net cash provided by operating activities:
Income (loss) allocated to minority interests................................... 10,581 (2,092) (5,364)
Extraordinary loss for early extinguishment of debt, net........................ 2,061 1,017 --
Write-off of financing costs related to early extinguishment of debt............ -- 6,131 --
Depreciation.................................................................... 25,055 17,468 13,716
Amortization of deferred financing costs and interest rate protection contracts. 3,742 3,724 4,524
Amortization of leasing commissions............................................. 1,660 1,788 1,722
Equity earnings in excess of cash distributions from joint ventures............. -- (365) (1,281)
Provision for uncollectible accounts receivable................................. 970 710 346
Gain on sale of land............................................................ (904) -- (106)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable......................................... (4,619) 1,945 (2,941)
(Increase) decrease in other assets................................................ 1,400 (3,232) 47
Increase in other liabilities...................................................... 3,381 9,785 6,047
Increase in accrued interest........................................................ 127 606 1,059
(Increase) decrease in due from affiliates, net..................................... 497 (355) 460
-------- -------- --------
Net cash provided by operating activities........................................ 49,856 45,191 36,399
-------- -------- --------
Investing Activities
Purchase of land....................................................................... (667) (953) (4,765)
Purchase of buildings and improvements................................................. (21,345) (45,036) (70,781)
Increase in property under development................................................. (49,668) (11,566) (7,056)
Acquisition of outlet centers.......................................................... (159,232) (134,668) --
Increase in construction reserves...................................................... (497) (40,067) --
Proceeds from sale of land............................................................. 1,358 -- 624
Lease commissions...................................................................... (537) -- --
Cash distributions in excess of equity earnings of joint ventures...................... 632 -- --
-------- -------- --------
Net cash used in investing activities............................................ (229,956) (232,290) (81,978)
-------- -------- --------
Financing Activities
Net proceeds from offerings............................................................ 242,729 36,948 --
Proceeds from notes payable............................................................ 160,057 591,520 185,078
Principal repayments on notes payable.................................................. (175,683) (397,951) (93,149)
Deferred financing fees................................................................ (583) (18,036) (4,822)
Distributions and dividends paid....................................................... (33,605) (27,470) (24,337)
Distributions to minority interests.................................................... (10,366) (8,915) (5,223)
-------- -------- --------
Net cash provided by financing activities........................................ 182,549 176,096 57,547
-------- -------- --------
Increase (decrease) in cash and cash equivalents....................................... 2,449 (11,003) 11,968
Cash and cash equivalents at beginning of period....................................... 3,924 14,927 2,959
-------- -------- --------
Cash and cash equivalents at end of period............................................. $ 6,373 $ 3,924 $ 14,927
======== ======== ========
Supplemental disclosure of noncash financing activity:
Assumption of notes payable............................................................. $ 31,368 $ -- $ --
======== ======== ========
===================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Consolidated Statements of Shareholders' Equity of the Company
(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, 1995........................ $23 $70 29 $128,275 $ (746) $127,651
Net income...................................... -- -- -- -- 18,170 18,170
Common distributions declared ($1.18 per share). -- -- -- -- (3,393) (3,393)
Preferred distributions and dividends declared:
Series A ($2.625 per share)................ -- -- -- -- (6,037) (6,037)
Series B ($2.125 per share)................ -- -- -- (14,907) 14,907)
----- ----- ----- -------- -------- --------
Balance, December 31, 1995...................... 23 70 29 128,275 (6,913) 121,484
Series B preferred stock exchanged and retired
(4,209,000 shares) for common stock
(6,734,323 shares)........................... -- (42) 67 (1,822) -- (1,797)
Issuance of 3,795,328 shares of common stock,
net of issuance costs......................... -- -- 38 38,893 -- 38,931
Net income....................................... -- -- -- -- 8,061 8,061
Common distributions declared ($1.325 per share).. -- -- -- -- (10,998) (10,998)
Preferred distributions and dividends declared:
Series A ($2.625 per share).................. -- -- -- -- (6,037) (6,037)
Series B ($2.125 per share).................. -- -- -- -- (10,435) (10,435)
Balance, December 31, 1996........................ 23 28 134 165,346 (26,322) 139,209
Issuance of 175,800 shares of Series B preferred
stock, net of issuance cost.................... -- 2 -- 3,798 -- 3,800
Issuance of 13,890,300 shares of common stock,
net of issuance cost.......................... -- -- 139 180,035 -- 180,174
Issuance of 3,636,363 shares of Series C preferred
stock, net of issuance cost..................... -- -- $36 -- 49,009 -- 49,045
Net income......................................... -- -- -- -- -- 5,905 5,905
Common distributions declared ($1.18 per share)..... -- -- -- -- -- (21,232) (21,232)
Preferred distributions and dividends declared:
Series A ($2.625 per share).................... -- -- -- -- -- (6,037) (6,037)
Series B ($2.125 per share).................... -- -- -- -- -- (6,336) (6,336)
----- ----- ----- ----- -------- -------- --------
Balance, December 31, 1997......................... $23 $30 $36 $273 $398,188 $(54,022) $344,528
===== ===== ===== ===== ======== ======== ========
====================================================================================================================================
See accompanying notes to financial statements.
PRIME RETAIL, INC.
Notes to Consolidated Financial Statements of the Company
(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 develops, acquires, owns
and operates factory outlet centers in the United States. The Company's factory
outlet center portfolio, including three factory outlet centers owned through
joint venture partnerships, consists of 28 factory outlet centers in 20 states,
which total approximately 7,217,000 square feet of gross leasable area ("GLA")
at December 31, 1997. 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 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, 1997, the Company owned 2,300,000 Senior Preferred Units
of the Operating Partnership (the "Senior Preferred Units"), 2,981,800 Series B
Convertible Preferred Units of the Operating Partnership (the "Series B
Convertible Preferred Units"), 3,636,363 Series C Preferred Units of the
Operating Partnership (the "Series C Preferred Units"), and 27,294,951 Common
Units of partnership interest in the Operating Partnership (the "Common Units").
Each Senior Preferred Unit, Series B Convertible Preferred Unit, and Series C
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"), Series B
Cumulative Participating Preferred Stock ("Series B Convertible Preferred
Stock"), and Series C Cumulative Participating Convertible Redeemable Preferred
Stock ("Series C Preferred Stock"), respectively, prior to the payment by the
Operating Partnership of distributions with respect to the Common Units. Series
B Convertible Preferred Units and Series C Preferred Units will be automatically
converted into Common Units to the extent of any conversion of Series B
Convertible Preferred Stock or Series C 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, Series B Convertible Preferred Stock,
or Series C Preferred Stock. (See Note 8 "Equity Offerings and Other
Transactions" of the Notes to the Consolidated Financial Statements for
additional information concerning equity transactions that were completed by the
Company in 1996 and 1997.)
A summary of the holders of units in the Operating Partnership as of
December 31, 1997 is as follows:
- ---------------------------------------------------------------------------------------------------------------------
Number of Units
---------------------------------------------------------
Holder Series A Series B Series C Common
- ---------------------------------------------------------------------------------------------------------------------
Prime Retail, Inc............................................2,300,000 2,981,800 3,636,363 27,294,951
PGI, management and other (1)................................ -- -- -- 8,505,472
Security Capital Preferred Growth Incorporated............... -- -- 727,273 --
--------- --------- --------- ----------
2,300,000 2,981,000 4,363,636 35,800,423
========= ========= ========= ==========
=====================================================================================================================
Note:
(1) Includes 742,180 units beneficially owned by management and 4,091,255 units
owned by certain executive officers based on their ownership interests in
PGI.
As of December 31, 1997, the Company has a 76.2% general partnership
interest in the Operating Partnership with full and complete control over the
management of the Operating Partnership as the sole general partner not subject
to removal by the limited partners.
The Operating Partnership is the 1% sole general partner of Prime Retail
Services Limited Partnership (the "Services Partnership"). The Operating
Partnership owns 100% of the non-voting preferred stock of Prime Retail
Services, Inc. (the "Services Corporation") which, in turn, is the 99% limited
partner of the Services Partnership. Certain members of management own 100% of
the voting common stock of the Services Corporation and no cash distributions
were made during the years ended December 31, 1997, 1996 and 1995. The Services
Partnership was formed primarily to operate business lines of the Company that
are not directly associated with the collection of rents. The Services
Corporation is subject to federal, state and local taxes.
Unless the context otherwise requires, all references to the Company
herein mean Prime Retail, Inc. and those entities owned or controlled by Prime
Retail, Inc., including the Operating Partnership and the Services Partnership.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company, the Operating Partnership and the partnerships in which the Company has
operational control. Profits and losses are allocated in accordance with the
terms of the agreement of limited partnership of the Operating Partnership. The
preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in partnerships in which the Company does not have
operational control are accounted for on the equity method of accounting. Income
(loss) applicable to minority interests and common shares as presented in the
consolidated statements of operations is allocated based on income (loss) before
minority interests after income allocated to preferred shareholders.
Significant intercompany accounts and transactions have been eliminated
in consolidation and combination.
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 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. The Company evaluates its rental
properties periodically to assess whether any impairment indications are
present, including recurring operating losses and significant adverse changes in
the business climate that affect the recovery of recorded asset value. If any
rental property is considered impaired, a loss is provided to reduce the
carrying value of the asset to its estimated fair value. No impairment losses
have been recorded in any of the periods presented.
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.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
Management regularly reviews accounts receivable and determines an
appropriate range for the allowance for doubtful accounts based upon the impact
of economic conditions on the merchants' ability to pay, past collection
experience and such other factors which, in management's judgment, deserve
current recognition. In turn, a provision is charged against earnings in order
to maintain the allowance level within this range. The allowance for doubtful
accounts at December 31, 1997 and 1996 was $1,780 and $1,349, respectively.
Accounts receivable due after one year primarily representing
straight-line rents were $5,969 and $5,310 at December 31, 1997 and 1996,
respectively.
Deferred Charges
Deferred charges consist of leasing commissions and financing costs.
Deferred leasing commissions incurred to originate and renew operating leases
are 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.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Minimum
rental income is recognized on a straight-line basis over the term of the lease
and unpaid rents are included in accounts receivable in the accompanying balance
sheet. Certain lease agreements contain provisions which provide for rents based
on a percentage of sales or based on a percentage of sales volume above a
specified threshold. In addition, the lease agreements generally provide for the
reimbursement of real estate taxes, insurance, advertising and certain common
area maintenance costs. These additional rents and tenant reimbursements are
accounted for on the accrual basis.
Earnings per Share
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" which specifies the
method of computation, presentation, and disclosure for earnings per share
("EPS"). SFAS No. 128 requires the presentation of basic EPS and diluted EPS.
Basic EPS is calculated by dividing net income available to common shareholders
by the weighted average number of shares outstanding during the period. Diluted
EPS includes the potentially dilutive effect, if any, which would occur if
outstanding (i) options to purchase Common Stock were exercised, (ii) Common
Units were converted into shares of Common Stock, (iii) shares of Series C
Preferred Stock and Units were converted into shares of Common Stock, and (iv)
Series B Convertible Preferred Stock were converted into shares of Common Stock.
For all periods presented, the effect of these exercises and conversions
was anti-dilutive and, therefore, dilutive EPS is equivalent to basic EPS.
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.
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 stock
option grants. The Company has elected to adopt only the disclosure provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation."
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally will not be subject to federal income tax at the corporate level on
income it distributes to its shareholders so long as it distributes at least 95%
of its taxable income (excluding any net capital gain) each year. If the Company
fails to qualify as a REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Even if the Company qualifies as a
REIT, the Company may be subject to certain state and local taxes on its income
and property. The Company incurred $263, $116, and $90 for state and local taxes
for the years ended December 31, 1997, 1996 and 1995, respectively. The Company
paid $170, $102, and $81 of state and local income taxes during the years ended
December 31, 1997 and 1996, and 1995, respectively.
The following table summarizes the taxability of dividends and
distributions paid during the years ended December 31, 1997, 1996 and 1995:
-----------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
Senior Preferred Stock
Ordinary income......................................................................... $2.625 $2.625 $2.625
====== ====== ======
Series B Convertible Preferred Stock
Ordinary income......................................................................... $1.940 $0.808 $1.607
Return of capital....................................................................... 0.185 1.317 0.518
------ ------ ------
$2.125 $2.125 $2.125
====== ====== ======
Common Stock
Return of capital....................................................................... $1.180 $1.325 $1.180
====== ====== ======
=============================================================================================================================
Risks and Uncertainties
The Company's results of operations are significantly dependent on the
overall health of the retail industry. The Company's tenant base is comprised
almost exclusively of merchants in the retail industry. The retail industry is
subject to external factors such as inflation, consumer confidence, unemployment
rates and consumer tastes and preferences. A decline in the retail industry
could reduce merchant sales, which could adversely affect the operating results
of the Company. A number of the merchants have occupied space in more than one
of the Company's factory outlet centers; however, no single merchant accounts
for more than 5.7% of the Company's revenues.
Note 3 -- Restricted Cash
At December 31, 1997 and 1996, the Company had placed in escrow $41,736
and $45,127, respectively, to be used to complete certain development projects,
to fund real estate taxes and debt service and to pay certain operating costs
under a mortgage loan agreement. At December 31, 1997, restricted cash included
$34,692 relating to a nonrecourse expansion loan which can only be used to fund
certain development costs relating to the expansion of 13 of the Company's
factory outlet centers, provided certain occupancy and other conditions have
been attained.
Note 4 -- Deferred Charges
Deferred charges were as follows:
- ----------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Leasing commissions................................................................ $ 11,261 $ 10,567
Financing costs.................................................................... 18,145 25,587
------- -------
29,406 36,154
Accumulated amortization........................................................... (13,200) (15,313)
------- -------
$ 16,206 $ 20,841
======= =======
================================================================================================================
Note 5 -- Investment In Partnerships
At December 31, 1997, the Company owned a 50% partnership interest in
two real estate ventures that are accounted for using the equity method of
accounting. The Company manages these ventures and earns a property management
fee based on the ventures' revenues. The condensed combined balance sheets of
these ventures and their condensed statements of operations are summarized as
follows:
--------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
--------------------------------------------------------------------------------------------------------------
Total assets, primarily rental property...................................... $ 51,864 $75,444
======== =======
Liabilities, primarily long-term debt........................................ $ 51,077 $70,750
Partners' capital............................................................. 787 4,694
-------- -------
Total liabilities and partners' capital...................................... $ 51,864 $75,444
======== =======
--------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------
Revenues..................................................................... $12,368 $17,868 $12,671
Operating expense............................................................ 4,899 6,268 4,504
Interest expense............................................................. 4,174 5,598 3,923
Depreciation and amortization................................................ 3,206 3,615 2,298
Extraordinary loss........................................................... 851 -- --
------- ------- -------
Net income (loss)........................................................... $ (762) $ 2,387 $ 1,946
======= ======= =======
====================================================================================================================
As of December 31, 1997, the Company guaranteed long-term debt of joint
venture partnerships of $24,019.
On September 2, 1997, the Company acquired a 25% ownership interest in
Buckeye Factory Shops Limited Partnership ("Buckeye") from its joint venture
partner for $23,148 (including $22,642 of mortgage indebtedness relating to such
property), thereby increasing its ownership percentage in such property to 100%
(the "Buckeye Acquisition"). Prior to September 2, 1997, the Company accounted
for its 75% investment in Buckeye using the equity method of accounting.
Commencing September 2, 1997, the operating results of Buckeye are consolidated.
As a result of the prepayment of the mortgage indebtedness noted above, the
joint venture partnership incurred an extraordinary loss of $851 related to the
write-off of certain unamortized financing costs totaling $624 and a debt
prepayment penalty of $227. The Company's 75% share of the extraordinary loss,
or $638, is included in the extraordinary loss in the Consolidated Statements of
Operations.
Note 6 -- Related Party Transactions
At December 31, 1997, the net amount due from affiliates consisted of
$1,052 due from joint venture partnerships relating to reimbursement of costs
paid by the Company on their behalf. At December 31, 1996, the net amount due
from affiliates consisted of $595 due from joint venture partnerships relating
to reimbursement of costs paid by the Company on their behalf and $954 of fees
due from joint venture partnerships in connection with the development of two
factory outlet centers.
Note 7 -- Bonds and Notes Payable
Bonds payable consisted of the following:
-------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
-------------------------------------------------------------------------------------------------------------------------------
Variable rate tax-exempt revenue bonds (the "Bonds"), rate determined by remarketing agents, ranging
from 3.80% to 3.95% at December 31, 1997, interest-only payments, due 2012 to 2014, collateralized
by properties in Chattanooga, TN and Knoxville, TN................................................... $ 28,250 $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
------- -------
$32,900 $32,900
======= =======
===============================================================================================================================
Under the terms of the loan agreements relating to the Bonds, the
issuing partnerships are required to make interest-only payments calculated
using a variable rate determined by the remarketing agents of the Bonds. The
interest rates ranged from 3.00% to 4.70% in 1997, 2.45% to 5.30% in 1996 and
2.65% to 5.30% in 1995. Under certain conditions, the interest rate on the Bonds
may be converted to a fixed rate at the request of the Company. A bondholder may
tender bonds during the variable interest rate period and receive principal,
plus accrued interest through the tender date. Upon tender, the remarketing
agents are required to immediately remarket the Bonds. In the event the
remarketing agents fail to remarket any bonds, the remarketing agents may draw
on certain liquidity facilities as described below. The remarketing agents
receive fees varying from 0.1% to 0.125% per annum on the outstanding bond
balance, payable quarterly in arrears.
At December 31, 1997, the Bonds are collateralized by letters of credit
(the "Letters of Credit") issued by a group of financial institutions pursuant
to a master letter of credit agreement. A letter of credit fee of 1.0% per annum
of the stated amount of the Letters of Credit is payable quarterly in advance to
such financial institutions. The Letters of Credit are collateralized by a
reimbursement agreement under the master letter of credit agreement (the
"Reimbursement Agreement") which obligates an insurance company to reimburse the
financial institutions for any funds drawn on the Letters of Credit. In
addition, in March 1994, the issuing partnerships, the Operating Partnership and
an insurance company entered into standby bond purchase and indemnity agreements
(the "Standby Agreements") in order to address the scheduled expirations of
various credit enhancements, including the Letters of Credit, through March 21,
1999.
Pursuant to the Standby Agreements, the insurance company agreed that in
the event that any of the issuing partnerships are unable to arrange replacement
credit enhancement facilities as necessary, the insurance company will purchase
the applicable Bonds and hold the same until March 21, 1999, at which time the
issuing partnership and the Operating Partnership will purchase the Bonds
pursuant to the terms of the related Standby Agreement.
The Letters of Credit are scheduled to expire on December 31, 1998. The
total commitments outstanding under the Letters of Credit, the Reimbursement
Agreement and the Standby Agreements as of December 31, 1997 were $28,909. The
due date of the Bonds accelerates upon the expiration of the Letters of Credit
unless the Letters of Credit are extended or replaced.
Notes payable consisted of the following:
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
First Mortgage and Expansion Loan, LIBOR plus 1.51% through November 10, 1998, 7.782% thereafter, 7.51% at
December 31, 1997, monthly installments of $2,580 including interest, due November 11, 2003,
collateralized by sixteen properties located throughout the United States................................ $355,996 $358,748
Term loan, LIBOR plus 1.95%, 7.95% at December 31, 1997, monthly interest-only payments through
February 10, 1998; quarterly principal and monthly interest payments thereafter, due November 11, 1999,
collateralized by excess cash flow of sixteen properties located throughout the United States............. 53,290 53,290
Mortgage, 6.83%, monthly installments of $218 including interest, due June 6, 2006, collateralized by
property in Niagara Falls, NY.............................................................................. 31,328 --
Mortgage, 8.35%, monthly installments of $215 including interest, due June 11, 2007, collateralized by
three properties located throughout the United States...................................................... 26,784 --
Mortgage, 9.375%, monthly installments of $71 including interest, due March 1, 2004, collateralized by
property located in Lombard, IL........................................................................... 6,735 6,940
Mortgage, 7.50%, monthly installments of $29 including interest, due June 22, 2000, collateralized by
property in Knoxville, TN.................................................................................. 3,732 3,793
Term loan, LIBOR plus 1.95%, 7.95% at December 31, 1997, monthly interest-only payments through April 10,
1998; monthly principal and interest payments thereafter, due February 13, 2000, collateralized by
excess cash flow of three properties located throughout the United States.................................. 3,000 --
Unsecured term loans, 8.25%, monthly interest-only payments, due August 31, 1998.............................. 1,500 12,000
Unsecured term loans, LIBOR plus 3.50%, 9.09% at December 31, 1996, monthly
interest-only payments, due November 11, 1997.............................................................. -- 16,000
Mortgage, LIBOR plus 2.25%, 7.87% at December 31, 1996, monthly interest-only
payments, due September 10, 1998, collateralized by property located in Gaffney, SC........................ -- 15,852
Unsecured line of credit, $15,000 at December 31, 1997, LIBOR plus 2.50%, monthly interest-only payments,
due July 11, 1998.......................................................................................... -- --
-------- --------
$482,365 $466,623
======== ========
==================================================================================================================================
At December 31, 1997, unused commitments were $35,396. Interest costs
are summarized as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
Interest incurred.............................................................................. $36,551 $24,310 $19,354
Interest capitalized........................................................................... (4,056) (3,348) (2,336)
Interest earned on interest rate protection contracts.......................................... (115) (201) (721)
Amortization of deferred financing costs and interest
rate protection contracts................................................................... 3,742 3,724 4,524
------- ------- -------
Interest expense............................................................................... $36,122 $24,485 $20,821
======= ======= =======
Interest paid.................................................................................. $36,424 $23,703 $18,295
======= ======= =======
===================================================================================================================================
The scheduled maturities of bonds and notes payable at December 31, 1997
were as follows:
------------------------------------------------------------------------------------------------------------
December 31, 1997
------------------------------------------------------------------------------------------------------------
1998.................................................................................... $ 13,951
1999.................................................................................... 50,179
2000.................................................................................... 10,340
2001.................................................................................... 5,069
2002.................................................................................... 5,484
Thereafter.............................................................................. 430,242
---------
$ 515,265
=========
============================================================================================================
The aggregate carrying amount of bonds and notes payable at December 31,
1997 approximated their fair value. At December 31, 1997, the aggregate carrying
amount of rental property collateralizing bonds and notes payable was $712,247.
At December 31, 1997, the Company held interest rate protection
contracts on all $28,250 of its floating rate tax-exempt indebtedness which
expire in 1999 and approximately $355,996 of other floating rate indebtedness
which expire in November 1998. In addition, the Company purchased additional
interest rate protection contracts on $43,900 (of which $22,000 expires in July
1998 and $21,900 expires in April 1999) of the $355,996 floating rate
indebtedness to further reduce the Company's exposure to increases in interest
rates. These contracts have a weighted average maturity of approximately 0.9
years.
The following table summarizes the material terms of the interest rate
protection contracts held for purposes other than trading and related borrowings
at December 31, 1997:
------------------------------------------------------------------------------------------------------------------
Interest Rate Protection Contracts
------------------------------------------------------------------------------------------------------------------
Borrowings Notional Date
Outstanding (in Amount Purchased/
millions) (in millions) Amended Term Index Maximum Index Rate
------------------------------------------------------------------------------------------------------------------
$356.0 $356.0 11/1/96 2 years LIBOR 7.0%
28.3 28.3 3/21/94 5 years Kenny Index Year 1 3.0%
Year 2 3.5%
Year 3 4.0%
Year 4 4.5%
______ ______ Year 5 5.0%
$384.3 $384.3
====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Interest Rate Protection on $356.0 Million Floating Rate Indebtedness
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum Spread
Notional Date Between
Amount Purchased/ Maximum Index
(in millions) Amended Term Index Maximum Index Rate Rate and Index
- ------------------------------------------------------------------------------------------------------------------------------------
$ 22.0 7/1/94 4 years LIBOR Year 1 5.0% 2.0%
Year 2 5.5% 1.5%
Year 3 6.0% 1.0%
Year 4 6.5% 0.5%
21.9 3/31/94, 5 years LIBOR Year 1 3.75% 3.25%
Amended Year 2 4.25% 2.75%
7/1/94 Year 3 4.75% 2.25%
Year 4 5.25% 1.75%
Year 5 5.75% 1.25%
-------
$ 43.9
=======
====================================================================================================================================
The net carrying amount of interest rate protection contracts at December
31, 1997 was $1,266. The estimated fair value of interest rate protection
contracts based on quoted market rates at December 31, 1997 was $99.
On February 13, 1997, the Company closed on $30,000 of loan facilities
with Nomura Asset Capital Corporation. The transaction provided (i) a $27,000
nonrecourse first mortgage loan (the "First Mortgage Loan") and (ii) a junior
secured loan (the "Junior Secured Loan") of $3,000. The First Mortgage Loan (i)
is cross collateralized by first mortgages on three of the Company's factory
outlet centers, (ii) bears a fixed rate of interest of 8.35%, and (iii) requires
monthly principal and interest payments pursuant to a 360-month amortization
schedule. The Junior Secured Loan is a recourse loan to the Company that (i) is
secured by a pledge of excess cash flow after debt service on the First Mortgage
Loan, (ii) bears a variable interest rate at the London Interbank offered rate
for 30-day deposits in U.S. dollars ("30-day LIBOR") plus 1.95%, (iii) matures
in three years and (iv) requires monthly interest only payments through April
10, 1998 and monthly principal and interest payments thereafter.
On July 11, 1997, the Company's $15,000 unsecured line of credit (the
"Corporate Line") was renewed. The purpose of the Corporate Line is to provide
working capital to facilitate the funding of short-term operating cash needs of
the Company. The Corporate Line bears an interest rate of 30-day LIBOR plus
2.50% and matures on July 11, 1998. No amounts were outstanding under the
Corporate Line at December 31, 1997.
In September 1997, the Company repaid certain outstanding corporate
indebtedness aggregating $113,410, including the Junior Secured Loan, with
proceeds from certain public and private equity offerings (see Note 8 - "Equity
Offerings and Other Transactions" of the Notes to the Consolidated Financial
Statements). As a result of the prepayment of such indebtedness, the Company
incurred an extraordinary loss of $1,423 related to the write-off of certain
unamortized financing costs. The Company also incurred an extraordinary loss of
$638 related to the write-off of certain unamortized financing costs in
connection with the Buckeye Acquisition (see Note 5 - "Investment in
Partnerships" of the Notes to the Consolidated Financial Statements).
On November 13, 1997, the Company closed on a term loan with Nomura
Securities (Bermuda) Ltd. ("Nomura Securities") of $53,290 (the "Term Loan").
The Term Loan is a recourse loan to the Company that (i) is secured by a pledge
of excess cash flow after debt service on a first mortgage loan collateralized
by 16 of the Company's factory outlet centers, (ii) bears a variable interest
rate of 30-day LIBOR plus 1.95%, (iii) matures on November 11, 1999, (iv)
requires monthly interest-only payments through February 10, 1998 and monthly
interest payments and quarterly principal payments thereafter that approximate a
six-year amortization schedule, and (v) may be subject to earlier principal
payments via "mark-to-market" of the underlying debt instrument.
In addition, on November 13, 1997, the Company closed on a term loan
with Nomura Securities of $3,000 (the "Second Term Loan"). The Second Term Loan
is a recourse loan to the Company that (i) is secured by a pledge of excess cash
flow after debt service on a first mortgage loan collaterlized by three of the
Company's factory outlet centers, (ii) bears a variable interest rate of 30-day
LIBOR plus 1.95%, (iii) matures on February 13, 2000, (iv) requires monthly
interest-only payments through April 10, 1998 and monthly principal and interest
payments thereafter that approximate a five-year amortization schedule, and (v)
may be subject to earlier principal payments via "mark-to-market" of the
underlying debt instrument.
On December 2, 1997, the Company assumed a $31,328 mortgage loan in
connection with the purchase of Niagara International Factory Outlets (the
"Niagara Loan"). The Niagara Loan (i) bears a fixed rate of interest of 6.83%,
(ii) requires monthly principal and interest payments that approximates a
25-year amortization schedule, and (iii) is collateralized by Niagara
International Factory Outlets.
On December 31, 1997, the Company obtained from a financial institution
a commitment for a construction mortgage loan in an amount not to exceed $20,396
(the "Construction Mortgage Loan"). The Construction Mortgage Loan (i) bears a
variable interest rate at the financial institution's prime rate or, at the
Company's option, a LIBOR index plus 1.75%, (ii) matures on December 31, 1999,
and (iii) requires monthly interest-only payments. The Construction Mortgage
Loan is collateralized by a first mortgage on Lebanon Factory Shops, a factory
outlet center located in Lebanon, Tennessee. At December 31, 1997, no amounts
were outstanding on the Construction Mortgage Loan.
Note 8 - Equity Offerings and Other Transactions
On June 27, 1996, the Company completed a registered exchange offer (the
"Exchange Offer") to exchange shares of its Common Stock for up to 4,209,000
shares, or 60%, of its Series B Convertible Preferred Stock. The Company
received tender offers for 4,648,650 shares, or approximately 66.27%, of the
Series B Convertible Preferred Stock. A proration factor was applied to each
share of Series B Convertible Preferred Stock validly tendered by holders, and
on June 27, 1996, the Company issued 6,734,323 shares of its Common Stock. In
connection with the Exchange Offer, certain affiliates of the Company who are
limited partners of the Operating Partnership (the "Limited Partners")
contributed to the Operating Partnership 625,000 common units for cancellation.
In addition, on June 26, 1996, the Company's Board of Directors approved a
special cash distribution (the "Special Cash Distribution") on its Common Stock
of $1,393, or $0.145 per common share, to holders of record on June 27, 1996.
The Special Cash Distribution was paid on July 15, 1996. The Limited Partners
were not entitled to receive and did not receive any portion of the Special Cash
Distribution.
On February 20, 1997, the Company completed a public offering by issuing
2,080,000 shares of its Common Stock at $12.50 per share and 175,800 shares of
its Series B Convertible Preferred Stock at $22.75 per share. In addition, on
March 10, 1997, the underwriter of the public offering exercised its
overallotment option to purchase 310,300 shares of the Company's Common Stock at
$12.50 per share. As a result of the public offering and the exercise of the
overallotment option, the Company received net proceeds of $31,754 that were
used to (i) repay certain outstanding indebtedness aggregating $26,500, (ii) to
fund development and construction activities, and (iii) for general corporate
purposes.
On August 8, 1997, the Company entered into a purchase agreement with
Security Capital Preferred Growth Incorporated ("Security Capital") providing
for the issuance of a new series of cumulative convertible non-voting preferred
securities (the "Series C Preferred Securities") at $13.75 per share, or an
aggregate of $60,000 in cash (the "Private Placement"). The Series C Preferred
Securities pay dividends equivalent to the amount being paid on the Company's
Common Stock, with an annual minimum equal to $1.18 per security. In addition,
the Company, subject to certain conditions, has agreed to waive the ownership
limitations otherwise applicable to the Common Stock to permit Security Capital
to own, at any one time, the shares of Common Stock issuable upon conversion of
the Series C Preferred Securities. The Company has the right to call the Series
C Preferred Securities, at par, after 10 years. Subject to certain
conditions,the Series C Preferred Securities may be issued in the form of shares
of preferred stock in the Company or preferred units of partnership interest in
the Operating Partnership that are exchangeable for shares of preferred stock or
Common Stock on a one-to-one basis. The Series C Preferred Securities may be
converted into shares of Common Stock on a one-to-one basis commencing August 8,
1998 (or earlier subject to certain conditions).
In September 1997, the Company completed a public offering of 11,500,000
shares (including 1,500,000 shares related to the exercise of the underwriters'
overallotment option) of its Common Stock at $14.00 per share (the "September
1997 Offering"). In addition, on September 8, 1997, the Company issued 727,273
Series C Preferred Units at $13.75 per unit pursuant to the initial sale under
the Private Placement. As a result of the September 1997 Offering and the
initial draw on the Private Placement (collectively, the "September Capital
Transactions"), the Company received net proceeds of $161,930 after commissions
and underwriting discounts. A portion of the net proceeds from the September
Capital Transactions were used (i) to repay certain outstanding corporate
indebtedness aggregating $113,410 and (ii) to acquire the 25% ownership interest
of the Company's joint venture partner in Buckeye for $23,148 (including $22,642
of mortgage indebtedness relating to such property). The remaining net proceeds
from the September Capital Transactions of $26,192 were used (i) to fund
development and construction activities, (ii) to fund property acquisitions, and
(iii) for general corporate purposes.
On December 2, 1997, the Company issued 3,636,363 shares of its Series C
Preferred Stock at $13.75 per share pursuant to the final sale under the Private
Placement. As a result of this issuance, the Company received net proceeds of
$49,045 that were used in the acquisition of Niagara International Factory
Outlets and Shasta Factory Stores.
Note 9 -- 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 limited partnership
interests in the Operating Partnership. 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. As of December 31, 1997,
8,505,472 Common Units were issued and outstanding. Minority interests also
includes interests in three property partnerships that are not wholly owned by
the Company. During the years ended December 31, 1997, 1996 and 1995, expenses
totaling $1,468, $884, and $1,049, 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, 1996, cash distributions and losses allocated to
minority interests reduced the minority interests balance to zero. After
reducing the minority interests balance to zero, additional distributions and
losses of $8,739 and $3,457 that were allocable to minority interests were
allocated to common shareholders during the years ended December 31, 1997 and
1996, respectively.
On September 8, 1997 the Company issued 727,273 Series C Preferred Units
at $13.75 per unit pursuant to the initial $10,000 sale under the Private
Placement (see Note 8 - "Equity Offerings and Other Transactions" of the Notes
to the Consolidated Financial Statements). The terms of the Series C Preferred
Units are substantially the same as those of the Series C Preferred Stock (see
Note 10 - "Preferred Stock" of the Notes to the Consolidated Financial
Statements). The net proceeds of $9,710 from the issuance of the Series C
Preferred Units are included in minority interests in the Consolidated Balance
Sheets.
At December 31, 1997 and 1996, loans to certain limited partners, who
also are executive officers of the Company, aggregating $4,750 were reported as
a reduction in minority interests in the Consolidated Balance Sheets.
Note 10 -- Preferred Stock
The Company is authorized to issue up to 24,315,000 shares of preferred
stock in one or more series. At December 31, 1997, 2,300,000 shares Senior
Preferred Stock, 2,981,800 shares of Series B Convertible Preferred Stock, and
3,636,363 shares of Series C 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. The Series C Preferred Stock has a
liquidation preference equivalent to $13.75 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, 1997,
there were 3,566,746 shares of Common Stock reserved for future issuance upon
conversion of the Series B Convertible Preferred Stock. Dividends on the Series
C Preferred Stock are equivalent to the amount being paid on the Company's
Common Stock, with an annual minimum equal to $1.18 per share.
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 unpai
dividends thereon. The Company, subject to certain conditions, has agreed to
waive the ownership limitations otherwise applicable to the Common Stock to
permit Security Capital to own, at any one time, the shares of Common Stock
issuable upon conversion of the Series C Preferred Securities. The Company has
the right to call the Series C Preferred Stock, at par, after 10 years. The
Series C Preferred Stock is convertible into shares of Common Stoc on a
one-to-one basis, subject to adjustment, commencing August 8, 1998 or earlier
subject to certain conditions.
The holders of the Senior Preferred Stock and Convertible Preferred
Stock, each series voting separately as a class, have the right to elect two
additional members to the Company's Board of Directors if the equivalent of six
quarterly dividends on these series of preferred stock are in arrears Each of
such two directors will be elected to serve until the earlier of (i) the
election and qualification of such directors' successor, or (ii) payment of
the dividend arrearage. If distributions on any Series C Preferred Stock have
been in arrears for two consecutive quarters or the Company fails to pay
distributions on the Common Stock in an amount per share at least equal to
$0.25 (subject to adjustment) for two consecutive quarters, the number of
directors of the Company shall be increased by one (or two if the board of
directors of the Company then consists of 10 or more members) as elected by the
holders of Series C Preferred Stock together with the holders of shares on a
parity as to distributions with the Series C Preferred Stock, voting as a
single class regardless of series. Each of such two directors will be elected
to serve until the earlier of (i) the election and qualification of such
directors' successor, or (ii) payment of the dividend arrearage.
Note 11 -- Stock Option Plans
Under the Company's 1994 and 1995 Stock Option Plans, options to
purchase shares of the Company's Common Stock have been or may be granted. The
option price for shares granted under these plans is the fair market value on
the grant date.
In 1994, the Company granted options to executive officers, outside
directors and consultants to purchase 585,000 shares of Common Stock at $19.00
per share. The options granted to executive officers vest at a rate of 20% per
year over five years and have a term of 10 years. The options granted to
outside directors and consultants (aggregating 35,000 options) were fully vested
at the grant date and have a term of 10 years.
In 1995, the Company granted options to purchase 20,000 common shares at
$12.45 per share to outside directors and consultants. These options were fully
vested at the grant date and have a term of 10 years.
In 1996, the Company granted options to executive officers, other key
employees and consultants to purchase 302,500 shares of Common Stock at exercise
prices ranging from $11.46 to $11.88 per share. These options were fully vested
at the grant date and have a term of 10 years.
In 1997, the Company granted options to executive officers and other key
employees to purchase 196,250 shares of Common Stock at an exercise price of
$12.53 per share. These options were fully vested at the grant date and have a
term of 10 years.
Unaudited pro forma information regarding net income and earnings per
share is required by SFAS No. 123, which requires that the information be
determined as if the Company has accounted for its stock options granted
subsequent to December 31, 1994 under the fair value method of SFAS No. 123. 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, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate.......................................................... 5.5% 6.5% 6.5%
Dividend yield................................................................... 8.3% 9.0% 9.0%
Volatility factor................................................................ 0.36 0.35 0.32
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.
For purposes of unaudited pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' applicable
vesting period. The Company's unaudited pro forma information for the years
ended December 31, 1997, 1996 and 1995 follows :
- -----------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item............................... $ 7,442 $ 8,765 $18,163
Extraordinary item............................................. (2,061) (1,017) --
-------- -------- -------
Net income..................................................... $ 5,381 $ 7,748 $18,163
======== ======== =======
Net loss applicable to common shares........................... $ (7,345) $ (6,488) $(2,782)
======== ======== =======
Earnings per common share - basic and diluted:
Loss before extraordinary item............................. $ (0.27) $ (0.67) $ (0.97)
Extraordinary item......................................... (0.11) (0.12) --
-------- -------- -------
Net loss................................................... $ (0.38) $ (0.79) $ (0.97)
======== ======== =======
=============================================================================================================================
The following is a summary of stock option activity and number of shares
reserved for outstanding options:
- ------------------------------------------------------------------------------------------------------------------------
Weighted
Average
Exercise Number
Price of Shares
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994.................................................... $19.00 585,000
Granted......................................................................... $12.45 20,000
---------
Balance at December 31, 1995.................................................... $18.78 605,000
Granted......................................................................... $11.83 302,500
Cancelled....................................................................... $11.88 (4,000)
---------
Balance at December 31, 1996.................................................... $16.49 903,500
Granted......................................................................... $12.53 196,250
Cancelled....................................................................... $11.88 (1,000)
---------
Balance at December 31, 1997.................................................... $15.78 1,098,750
=========
========================================================================================================================
Options on 961,253, 640,253 and 224,750 shares were exercisable at
December 31, 1997, 1996, and 1995, respectively, at a weighted average exercise
price of $15.32 per share, $15.45 per share, and $18.42 per share, respectively.
The weighted fair value of options granted during the years ended December 31,
1997, 1996, and 1995 was $1.90 per share, $1.69 per share, and $1.60 per share
respectively. Exercise prices for options outstanding at December 31, 1997
ranged from $11.46 to $19.00 per share. The weighted average remaining
contractual life of those options is 7.3 years. Under the Company's 1994 and
1995 Stock Option Plans, there were 106,250 and 311,500 shares reserved for
future grants at December 31, 1997 and 1996, respectively.
Note 12 -- Lease Agreements
The Company is the lessor of retail and office space under operating
leases with initial lease terms that expire from 1998 to 2016. Most leases are
renewable for five years at the lessee's option. Future minimum base rent to be
received under noncancelable operating leases were as follows:
---------------------------------------------------------------------------------------------------------
December 31, 1997
---------------------------------------------------------------------------------------------------------
1998........................................................................... $ 91,287
1999........................................................................... 81,579
2000........................................................................... 66,987
2001........................................................................... 48,046
2002........................................................................... 28,635
Thereafter..................................................................... 55,352
---------
$ 371,886
=========
=========================================================================================================
The Company leases certain land, buildings, and equipment under various
noncancelable operating lease agreements. Rental expense for operating leases
was $1,059, $1,011, and $961for the years ended December 31, 1997, 1996, and
1995, 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 consisted of the following:
-----------------------------------------------------------------------------------------------------------
December 31, 1997
-----------------------------------------------------------------------------------------------------------
1998........................................................................... $ 977
1999........................................................................... 940
2000........................................................................... 877
2001........................................................................... 835
2002........................................................................... 771
Thereafter..................................................................... 583
------
$4,983
======
===========================================================================================================
Note 13 -- Legal Proceedings
In the ordinary course of business, the Company is subject to certain
legal actions. While any litigation contains an element of uncertainty,
management believes that losses, if any, resulting from such matters, will not
have a material adverse effect on the consolidated financial statements of the
Company.
Note 14 -- Property Acquisitions
On November 1, 1996, the Company acquired Rocky Mountain Factory Stores
and Kansas City Factory Outlets for an aggregate purchase price of $71,700.
On November 1, 1996, the Company purchased its joint venture partner's
first mortgage on and 50% ownership interest in Grove City Factory Shops for
$57,094 thereby increasing its ownership interest in such property to 100%.
On February 13, 1997, the Company, acquired Oak Creek Factory Stores,
Bend Factory Outlets and Factory Outlets at Post Falls from an unrelated third
party for an aggregate purchase price of $37,250. The Company financed the
purchase with loan proceeds from a financial institution and a $4,000 promissory
note issued to the seller. The operating results of the Company for 1997 include
the results of these acquisitions effective with the closing on February 13,
1997.
On September 2, 1997, the Company acquired a 25% ownership interest in
Buckeye from its joint venture partner for $23,148 (including $22,642 of
mortgage indebtedness relating to such property), thereby increasing its
ownership percentage in such property to 100%. Prior to September 2, 1997, the
Company accounted for its 75% investment in Buckeye using the equity method of
accounting. Commencing September 2, 1997, the operating results of Buckeye are
consolidated. The Company financed the acquisition with proceeds from the
September 1997 Offering.
On October 29, 1997, the Company acquired Tidewater Outlet Mall,
Manufacturer's Outlet Mall, Kittery Outlet Village (collectively "Prime Retail
Outlets of Kittery"), and Latham Factory Outlet Center (the "Latham Property")
from an unrelated third party for an aggregate purchase price of $26,000. The
Company financed the purchase primarily with the proceeds from the September
1997 Offering.
In addition, on December 2, 1997, the Company acquired Niagara
International Factory Outlets ("Niagara") and Shasta Factory Stores ("Shasta")
from an unrelated third party for an aggregate purchase price of $100,975,
including the assumption of mortgage indebtedness of $31,368. The Company
financed the purchase with proceeds from the September 1997 Offering and the
Private Placement.
The Company accounted for these acquisitions using the purchase method
of accounting. The operating results of these acquisitions have been included in
the Company's consolidated results of operations commencing on the date of
acquisition The following Unaudited pro forma information presents a summary of
the consolidated results of operations of the Company as if the these
acquisitions had occurred on January 1, 1996:
- ------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Total revenues.................................................................. $148,788 $129,565
======== ========
Income before extraordinary item................................................ $ 8,983 $ 10,807
======== ========
Net income...................................................................... $ 6,709 $ 9,790
======== ========
Net loss applicable to common shares............................................ $ (6,017) $ (4,446)
======== ========
Earnings per common share - basic and diluted:
Loss before extraordinary item.............................................. $ (0.20) $ (0.42)
Extraordinary item.......................................................... (0.11) (0.12)
-------- --------
Net loss..................................................................... $ (0.31) $ (0.54)
======== ========
==================================================================================================================
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
expense based on the purchase price of such assets acquired and interest expense
on debt incurred on financing the acquisitions. These unaudited pro forma
results do not purport to be indicative of the results of operations which
actually would have resulted had the combination been in effect on January 1,
1996 or of future results of operations of the Company.
Note 15-- Merger Agreement
On November 12, 1997 and as amended on February 1, 1998, the Company
entered into a definitive merger agreement (as amended, the "Merger Agreement")
with Horizon Group, Inc. ("Horizon") for an aggregate consideration of
approximately $945,200, including the assumption of $556,900 of Horizon debt and
transaction costs. Upon completion of the transaction, the Company will own and
operate 48 outlet centers totaling approximately 13,406,261 square feet of GLA.
Under the terms of the Merger Agreement, the Company will pay a fixed
exchange ratio of 0.20 of a share of Series B Convertible Preferred Stock and
0.597 of a share of Common Stock for each share of common stock of Horizon. In
addition, each common unit in Horizon Partnership will entitle the holder to
receive 0.9193 of a Common Unit of the Operating Partnership that will be
exchangeable for a like number of shares of Common Stock of the Company.
Immediately prior to the merger, Horizon Group Properties, Inc.("HGP"),
a subsidiary of Horizon, will become the sole general partner of Horizon/Glen
Outlet Center Limited Partnership ("Horizon Partnership") and the common stock
of HGP will be distributed to the shareholders of both the Company and Horizon.
All of the common equity of HGP will be distributed to the convertible preferred
and common shareholders and unitholders of the Company and the shareholders and
limited partners of Horizon based on their ownership in the Company immediately
following the merger. It is presently expected that following the merger one
share of common stock of HGP will be distributed for every 10 shares of Common
Stock or Common Units of the Company, and that approximately 1.196 shares of
common stock of HGP will be distributed for every 10 shares of Series B
Convertible Preferred Stock held in the Company. Immediately prior to the
closing of the merger, the Company will pay a special cash distribution of $0.60
per share of Series B Convertible Preferred Stock and $0.50 per share/unit of
Common Stock, Series C Preferred Security and Common Unit, as applicable
Shareholders and limited partners in Horizon will not participate in this
distribution. HGP will own and operate 15 outlet centers (including Indiana
Factory Shops and Nebraska Crossing Factory Stores which will be acquired from
the Company) totaling 3,084,823 square feet of GLA.
The merger will be accounted for as a purchase. It is conditioned upon,
among other things, the approvals of each Company's shareholders and partners
and the satisfaction of other customary conditions. The closing is expected
during the second quarter of 1998. The exchange of shares of Horizon for shares
of the Company will be made on a tax-free basis.
On December 10, 1997, a shareholder of Horizon filed a purported class
action lawsuit in the Circuit Court for Muskegon County, Michigan against
Horizon, the Company, and certain directors and former directors of Horizon
claiming, among other things, that Horizon's directors breached their fiduciary
duties to Horizon's shareholders in approving the merger of Horizon and the
Company and that the consideration to be paid to Horizon's shareholders in
connection with the merger is unfair and inadequate. The lawsuit requests that
such merger be enjoined or, in the event that the purported transaction is
consummated, that it be rescinded or unspecified damages be awarded to the class
members. On January 16, 1998, the defendants answered the complaint, denying
that the Horizon board of directors breached their fiduciary duties and denying
that such consideration is unfair or inadequate. Although the Company is named
as a defendant in the complaint, the substantive allegations focus on the
actions of Horizon and its board of directors and not on any actions of the
Company or its board of directors. Since this litigation is in the initial
phases of discovery, its outcome is not susceptible to easy or certain
prediction; however, the Company intends to defend itself vigorously.
PRIME RETAIL, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
Costs Capitalized Gross Amount at Which
Initial Cost to Subsequent to Carried at Close of
Company Acquisition Period
-------------------- -------------------- -----------------------------
Buildings & Buildings & Buildings & Accumulated Constructed(C)
Description Encumbrances Land Improvements Land Improvements Land Improvements Total Depreciation Acquired(A)
- -------------- ------------ ------- ------------ ------- ------------ ------- ------------ -------- ------------ --------------
Bend Factory Shops $ 7,936 $ 2,560 $ 8,476 $ 42 $ 2,560 $ 8,518 $ 11,078 $ 215 Feb. 1997(A)
Buckeye Factory
Shops -- 1,013 21,455 677 1,013 22,132 23,145 398 Sept. 1997(A)
Carolina Factory
Shops -- -- -- $ 827 24,900 827 24,900 25,727 1,268 Nov. 1996(C)
Castle Rock
Factory Shops 35,942 4,424 47,200 2,717 14,460 7,141 61,660 68,801 7,515 Mar. 1994(A)
Coral Isle Factory
Shops 10,840 2,753 15,602 -- 278 2,753 15,880 18,633 1,552 Mar. 1994(A)
Factory Outlets at
Post Falls 11,805 3,100 12,163 -- 69 3,100 12,232 15,332 315 Feb. 1997(A)
Florida Keys
Factory Shops 15,632 -- -- 2,874 21,366 2,874 21,366 24,240 3,165 Sept. 1994(C)
Gainesville
Factory Shops 20,824 -- -- 535 29,657 535 29,657 30,192 5,075 Aug. 1993(C)
Grove City
Factory Shops 41,305 1,193 58,630 (70) 3,116 1,123 61,746 62,869 2,634 Nov. 1996(A)
Gulf Coast
Factory Shops 29,438 -- -- 3,877 28,734 3,877 28,734 32,611 6,135 Oct. 1991(C)
Gulfport Factory
Shops 19,968 -- -- -- 33,438 -- 33,438 33,438 2,710 Oct. 1995(C)
Huntley Factory
Shops 17,800 -- -- 1,506 34,772 1,506 34,772 36,278 4,049 Sept. 1994(C)
Indiana Factory
Shops 14,263 -- -- 531 24,068 531 24,068 24,599 2,859 Nov. 1994(C)
Kansas City
Factory Shops 14,605 815 31,311 -- 2,151 815 33,277 34,277 1,874 Nov. 1996(A)
Prime Retail
Outlets of Kittery -- 820 24,061 -- 17 820 24,078 24,898 100 Oct. 1997(A)
Latham Factory
Shops -- 507 1,476 -- -- 507 1,476 1,983 6 Oct. 1997(A)
Magnolia Bluff
Factory Shops 25,331 -- -- 3,074 30,541 3,074 30,541 33,615 3,153 July 1995(C)
Melrose Place 2,000 -- -- 499 1,880 499 1,880 2,379 744 Aug. 1987(C)
Nebraska Crossing
Factory Stores 11,753 2,904 16,614 -- 457 2,904 17,071 19,975 1,600 Mar. 1994(A)
Niagara
International
Factory Outlets 31,328 7,247 82,842 -- 2 7,247 82,844 90,091 180 Dec. 1997(A)
Northgate Plaza 6,735 3,626 11,630 -- 142 3,626 11,772 15,398 1,278 Mar. 1994(A)
Oak Creek Factory
Stores 7,043 1,924 9,099 -- 32 1,924 9,131 11,055 218 Feb. 1997(A)
Ohio Factory Shops 26,529 843 31,084 250 12,637 1,093 43,721 44,814 5,588 Mar. 1994(A)
Rocky Mountain
Factory Shops 22,808 6,400 33,244 -- (53) 6,400 33,191 39,591 1,851 Nov. 1996(A)
San Marcos Factory
Shops 39,537 -- -- 1,626 40,320 1,626 40,320 41,946 9,940 Aug. 1990(C)
Shasta Factory
Stores -- 1,875 11,036 -- 1 1,875 11,037 12,912 24 Dec. 1997(A)
Triangle Factory
Shops 9,421 -- -- 2,502 21,916 2,502 21,916 24,418 5,249 Oct. 1991(C)
Warehouse Row 23,900 -- -- 1,175 32,073 1,175 32,073 33,248 10,171 Nov. 1989(C)
Warehouse Row II -- -- -- 350 2,580 350 2,580 2,930 334 Dec. 1993(A)
Western Plaza 10,732 -- -- 2,000 6,990 2,000 6,990 8,990 954 Jun. 1993(A)
Property Under Under
Development -- -- -- -- 53,139 -- 53,139 53,139 -- Construction
Other Property -- -- 1,588 -- 592 -- 2,180 2,180 879 Mar.1994-
-------- ------- -------- ------- -------- ------- -------- -------- --------- Dec.1997(A)
$457,475 $42,004 $417,511 $24,273 $420,994 $66,277 $838,505 $904,782 $ 82,033
======== ======= ======== ======= ======== ======= ======== ======== =========
PRIME RETAIL, INC.
Notes to Schedule III - Real Estate and Accumulated Depreciation
December 31, 1997
(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 $986,004 at December 31,
1997.
Investment in Rental Property
Year Ended December 31
------------------------------------
1997 1996 1995
-------- -------- --------
Balance, beginning of period.................................................... $640,759 $454,480 $376,181
Retirements..................................................................... (718) ( 8) (258)
Acquisitions.................................................................... 191,345 131,593 --
Improvements.................................................................... 73,773 54,694 79,075
Cost of real estate sold........................................................ (377) -- (518)
-------- --------- --------
Balance, end of period.......................................................... $904,782 $640,759 $454,480
======== ========= ========
Accumulated Depreciation
Year Ended December 31
------------------------------------
1997 1996 1995
-------- -------- --------
Balance, beginning of period.................................................... $57,674 $40,190 $26,668
Retirements..................................................................... (718) (8) (258)
Other........................................................................... 22 24 --
Depreciation for the period..................................................... 25,055 17,468 13,780
------- ------- -------
Balance, end of period.......................................................... $82,033 $57,674 $40,190
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