ITEM 1 - BUSINESS
The Company
Prime Retail, Inc. (including its predecessors, collectively, the "Company") was organized as a Maryland corporation on July 16, 1993. The Company commenced operations upon completion of its initial public offering (the "Initial Public Offering") on March 22, 1994. The Company is a self-administered and self-managed real estate investment trust ("REIT") and operates primarily within one business segment. Concurrent with the completion of the Initial Public Offering, the Company became the general partner of Prime Retail, L.P. (the "Operating Partnership") which owns interests in and provides development, leasing, marketing and management services for 51 outlet centers and three community shopping centers (the "Properties") with a total of 14,699,000 and 424,000 square feet of gross leasable area ("GLA") at December 31, 1999, respectively. The Properties are located throughout the United States, generally near large metropolitan areas.
On November 1, 1994, the Company organized Prime Retail Services Limited Partnership and Prime Retail Services, Inc. (collectively referred to as the "Services Corporation"). The Services Corporation was formed primarily to operate business lines of the Company that are not directly associated with the collection of rents.
As used herein, unless the context otherwise requires, the term "Company" shall mean the Company, including its predecessors, and those entities owned or controlled by the Company.
The Company's executive offices are located at 100 East Pratt Street, Baltimore, Maryland 21202 (telephone 410-234-0782).
Tax Status
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company generally is not subject to federal income tax at the corporate level on income it distributes to its stockholders so long as it distributes at least 95% of its taxable income (excluding any net capital gain) each year. Since the Initial Public Offering, the Company believes that it has complied with the tax regulations to maintain its REIT status. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Even if the Company qualifies as a REIT, the Company may be subject to certain state and local taxes on its income and property.
Business of the Company
The Company is engaged primarily in the ownership, development, construction, leasing, marketing and management of outlet centers throughout the United States. Outlet centers have become an established segment of the retail industry, enabling value-oriented shoppers to purchase designer and brand-name products directly from manufacturers at discounts.
Since entering the outlet center business in 1988 (through the retail division of The Prime Group, Inc. ("PGI"), from which the Company acquired certain Properties and management and development operations), the Company has become the leading developer and operator in the industry having developed or acquired outlet centers containing 14,699,000 square feet of GLA at December 31, 1999, including 22 outlet centers containing 6,626,000 square feet of GLA that was added to our portfolio in connection with the Company's June 1998 merger with Horizon Group, Inc.
The average outlet center in the Company's portfolio contains approximately 288,000 square feet of GLA at December 31, 1999, significantly larger than the industry average of approximately 195,000 square feet.
The Company's outlet centers feature a diversified mix of nationally recognized manufacturers of designer and brand-name merchandise with which the Company and its employees have established long-standing relationships, including AnnTaylor/AnnTaylor Loft, Bose, Brooks Brothers, Corning-Revere, Danskin, Donna Karan, Eddie Bauer, Ellen Tracy, Esprit, Guess?, J. Crew, Jones New York, Levi's/Dockers Outlet, Mikasa, Nautica, Nike, Phillips-Van Heusen (including Bass, Gant, Geoffrey Beene, Izod and Van Heusen), Polo/Ralph Lauren, Reebok, Off-5th Saks Fifth Avenue, Sara Lee (including Champion, Coach, L'eggs, Hanes, Bali, Playtex, and Socks Galore), Sony, Springmaid-Wamsutta, Tommy Hilfiger and VF Corporation (including Barbizon and Vanity Fair). As a group, the foregoing merchants accounted for approximately 29.20% of the gross revenues of the Company during the year ended December 31, 1999, and occupied approximately 34.38% of the total leased GLA contained in the Company's outlet centers at December 31, 1999. During the year ended December 31, 1999, no group of merchants under common control accounted for more than 5.09% of the gross revenues of the Company or occupied more than 5.69% of the total leased GLA of the Company at December 31, 1999.
Business Strategy
The Company's objective is to enhance its funds from operations and the long-term value of its outlet centers by actively managing its current portfolio of properties.
Active Portfolio Management. The Company employs the following strategies that are designed to increase the sales and profitability of its tenants, resulting in improved occupancy levels and higher overall rental income:
|X| Enhance Tenant Mix. A successful outlet center must provide a unique and attractive shopping experience. The Company seeks to offer a superior shopping experience to consumers by assembling a diverse mix of nationally and internationally recognized manufacturers and retailers of designer and brand name merchandise. The Company has identified certain key tenants (the "Prime 15") that it believes will enhance consumer traffic and increase tenant sales at the Prime Outlets. The current "Prime 15" are Bose, Brooks Brothers, Calvin Klein, Coach, Donna Karan, Eddie Bauer, Jones New York, Levi's/Dockers, Liz Claiborne, Nautica, Nike, Polo/Ralph Lauren, Sony, The Gap and Tommy Hilfiger. The Company currently leases 380 stores to the Prime 15 and actively seeks to increase their representation throughout the Prime Outlets. In addition, the Company continues to add new tenants that attract customers and enhance the competitive position of the Prime Outlets.
|X| Implement Innovative Marketing Strategies. During 1998, the Company adopted a nationwide branding strategy to increase sales, improve customer awareness and loyalty and promote higher traffic at its centers. As part of this strategy, the Company has renamed its outlet centers, with the "Prime Outlets" brand name. In addition, the Company has entered into strategic marketing alliances with companies such as Coca-Cola USA seeking to access the estimated 170 million customers at its centers.
|X| Minimize Operating Expenses. The Company's in-house capabilities in property management and leasing reduce its reliance on third party service providers and enable it to more effectively control the expenses associated with these functions. The Company continually monitors its operating expenses at the property, regional and corporate levels and attempts to minimize the occupancy cost for its tenants. Where possible, the Company leverages its large size to obtain more favorable rates from its vendors and suppliers.
Selective Growth and Expansion. The Company will selectively expand existing centers to the extent proposed projects offer attractive investment returns. In 1999, Prime Retail, Inc. added a total of 102,000 square feet of GLA by expanding two of its existing centers. In addition, construction continues at Prime Outlets of Puerto Rico, the first outlet center in Puerto Rico, which will contain 175,000 square feet of GLA and is scheduled to open during the second quarter of 2000.
Competition
The Company's outlet centers compete for customers primarily with traditional shopping malls, "off-price" retailers and other outlet centers. The Company carefully considers the degree of existing and planned competition in a proposed market area before developing a new outlet center. Merchants of outlet centers generally avoid direct competition with major retailers and their own full-price stores. Generally, this is accomplished by locating outlet centers at least 20 miles from the nearest regional mall. For this reason, the Company's outlet centers compete only to a limited extent with traditional retail malls in or near metropolitan areas.
In addition to traditional sources of competition faced by the Company's outlet centers, which are mentioned above, the Company's outlet centers compete for customers with web-based retailers. Because of the newness of competition from web-based retailers, it is difficult to quantify the risk of such competition to the Company.
The Company's outlet centers compete to a limited extent with various full-price and off-price retailers in the highly fragmented retailing industry. However, management believes that the majority of the Company's customers visit outlet centers specifically for designer and brand-name goods at discounted prices. Traditional full-price and off-price retailers are often unable to provide such a variety of products at attractive prices.
Because a number of the Company's outlet centers are located in relatively undeveloped areas, there are often other potential sites near the Company's outlet centers that may be developed into outlet centers by competitors. The existence or development of an outlet center with a more convenient location or lower rents may attract the Company's merchants or cause them to seek more favorable lease terms at or prior to renewal of their leases and, accordingly, may affect adversely the business, revenues and/or sales volume of the Company's outlet centers.
The Company's community shopping centers compete with similar community shopping centers located in the same geographic trade areas.
Relationship with Municipalities
Because of the favorable impact that the Company's Properties may have on a local community's economy by generating sales and property taxes and increasing employment in the area, local communities often assist the Company with respect to zoning, economic incentives or favorable business development legislation. The Company explores opportunities to obtain incentives from local, county and state governments in connection with the development of its outlet centers. Such incentives often fund the cost of off-site sewer and water services to the site, required highway improvements and, on occasion, the cost of land and various on-site improvements.
Environmental Matters
Under various federal, state and local laws and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous substances on their property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous substances. The costs of remediation or removal may be substantial, and the presence of the hazardous substances, or the failure to promptly remediate them, may adversely affect the owner's ability to sell the real estate or to borrow using the real estate as collateral. In connection with its ownership and operation of the Properties, the Company may be potentially liable for the costs of removal or remediation of hazardous substances.
The Company has no knowledge, nor has the Company been notified by any governmental authority, of any material noncompliance, liability or claim relating to hazardous substances in connection with any properties in which any of such entities now has or heretofore had an interest. However, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by merchants and occupants of the Properties, by the condition of properties in the vicinity of the Properties (such as the presence of underground storage tanks) or by third parties unrelated to the Company.
Insurance
Management believes that each of the Properties is covered by adequate fire, flood, and property insurance provided by reputable companies and with commercially reasonable deductibles and limits.
Employees
As of December 31, 1999, the Company had 1,082 employees. The Company believes that its relations with its employees are satisfactory.
Executive Officers
The following table sets forth the names, position and age (as of April 1, 2000)of the current executive officers of the Company:
Biographies of Executive Officers
Glenn D. Reschke. Glenn D. Reschke is President and Chief Executive Officer and a Director of the Company. Mr. Reschke's responsibilities with Prime include leasing, marketing, operations, and management, development, and construction for Prime's retail projects. Mr. Reschke joined PGI in 1983 and, since that time, served as Vice President, Senior Vice President and Executive Vice President of PGI, and was responsible for PGI's multi-family, senior housing, single family and land development divisions. Mr. Reschke received a Masters in Business Administration from Eastern Michigan University with a specialization in finance after receiving a Bachelor of Science degree with honors in Chemical Engineering from Rose Hulman Institute of Technology in Terre Haute, Indiana. Mr. Reschke is the brother of Michael W. Reschke, the Company's Chairman of the Board.
David G. Phillips. David G. Phillips is President of Athena/Prime Retail Europe and Executive Vice President of the Company. Athena/Prime Retail Europe is a joint venture between the Company and the Athena Group, a private equity investment company based in New York. Mr. Phillips oversees the Company's development, marketing, leasing and operations efforts in Europe. Mr. Phillips joined PGI in 1989 and served as Vice President, Senior Vice President, and Executive Vice President, Operations, Marketing and Leasing. Prior to joining PGI, Mr. Phillips was a leasing representative at D.I. Realty, Inc., leasing a variety of retail projects including outlet centers and traditional and specialty malls. Mr. Phillips received a Masters of Science in Real Estate Development at Johns Hopkins University and received a Bachelor of Science degree in Business Administration from the University of Vermont. Mr. Phillips is a member of the ICSC with a CLS (Certified Leasing Specialist) designation and the Urban Land Institute.
Robert P. Mulreaney. Robert P. Mulreaney is Executive Vice President - Chief Financial Officer and Treasurer of the Company. Mr. Mulreaney joined the Company in 1994. Mr. Mulreaney's responsibilities with the Company include capital market activities, corporate budgeting, financial reporting, investor relations, accounting, taxation, treasury, and management information systems. Prior to joining the Company, Mr. Mulreaney was associated for 14 years with Ernst & Young LLP, where he specialized in accounting and consulting issues related to real estate and financial institutions. Mr. Mulreaney received a Bachelor of Business Administration in Accounting in 1980 from Marshall University. Mr. Mulreaney is a member of the American Institute of Certified Public Accountants, the Maryland Association of Certified Public Accountants, and the West Virginia Society of Certified Public Accountants.
C. Alan Schroeder. C. Alan Schroeder is Executive Vice President - General Counsel and Secretary of the Company. Mr. Schroeder has been General Counsel and Secretary of the Company since the initial public offering of stock in the Company in 1994. From 1990 to 1994, Mr. Schroeder was an Assistant General Counsel of PGI and was responsible for legal matters relating to the retail division of PGI. Prior to joining PGI, Mr. Schroeder was associated for four years with Hopkins & Sutter, a Chicago, Illinois based law firm. Mr. Schroeder received a Juris Doctorate degree from The University of Chicago Law School. Mr. Schroeder received an A.B. degree in Economics and Sociology from Bowdoin College in Brunswick, Maine. Mr. Schroeder is licensed to practice law in Illinois.
Steven Gothelf. Steven Gothelf is Executive Vice President - Finance of the Company. Mr. Gothelf joined PGI in 1990 and, since that time, served as Vice President of Asset and Development Management. Mr. Gothelf's responsibilities with the Company include financing, capital market activities, and the review and analysis of potential outlet center acquisitions. For two years prior to joining PGI, Mr. Gothelf was Vice President of Finance and Administration of Clarion Development Inc. Before joining Clarion Development Inc., Mr. Gothelf was a Market Maker for financial futures at the Chicago Board of Trade and prior to that was a Manager of Real Estate Tax and Consulting for KPMG Peat Marwick LLP. Mr. Gothelf received his B.S. degree in Accounting from the University of Illinois and is a certified public accountant.
John S. Mastin. John S. Mastin is Executive Vice President - Leasing of the Company. Mr. Mastin's responsibilities with the Company include supervision of leasing and merchandising for all of the Company's outlet centers. Mr. Mastin joined the Company in June of 1996. Prior to joining the Company, Mr. Mastin spent 24 years with The Rouse Company. At The Rouse Company, Mr. Mastin began his career as a Junior Leasing Representative and was promoted to Vice President and Assistant Director of Leasing. Mr. Mastin led the leasing effort for The Rouse Company with numerous regional malls as well as inner-city festival market places which include Bayside in Miami, Florida, and the redevelopment of Underground Atlanta in Atlanta, Georgia. Mr. Mastin was involved in the releasing and remerchandising effort for the operating properties division of The Rouse Company. Prior to The Rouse Company, Mr. Mastin was a Naval Aviator for four years. Mr. Mastin received his Bachelor of Arts in English from Niagara University. Mr. Mastin is a member of the ICSC.
Frederick J. Meno. Frederick J. Meno is Senior Vice President - Operations of Prime Retail, where he is responsible for supervising the management, operations, outdoor advertising and specialty leasing programs for Prime's nationwide portfolio of outlet centers. Prior to joining Prime, Mr. Meno was Executive Director of Insignia/ESG, Inc., where he was responsible for all management, leasing, construction management, and business development activities for Insignia/ESG's 10 million square foot national enclosed mall portfolio, as well as Insignia/ESG's Dallas/Fort Worth office, industrial and non-enclosed retail portfolio. For 10 years prior to joining Insignia/ESG, Inc., Mr. Meno was President of the Woodmont Property management Company in Fort Worth, Texas. A 1979 graduate of Ohio State University, having majored in Urban Land Development and Economics with a degree in Business Administration, Mr. Meno is a member of the Institute of Real Estate Management and the ICSC. Mr. Meno has achieved the designations of Certified Property Manager, Real Property Administrator and Certified Shopping Manager and is a licensed Real Estate Salesman in the State of Texas. Mr. Meno is also on the Advisory Board of the Shopping Center Management Insider Publication and he is the 2001 Dean for ICSC's University of Shopping Centers School of Outlet Retailing, ValueOrientor and Community Centers.
Changes in Executive Officers
Abraham Rosenthal. Effective February 25, 2000, Abraham Rosenthal resigned from his position as Chief Executive Officer and Director of the Company.
R. Bruce Armiger. Effective March 24, 2000, R. Bruce Armiger resigned from his position as Senior Vice President - Development of the Company.
Michael W. Reschke. On April 5, 2000, Michael W. Reschke relinquished his responsibilities as an executive officer and became non-executive Chairman of the Board of the Company.
ITEM 2
ITEM 2 - PROPERTIES
General
As a fully-integrated real estate company, the Company provides development, construction, finance, leasing, accounting, marketing and management services for all of its properties. At December 31, 1999, the Company's portfolio consisted of (i) 51 outlet centers aggregating 14,699,000 square feet of GLA (including 1,490,000 square feet of GLA at outlet centers owned through joint venture partnerships), (ii) three community shopping centers aggregating 424,000 square feet of GLA and (iii) 159,000 square feet of GLA of office space.
The table set forth below summarizes certain information with respect to the Company's existing centers as of December 31, 1999 (see "Note 6 - Bonds and Notes Payable" of the Notes to the Consolidated Financial Statements contained herein for information with respect to mortgage indebtedness on the Company's properties).
Notes: (1) Percentage reflects fully executed leases as of December 31, 1999 as a percent of square feet of GLA. (2) The Company acquired this outlet center on June 15, 1998 as a result of its merger with Horizon Group, Inc. (3) The Company acquired this outlet center on June 15, 1998 as a result of its merger with Horizon Group, Inc. On November 19, 1999, the Company sold this outlet center to a joint venture partnership with an unrelated party in which the Company owns a 30.0% interest. (4) The Company acquired this outlet center on June 15, 1998 as a result of its merger with Horizon Group, Inc. On February 23, 2000, the Company sold this outlet center to a joint venture partnership with an unrelated party in which the Company owns a 30.0% interest. (5) The Company owns a 2% partnership interest as the sole general partner in Phase I of this property but is entitled to 99% of the property's operating cash flow and net proceeds from a sale or refinancing. This mixed-use development includes 154,000 square feet of office space which was 98% leased as of December 31, 1999. (6) On September 1, 1999, the Company acquired 50% of Phase I and 51% of Phases II and III of this outlet center which it owns in joint venture partnerships with unrelated parties. (7) The Company owns 50% of this outlet center in a joint venture partnership with an unrelated third party. (8) The Company operates this outlet center pursuant to a long-term ground lease under which the Company receives the economic benefit of a 100% ownership interest. (9) The real property on which this outlet center is located is subject to a long-term ground lease. (10) The Company expects to close on the sale of this outlet center on or about May 15, 2000 to a joint venture partnership with an unrelated party in which the Company owns a 30.0% interest. (11) The Company also owns three community centers not included in this table containing 424,000 square feet of GLA in the aggregate that were 84% leased as of December 31, 1999.
Lease Terms
In general, the leases relating to the Company's outlet centers have a term of three to five years. Most leases provide for the payment of percentage rents for annual sales in excess of certain thresholds. In addition, the typical lease agreement provides for the recovery of all of a merchant's proportionate share of actual common area maintenance ("CAM"), refuse removal, insurance, and real estate taxes as well as a collection for advertising and promotion and an administrative fee. CAM includes such items as common area utilities, security, parking lot cleaning, maintenance and repair of common areas, capital replacement reserves, landscaping, seasonal decorations, public restroom maintenance and certain administrative expenses.
The following table sets forth, as of December 31, 1999, tenant lease expirations for the next 10 years at the Company's outlet centers (assuming that none of the tenants exercise any renewal option and including leases at outlet centers owned through joint venture partnerships):
Tenants
In management's view, tenant mix is an important factor in determining an outlet center's success. Virtually all aspects of the Company's outlet centers, ranging from site selection to architectural design, are planned to attract and retain a diverse mix of nationally and internationally recognized manufacturers of upscale designer and brand-name products. Crucial to the development of a new outlet center is having lead tenants committed to the outlet center early in the process. In management's view, lead tenants are manufacturers that during the development of an outlet center attract other high-quality manufacturers to the outlet center and provide for a well-balanced and diversified mix of tenants that will attract consumers to the outlet center. Lead tenants are placed in strategic locations designed to draw customers into the outlet center and to encourage them to shop at more than one store. The Company continually examines the placement of tenants within each center and, in collaboration with its tenants, adjusts the size and location of their space within the center in an effort to improve sales per square foot.
During the year ended December 31, 1999, no group of tenants under common control accounted for more than 5.09% of the gross revenues of the Company or occupied more than 5.12% of the total GLA of the Company.
The following list includes some of the lead tenants in the Company's outlet centers based on leases executed as of December 31, 1999:
During the year ended December 31, 1999, total bad debt expense was approximately $0.8 million or 0.25% of total revenues.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
In the ordinary course of business the Company is subject to certain legal actions. While any litigation contains an element of uncertainty, management believes the losses, if any, resulting from such matters, including the matter described below, will not have a material adverse effect on the consolidated financial statements of the Company.
The Company and its affiliates are defendants in a lawsuit filed on August 10, 1999 in the Circuit Court for Baltimore City and removed to U.S. District Court for the District of Maryland on August 20, 1999. The lawsuit alleges that the Company and its related entities overcharged tenants for common area maintenance charges and promotional fund charges. The outcome of, and the ultimate liability of the Company, if any, from, this lawsuit cannot currently be predicted. Management believes that the Company has acted properly and intends to defend this lawsuit vigorously.
The New York Stock Exchange ("NYSE") has notified the Company that it is reviewing transactions in the stock of the Company prior to the Company's January 18, 2000 press release concerning financial matters.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31, 1999.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock trades on the NYSE under the trading symbol "PRT".
The following table sets forth the quarterly high, low and end of period closing sales prices per share of the Company's Common Stock as reported on the NYSE as well as the cash distributions paid during the periods indicated:
Note: (1) Includes a special cash distribution of $0.50 per common share relating to the Company's merger with Horizon completed in June 1998 (see Note 3 - "Business Combination" of the Notes to Consolidated Financial Statements).
The Company's current policy regarding the payment of common stock distributions is to only make distributions to the extent necessary to maintain its status as a real estate investment trust for federal income tax purposes. Based on its current federal tax income tax projections, the Company does not expect to pay any distributions on its common stock or common units of limited partnership interest in Prime Retail, L.P. during 2000. With respect to distributions on the Company's 10.5% Series A Senior Cumulative Preferred Stock and 8.5% Series B Cumulative Convertible Preferred Stock, the Board of Directors considered and did not declare a quarterly distribution on such preferred stock due February 15, 2000. The Company's Board of Directors will continue to evaluate the payment of such preferred stock distributions on a quarterly basis.
The Company is currently prohibited under the terms of more than one of its credit agreements from paying dividends or distributions as a result of non-compliance with a financial covenant (see Note 6 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements. In addition, the Company may make no distribution to its common shareholders unless it is current with respect to distributions to its preferred shareholders.
The approximate number of holders of record of the Common Stock was 949 including participants in security position listings as of March 28, 2000.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA (Amounts in thousands, except per share amounts)
Notes: (1) Management believes that in order to facilitate a clear understanding of the consolidated historical operating results of the Company, Funds from Operations ("FFO") should be considered in conjunction with net income (loss) as presented in the financial statements included in this Annual Report on Form 10-K. Management believes that FFO is an important and widely accepted measure of the operating performance of REITs which provides a relevant basis for comparison to other REITS. Therefore, FFO is presented to assist investors in analyzing the performance of the Company. FFO represents net income (loss) (computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains or losses from debt restructuring, sales of property and discontinued operations, plus depreciation and amortization and after adjustments for unconsolidated investment partnerships and joint ventures. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") issued a clarification of its definition of FFO. Although the Company has adopted the NAREIT definition of FFO, the Company cautions that the calculation of FFO may vary from entity to entity and as such the presentation of FFO by the Company may not be comparable to other similarly titled measures of other reporting companies. FFO does not represent cash flow from operating activities in accordance with GAAP and is not indicative of cash available to fund all of the Company's cash needs. FFO should not be considered as an alternative to net income or any other GAAP measure as an indicator of performance and should not be considered as an alternative to cash flow as a measure of liquidity or the ability to service debt or to pay dividends. A reconciliation of income (loss) before allocations to minority interests and preferred shareholders to FFO is as follows:
Notes: (i) Includes a nonrecurring charge of $6,131 related to the prepayment of long-term debt recorded during 1996. (ii)Amounts include net preferential partner distributions from a joint venture partnership of $400 and $162 for the years ended December 31, 1996 and 1995, respectively.
(2) Includes a special cash distribution of $0.50 per common share relating to the Company's merger with Horizon completed in June 1998 (see Note 3 - "Business Combination" of the Notes to Consolidated Financial Statements). (3) Includes a special cash distribution of $0.145 per common share relating to the Company's exchange offer completed in June 1996. (4) Includes outlet centers operated under joint venture partnerships with unrelated third parties as follows:
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Amounts in thousands, except per share, per unit, and per square foot information)
Introduction
The following discussion and analysis of the consolidated financial condition and results of operations of Prime Retail, Inc. (the "Company") should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The Company's operations are conducted through Prime Retail, L.P. (the "Operating Partnership"). The Company controls the Operating Partnership as its sole general partner and is dependent upon the distributions or other payments from the Operating Partnership to meet its financial obligations. Historical results and percentage relationships set forth herein are not necessarily indicative of future operations.
Cautionary Statements
The following discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management's current views with respect to future events and financial performance. These statements are subject to potential risks and uncertainties and, therefore, actual results may differ materially. Such forward-looking statements are subject to certain risks and uncertainties; including, but not limited to, the risk that the Company may be unable to obtain waivers or amendments to the provisions of its credit agreement sthat are presently in default or to refinance the indebtedness outstanding under such agreements in the event they are accelerated; the effects of future events on the Company's financial performance; risks related to the retail industry in which the Company's outlet centers compete, including the potential adverse impact of external factors, such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; risks associated with the Company's planned asset sales; risks associated with the Company's property development activities, such as the potential for cost overruns, delays and the lack of predictability with respect to the financial returns associated with these development activities; the risk of potential increase in market interest rates from current levels; risks associated with real estate ownership, such as the potential adverse impact of changes in local economic climate on the revenues and the value of the Company's properties; risks associated with litigation; and risks associated with newly arising competition from web-based retailers, given the newness of web-based retailing, it is difficult to quantify at this time.
Merger with Horizon Group, Inc.
On June 15, 1998, the merger and other transactions (collectively, the "Merger Transactions") between the Company and Horizon Group, Inc. ("Horizon") were consummated for an aggregate consideration of $1,134,682, including liabilities assumed and related transaction costs. The merger has been accounted for using the purchase method of accounting and the purchase price of $1,134,682 was allocated to the assets acquired and the liabilities assumed based on estimates of their respective fair values. Accordingly, the operating results of the 22 properties acquired from Horizon have been included in the Company's consolidated results of operations commencing on June 15, 1998. See "Liquidity and Capital Resources - Business Combination" for further information.
Portfolio Growth
The Company grew to its present size, a process that had been largely completed by the end of 1999, by developing and acquiring outlet centers and expanding its existing outlet centers. The Company's outlet portfolio consisted of 51 outlet centers totaling 14,699,000 square feet of gross leasable area ("GLA") at December 31, 1999, compared to 50 outlet centers totaling 14,348,000 square feet of GLA at December 31, 1998 and 28 outlet centers totaling 7,217,000 square feet of GLA at December 31, 1997. The significant increase in the number of the Company's outlet centes and GLA are collectively referred to as the "Portfolio Expansion and the Horizon Merger."
During 1999, the Company (i) opened two expansions to existing outlet centers totaling 85,000 square feet of GLA and (ii) acquired from Horizon Group Properties, Inc. ("HGP") ownership interests in the Bellport Outlet Center which consists of 292,000 square feet of GLA. During 1998, the Company opened two outlet centers and nine expansions to existing outlet centers totaling 931,000 square feet of GLA in the aggregate. In connection with the Merger Transactions, the Company (i) acquired and integrated 22 of Horizon's outlet centers into its existing portfolio adding 6,626,000 square feet of GLA in the aggregate and (ii) sold two outlet centers to HGP totaling 426,000 square feet of GLA.
Table 2-Statements of Operations on a Weighted Average per Square Foot Basis
A summary of the operating results for the years ended December 31, 1999, 1998 and 1997 is presented in the following table, expressed in amounts calculated on a weighted average occupied GLA basis.
Notes: (1) Includes total GLA in which the Company receives substantially all of the economic benefit. (2) Includes outlet centers operated under unconsolidated joint venture partnerships with unrelated third parties. (3) Based on occupied GLA weighted by months of operation. The occupied GLA on a weighted average basis from the 22 properties the Company acquired from Horizon have been included in the weighted average GLA commencing on June 15, 1998. (4) Excludes a (i) provision for abandoned projects of $16,039, (ii) a provision for asset impairment of $15,842, and (iii) a loss on Designer Connection outlet stores of $6,561 recorded during 1999.
Comparison of the year ended December 31, 1999 to the year ended December 31, 1998
For the year ended December 31, 1999, the Company reported net loss of $34,829. The 1999 results include (i) a fourth quarter loss on the sale of real estate of $15,153, (ii) a provision for abandoned projects of $16,039, (iii) a provision for asset impairment of $15,842, (iv) a loss on Designer Connection outlet stores of $6,561, and (v) an extraordinary loss of $3,518 related to the pre-payment of certain long-term debt. For the year ended December 31, 1999, the net loss applicable to common shareholders was $44,791, or $1.04 and $1.30 per common share on a basic and diluted basis, respectively. For the year ended December 31, 1998, the Company reported net income of $17,530. The 1998 results include (i) a second quarter loss on the sale of real estate of $15,461 in connection with the Merger Transactions and (ii) a loss on Designer Connection outlet stores of $1,067. For the year ended December 31, 1998, the net loss applicable to common shareholders was $7,074, or $0.20 per common share on a basic and diluted basis.
Total revenues were $305,956 for the year ended December 31, 1999, compared to $231,809 for the year ended December 31, 1998, an increase of $74,147, or 32.0%. Base rents increased $45,603, or 30.7%, in 1999 compared to 1998. These increases are primarily due to the Portfolio Expansion and the Horizon Merger. Straight-line rents (included in base rents) were $1,181 and $1,229 for the years ended December 31, 1999 and 1998, respectively. The average base rent per square foot for new outlet leases negotiated and executed by the Company was $17.67 and $16.12 for the years ended December 31, 1999 and 1998, respectively.
Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, increased $1,701, or 26.6%, during the year ended December 31, 1999 compared to the same period in 1998. This increase was attributable to higher reported merchant sales in 1999 as well as the Portfolio Expansion and the Horizon Merger.
As summarized in TABLE 3, merchant sales reported to the Company increased by $117.6 million, or 3.7%, to $3,286.9 million from $3,169.3 million for the years ended December 31, 1999 and 1998, respectively. The increase in total reported merchant sales is primarily due to the Portfolio Expansion and the Horizon Merger. The weighted average reported merchant sales per square foot increased by 0.8% to $256.50 per square foot in 1999 from $254.56 per square foot in 1998. Total merchant occupancy cost per square foot increased slightly from $21.30 in 1998 to $21.90 in 1999 and increased as a percentage of reported sales from 8.37% to 8.54%, respectively.
Table 3-Summary of Reported Merchant Sales(1)
A summary of reported outlet merchant sales and related data for 1999, 1998 and 1997 follows:
Notes: (1) Total reported merchant sales summarizes gross sales generated by merchants and includes changes in merchant mix and the effect of new space created from the acquisition and opening of new and expanded outlet centers. Several of the Company's outlet centers were constructed, expanded or acquired during the time periods contained in TABLE 3 and therefore, reported sales for such new openings, expansions and acquisitions were reported only for the partial period and were not annualized. TABLE 3 should be read in conjunction with the information summarized under the caption "Properties--Portfolio of Properties". (2) Weighted average reported sales per square foot is based on reported sales divided by the weighted average square footage occupied by the merchants reporting those sales. Same-space sales is defined as the weighted average reported merchant sales per square foot for space open since the beginning of the prior year. (3) Total merchant occupancy cost per square foot includes base rents, percentage rents and tenant reimbursements which includes tenant marketing contributions. (4) Computed as follows: total merchant occupancy cost per square foot divided by total weighted average reported merchant sales per square foot. (5) Computed as follows: total merchant occupancy cost per square foot (excluding marketing contributions paid by merchants) divided by total weighted average reported merchant sales per square foot.
Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, increased by $22,911, or 34.1%, in 1999 over 1998. This increase is primarily due to the Portfolio Expansion and the Horizon Merger.
As shown in TABLE 4, tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 96.6% in 1999 compared to 96.8% in 1998. These levels reflect the Company's continued efforts to contain operating expenses at its properties while requiring merchants to pay their pro rata share of these expenses. TABLE 4 sets forth recoveries from merchants as a percentage of total recoverable expenses for 1999, 1998, and 1997:
Table 4-Tenant Recoveries as a Percentage of Total Recoverable Expenses
- -------------------------------------------------------------------------------- Percentage of Expenses Year Recovered from Tenants(1) - --------------------------------------------------------------------------------
1999..................................................................96.6% 1998..................................................................96.8% 1997..................................................................96.4%
================================================================================ Note: (1) Total recoverable expenses include property operating expenses and real estate taxes.
Interest and other income increased by $3,932, or 39.7%, to $13,829 during the year ended December 31, 1999 as compared to $9,897 for the year ended December 31, 1998. The increase reflects higher (i) temporary tenant income of $1,677, (ii) lease termination income of $717, (iii) municipal assistance income of $506, (iv) parking garage income of $360, (v) property management fees of $270, (vi) gift certificate program income of $241, and (vii) other ancillary income of $161.
Property operating expense increased by $18,178, or 34.5%, to $70,862 in 1999 compared to $52,684 in 1998. Real estate taxes expense increased by $5,700, or 34.1%, to $22,405 in 1999 from $16,705 in 1998. The increases in property operating expenses and real estate taxes are primarily due to the Portfolio Expansion and the Horizon Merger. As show in TABLE 5, depreciation and amortization expense increased by $20,913, or 39.7%, to $73,640 in 1999, compared to $52,727 in 1998. This increase results from the depreciation and amortization of assets associated with the Portfolio Expansion and the Horizon Merger.
Table 5-Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense for 1999, 1998 and 1997 are summarized as follows:
Note: (1) In accordance with generally accepted accounting principles ("GAAP"), leasing commissions are classified as intangible assets. Therefore, the amortization of leasing commissions is reported as a component of depreciation and amortization expense.
As shown in TABLE 6, interest expense increased by $33,230, or 54.7%, to $93,934 in 1999 compared to $60,704 in 1998. This increase reflects (i) higher interest incurred of $30,571, (ii) a decrease in the amount of interest capitalized in connection with development projects of $1,147 and (iii) an increase in amortization of deferred financing costs of $2,587. Partially offsetting these items was a decrease in amortization of interest rate protection contracts of $1,075. Additionally, interest incurred reflects amortization of debt premiums of $4,406 and $2,153 for the yers ended December 31, 1999 and 1998, respectively.
The increase in interest incurred is primarily attributable to an increase of $387,408 in the Company's average debt outstanding during 1999 compared to 1998 and (ii) higher interest rates on variable-rate indebtedness due to increased market rates.
Table 6-Components of Interest Expense
The components of interest expense for 1999, 1998 and 1997 are summarized as follows:
Other charges increased by $2,423 to $6,918 in 1999 compared to $4,495 for 1998. This increase reflects (i) the write-off of $3,100 of capitalized costs associated with the Company's expired option to purchase its joint venture partner's 50.0% ownership interest in Prime Outlets at New River, and (ii) an increase in other miscellaneous charges of $389. Partially offsetting these items was (i) a decrease in the provision for uncollectible accounts receivable of $608 and (ii) lower marketing costs of $458.
When accounting for the fourth quarter of 1999, the Company determined that certain events and circumstances had occurred during 1999 including, limited leasing success and revised occupancy estimates, which indicated two of the Company's outlet centers (Prime Outlets at Jeffersonville II and Prime Outlets at Oxnard) were permanently impaired. Accordingly, the results of operations for 1999 include a provision for asset impairment of $15,842 representing the write-down of the carrying values of these assets to their estimated fair value in accordance with SFAS No. 121. Additionally, when accounting for the fourth quarter of 1999, the Company recorded a provision for abandoned projects of $16,039 based on management's determination that as of December 31, 1999, the Company s pre-development efforts associated with certain projects were no longer viable.
The operating results for the Company's Designer Connection outlet stores are reflected in loss on Designer Connection in the Consolidated Statements of Operations for all periods presented. When accounting for the fourth quarter of 1999, the Company decided to discontinue the operations of its Designer Connection outlet stores. Accordingly, the Company recorded non-recurring charges aggregating $3,659 including (i) $1,659 related to the write-off of costs associated with a web-site for Designer Connection and(ii) $2,000 of costs to cover the expected cash and non-cash costs of the closure. The cash and non-cash costs of the closure primarily consist of (i) employee termination costs, (ii) lease obligations, and (iii) the write-down of assets to their net realizable value. The Company expects that the operations of its Designer Connection outlet stores will cease by July 31, 2000.
Table 7-Capital Expenditures
The components of capital expenditures for 1999, 1998 and 1997 are summarized as follows:
Notes: (1) Includes the assets acquired by the Company during 1998 in connection with its merger with Horizon, net of the spin-off of HGP. (2) Includes the assets acquired by the Company during 1997 consisting of (i) the purchase of seven outlet centers ($166,987) and (ii) the purchase of the Company's joint venture partner's partnership interest in Prime Outlet at Lodi ($24,358).
Notes:
(1) The fourth quarter of 1999 reflects non-recurring charges and expenses aggregating $37,981 including (i) a provision for asset impairment of $15,842, (ii) a provision for abandoned projects of $16,039, (iii) the write-off of $3,100 of capitalized costs associated with the Company's expired option to purchase its joint venture partner's 50.0% ownership interest in Prime Outlets at New River, and (iv) $3,000 of start-up and organizational expenses associated with the Company's eOutlets.com subsidiary (see Note 13 - "Special Charges" and Note 14 - "Subsequent Event" of the Notes to Consolidated Financial Statements).
(2) The second quarter of 1998 includes a special cash distribution of $0.50 per common share relating to the Company's merger with Horizon completed in June 1998 (see Note 3 - "Business Combination" of the Notes to Consolidated Financial Statements).
Comparison of the year ended December 31, 1998 to the year ended December 31,
For the year ended December 31, 1998, the Company reported net income of $17,530. The 1998 results include (i) a second quarter loss on the sale of real estate of $15,461 in connection with the Merger Transactions and (ii) a loss on Designer Connection outlet stores of $1,067. For the year ended December 31, 1998, the net loss applicable to common shareholders was $7,074, or $0.20 per common share on a basic and diluted basis. For the year ended December 31, 1997, the Company reported net income of $5,905. The 1997 results include an extraordinary loss of $2,061 related to the pre-payment of certain long-term debt. For the year ended December 31, 1997, the net loss applicable to common shareholders was $6,821, or $0.36 per common share on a basic and diluted basis.
Total revenues were $231,809 for the year ended December 31, 1998, compared to $129,130 for the year ended December 31, 1997, an increase of $102,679, or 79.5%. Base rents increased $70,330, or 90.1%, in 1998 compared to 1997. These increases are primarily due to the Portfolio Expansion and the Horizon Merger. Straight-line rents (included in base rents) were $1,229 and $643 for the years ended December 31, 1998 and 1997, respectively. The average base rent per square foot for new manufacturers' outlet leases negotiated and executed by the Company was $16.12 and $15.52 for the years ended December 31, 1998 and 1997, respectively.
Percentage rents, which represent rents based on a percentage of sales volume above a specified threshold, increased $3,107, or 94.8%, during the year ended December 31, 1998 compared to the same period in 1997. This increase was attributable to higher reported merchant sales in 1998 as well as the Portfolio Expansion and the Horizon Merger.
As summarized in TABLE 3, merchant sales reported to the Company increased by $1,735.1 million, or 121.0%, to $3,169.3 million from $1,434.2 million for the years ended December 31, 1998 and 1997, respectively. The increase in total reported merchant sales is primarily due to the Portfolio Expansion and the Horizon Merger. The weighted average reported merchant sales per square foot increased by 7.8% to $254.56 per square foot in 1998 from $236.20 per square foot in 1997. Total merchant occupancy cost per square foot decreased slightly from $21.36 in 1997 to $21.30 in 1998 and decreased as a percentage of reported sales from 8.39% to 7.65%, respectively. The decrease in the cost of merchant occupancy to reported sales is primarily due to an increase in the weighted average reported merchant sales per square foot for the Company's entire manufacturers' outlet portfolio.
Tenant reimbursements, which represent the contractual recovery from tenants of certain operating expenses, increased by $29,633, or 79.0% in 1998 over 1997. These increases are primarily due to the Portfolio Expansion and the Horizon Merger.
As shown in Table 4, tenant reimbursements as a percentage of recoverable property operating expenses and real estate taxes was 96.8% in 1998 compared to 96.4% in 1997. These levels reflect the Company's continued efforts to contain operating expenses at its properties while requiring merchants to pay their pro rata share of these expenses.
Interest and other income decreased by $391, or 3.8%, to $9,897 during the year ended December 31, 1998 as compared to $10,288 for the year ended December 31, 1997. The decrease reflects (i) lower interest income of $1,262 and (ii) other ancillary income of $561. Partially offsetting these items was higher temporary tenant income of $1,432. The reduction in interest income was primarily the result of the use of a portion of the Company's expansion loan escrow account to fund certain of its development activities during 1997 and 1998. The expansion loan escrow account is included in restricted cash in the Consolidated Balance Sheets.
Property operating expense increased by $23,192, or 78.6%, to $52,684 in 1998 compared to $29,492 in 1997. Real estate taxes expense increased by $7,288, or 77.4%, to $16,705 in 1998 from $9,417 in 1997. The increases in property operating expenses and real estate taxes are primarily due to the Portfolio Expansions and the Horizon Merger. As shown in Table 5, depreciation and amortization expense increased by $26,012, or 97.4%, to $52,727 in 1998, compared to $26,715 in 1997. This increase results from the depreciation and amortization of assets associated with the Portfolio Expansion and the Horizon Merger.
As shown in Table 6, interest expense increased by $24,582, or 68.1%, to $60,704 in 1998 compared to $36,122 in 1997. This increase reflects higher interest incurred of $27,194. Partially offsetting this item was an increase in the amount of interest capitalized in connection with development projects of $1,737, a decrease in amortization of deferred financing costs of $637, and a decrease in amortization of interest rate protection contracts of $238. Additionally, interest incurred reflects amortization of debt premiums of $2,153 for the year ended December 31, 1998.
The increase in interest incurred is primarily attributable to an increase of $379,108 in the Company's average debt outstanding during 1998 compared to 1997.
Other charges increased by $1,261 to $4,495 in 1998 compared to $3,234 for 1997. This increase reflects (i) a higher provision for potentially unsuccessful pre-development efforts of $508, (ii) an increase in the provision for uncollectible accounts receivable of $417, (iii) an increase in other miscellaneous charges of $215, and (iv) higher marketing costs of $121.
In connection with the closing of its merger with Horizon on June 15, 1998, the Company sold Indiana Factory Shops and Nebraska Crossing Factory Stores (collectively, the "Prime Transferred Properties") to HGP for an aggregate consideration of $26,015 resulting in a second quarter loss on the sale of real estate of $15,461.
Liquidity and Capital Resources
Sources and Uses of Cash
For the year ended December 31, 1999, net cash provided by operating activities was $102,221, net cash used in investing activities was $56,666, and net cash used in financing activities was $43,977.
The uses of cash for investing activities during 1999 of $89,969 included (i) costs associated with development and construction of two expansions to existing outlet centers aggregating 85,000 square feet of GLA which opened during 1999, (ii) costs associated with development and construction of a new center (Prime Outlets of Puerto Rico) and three expansions to existing centers aggregating approximately 457,000 square feet of GLA which are expected to open during 2000, (iii) costs associated with the completion of two outlet centers and nine expansions to existing outlet centers aggregating 931,000 square feet of GLA which opened during 1998, and (iv) costs for pre-development activities related to future development opportunities. Partially offsetting these uses were $33,303 of net proceeds from the sale of Prime Outlets at Birch Run. See "Prime/Estein Joint Venture Transaction" for further information.
The gross uses of cash from financing activities during 1999 included (i) principal repayments on notes payable of $204,432, (ii) preferred and common stock distributions of $75,536, (iii) costs associated with the Company's redemption of its outstanding shares of Series C preferred stock of $45,054, (iv) distributions to minority interests, including limited partners of the Operating Partnership, of $12,976, and (v) deferred financing costs of $10,321. Partially offsetting these items were proceeds from new borrowings of $304,342.
Although the Company believes that cash flow from (i) operations, (ii) new borrowings, (iii) refinancing of certain existing debt, (iv) the potential sale of a joint venture interest in certain outlet centers, and (v) the potential sale of equity or debt securities in the public or private capital markets will be sufficient to satisfy its scheduled debt service obligations and sustain its operations for the next year. There can be no assurance that the Company will be successful in obtaining the required amount of funds for these items or that the terms of capital raising activities, if any, will be as favorable as the Company has experienced in prior periods. At December 31, 1999, unused commitments available for borrowings under various loan facilities were $13,546 in the aggregate.
Dividends and Distributions
In order to qualify as a Real Estate Investment Trust ("REIT") for federal income tax purposes, the Company is required to pay distributions to its common and preferred shareholders of at least 95.0% of its REIT taxable income in addition to satisfying other requirements. Although the Company intends to make distributions in accordance with the requirements of the Internal Revenue Code of 1986, as amended, it also intends to retain such amounts as it considers necessary from time to time for capital and liquidity needs of the Company.
The Company's current policy with respect to common stock distributions is to only make payments to the extent necessary to maintain its status as a REIT for federal income tax purposes. Based on the Company's current federal income tax projections, it does not expect to pay any distributions on its common stock or common units of limited partnership interest in Prime Retail, L.P. during 2000. With respect to distributions on the Company's 10.5% Series A Senior Cumulative Preferred Stock ("Senior Preferred Stock") and 8.5% Cumulative Convertible Preferred Stock ("Series B Convertible Preferred Stock"), the Board of Directors considered and did not declare a quarterly distribution on such preferred stock due February 15, 2000. The Board of Directors will continue to evaluate the payment of such preferred stock distributions on a quarterly basis. The holders of the Senior Preferred Stock and Series B Convertible Preferred Stock, each series voting separately as a class, have the right to elect two additional members to the Company's Board of Directors if the equivalent of six consecutive quarterly dividends on these series of preferred stock are in arrears. Each of such two directors will be elected to serve until the earlier of (i) the election and qualification of such directors' successor, or (ii) payment of the dividend arrearage.
The Company is currently prohibited under the terms of more than one of its credit agreements from paying dividends or distributions as a result of non-compliance with a financial covenant. In addition, the Company may make no distributions to its common shareholders unless it is current with respect to distributions to its preferred shareholders. Annualized cumulative dividends on the Company's Senior Preferred Stock and Series B Convertible Preferred Stock outstanding as of December 31, 1999 are $6,038 and $16,636, respectively.
Debt Repayments
The Company's aggregate indebtedness was $1,260,670 and $1,217,507 at December 31, 1999 and 1998, respectively. At December 31, 1999, such indebtedness had a weighted average maturity of 5.19 years and bore interest at a weighted average interest rate of 7.87% per annum. At December 31, 1999, $940,484, or 74.6%, of such indebtedness bore interest at fixed rates and $320,186, or 25.4%, of such indebtedness bore interest at variable rates. The Company is obligated to repay, excluding acceleration provisions, $95,732 and $229,632 of mortgage indebtedness during 2000 and 2001, respectively. See "Debt Covenants."
Repurchase of Shares of Series C Preferred Stock
On March 31, 1999, the Company entered into an agreement providing for the repurchase of all of its outstanding shares of Series C Preferred Stock for $43,636 or $10.00 per share. The agreement provided for the repurchase to occur in two stages. In the first stage, on March 31, 1999, the Company repurchased 3,300,000 shares of the Series C Preferred Stock in exchange for the issuance of a 12.0% fixed rate $33,000 unsecured promissory note which was repaid on September 29, 1999. In the second stage, the Company repurchased the remaining 1,063,636 outstanding shares of its Series C Preferred Stock for an aggregate purchase price of $10,636 on September 29, 1999.
Business Combination
On June 15, 1998, the Merger Transactions as set forth in the agreement and plan of merger (the "Merger Agreement") between the Company and Horizon were consummated for an aggregate consideration of $1,134,682, including liabilities assumed and related transaction costs.
Pursuant to the terms of the Merger Agreement, the Company acquired (i) all of the outstanding shares of common stock of Horizon at an exchange ratio of 0.20 of a share of the Company's Series B Convertible Preferred Stock and 0.597 of a share of the Company's Common Stock for each share of common stock of Horizon, and (ii) all of the outstanding limited partnership units of Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership") at an exchange ratio of 0.9193 of a Common Unit of partnership interest in the Operating Partnership. A total of 4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329 shares of Common Stock were issued by the Company to the shareholders of Horizon and 3,782,121 Common Units were issued by the Operating Partnership to the limited partners of Horizon Partnership.
Immediately prior to the merger, Horizon Partnership contributed 13 of its 35 centers to Horizon Group Properties, L.P., of which HGP, a subsidiary of Horizon, is the sole general partner. HGP was spun-off from the Company on June 15, 1998. The remaining 22 outlet centers of Horizon were integrated into the Company's existing portfolio. On June 19, 1998, all of the common equity of HGP was distributed to the convertible preferred and common shareholders and unitholders of the Company and its Operating Partnership and the shareholders and limited partners of Horizon and Horizon Partnership based on their ownership in the Company immediately following consummation of the merger. One share of common stock of HGP was distributed for every 20 shares of Common Stock and Series C Preferred Stock of the Company and for every 20 Common Units of the Operating Partnership. Additionally, approximately 1.196 shares of the common stock of HGP were distributed for every 20 shares of Series
B Convertible Preferred Stock of the Company.
In connection with the Merger Transactions, the Company sold the Prime Transferred Properties to HGP for an aggregate consideration of $26,015, resulting in a loss of $15,461. Proceeds from the sale of the Prime Transferred Properties were used to repay indebtedness associated with the Horizon properties.
Concurrent with the closing of the merger, a special cash distribution was made aggregating $21,871 consisting of $0.50 per share/unit to holders of Common Stock, Series C Preferred Securities and Common Units and $0.60 per share to holders of Series B Convertible Preferred Stock. Shareholders of Horizon and limited partners of Horizon Partnership did not participate in these distributions.
The merger has been accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and the liabilities assumed based on estimates of their respective fair values. Certain assumptions were made which management of the Company believed were reasonable. The operating results of those properties acquired have been included in the Company's consolidated results of operations commencing on the date of the merger. The operating results of the Prime Transferred Properties have been included in the Company's consolidated results of operations through the date of disposition.
Debt Transactions
On December 8, 1999, the Company refinanced the existing mortgage indebtedness on Prime Outlets at Williamsburg (the "Williamsburg Center") with a $42,500 loan facility from a financial institution. At closing, the Company received an initial funding of $32,500 (the "Initial Funding") and a commitment, subject to various conditions, for up to $10,000 (the "Final Draw") to finance a planned expansion to the Williamsburg Center. The Initial Funding generated net cash proceeds of $9,077 after the repayment in full of $22,405 of existing mortgage indebtedness and closing costs. The Final Draw is expected to be made in a single advance subject to satisfaction of certain conditions, including the substantial completion of the expansion to the Williamsburg Center. In connection with the debt refinancing, the Company incurred an extraordinary loss of $159, net of minority interests of $40. The loan facility consists of an interim loan (the "Interim Loan") and a permanent loan (the "Permanent Loan"). The Interim Loan (i) bears interest at 30-day LIBOR plus 2.5%, (ii) requires monthly interest-only payments, (iii) is collateralized by a first mortgage on the Williamsburg Center, and (iv) matures on January 11, 2002. The Interim Loan may be converted to the Permanent Loan subject to satisfaction of certain conditions. The Permanent Loan would (i) bear interest at a fixed-rate equal to prevailing market rates, (ii) require monthly principal and interest payments pursuant to a 25-year amortization schedule, (iii) be collateralized by a first mortgage on the Williamsburg Center, and (iv) have a term of 10 years.
On November 15, 1999, the Company closed on a $20,000 subordinated loan (the "Subordinated Loan") from an institutional lender. The Subordinated Loan (i) bears interest at a fixed-rate of 15.0%, (ii) requires monthly interest-only payments, (iii) matures on June 30, 2000, and (iv) is secured by a pledge of a security interest in certain of the Company's ownership interests in, and the available cash flow from five outlet centers, including Prime Outlets of Puerto Rico, which is currently under construction. The Company may elect, at its option, to extend the maturity of the Subordinated Loan to December 31, 2000.
On November 12, 1999, the Company closed on $55,000 term loan (the "$55,000 Term Loan") from a financial institution. The $55,000 Term Loan (i) bears interest at 30-day LIBOR plus 6.0%, (ii) requires monthly principal and interest payments, and (iii) matures in two years. The $55,000 Term Loan was issued by Prime Retail Capital I, L.L.C. ("PRC"), a newly-formed wholly-owned subsidiary of Prime Retail, L.P., and is secured by the excess cash flow from 15 outlet centers after the payment of senior debt service and reserves under an existing $349,797 first mortgage loan. The $55,000 Term Loan also is secured by a pledge of PRC's 49.9% limited partnership interest in partnerships that own twelve of those outlet centers and Prime Retail, L.P.'s 100% equity interest in PRC. The $55,000 Term Loan is unconditionally guaranteed by Prime Retail, L.P. and Prime Retail, Inc. The Company used the net cash proceeds from the $55,000 Term Loan to repay $40,944 of short-term indebtedness and to repay a portion of the borrowings under the Line of Credit.
During October 1999, the Company refinanced its $28,250 of variable-rate, tax-exempt revenue bonds by issuing $28,250 of fixed rate tax-exempt revenue bonds (the "Fixed Rate Bonds"). The Fixed Rate Bonds bear interest ranging from 6.875% to 7.0%, require semi-annual interest payments and mature from December 15, 2012 through December 1, 2014. The Fixed Rate Bonds are redeemable by the Company commencing in December 2006 at 102% of the outstanding principal balance. The redemption price decreases incrementally each year thereafter through December 2008, at which date the redemption price is fixed at 100% of the outstanding principal balance. In connection with the debt refinancing, the Company incurred an extraordinary loss on early extinguishment of debt of $536, net of minority interests of $134. Unless cured or waived, the defaults existing under certain of the Company's credit agreements discussed more fully below will entitle the holders of the Fixed Rate Bonds to put such obligations to Prime Retail, Inc. at a price equal to par plus accrued interest.
On September 29, 1999, the Company received $40,000 of proceeds from a line of credit facility (the "Line of Credit") with a group of institutional lenders. These proceeds were used to repurchase the Company's Series C Preferred Stock. The Line of Credit (i) bore interest at a fixed-rate of 11.0%, (ii) required monthly interest-only payments, and (iii) matured in nine months. The Line of Credit was repaid in full on November 19, 1999. In connection with the repayment of the Line of Credit, the Company incurred an extraordinary loss on the early extinguishment of debt of $717, net of minority interests of $179. The lenders are entitled to receive a cash payment that increases their internal rate of return with respect to amounts advanced under such facility by 4.0% per annum (the "Cash Payment"). Lenders under the Line of Credit also received warrants to purchase a 5% interest in the Company's e-commerce subsidiary, which subsequently ceased all operations effective April 12, 2000 (see eOutlets.com)
On July 11, 1999, the Company's $20,000 unsecured line of credit (the "Corporate Line") was renewed and increased to $25,000. The purpose of the Corporate Line is to provide working capital to facilitate the funding of short-term operating cash needs of the Company. The Corporate Line bears an interest rate of 30-day LIBOR plus 2.50% and matures on July 11, 2000. At December 31, 1999, the Corporate Line had an outstanding principal balance of $22,175. There can be no assurance that the Company will be successful in renewing the Corporate Line or that a renewal of the Corporate Line will be on terms as favorable as the Company has experienced in prior periods.
On April 27, 1999, the Company closed on a $63,000 debt financing with a financial institution that provided approximately $27,900 of net proceeds. The $63,000 note is (i) collateralized by a first mortgage on Prime Outlets at Niagara Falls USA, (ii) bears interest at a fixed rate of 7.604%, (iii) requires monthly principal and interest payments of $450 pursuant to a 30-year amortization schedule, and (iv) matures in 10 years. In connection with the debt refinancing, the Company incurred an extraordinary loss on early extinguishment of debt of $2,106, net of minority interests of $534.
As of December 31, 1999, the Company is a guarantor or otherwise obligated with respect to an aggregate of $12,722 of the indebtedness of Horizon Group Properties, Inc. and its affiliates ("HGP") including a $10,000 obligation under HGP's secured credit facility which bears a rate of interest of LIBOR plus 1.90%, matures in July 2001, and is collateralized by seven properties located throughout the United States.
On April 1, 1998, Horizon consummated an agreement with Castle & Cooke Properties, Inc. which released Horizon from its future obligations under its long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in connection with the formation of a joint venture with certain affiliates of Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the project and an affiliate of Castle & Cooke, released Horizon from any continuing obligations under the lease, which expires in 2045, in exchange for Horizon's conveyance to the joint venture of its rights and obligations under such lease. The agreement also provided that Horizon transfer to such joint venture substantially all of Horizon's economic interest in its outlet center in Lake Elsinore, California together with legal title to vacant property located adjacent to the center. As of December 31, 1999, the Company held a small minority interest in the joint venture but has no obligation or commitment with respect to the post-closing operations of the Dole Cannery project. Mortgage indebtedness with an outstanding balance of $28,938 at December 31, 1999, for which one of the Company's subsidiary partnerships remains legally responsible, is collateralized by a first mortgage on the Lake Elsinore outlet center. The joint venture, as a limited partner in such subsidiary partnership, is obligated to make capital contributions to the partnership to pay debt financing, operating and other expenses under certain conditions. The subsidiary partnership will remain legally responsible for such expenses in case of any shortfalls by the joint venture with respect to such capital contributions. Castle & Cooke has provided the Company with an unconditional guaranty with respect to any such shortfalls.
Debt Covenants
Certain of the Company's debt obligations require compliance with various financial loan covenants including, but not limited to, those relating to the Company's (i) total outstanding variable interest rate indebtedness, (ii) total outstanding indebtedness to total market value, as defined, (iii) consolidated net worth, as defined, and (iv) debt service and fixed charge coverage ratios, as defined.
As a result of its financial results for the quarter ended December 31, 1999, the Company is not in compliance with a financial covenant contained in two of its credit facilities, the Subordinated Loan and a $40,000 unsecured revolving loan (the "Unsecured Revolving Loan"). Neither of the loans has been accelerated nor was notice of the respective lender's intention to accelerate the maturity of the loans received by the Company. The Company entered into an amendment to the Subordinated Loan on February 23, 2000 which waived the covenant violation as of December 31, 1999 and modified the covenant terms through the Subordinated Loan's maturity date. The Company is currently in discussions with the Unsecured Revolving Loan lender to obtain a waiver and/or amend the loan; however, there can be no assurance as to whether and when the Company will obtain any such waiver or amendment. Furthermore, the Company's failure to obtain from its independent auditor's an unqualified report with respect to its consolidated financial statements will also constitute a default under these two credit facilities.
In addition, noncompliance with the covenants described above has triggered certain cross-default provisions with respect to several of the Company's other debt instruments, including the Subordinated Loan, the $55,000 Term Loan and the Fixed Rate Bonds. None of these loans have been accelerated nor was a notice of the respective lender's intent to accelerate received by the Company. Management is currently in discussion with the affected lenders to obtain a resolution of the cross-default provisions. If the Company is unable to obtain such waiver or amendment to the Unsecured Revolving Loan and reach resolution with certain other lenders, the Company will look to (i) obtain alternative financing from other financial institutions, or (ii) the potential sale of assets or a joint venture interest in certain outlet centers as sources of cash to repay the amounts outstanding under such loans. This condition raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Although the Company continues to maintain its regularly scheduled payments under all of its indebtedness, there can be no assurance that one or all of the affected lenders will not declare a default and accelerate the maturity of such indebtedness. Additionally, there can be no assurance that the Company will be in compliance with its financial debt covenants in future periods since the Company's future financial performance is subject to various risks and uncertainties, including but not limited to, the effects of increases in market interest rates from current levels; the risk of potential increases in vacancy rates and the resulting impact on the Company's revenue; and risks associated with refinancing the Company's current debt obligations or obtain new financing under terms as favorable as the Company has experienced in prior periods.
Prime/Estein Joint Venture Transaction
On August 6, 1999, the Company entered into an agreement (the "Prime/Estein Joint Venture Agreement") to sell three factory outlet centers, including two future expansions in four phases to a joint venture (the "Venture") between an affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment company, and the Company. The Prime/Estein Joint Venture Agreement provided for a total purchase price of $274,000, including (i) the assumption of approximately $151,500 of first mortgage indebtedness, (ii) an $8,000 payment to the Company for a ten-year covenant-not-to-compete and (iii) a $6,000 payment to the Company for a ten-year licensing agreement with the Venture to continue the use of the "Prime Outlets" brand name.
On November 19, 1999, the Company successfully completed the initial installment of the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at Birch Run to the Venture for aggregate consideration of $117,000, including a $64,500 "wrap-around" first mortgage provided by the Company. In connection with the sale of Prime Outlets at Birch Run, the Company received cash proceeds of $33,303, net of transaction costs and recorded a loss on the sale of real estate of $9,326. Effective November 19, 1999, the Company commenced accounting for its 30.0% ownership interest in Prime Outlets at Birch Run in accordance with the equity method of accounting. The "wrap-around" first mortgage provided by the Company to the Venture has a ten-year term at a fixed interest rate of 7.75% requiring monthly payments of principal and interest pursuant to a 25-year amortization schedule. The Company's net investment in the "wrap-around" first mortgage as of December 31, 1999 was $10,745 which is included in other assets in the Consolidated Balance Sheet. Additionally, the Venture assumed $53,755 of outstanding mortgage indebtedness. Included in the aggregate consideration is a $5,500 payment related to the covenant-not-to-compete and a $3,000 payment related to the licensing agreement. The payments to the Company for the covenant-not-to-compete and the licensing agreement are included in accounts payable and other liabilities in the consolidated balance sheet and will be amortized into interest and other income over their ten-year lives.
During the fourth quarter of 1999, the Company recorded a loss on the sale of real estate of $5,827 related to the write-down of the carrying value of Prime Outlets at Williamsburg based on the terms of the Prime/Estein Joint Venture Agreement. On February 23, 2000, the Company completed the second installment of the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at Williamsburg to the Venture for aggregate consideration of $59,000, including (i) the assumption of mortgage indebtedness of $32,500, (ii) a $1,250 payment related to the covenant-not-to-compete and (iii) a $1,500 payment related to the licensing agreement. In connection with the sale of Prime Outlets at Williamsburg, the Company received (i) cash proceeds of $11,063, net of transaction costs and (ii) a promissory note in the amount of $10,000 from the Venture (of which Estein's obligation is $7,000), such amount to be payable on or before the ealier of the closing of the proposed sale of an expansion of the Williamsburg center or December 15, 2000. The promissory note requires the monthly payment of interest in arrears at an annual rate of 7.75%. Although, the Company expects to close on the sale of Prime Outlets at Hagerstown, including the expansion scheduled to open during the second quarter of 2000, for aggregate consideration of approximately $80,500 on or about May 15, 2000, completion of this transaction remains subject to various conditions and there can be no assurance as to whether or when this transaction will be consummated. As of December 31, 1999, the Company classified $97,639 representing the aggregate carrying value of Prime Outlets at Williamsburg and Prime Outlets at Hagerstown (collectively, the "Held for Sale Properties") as assets held for sale in its Consolidated Balance Sheet. Total revenues and expenses for the Held for Sale Properties were $16,243 and $12,185, respectively for the year ended December 31, 1999.
The Venture has agreed to retain the Company as its sole and exclusive managing and leasing agent for a property management fee equal to 4.0% of gross rental receipts. The Venture also will pay a monthly asset management and partnership administration fee to an affiliate of Estein equal to 3.0% of the monthly net operating income from the centers.
Planned Development
The Company opened a 21,000 square foot expansion at Prime Outlets at Lebanon in March 1999 and a 64,000 square foot expansion at Prime Outlets at San Marcos in August 1999. The Home Co., the Company's first home furnishings store which it owns a 47.6% interest through a joint venture, occupies 64,000 square feet of the expansion at San Marcos. In addition, construction continues at Prime Outlets of Puerto Rico, the first outlet center in Puerto Rico, which will contain 175,000 square feet of GLA, and is expected to open in the second quarter of 2000. Additionally, the Company continues construction of two expansions consisting of 162,000 and 50,000 square feet of GLA at Prime Outlets at Hagerstown and Prime Outlets at San Marcos, respectively. These expansions are scheduled to open during the second quarter of 2000. The Company expects to begin construction in the second quarter of 2000 of a 60,000 square foot expansion to Prime Outlets at Williamsburg. This expansion is scheduled to open in the fourth quarter of 2000. At December 31, 1999, the remaining budgeted capital expenditures for projects scheduled to open in 2000 aggregated approximately $31,300, while anticipated capital expenditures related to the completion of expansions of existing outlet centers opened during 1999 (aggregating 102,000 square feet of GLA) approximated $750.
Although the Company expects to fund the development cost of these projects from (i) retained cash flow from operations, (ii) construction loans, (iii) the potential sale of equity or debt securities in the public or private capital markets, and (iv) the potential sale of a joint venture interest in certain outlet centers, there can be no assurance that the Company will be successful in obtaining the required amount of equity capital or debt financing for the planned development projects or that the terms of such capital raising activities will be as favorable as the Company has experienced in prior periods. If adequate financing for such development and expansion is not available, the Company may not be able to develop new centers or expand existing centers at currently planned levels.
eOutlets.com
On April 12, 2000, the Company announced that it has been unable to conclude an agreement to transfer ownership of its wholly-owned e-commerce subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a management-led investor group comprised of eOutlets.com management and outside investors. Effective April 12, 2000, eOutlets.com ceased all operations.
In connection with the discontinuance of eOutlets.com, the Company expects to incur a non-recurring loss of approximately $13,000 in the first quarter of 2000. The non-recurring loss includes (i) the write-off of $3,500 of costs capitalized during 1999 and (ii) approximately $9,500 of costs incurred during 2000, including costs associated with discontinuing the operations of eOutlets.com. In addition, during 1999 the Company incurred expenses of $3,500 related to organizational and other start-up expenditures of eOutlets.com which are reflected in corporate general and administrative expense in the Consolidated Statements of Operations.
Taxability of Distributions
TABLE 9 summarizes the taxability of distributions paid during (i) the year ended December 31, 1999 (ii) the period from January 1 to June 15, 1998, and (iii) the period from June 16 to December 31, 1998. Distributions paid by the Company out of its current or accumulated earnings and profits (and not designated as capital gains dividends) will constitute taxable distributions to each holder. To the extent the Company makes distributions (not designated as capital gains dividends) in excess of its current and accumulated earnings and profits, such distributions will be treated first as a tax-free return of capital to each holder, reducing the adjusted basis which such holder has in his shares of stock by the amount of such distributions (but not below zero), with distributions in excess of a holder's adjusted basis in his stock taxable as capital gains (provided that the shares have been held as a capital asset).
Table 9-Taxability of Distributions
No assurance can be made that future distributions, if any, will be treated similarly. Each holder of stock may have a different basis in its stock and, accordingly, each holder is advised to consult with a tax advisor.
Economic Conditions
Substantially all of the merchants' leases contain provisions that somewhat mitigate the impact of inflation. Such provisions include clauses providing for increases in base rent and clauses enabling the Company to receive percentage rentals based on merchants' gross sales. Substantially all leases require merchants to pay their proportionate share of all operating expenses, including common area maintenance, real estate taxes and promotion, thereby reducing the Company's exposure to increased costs and operating expenses resulting from inflation.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plan to become Year 2000 ready. In 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties with which the Company does business. The Company will continue to monitor its mission critical computer application and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
Funds from Operations
Management believes that to facilitate a clear understanding of the Company's operating results, funds from operations ("FFO") should be considered in conjunction with net income (loss) presented in accordance with GAAP. In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") established guidelines clarifying the definition of FFO. FFO is defined as net income (loss) (determined in accordance with GAAP) excluding gains (or losses) from debt restructuring, sales of property and discontinued operations, plus depreciation and amortization after adjustments for unconsolidated partnerships and joint ventures.
Management believes that FFO is an important and widely used measure of the operating performance of REITs which provides a relevant basis for comparison to other REITs. Therefore, FFO is presented to assist investors in analyzing the performance of the Company. The Company's FFO is not comparable to FFO reported by other REITs that do not define the term using the current NAREIT definition or that interpret the current NAREIT definition differently than does the Company. Therefore, the Company cautions that the calculation of FFO may vary from entity to entity and as such the presentation of FFO by the Company may not be comparable to other similarly titled measures of other reporting companies. The Company believes that in order to facilitate a clear understanding of its operating results, FFO should be examined in conjunction with net income determined in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions.
TABLE 10 provides a reconciliation of income before allocations to minority interests and preferred shareholders to FFO for the years ended December 31, 1999, 1998 and 1997. FFO decreased $21,699, or 24.1% to $68,321 for the year ended December 31, 1999 from $90,020 for the year ended December 31, 1998. The 1999 FFO results reflect fourth quarter 1999 non-recurring charges and expenses aggregating $37,981, including (i) a provision for asset impairment of $15,842, (ii) a provision for abandoned projects of $16,039, (iii) the write-off of $3,100 of capitalized costs associated with the Company's expired option to purchase its joint venture partner's 50.0% ownership interest in Prime Outlets at New River, and (iv) $3,000 of start-up and organizational expenses associated with the Company's eOutlets.com subsidiary.
Excluding these non-recurring charges and expenses, FFO increased $16,282, or 18.1%, to $106,302 for the year ended December 31, 1999 from $90,020 for the year ended December 31, 1998. The increase is primarily attributable to the Portfolio Expansion and the Horizon Merger.
The payout ratios based on distributions made by the Company divided by FFO for 1999, 1998 and 1997 were 97.4%, 92.9%, and 103.7%, respectively.
Table 11-Consolidated Quarterly Summary of Funds from Operations
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MATERIAL RISK
Market Risk Sensitivity
Interest Rate Risk
In the ordinary course of business, the Company is exposed to the impact of interest rate changes. The Company employs established policies and procedures to manage its exposure to interest rate changes. The Company uses a mix of fixed and variable rate debt to (i) limit the impact of interest rate changes on its results from operations and cash flows and (ii) to lower its overall borrowing costs. The following table provides a summary of principal cash flows and related interest rates by fiscal year of maturity, excluding acceleration provisions. Variable interest rates are based on the weighted average rates of the portfolio at December 31, 1999.
ITEM 8
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
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
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
3. Exhibits
Exhibit Number Description - ------- -----------
3.1 Amended and Restated Articles of Incorporation of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616)]
3.2 Articles Supplementary of Prime Retail, Inc. relating to Series B Preferred Stock. [Incorporated by reference to the same titled exhibit in the Company"s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616)]
3.3 Second Amended and Restated By-Laws of Prime Retail, Inc.
Exhibit Number Description - ------- -----------
4.1 Form of Series A Preferred Stock Certificate [Incorporated by reference to the same titled exhibit in the Company"s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).]
4.2 Form of Series B Preferred Stock Certificate [Incorporated by reference to the same titled exhibit in the Company"s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).]
4.3 Form of Common Stock Certificate [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).]
10.1 Third Amended and Restated Agreement of Limited Partnership of Prime Retail, L.P. dated as of October 15, 1998 and effective as of June 15, 1998. [Incorporated by reference to the same titled exhibit in the Company"s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616)]
10.1A Amendment No. 1 to Third Amended and Restated Agreement of Limited Partnership of Prime Retail, L.P. dated as of September 28, 1999.
# 10.2 1994 Stock Incentive Plan [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).]
# 10.3 1995 Stock Incentive Plan [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 333-1666).]
# 10.4 Executive Employment Agreement (Michael W. Reschke) [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
# 10.5 Separation Agreement dated February 23, 2000 by and between Prime Retail, Inc. and Abraham Rosenthal.
# 10.6 Employment Agreement dated October 6, 1999 by and among primeoutlets.com inc., Prime Retail, L.P., Prime Retail, Inc. and William H. Carpenter, Jr.
# 10.7 Form of Executive Employment Agreement (David G. Phillips) [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).]
10.15 Registration Rights Agreement dated June 15, 1998 by and between Prime Retail, Inc. and Prime Retail, L.P. for the benefit of holders of common units of Prime Retail, L.P. and certain stockholders of Prime Retail, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616)]
10.16 Form of Property Level General Partnership Agreement [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).]
10.17 Form of Property Level Limited Partnership Agreement [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).]
10.18 Noncompetition and Restriction Agreement with Michael W. Reschke of PGI [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
Exhibit Number Description - ------- -----------
# 10.21 Consulting Agreement between the Company and Marvin Traub Associates, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).]
10.28 Waiver, Recontribution and Indemnity Agreement by the Limited Partners [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as amended (File No. 0-23616).]
10.29 Indemnity Agreement made by the Company in favor of The Prime Group, Inc. and Prime Group Limited Partnership [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 333-1666).]
10.30 Promissory Note dated October 31, 1996 by and between Prime Retail, L.P. and Nomura Asset Capital Corporation [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-233616).]
10.30A Form of Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filings with Nomura Asset Capital Corporation [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).]
10.31 Form of Standby Bond Purchase and Indemnity Agreement [Incorporated by reference to the same titled exhibit in the Company's registration statement on Form S-11 (Registration No. 33-68536).]
10.32 Consulting Agreement between the Company and Financo, Inc. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-23616).]
10.33 Amended and Restated Agreement and Plan of Merger among Prime Retail, Inc., Prime Retail, L.P., Horizon Group, Inc., Sky Merger Corp., Horizon Group Properties, Inc., Horizon Group Properties, L.P., and Horizon/Glen Outlet Centers Limited Partnership dated as of February 1, 1998 [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated February 1, 1998 (File No. 0-23616).]
10.34 Agreement among Prime Retail, Inc., Horizon Group, Inc., Mr. David H. Murdock, Castle & Cooke Properties, Inc., and Pacific Holding Company dated as of February 1, 1998 [Incorporated by reference to the same titled exhibit in the Company's Current Report on Form 8-K dated February 1, 1998 (File No. 0-23616).]
# 10.35 Letter Agreement with David G. Phillips regarding the purchase of units in Prime Retail, L.P. dated August 6, 1996. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-23616).]
# 10.36 Non-employee Director Stock Plan [Incorporated by reference to Appendix I in the Company's registration statement on Form S-4 (File No. 333-51285).]
# 10.37 1998 Long-Term Stock Incentive Plan [Incorporated by reference to Appendix J in the Company's registration statement on Form S-4 (File No. 333-51285).]
# 10.38 Description of the 1999 Long-Term Incentive Program. [Incorporated by reference to the same titled exhibit in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as amended (File No. 0-23616)]
Exhibit Number Description - ------- -----------
# 10.39 Loan Agreement dated as of June 15, 1998 between Outlet Village of Kittery Limited Partnership, the Prime Outlets at Gilroy Limited Partnership, The Prime Outlets at Michigan City Limited Partnership and Finger Lakes Outlet Center, L.L.C. and Nomura Asset Capital Corporation (Permanent Loan) [Incorporated by reference to Exhibit 10.1 in the Company's Current Report on Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.40 Form of Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filings with Nomura Asset Capital Corporation (Permanent Loan and Bridge Loan) [Incorporated by reference to Exhibit 10.2 in the Company' Current Report on Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.41 Loan Agreement dated as of June 15, 1998 between Buckeye Factory Shops Limited Partnership, Latham Factory Stores Limited Partnership, Carolina Factory Shops Limited Partnership, Shasta Outlet Center Limited Partnership, The Prime Outlets at Calhoun Limited Partnership and The Prime Outlets at Lee Limited Partnership and Nomura Asset Capital Corporation (Bridge Loan) [Incorporated by reference to Exhibit 10.3 in the Company's Current Report on Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.42 Guaranty dated as of June 15, 1998 by Prime Retail, Inc. to and for the benefit of Nomura Asset Capital Corporation [Incorporated by reference to Exhibit 10.4 in the Company's Current Report on Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.43 Guaranty dated as of June 15, 1998 by Prime Retail, L.P. to and for the benefit of Nomura Asset Capital Corporation [Incorporated by reference to Exhibit 10.5 in the Company's Current Report on Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.44 Guaranty and Indemnity Agreement dated as of June 15, 1998 by and among Horizon Group Properties, Inc., Horizon Group Properties, Inc. , Horizon Group Properties, L.P., Prime Retail, Inc. and Prime Retail, L.P. [Incorporated by reference to Exhibit 10.6 in the Company's Current Report on Form 8-K dated June 15, 1998 (File No. 001-13301)]
# 10.45 Contribution Agreement dated as of June 15, 1998 by and among Horizon Group, Inc., Sky Merger Corp., Horizon/Glen Outlet Centers Limited Partnership, Horizon Group Properties, Inc., and Horizon Group Properties, L.P. [Incorporated by reference to Exhibit 10.7 in the Company's Current Report on Form 8-K dated June 15, 1998 (File No. 001-13301)]
10.46 Series C Preferred Share Repurchase Agreement dated as of March 31, 1999 among Security Capital Preferred Growth Incorporated, Prime Retail, Inc., and Prime Retail, L.P. [Incorporated by reference to Exhibit 10.1 in the Company's Current Report on Form 8-K dated March 31, 1999 (File No. 0-23616)]
10.47 Purchase and Sale Agreement, dated as of August 6, 1999, among The Prime Outlets at Birch Run, L.L.C., The Prime Outlets at Williamsburg, L.L.C. and Outlet Village of Hagerstown Limited partnership and Welp Triple Outlet, L.C. [Incorporated by reference to Exhibit 10.1 in the Company's Current Report on Form 8-K dated August 11, 1999 (File No. 001-13301)]
12 Statement re: Computation of Ratio Earnings to Combined Fixed Charges and Preferred Stock Dividends
21 Subsidiaries of Prime Retail, Inc.
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
_____________________ Note:
# Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c).
(b) Reports on Form 8-K
None
(c) Exhibits
The list of exhibits filed with this report is set forth in response to Item 14 (a)(3). The required exhibits have been filed as indicated in the Exhibit Index. The Company agrees to furnish a copy of any long-term debt instrument wherein the securities authorized do not exceed 10 percent of the registrant's total assets on a consolidated basis upon the request of the Securities and Exchange Commission.
(d) Financial Statements and Schedules
Schedule III -- Real Estate and Accumulated Depreciation attached hereto is hereby incorporated by reference to this Item.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRIME RETAIL, INC.
Dated: April 14, 2000 /s/ Glenn D. Reschke -------------------- Glenn D. Reschke President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/Michael W. Reschke April 14, 2000 --------------------------- Michael W. Reschke Chairman of the Board
/s/William H. Carpenter, Jr. April 14, 2000 ---------------------------- William H. Carpenter, Jr. Director
/s/William P. Dickey April 14, 2000 ---------------------------- William P. Dickey Director
/s/Norman Perlmutter April 14, 2000 ---------------------------- Norman Perlmutter Director
/s/Robert D. Perlmutter April 14, 2000 ---------------------------- Robert D. Perlmutter Director
/s/Kenneth A. Randall April 14, 2000 ---------------------------- Kenneth A. Randall Director
/s/Sharon Sharp April 14, 2000 ---------------------------- Sharon Sharp Director
/s/James R. Thompson April 14, 2000 ---------------------------- James R. Thompson Director
/s/Marvin S. Traub April 14, 2000 ---------------------------- Marvin S. Traub Director
Report of Independent Auditors
To the Board of Directors and Shareholders Prime Retail, Inc.
We have audited the accompanying consolidated balance sheets of Prime Retail, Inc. (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Prime Retail, Inc. will continue as a going concern. As more fully described in Note 6, the Company is not in compliance with a financial covenant contained in one of its credit facilities. In addition, noncompliance with the financial covenant has triggered certain cross-default provisions with respect to several of the Company's other debt instruments. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 6. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Baltimore, Maryland March 23, 2000, except for Note 14, as to which the date is April 12, 2000
Prime Retail, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share information)
See accompanying notes to financial statements.
Prime Retail, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share information)
See accompanying notes to financial statements.
Prime Retail, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
See accompanying notes to financial statements.
PRIME RETAIL, INC. Consolidated Statements of Cash Flows (continued) (Amounts in thousands)
Supplemental Disclosure of Noncash Investing and Financing Activities:
See accompanying notes to financial statements
Prime Retail, Inc.
Consolidated Statements of Shareholders' Equity
(Amounts in thousands, except share information)
See accompanying notes to financial statements.
Prime Retail, Inc.
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and unit information)
Note 1 - Organization and Basis of Presentation
Organization
Prime Retail, Inc. (the "Company") is a self-administered and self-managed real estate investment trust ("REIT") that operates primarily within one business segment and develops, acquires, owns and operates outlet centers in the United States. The Company's outlet center portfolio, including four outlet centers owned through joint venture partnerships, consists of 51 outlet centers in 26 states, which total 14,699,000 square feet of gross leasable area ("GLA") at December 31, 1999. As a fully-integrated real estate firm, the Company provides development, construction, accounting, finance, leasing, marketing, and management services for all of its properties (the "Properties"). The Company's Properties are held and substantially all of its business and operations are conducted through Prime Retail, L.P. (the "Operating Partnership"). The Company controls the Operating Partnership as its sole general partner and is dependent upon the distributions or other payments from the Operating Partnership to meet its financial obligations.
At December 31, 1999, the Company owned 2,300,000 Senior Preferred Units of the Operating Partnership (the "Senior Preferred Units"), 7,828,125 Series B Convertible Preferred Units of the Operating Partnership (the "Series B Convertible Preferred Units"), and 43,368,620 Common Units of partnership interest in the Operating Partnership (the "Common Units"). Each Senior Preferred Unit, and Series B Convertible Preferred Unit, (collectively, the "Preferred Units") entitles the Company to receive distributions from the Operating Partnership in an amount equal to the dividend declared or paid with respect to a share of the Company's Series A Senior Cumulative Preferred Stock ("Senior Preferred Stock") and Series B Cumulative Convertible Participating Preferred Stock ("Series B Convertible Preferred Stock"), respectively, prior to the payment by the Operating Partnership of distributions with respect to the Common Units. Series B Convertible Preferred Units will be automatically converted into Common Units to the extent of any conversion of Series B Convertible Preferred Stock into Common Stock. The Preferred Units will be redeemed by the Operating Partnership to the extent of any redemption of Senior Preferred Stock or Series B Convertible Preferred Stock.
A summary of the holders of units in the Operating Partnership as of December 31, 1999 is as follows:
Note: (1) Includes 993,480 units beneficially owned by management and 4,102,923 units owned by certain executive officers based on their ownership interests in Prime Group, Inc.
As of December 31, 1999, the Company has a 80% general partnership interest in the Operating Partnership with full and complete control over the management of the Operating Partnership as the sole general partner not subject to removal by the limited partners.
The Operating Partnership is the 1% sole general partner of Prime Retail Services Limited Partnership (the "Services Partnership"). The Operating Partnership owns 100% of the non-voting preferred stock of Prime Retail Services, Inc. (the "Services Corporation") which, in turn, is the 99% limited partner of the Services Partnership. Certain members of management own 100% of the voting common stock of the Services Corporation and no cash distributions were made during the years ended December 31, 1999, 1998 and 1997. The Services Partnership was formed primarily to operate business lines of the Company that are not directly associated with the collection of rents. The Services Corporation is subject to federal, state and local taxes.
Unless the context otherwise requires, all references to the Company herein mean Prime Retail, Inc. and those entities owned or controlled by Prime Retail, Inc., including the Operating Partnership and the Services Partnership.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and the partnerships in which the Company has operational control. Profits and losses are allocated in accordance with the terms of the agreement of limited partnership of the Operating Partnership. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investments in partnerships in which the Company does not have operational control are accounted for on the equity method of accounting. Income (loss) applicable to minority interests and common shares as presented in the consolidated statements of operations is allocated based on income (loss) before minority interests after income allocated to preferred shareholders.
Significant intercompany accounts and transactions have been eliminated in consolidation. Operating results associated with the Company's Designer Connection outlet stores have been classified as loss on Designer Connection in the Consolidated Statements of Operations for all periods presented. Certain amounts in prior years have been reclassified to the current year presentation.
Note 2 - Summary of Significant Accounting Policies
Rental Property
Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets which are as follows:
Land improvements.................................... 20 years Buildings and improvements........................... Principally 40 years Tenant improvements.................................. Term of related lease Furniture and equipment.............................. 5 years
Rental property is generally carried at historical cost net of accumulated depreciation. Development costs, which include fees and costs incurred in developing new properties, are capitalized as incurred. Upon completion of construction, development costs are amortized over the useful lives of the respective properties on a straight-line basis. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements which improve and/or extend the useful life of assets are capitalized and depreciated over their estimated useful lives.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Impairment losses are measured as the difference between carrying value and fair value for assets to be held in portfolio. For assets to be sold, impairment is measured as the difference between carrying value and fair value, less costs to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of interest.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Management regularly reviews accounts receivable and determines an appropriate range for the allowance for doubtful accounts based upon the impact of economic conditions on the merchants' ability to pay, past collection experience and such other factors which, in management's judgment, deserve current recognition. In turn, a provision is charged against earnings in order to maintain the allowance level within this range. The allowance for doubtful accounts at December 31, 1999 and 1998 was $7,008 and $4,288, respectively.
Accounts receivable due after one year representing straight-line rents were $8,285 and $7,233 at December 31, 1999 and 1998, respectively.
Deferred Charges
Deferred charges consist of leasing commissions and financing costs. Deferred leasing commissions representing costs incurred to originate and renew operating leases are deferred and amortized on a straight-line basis over the term of the related lease. Fees and costs incurred to obtain financing are deferred and are being amortized as a component of interest expense over the terms of the respective loans on a basis that approximates the interest method.
Due from Affiliates, Net
Due from affiliates, net consists of amounts due from joint venture partnerships related to the reimbursement of costs paid by the Company on their behalf.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease and unpaid rents are included in accounts receivable in the accompanying balance sheet. Certain lease agreements contain provisions which provide for rents based on a percentage of sales or based on a percentage of sales volume above a specified threshold. These contingent rents are not recognized until the required thresholds are exceeded. In addition, the lease agreements generally provide for the reimbursement of real estate taxes, insurance, advertising and certain common area maintenance costs. These additional rents and tenant reimbursements are accounted for on the accrual basis.
Earnings per Share
Basic earnings per share ("EPS") is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS includes the potentially dilutive effect, if any, which would occur if outstanding (i) options to purchase Common Stock were exercised, (ii) Common Units were converted into shares of Common Stock, (iii) shares of Series C Preferred Stock were converted into shares of Common Stock, and (iv) shares of Series B Convertible Preferred Stock were converted into shares of Common Stock. For the year ended December 31, 1999, a redemption discount and dividends aggregating $12,710 related to the Company's repurchase of its Series C Preferred Stock were excluded from the numerator and incremental shares of 1,064 were included in the denominator of the computation of diluted EPS. For the year ended December 31, 1999, the effect of all other exercises and conversions was anti-dilutive and, therefore, was excluded from the computation of diluted EPS. For the years ended December 31, 1998 and 1997, the effect of all exercises and conversions was anti-dilutive and, therefore, dilutive EPS is equivalent to basic EPS.
The following table sets forth the computation of basic and diluted earnings per share:
Stock Based Compensation
The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense for employee stock option grants. The Company has elected to adopt only the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax at the corporate level on income it distributes to its shareholders so long as it distributes at least 95% of its taxable income (excluding any net capital gain) each year. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Even if the Company qualifies as a REIT, the Company may be subject to certain state and local taxes on its income and property. The Company incurred $234, $337, and $263 of state and local taxes for the years ended December 31, 1999, 1998 and 1997, respectively. The Company paid $68, $424, and $170 of state and local taxes during the years ended December 31, 1999 and 1998, and 1997, respectively.
The following table summarizes the taxability of dividends and distributions paid during (i) the year ended December 31, 1999, (ii) the period from January 1 to June 15, 1998, (iii) the period from June 16 to December 31, 1998, and (iv) the year ended December 31, 1997:
Risks and Uncertainties
The Company's results of operations are significantly dependent on the overall health of the retail industry. The Company's tenant base is comprised almost exclusively of merchants in the retail industry. The retail industry is subject to external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences. A decline in the retail industry could reduce merchant sales, which could adversely affect the operating results of the Company.
In addition to traditional sources of risks to retailers and owners of outlet centers, which are mentioned above, the Company's outlet centers compete for customers with web-based retailers. Because of the newness of competition from web-based retailers, it is difficult to quantify the risk of such competition to the Company.
Note 3 - Business Combination
On June 15, 1998, the merger and other transactions (collectively, the "Merger Transactions") as set forth in the agreement and plan of merger (the "Merger Agreement") between the Company and Horizon Group, Inc. ("Horizon") were consummated for an aggregate consideration of $1,134,682, including liabilities assumed and related transaction costs.
Pursuant to the terms of the Merger Agreement, the Company acquired (i) all of the outstanding shares of common stock of Horizon at an exchange ratio of 0.20 of a share of the Company's Series B Convertible Preferred Stock and 0.597 of a share of the Company's Common Stock for each share of common stock of Horizon, and (ii) all of the outstanding limited partnership units of Horizon/Glen Outlet Centers Limited Partnership ("Horizon Partnership") at an exchange ratio of 0.9193 of a Common Unit of partnership interest in the Operating Partnership. A total of 4,846,325 shares of Series B Convertible Preferred Stock and 14,466,329 shares of Common Stock were issued by the Company to the shareholders of Horizon and 3,782,121 Common Units were issued by the Operating Partnership to the limited partners of Horizon Partnership.
Immediately prior to the merger, Horizon Partnership contributed 13 of its 35 centers to Horizon Group Properties, L.P., of which Horizon Group Properties, Inc. ("HGP"), a subsidiary of Horizon, is the sole general partner. HGP was spun-off from the Company on June 15, 1998. The remaining 22 outlet centers of Horizon were integrated into the Company's existing portfolio. On June 19, 1998, all of the common equity of HGP was distributed to the convertible preferred and common shareholders and unitholders of the Company and its Operating Partnership and the shareholders and limited partners of Horizon and Horizon Partnership based on their ownership in the Company immediately following consummation of the merger. One share of common stock of HGP was distributed for every 20 shares of Common Stock and Series C Preferred Stock of the Company and for every 20 Common Units of the Operating Partnership. Additionally, approximately 1.196 shares of the common stock of HGP were distributed for every 20 shares of Series B Convertible Preferred Stock of the Company.
In connection with the Merger Transactions, the Company sold Indiana Factory Shops and Nebraska Crossing Factory Stores (collectively, the "Prime Transferred Properties") to HGP for an aggregate consideration of $26,015, resulting in a loss on the sale of real estate of $15,461. Proceeds from the sale of the Prime Transferred Properties were used to repay indebtedness associated with the Horizon properties.
Concurrent with the closing of the merger, a special cash distribution was made aggregating $21,871 consisting of $0.50 per share/unit to holders of Common Stock, Series C Preferred Securities and Common Units and $0.60 per share to holders of Series B Convertible Preferred Stock. Shareholders of Horizon and limited partners of Horizon Partnership did not participate in these distributions.
The merger has been accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and the liabilities assumed based on estimates of their respective fair values. Certain assumptions were made which management of the Company believed were reasonable. The operating results of these properties have been included in the Company's consolidated results of operations commencing on the date of the merger. The operating results of the Prime Transferred Properties have been included in the Company's consolidated results of operations through the date of disposition.
The following unaudited pro forma information presents a summary of the Company's consolidated results of operations as if these acquisitions and dispositions had occurred on January 1, 1998:
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional depreciation expense based on the purchase price of such assets acquired and interest expense on debt incurred to finance the acquisitions. These unaudited pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect on January 1, 1998 or of future results of operations of the Company.
Note 4 - Restricted Cash
At December 31, 1999 and 1998, the Company had placed in escrow $28,131 and $34,969, respectively, to be used to complete certain development projects, to fund real estate taxes and debt service and to pay certain operating costs under mortgage loan agreements. At December 31, 1999, restricted cash included $1,326 relating to a nonrecourse expansion loan which was funded during January 2000 for certain development costs relating to the completion of expansions of ten of the Company's outlet centers.
Note 5 - Deferred Charges
Deferred charges were as follows:
Note 6 - Bonds and Notes Payable
Bonds payable consisted of the following:
During October 1999, the Company refinanced its $28,250 of variable-rate, tax-exempt revenue bonds by issuing $28,250 of fixed rate tax-exempt revenue bonds (the "Fixed Rate Bonds"). The Fixed Rate Bonds bear interest ranging from 6.875% to 7.0%, require semi-annual interest payments and mature from December 15, 2012 through December 1, 2014. The Fixed Rate Bonds are redeemable by the Company commencing in December 2006 at 102% of the outstanding principal balance. The redemption price decreases incrementally each year thereafter through December 2008, at which date the redemption price is fixed at 100% of the outstanding principal balance. In connection with the debt refinancing, the Company incurred an extraordinary loss on early extinguishment of debt of $536, net of minority interests of $134. Unless cured or waived, the defaults existing under certain of the Company's credit agreements discussed more fully below will entitle the holders of the Fixed Rate Bonds to put such obligations to Prime Retail, Inc. at a price equal to par plus accrued interest.
Notes payable consisted of the following:
At December 31, 1999, unused commitments available for borrowings under various loan facilities were $13,546 in the aggregate. Interest costs are summarized as follows:
The scheduled maturities, excluding acceleration provisions, of bonds and notes payable at December 31, 1999 were as follows:
------------------------------------------------------------------------------- Years ended December 31, ------------------------------------------------------------------------------- 2000.......................................................... $ 95,732 2001.......................................................... 229,632 2002.......................................................... 79,666 2003.......................................................... 349,913 2004.......................................................... 53,820 Thereafter.................................................... 451,907 ---------- $1,260,670 ========== ===============================================================================
Bonds and notes payable include unamortized debt premiums of $17,303 in the aggregate at December 31, 1999. Debt premiums are being amortized over the terms of the related debt instruments in accordance with the effective interest method. Additionally, interest incurred reflects amortization of debt premiums of $4,406 and $2,153 for the years ended December 31, 1999 and 1998, respectively. The aggregate carrying amount of bonds and notes payable at December 31, 1999 approximated their fair value. At December 31, 1999, the aggregate carrying amount of rental property collateralizing bonds and notes payable was $1,738,012.
On December 8, 1999, the Company refinanced the existing mortgage indebtedness on Prime Outlets at Williamsburg (the "Williamsburg Center") with a $42,500 loan facility from a financial institution. At closing, the Company received an initial funding of $32,500 (the "Initial Funding") and a commitment, subject to various conditions, for up to $10,000 (the "Final Draw") to finance a planned expansion to the Williamsburg Center. The Initial Funding generated net cash proceeds of $9,077 after the repayment in full of $22,405 of existing mortgage indebtedness and closing costs. The Final Draw is expected to be made in a single advance subject to satisfaction of certain conditions, including the substantial completion of the expansion to the Williamsburg Center. In connection with the debt refinancing, the Company incurred an extraordinary loss of $159, net of minority interests of $40. The loan facility consists of an interim loan (the "Interim Loan") and a permanent loan (the "Permanent Loan"). The Interim Loan (i) bears interest at 30-day LIBOR plus 2.5%, (ii) requires monthly interest-only payments, (iii) is collateralized by a first mortgage on the Williamsburg Center, and (iv) matures on January 11, 2002. The Interim Loan may be converted to the Permanent Loan subject to satisfaction of certain conditions. The Permanent Loan would (i) bear interest at a fixed-rate equal to prevailing market rates, (ii) require monthly principal and interest payments pursuant to a 25-year amortization schedule, (iii) be collateralized by a first mortgage on the Williamsburg Center, and (iv) have a term of 10 years.
On November 15, 1999, the Company closed on a $20,000 subordinated loan (the "Subordinated Loan") from an institutional lender. The Subordinated Loan (i) bears interest at a fixed-rate of 15.0%, (ii) requires monthly interest-only payments, (iii) matures on June 30, 2000, and (iv) is secured by a pledge of a security interest in certain of the Company's ownership interests in, and the available cash flow from five outlet centers, including Prime Outlets of Puerto Rico, which is currently under construction. This collateral is also pledged to secure borrowings under the Line of Credit (as defined below). The Company may elect, at its option, to extend the maturity of the Subordinated Loan to December 31, 2000.
On November 12, 1999, the Company closed on $55,000 term loan (the "$55,000 Term Loan") from a financial institution. The $55,000 Term Loan (i) bears interest at 30-day LIBOR plus 6.0%, (ii) requires monthly principal and interest payments, and (iii) matures in two years. The $55,000 Term Loan was issued by Prime Retail Capital I, L.L.C. ("PRC"), a newly-formed wholly-owned subsidiary of Prime Retail, L.P., and is secured by the excess cash flow from 15 outlet centers after the payment of senior debt service and reserves under an existing $349,797 first mortgage loan. The $55,000 Term Loan also is secured by a pledge of PRC's 49.9% limited partnership interest in partnerships that own twelve of those outlet centers and Prime Retail, L.P.'s 100% equity interest in PRC. The $55,000 Term Loan is unconditionally guaranteed by Prime Retail, L.P. and Prime Retail, Inc. The Company used the net cash proceeds from the $55,000 Term Loan to repay $40,944 of short-term indebtedness and to repay a portion of the borrowings under the Line of Credit.
On September 29, 1999, the Company received $40,000 of proceeds from a line of credit facility (the "Line of Credit") with a group of institutional lenders. These proceeds were used to repurchase the Company's Series C Preferred Stock. The Line of Credit (i) bore interest at a fixed-rate of 11.0%, (ii) required monthly interest-only payments, and (iii) matured in nine months. The Line of Credit was repaid in full on November 19, 1999. In connection with the repayment of the Line of Credit, the Company incurred an extraordinary loss on the early extinguishment of debt of $717, net of minority interests of $179. The lenders are entitled to receive a cash payment that increases their internal rate of return with respect to amounts advanced under such facility by 4.0% per annum (the "Cash Payment"). Lenders under the Line of Credit also received warrants to purchase a 5% interest in the Company's e-commerce subsidiary, which subsequently ceased all operations effective April 12, 2000 (see Note 14 - "Subsequent Event").
On July 11, 1999, the Company's $20,000 unsecured line of credit (the "Corporate Line") was renewed and increased to $25,000. The purpose of the Corporate Line is to provide working capital to facilitate the funding of short-term operating cash needs of the Company. The Corporate Line bears an interest rate of 30-day LIBOR plus 2.50% and matures on July 11, 2000. At December 31, 1999, the Corporate Line had an outstanding principal balance of $22,175.
On April 27, 1999, the Company closed on a $63,000 debt financing with a financial institution that provided approximately $27,900 of net proceeds. The $63,000 note is (i) collateralized by a first mortgage on Prime Outlets at Niagara Falls USA, (ii) bears interest at a fixed rate of 7.604%, (iii) requires monthly principal and interest payments of $450 pursuant to a 30-year amortization schedule, and (iv) matures in 10 years. In connection with the debt refinancing, the Company incurred an extraordinary loss on early extinguishment of debt of $2,106, net of minority interests of $534.
As of December 31, 1999, the Company is a guarantor or otherwise obligated with respect to an aggregate of $12,722 of the indebtedness of Horizon Group Properties, Inc. and its affiliates ("HGP") including a $10,000 obligation under HGP's secured credit facility which bears a rate of interest of LIBOR plus 1.90%, matures in July 2001, and is collateralized by seven properties located throughout the United States.
On April 1, 1998, Horizon consummated an agreement with Castle & Cooke Properties, Inc. which released Horizon from its future obligations under its long-term lease of the Dole Cannery outlet center in Honolulu, Hawaii, in connection with the formation of a joint venture with certain affiliates of Castle & Cooke, Inc. ("Castle & Cooke") to operate such property. Under the terms of the agreement, Castle & Cooke Properties, Inc., the landlord of the project and an affiliate of Castle & Cooke, released Horizon from any continuing obligations under the lease, which expires in 2045, in exchange for Horizon's conveyance to the joint venture of its rights and obligations under such lease. The agreement also provided that Horizon transfer to such joint venture substantially all of Horizon's economic interest in its outlet center in Lake Elsinore, California together with legal title to vacant property located adjacent to the center. As of December 31, 1999, the Company held a small minority interest in the joint venture but has no obligation or commitment with respect to the post-closing operations of the Dole Cannery project. Mortgage indebtedness with an outstanding balance of $28,938 at December 31, 1999, for which one of the Company's subsidiary partnerships remains legally responsible, is collateralized by a first mortgage on the Lake Elsinore outlet center. The joint venture, as a limited partner in such subsidiary partnership, is obligated to make capital contributions to the partnership to pay debt financing, operating and other expenses under certain conditions. The subsidiary partnership will remain legally responsible for such expenses in case of any shortfalls by the joint venture with respect to such capital contributions. Castle & Cooke has provided the Company with an unconditional guaranty with respect to any such shortfalls.
Debt Covenants
Certain of the Company's debt obligations require compliance with various financial loan covenants including, but not limited to, those relating to the Company's (i) total outstanding variable interest rate indebtedness, (ii) total outstanding indebtedness to total market value, as defined, (iii) consolidated net worth, as defined, and (iv) debt service and fixed charge coverage ratios, as defined.
As a result of its financial results for the quarter ended December 31, 1999, the Company is not in compliance with a financial covenant contained in two of its credit facilities, the Subordinated Loan and a $40,000 unsecured revolving loan (the "Unsecured Revolving Loan"). Neither of the loans has been accelerated nor was notice of the respective lender's intention to accelerate the maturity of the loans received by the Company. The Company entered into an amendment to the Subordinated Loan on February 23, 2000 which waived the covenant violation as of December 31, 1999 and modified the covenant terms through the Subordinated Loan's maturity date. The Company is currently in discussions with the Unsecured Revolving Loan lender to obtain a waiver and/or amend the loan; however, there can be no assurance as to whether and when the Company will obtain any such waiver or amendment. Furthermore, the Company's failure to obtain from its independent auditor's an unqualified report with respect to its consolidated financial statements will also constitute a default under these two credit facilities.
In addition, noncompliance with the covenants described above has triggered certain cross-default provisions with respect to several of the Companys other debt instruments, including the Subordinated Loan, the $55,000 Term Loan and the Fixed Rate Bonds. None of these loans have been accelerated nor was a notice of the respective lender's intent to accelerate received by the Company. Management is currently in discussion with the affected lenders to obtain a resolution of the cross-default provisions. If the Company is unable to obtain such waiver or amendment to the Unsecured Revolving Loan and reach resolution with certain other lenders, the Company will look to (i) obtain alternative financing from other financial institutions, or (ii) the potential sale of assets or a joint venture interest in certain outlet centers as sources of cash to repay the amounts outstanding under such loans. This condition raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Although the Company continues to maintain its regularly scheduled payments under all of its indebtedness, there can be no assurance that one or all of the affected lenders will not declare a default and accelerate the maturity of such indebtedness. Additionally, there can be no assurance that the Company will be in compliance with its financial debt covenants in future periods since the Company's future financial performance is subject to various risks and uncertainties, including but not limited to, the effects of increases in market interest rates from current levels; the risk of potential increases in vacancy rates and the resulting impact on the Company's revenue; and risks associated with refinancing the Company's current debt obligations or obtain new financing under terms as favorable as the Company has experienced in prior periods.
Note 7 - Minority Interests
In conjunction with the formation of the Company and the Operating Partnership, the predecessor owners contributed interests in certain properties to the Operating Partnership and, in exchange, received 8,505,472 limited partnership interests in the Operating Partnership ("Common Units"). Additionally, 3,782,121 Common Units were issued in June 1998 in connection with the Company's merger with Horizon. Subject to certain conditions, each Common Unit held by a Limited Partner may be exchanged for one share of Common Stock or, at the option of the Company, cash equal to the fair market value of a share of Common Stock at the time of exchange.
During 1999 and 1998, 471,923 and 975,462 Common Units, respectively, were exchanged for shares of Common Stock. As of December 31, 1999, 10,840,208 Common Units were issued and outstanding. Minority interests also includes interests in two property partnerships that are not wholly owned by the Company. During the years ended December 31, 1999, 1998 and 1997, expenses totaling $11,752, $3,035, and $1,468, respectively, related solely to the operation of the Company were allocated only to the common shareholders. Such allocation is consistent with the federal and state tax treatment of these expenses.
During the year ended December 31, 1999, cash distributions paid to minority interest totaled $12,976, minority interests conversions to common stock totaled $6,990 and income allocated to minority interests totaled $2,339, net of an $887 allocation of extraordinary losses. In addition, the minority interests' balance was reduced by $3,351 in connection with the sale of a joint venture property. During the years ended December 31, 1999 and 1997, cash distributions and losses allocated to minority interests reduced the minority interests' balance related to Common Units to zero. After reducing the minority interests' balance to zero, all cash distributions related to Common Units are treated as income allocated to minority interests.
At December 31, 1999 and 1998, loans to certain limited partners, aggregating $1,188 and $2,375, respectively, were reported as a reduction in minority interests in the Consolidated Balance Sheets.
Note 8 - Shareholders' Equity
The Company is authorized to issue up to (i) 150,000,000 shares of common stock and (ii) 24,315,000 shares of preferred stock in one or more series. At December 31, 1999, 43,368,620 shares of common stock, 2,300,000 shares of Senior Preferred Stock and 7,828,125 shares of Series B Convertible Preferred Stock were issued and outstanding.
The Senior Preferred Stock and Series B Convertible Preferred Stock have a liquidation preference equivalent to $25.00 per share plus the amount equal to any accrued and unpaid dividends thereon.
Dividends on the Senior Preferred Stock are payable quarterly in the amount of $2.625 per share per annum. Dividends on the Series B Convertible Preferred Stock are payable quarterly at the greater of (i) $2.125 per share per annum or (ii) the dividends on the number of shares of Common Stock into which a share of Series B Convertible Preferred Stock will be convertible at the conversion price of $20.90 per share of Common Stock. At December 31, 1999, there were 9,363,786 shares of Common Stock reserved for future issuance upon conversion of the Series B Convertible Preferred Stock.
The Company has the right to redeem the Senior Preferred Stock and the Series B Convertible Preferred Stock beginning on and after March 31, 1999 at $26.75 and $27.125 per share, respectively, plus the amount equal to any accrued and unpaid dividends thereon. The redemption price decreases incrementally each year thereafter through March 31, 2004, at which date the redemption price is fixed at $25.00 per share plus the amount equal to any accrued and unpaid dividends thereon.
On March 31, 1999, the Company entered into an agreement providing for the repurchase of all of its outstanding shares of Series C Preferred Stock for $43,636 or $10.00 per share. The agreement provided for the repurchase to occur in two stages. In the first stage, on March 31, 1999, the Company repurchased 3,300,000 shares of the Series C Preferred Stock in exchange for the issuance of a 12.0% fixed rate $33,000 unsecured promissory note which was repaid on September 29, 1999. In the second stage, the Company repurchased the remaining 1,063,636 outstanding shares of its Series C Preferred Stock for an aggregate purchase price of $10,636 on September 29, 1999.
During the year ended December 31, 1999, a redemption discount of $13,338 representing the excess of the carrying amount of the Series C Preferred Stock over its redemption amount is reflected in the Consolidated Statements of Operations as a loss allocated to preferred shareholders.
In order to qualify as a Real Estate Investment Trust ("REIT") for federal income tax purposes, the Company is required to pay distributions to its common and preferred shareholders of at least 95.0% of its REIT taxable income in addition to satisfying other requirements. Although the Company intends to make distributions in accordance with the requirements of the Internal Revenue Code of 1986, as amended, it also intends to retain such amounts as it considers necessary from time to time for capital and liquidity needs of the Company.
The Company's current policy with respect to common stock distributions is to only make payments to the extent necessary to maintain its status as a REIT for federal income tax purposes. Based on the Company's current federal income tax projections, it does not expect to pay any distributions on its common stock or common units of limited partnership interest in Prime Retail, L.P. during 2000. With respect to distributions on the Company's Senior Preferred Stock and Series B Convertible Preferred Stock, the Board of Directors considered and did not declare a quarterly distribution on such preferred stock due February 15, 2000. The Board of Directors will continue to evaluate the payment of preferred stock distributions on a quarterly basis. The holders of the Senior Preferred Stock and Series B Convertible Preferred Stock, each series voting separately as a class, have the right to elect two additional members to the Company's Board of Directors if the equivalent of six consecutive quarterly dividends on these series of preferred stock are in arrears. Each of such two directors will be elected to serve until the earlier of (i) the election and qualification of such directors' successor, or (ii) payment of the dividend arrearage.
The Company is currently prohibited under the terms of more than one of its credit agreements from paying dividends or distributions as a result of non-compliance with a financial covenant (see Note 6 - "Bonds and Notes Payable" of the Notes to Consolidated Financial Statements.) The Company may make no distributions to its common shareholders unless it is current with respect to distributions to its preferred shareholders. In addition, the Company may make no distributions to its common shareholders unless it is current with respect to distributions to its preferred shareholders. Annualized cumulative dividends on the Company's Senior Preferred Stock and Series B Convertible Preferred Stock outstanding as of December 31, 1999 are $6,038 and $16,636, respectively.
Note 9 - Stock Incentive Plans
Under various plans, the Company may grant stock options and other awards to executive officers, other key employees, outside directors and consultants. The exercise price for stock options granted is the fair market value of the Company's common stock on the date of grant.
In general, stock options are fully vested on the date of grant and have a term of 10 years. In certain cases for executive officers, stock options granted become exercisable over periods up to six years.
During 1999, the Company awarded 135,955 shares of restricted Common Stock to certain executive officers. These awards were 25% vested on the date of grant. The restricted shares vest an additional 25% annually until fully vested. In 1999, the Company also awarded 24,000 shares of restricted common stock and granted options to outside directors to purchase 85,000 shares of Common Stock at $9.85 per share. These awards were fully vested at the grant date. The options have a term of 10 years.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Accordingly, no compensation expense has been recognized for employee stock option grants. If the Company had elected to recognize compensation based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, unaudited pro forma net income (loss) and earnings per share would have been as follows:
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:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
A summary of the Company's stock option plans for the years ended December 31 are as follows:
The weighted fair value of options granted during the years ended December 31, 1999, 1998 and 1997 was $0.96 per share, $0.96 per share, and $1.90 per share, respectively. Under the Company's various plans there were 2,279,425 and 1,748,675 shares reserved for future grants at December 31, 1999 and 1998, respectively.
Note 10 - Lease Agreements
The Company is the lessor of retail and office space under operating leases with lease terms that expire from 2000 to 2016. Most leases are renewable for five years at the lessee's option. Future minimum base rent to be received under noncancelable operating leases as of December 31, 1999 were as follows:
------------------------------------------------------------------------------- Years ended December 31, -------------------------------------------------------------------------------
2000................................................................ $160,132 2001................................................................ 131,169 2002................................................................ 97,458 2003................................................................ 66,123 2004................................................................ 36,213 Thereafter.......................................................... 51,211 -------- $542,306 ========
===============================================================================
The Company leases certain land, buildings, and equipment under various noncancelable operating lease agreements. Rental expense for operating leases was $3,699, $1,818, and $1,059 for the years ended December 31, 1999, 1998, and 1997, respectively. Future minimum rental payments, by year and in the aggregate, payable under these noncancelable operating leases with initial or remaining terms of one year or more as of December 31, 1999 consisted of the following:
------------------------------------------------------------------------------- Years ended December 31, ------------------------------------------------------------------------------- 2000............................................................. $3,445 2001............................................................. 3,376 2002............................................................. 3,130 2003............................................................. 2,533 2004............................................................. 1,525 ------- $14,009 ======= ===============================================================================
Note 11 - Prime/Estein Joint Venture Transaction
On August 6, 1999, the Company entered into an agreement (the "Prime/Estein Joint Venture Agreement") to sell three factory outlet centers, including two future expansions in four phases to a joint venture (the "Venture") between an affiliate of Estein & Associates USA, Ltd. ("Estein"), a real estate investment company, and the Company. The Prime/Estein Joint Venture Agreement provided for a total purchase price of $274,000, including (i) the assumption of approximately $151,500 of first mortgage indebtedness, (ii) an $8,000 payment to the Company for a ten-year covenant-not-to-compete and (iii) a $6,000 payment to the Company for a ten-year licensing agreement with the Venture to continue the use of the "Prime Outlets" brand name.
On November 19, 1999, the Company successfully completed the initial installment of the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at Birch Run to the Venture for aggregate consideration of $117,000, including a $64,500 "wrap-around" first mortgage provided by the Company. In connection with the sale of Prime Outlets at Birch Run, the Company received cash proceeds of $33,303, net of transaction costs and recorded a loss on the sale of real estate of $9,326. Effective November 19, 1999, the Company commenced accounting for its 30.0% ownership interest in Prime Outlets at Birch Run in accordance with the equity method of accounting. The "wrap-around" first mortgage provided by the Company to the Venture has a ten-year term at a fixed interest rate of 7.75% requiring monthly payments of principal and interest pursuant to a 25-year amortization schedule. The Company's net investment in the "wrap-around" first mortgage as of December 31, 1999 was $10,745 which is included in other assets in the Consolidated Balance Sheet. Additionally, the Venture assumed $53,755 of outstanding mortgage indebtedness. Included in the aggregate consideration is a $5,500 payment related to the covenant-not-to-compete and a $3,000 payment related to the licensing agreement. The payments to the Company for the covenant-not-to-compete and the licensing agreement are included in accounts payable and other liabilities in the Consolidated Balance Sheet and will be amortized into income over their ten-year lives.
During the fourth quarter of 1999, the Company recorded a loss on the sale of real estate of $5,827 related to the write-down of the carrying value of Prime Outlets at Williamsburg based on the terms of the Prime/Estein Joint Venture Agreement. On February 23, 2000, the Company completed the second installment of the Prime/Estein Joint Venture Agreement consisting of the sale of Prime Outlets at Williamsburg to the Venture for aggregate consideration of $59,000, including (i) the assumption of mortgage indebtedness of $32,500, (ii) a $1,250 payment related to the covenant-not-to-compete and (iii) a $1,500 payment related to the licensing agreement. In connection with the sale of Prime Outlets at Williamsburg, the Company received (i) cash proceeds of $11,063, net of transaction costs and (ii) a promissory note in the amount of $10,000 from the Venture (of which Estein's obligation is $7,000), such amount to be payable on or before the earlier of the closing of the proposed sale of an expansion of the Williamsburg center or December 31, 2000. The promissory note requires the monthly payment of interest in arrears at an annual rate of 7.75%. Although the Company expects to close on the sale of Prime Outlets at Hagerstown, including the expansion scheduled to open during the second quarter of 2000, for aggregate consideration of approximately $80,500 on or about May 15, 2000, completion of this transaction, remains subject to various conditions and there can be no assurance as to whether or when this transaction will be consummated. As of December 31, 1999, the Company classified $97,639 representing the aggregate carrying value of Prime Outlets at Williamsburg and Prime Outlets at Hagerstown (collectively, the "Held for Sale Properties") as assets held for sale in its Consolidated Balance Sheet. Total revenues and expenses for the Held for Sale Properties were $16,243 and $12,185, respectively, for the year ended December 31, 1999.
Note 12 - Special Charges
When accounting for the fourth quarter of 1999, the Company determined that certain events and circumstances had occurred during 1999 including, limited leasing success and revised occupancy estimates, which indicated two of the Company's outlet centers (Prime Outlets at Jeffersonville II and Prime Outlets at Oxnard) were permanently impaired. Accordingly, the results of operations for 1999 include a provision for asset impairment of $15,842 representing the write-down of the carrying values of these assets to their estimated fair value in accordance with SFAS No. 121. Additionally, when accounting for the fourth quarter of 1999, the Company recorded a provision for abandoned projects of $16,039 based on management's determination that as of December 31, 1999, the Company's pre-development efforts associated with certain projects were no longer viable.
The operating results for the Company's Designer Connection outlet stores are reflected in loss on Designer Connection in the Consolidated Statements of Operations for all periods presented. When accounting for the fourth quarter of 1999, the Company decided to discontinue the operations of its Designer Connection outlet stores. Accordingly, the Company recorded non-recurring charges aggregating $3,659 including (i) $1,659 related to the write-off of costs associated with a web-site for Designer Connection and (ii) $2,000 of costs to cover the expected cash and non-cash costs of the closure. The cash and non-cash costs of the closure primarily consists of (i) employee termination costs, (ii) lease obligations, and (iii) the write-down of assets to their net realizable value. The Company expects that the operations of its Designer Connection outlet stores will cease by July 31, 2000.
Note 13 - Legal Proceedings
In the ordinary course of business the Company is subject to certain legal actions. While any litigation contains an element of uncertainty, management believes the losses, if any, resulting from such matters, including the matter described below, will not have a material adverse effect on the consolidated financial statements of the Company.
Company and its affiliates are defendants in a lawsuit filed on August 10, 1999 in the Circuit Court for Baltimore City and removed to U.S. District Court for the District of Maryland on August 20, 1999. The lawsuit alleges that the Company and its related entities overcharged tenants for common area maintenance charges and promotion fund charges. The outcome of, and the ultimate liability of the Company, if any, from, this lawsuit cannot currently be predicted. Management believes that the Company has acted properly and intends to defend this lawsuit vigorously.
The New York Stock Exchange has notified the Company that it is reviewing transactions in the stock of the Company prior to the Company's January 18,2000 press release concerning financial matters.
Note 14 - Subsequent Event
On April 12, 2000, the Company announced that it has been unable to conclude an agreement to transfer ownership of its wholly-owned e-commerce subsidiary, primeoutlets.com inc., also known as eOutlets.com, to a management-led investor group comprised of eOutlets.com management and outside investors. Effective April 12, 2000, eOutlets.com ceased all operations.
In connection with the discontinuance of eOutlets.com, the Company expects to incur a non-recurring loss of approximately $13,000 in the first quarter of 2000. The non-recurring loss includes (i) the write-off of $3,500 of costs capitalized during 1999 and (ii) approximately $9,500 of costs incurred during 2000, including costs associated with discontinuing the operations of eOutlets.com. In addition, during 1999 the Company incurred expenses of $3,500 related to organizational and other start-up expenditures of eOutlets.com which are reflected in corporate general and administrative expense in the Consolidated Statements of Operations.
PRIME RETAIL, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (in thousands)
At December 31, 1999, the Company had two properties, Prime Outlets at Hagerstown and Prime Outlets at Williamsburg, classified as held for sale with a combined value of $97,639. The two properties have mortgage notes payable of $71,060 outstanding at December 31, 1999.
PRIME RETAIL, INC.
Notes to Schedule III - Real Estate and Accumulated Depreciation
December 31, 1999
(in thousands)
Depreciation on building and improvements is calculated on a straight-line basis over the estimated useful lives of the asset as follows:
Land improvements.......................................................20 years Buildings and improvements..................................Principally 40 years Tenant improvements........................................Term of related lease Furniture and equipment..................................................5 years
The aggregate cost for federal income tax purposes was $1,719,218 at December 31, 1999.